ONEOK INC quarterly report, Q2 FY2012

ONEOK, Inc. Form 10-Q Summary

Business context and reporting period

ONEOK, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Operations comprise the consolidated ONEOK Partners segment, Natural Gas Distribution and Energy Services. ONEOK controlled ONEOK Partners and held a 43.4% ownership interest at June 30, 2012. Results are seasonal and are not necessarily indicative of full-year performance. All share and per-share amounts reflect the June 2012 two-for-one stock split.

Financial performance and position

Metric	Three months ended June 30, 2012	Six months ended June 30, 2012
Revenue	$2.529 billion	$5.944 billion
Net margin	$549.0 million	$1.193 billion
Operating income	$234.1 million	$560.0 million
Net income	$149.2 million	$382.7 million
Net income attributable to ONEOK	$61.0 million	$183.9 million
Diluted EPS	$0.29	$0.87
Operating cash flow	Not separately reported	$652.6 million
Capital expenditures	$432.3 million	$780.7 million

Net margin was approximately 21.7% of revenue for the quarter and 20.1% for the six-month period. Operating margins were approximately 9.3% and 9.4%, respectively. Net income attributable to ONEOK represented approximately 2.4% of quarterly revenue and 3.1% of six-month revenue.

Cash and cash equivalents were $114.9 million at June 30, 2012, compared with $66.0 million at December 31, 2011.
Total assets were $13.817 billion; total equity was $4.206 billion.
Long-term debt, including current maturities, had a book value of approximately $5.237 billion and an estimated fair value of $5.9 billion. Notes payable were $595.9 million.
ONEOK had $571.9 million of commercial paper outstanding, $22.8 million of cash and approximately $626.4 million of available credit under its $1.2 billion revolving credit agreement.
ONEOK Partners had $24.0 million of commercial paper outstanding, approximately $92.2 million of cash and approximately $1.2 billion of available revolving credit.
ONEOK's stand-alone debt-to-capital ratio was 50.5%, versus a 67.5% covenant limit. ONEOK Partners' indebtedness-to-adjusted-EBITDA ratio was 2.3x, versus a 5.0x covenant limit. Both entities were in compliance with their covenants.
ONEOK's and ONEOK Partners' senior debt ratings were Baa2 from Moody's and BBB from S&P, both with stable outlooks.

Material changes versus the prior comparable period

Quarterly revenue declined 27% and six-month revenue declined 18%, primarily because of lower natural gas and NGL prices. Higher NGL volumes and more favorable NGL price differentials partly offset the decline.
Quarterly net margin increased 6% to $549.0 million; six-month net margin increased 4% to $1.193 billion.
Quarterly operating income increased 8% to $234.1 million; six-month operating income increased 3% to $560.0 million.
Quarterly net income attributable to ONEOK increased 11% to $61.0 million, while six-month attributable net income declined 1% to $183.9 million.
ONEOK Partners operating income increased 13% for the quarter and 28% for the six-month period, driven by higher volumes from completed growth projects, including the Garden Creek processing plant, and improved NGL differentials.
Energy Services shifted to operating losses of $15.1 million for the quarter and $45.8 million for the six-month period, compared with losses of $5.8 million and income of $42.0 million, respectively, in the prior-year periods.
Natural Gas Distribution operating income increased 7% for the quarter but declined 2% for the six-month period. Warmer weather reduced volumes and transportation margins, while rate increases and surcharge recoveries provided partial offsets.
Operating cash flow declined to $652.6 million from $875.6 million, while capital expenditures increased 49% to $780.7 million.

Guidance, outlook, commentary and unusual items

ONEOK projected 2012 capital expenditures of approximately $2.349 billion, including $2.045 billion for ONEOK Partners, $272 million for Natural Gas Distribution and $32 million for other activities.
ONEOK Partners expected total new capital investments of approximately $5.7 billion to $6.6 billion, including projects announced in July 2012. These projects target gathering, processing, NGL transportation and fractionation infrastructure and are intended to increase fee-based earnings and cash flows.
Additional July 2012 projects included Garden Creek II, expansion of the Bakken NGL Pipeline, the MB-3 fractionator and an ethane/propane splitter, with aggregate additional investment of approximately $980 million to $1.1 billion through 2014.
ONEOK declared a quarterly dividend of $0.33 per share, and ONEOK Partners declared a quarterly distribution of $0.66 per unit, each payable August 15, 2012.
ONEOK sold its retail natural gas marketing business on February 1, 2012, for net proceeds of approximately $32.9 million and recorded an after-tax gain of approximately $13.5 million. Prior periods were recast as discontinued operations.
A $10.3 million goodwill impairment charge was recorded in the first quarter after the Energy Services goodwill balance was reduced to zero, reflecting lower natural gas prices and narrower location and seasonal differentials.
A $29.9 million loss was reclassified from accumulated other comprehensive loss into earnings for the six months because hedged inventory costs exceeded expected recoveries.
ONEOK issued $700 million of 4.25% senior notes due 2022 in January 2012. ONEOK Partners issued common units in March 2012, generating approximately $920 million of combined net proceeds from public and private offerings, and repaid $350 million of senior notes at maturity.
ONEOK entered into a $150 million accelerated share repurchase agreement in June 2012 and received approximately 2.9 million shares initially. The agreement was scheduled to end in September 2012.

Risks and contingencies

Commodity prices, natural gas and NGL supply growth, narrower location and seasonal differentials, ethane rejection and lower market volatility may pressure Energy Services and gathering and processing margins.
Energy Services is reducing leased transportation and storage capacity to align fixed costs with customer demand, but additional contract-termination or renegotiation charges may occur.
ONEOK Partners' extensive growth program is subject to permitting, construction cost, schedule, supply commitment, producer drilling and demand risks.
Capital-intensive operations create exposure to financing conditions, interest rates, credit ratings and access to debt and equity markets.
A downgrade below investment grade could increase collateral requirements for derivatives and potentially limit Energy Services marketing and trading activities. The filing estimated additional collateral requirements of approximately $3.1 million based on June 30, 2012 positions.
Environmental, greenhouse-gas, air-quality and pipeline-safety regulations could require additional capital and operating expenditures. Potential costs associated with future pipeline-safety requirements were not clear in the filing.
ONEOK Partners' Northern Border Pipeline rate case or settlement requirement by December 31, 2012, could affect future equity earnings.
Litigation and claims arise in the ordinary course of business. Management stated that probable outcomes were not expected to have a material adverse effect, but reasonably possible losses could not be estimated.
Management stated that disclosure controls and procedures were effective as of June 30, 2012, with no material changes in internal control over financial reporting.

Most important facts for investors to verify

Reconcile consolidated earnings with the substantial noncontrolling interest attributable to the portion of ONEOK Partners not owned by ONEOK.
Assess whether the large ONEOK Partners growth program generates the expected fee-based volumes, earnings and cash flow without materially increasing leverage.
Monitor Energy Services margins, transportation and storage contract reductions, potential additional charges and exposure to natural gas price differentials.
Verify cash flow coverage of $2.349 billion of projected 2012 capital expenditures, dividends, distributions and share repurchases.
Review debt maturities, commercial paper reliance, revolving-credit availability and compliance with ONEOK and ONEOK Partners covenants.
Evaluate the effect of the retail marketing business sale, the goodwill impairment and the $29.9 million hedge-loss reclassification when comparing recurring performance.
Track regulatory rate proceedings in Oklahoma, Kansas and Texas, as well as environmental, pipeline-safety and derivatives-market regulations.
Confirm the final share count and settlement economics of the accelerated share repurchase agreement.