ONEOK INC annual report, FY2012

ONEOK, Inc. 2012 Form 10-K Summary

Business context and reporting period

ONEOK, Inc. filed its Form 10-K for the fiscal year ended December 31, 2012, filed February 26, 2013. The company operates through three reportable segments: ONEOK Partners, Natural Gas Distribution and Energy Services. ONEOK controls and owns 43.4% of ONEOK Partners, a midstream natural gas and NGL business, and also operates regulated gas utilities serving more than 2 million customers in Oklahoma, Kansas and Texas.

2012 market conditions included lower natural gas, ethane and propane prices, a warmer-than-normal winter, narrower natural gas and NGL location and seasonal price differentials, and continued growth in shale-related production.

Key financial metrics

Metric	2012	2011	Change
Revenue	$12.633 billion	$14.806 billion	Down 15%
Net margin	$2.351 billion	$2.380 billion	Down 1%
Operating income	$1.103 billion	$1.159 billion	Down 5%
Net income attributable to ONEOK	$360.6 million	$360.6 million	Flat
Continuing-operations diluted EPS	$1.64	$1.67	Down 2%
Total diluted EPS	$1.71	$1.68	Up 2%
Operating cash flow	$990.9 million	$1.360 billion	Down 27%
Capital expenditures	$1.866 billion	$1.336 billion	Up 40%
Total assets	$15.855 billion	$13.697 billion	Up 16%

Net margin was approximately 18.6% of revenue, compared with approximately 16.1% in 2011. Operating income was approximately 8.7% of revenue, compared with approximately 7.8% in 2011. The filing does not present a consolidated EBITDA value.

ONEOK Partners: Revenue was $10.182 billion, net margin was $1.642 billion and operating income was $962.9 million. Operating income increased 2%, supported by volume growth from completed gathering, processing and NGL projects, partly offset by weaker commodity prices and NGL optimization margins.
Natural Gas Distribution: Net margin was $756.4 million and operating income was $215.7 million, up 9%. Results benefited from approved rate increases and lower operating costs; warmer weather reduced residential and commercial volumes, but weather-normalization mechanisms mitigated the margin impact.
Energy Services: Net margin was negative $49.3 million and operating loss was $77.9 million, compared with operating income of $23.8 million in 2011. Narrower location and seasonal price differentials, lower volatility and unfavorable hedge economics materially reduced storage, transportation and marketing margins. The segment also recorded a $10.3 million goodwill impairment charge.

Debt, liquidity and distributions

Consolidated long-term debt, including current maturities, was $6.526 billion at December 31, 2012, compared with $4.894 billion in 2011. ONEOK separately reported approximately $1.7 billion of indebtedness, excluding ONEOK Partners, while ONEOK Partners reported approximately $4.8 billion.
ONEOK had $817.2 million of commercial paper outstanding, $46.5 million of cash and cash equivalents, and approximately $380.9 million of available capacity under its $1.2 billion revolving credit agreement.
ONEOK Partners had approximately $537.0 million of cash, no commercial paper outstanding, no revolving-credit borrowings and approximately $1.2 billion of available revolving-credit capacity.
ONEOK’s stand-alone debt-to-capital ratio under its credit agreement was 52.2%; ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 3.0 to 1. Both entities were in compliance with applicable covenants.
Cash dividends paid by ONEOK increased to $1.27 per share from $1.08 in 2011. A January 2013 dividend of $0.36 per share was declared, equivalent to $1.44 annually.
ONEOK Partners paid distributions of $2.59 per unit in 2012, up approximately 11%. ONEOK received $760.9 million of distributions from ONEOK Partners.
ONEOK repurchased approximately 3.4 million shares for $150 million in 2012. Approximately $300 million remained available under the three-year, $750 million repurchase program.

Material changes versus the prior comparable period

Revenue declined primarily because of lower realized natural gas and NGL prices and narrower price differentials, despite higher volumes from completed ONEOK Partners projects.
Operating cash flow declined by $369.0 million, while capital expenditures increased by $530.1 million, producing a substantial funding requirement for growth projects.
ONEOK Partners operating income increased modestly as volume-driven fee-based earnings offset lower NGL optimization margins and commodity prices.
Energy Services deteriorated sharply, with net margin decreasing $98.0 million and operating income declining $101.7 million.
ONEOK issued $700 million of 4.25% senior notes due 2022. ONEOK Partners issued $1.3 billion of senior notes and completed equity issuances generating approximately $920 million of net proceeds.
ONEOK Partners’ ownership interest increased to 43.4% from 42.8% following the purchase of 8.0 million common units.
ONEOK sold its retail natural gas marketing business for net proceeds of approximately $32.9 million and recognized an after-tax gain of approximately $13.5 million. The business is presented as discontinued operations.
ONEOK completed a two-for-one common-stock split in June 2012; all share and per-share data in the filing are presented on a post-split basis.

Guidance, outlook, commentary and unusual items

ONEOK Partners planned approximately $4.7 billion to $5.3 billion of capital projects through 2015, focused on gathering, processing, fractionation and NGL transportation infrastructure in the Williston Basin, Mid-Continent and Gulf Coast.
Projected 2013 capital expenditures were $2.956 billion, including $2.640 billion for ONEOK Partners and $286 million for Natural Gas Distribution.
Management expected widespread and prolonged ethane rejection in 2013 to reduce NGL volumes and have a significant adverse impact on financial results, but did not expect prolonged ethane rejection to continue into 2014.
Energy Services expected market conditions to remain difficult in 2013 and planned to reduce or recontract leased storage and transportation capacity at market rates. Approximately 32% of transportation capacity and 31% of storage capacity expired by the end of 2013.
Management expected cash flow from operations, existing resources and ONEOK Partners distributions to fund planned operations and provide flexibility for additional share repurchases. The filing does not provide formal consolidated earnings guidance.
The Bakken Crude Express Pipeline was canceled after insufficient long-term transportation commitments were obtained.
ONEOK Partners’ new projects include processing plants, the Bakken NGL Pipeline, Sterling III, additional fractionation capacity and an ethane/propane splitter. Completion timing and costs remain subject to permitting, construction and supply risks.
Other unusual items included the $10.3 million Energy Services goodwill impairment, $13.5 million after-tax gain on the retail marketing sale and losses recognized from certain natural gas inventory hedges.

Risks and contingencies

Commodity-price, NGL product-mix, ethane-rejection and location-differential risk may reduce earnings and cash flow, particularly in ONEOK Partners’ nonregulated businesses and Energy Services.
ONEOK’s cash flow depends substantially on distributions from ONEOK Partners. ONEOK Partners’ ability to maintain distributions depends on operating cash flow, financing access, project execution and unconsolidated-affiliate distributions.
High capital spending and increased leverage create refinancing, interest-rate, credit-rating and liquidity risks. A downgrade below investment grade could increase borrowing and collateral requirements and impair Energy Services operations.
Growth projects face construction cost, permitting, labor, supply, producer-commitment and demand risks. The filing states that approximately $13.9 billion of consolidated contractual obligations were outstanding at year-end, including debt, interest, leases, derivatives and purchase commitments.
Regulatory risks include FERC and state rate proceedings, potential rate reductions, recovery of regulatory assets, pipeline-integrity requirements, PHMSA regulation and environmental compliance.
Environmental releases, pipeline incidents, severe weather, terrorism, cybersecurity events, counterparty defaults and labor disruptions could materially affect operations and cash flows.
Gas index pricing litigation remained pending on appeal; management stated that the probable outcome of litigation and claims was not expected to have a material adverse effect, but reasonably possible losses could not be estimated.
The filing identifies potential future impairment risk in Powder River Basin assets and equity investments if natural gas volumes continue to decline.

Important facts for investors to verify

Whether 2013 ethane rejection and lower NGL volumes materially reduced ONEOK Partners’ earnings, cash flow and distributions.
Actual completion dates, final costs, contracted volumes and returns for the major ONEOK Partners growth projects.
Whether Energy Services’ capacity reductions and contract renegotiations improved margins without generating material termination or impairment charges.
ONEOK and ONEOK Partners debt maturities, refinancing needs, covenant headroom and continued investment-grade credit ratings.
Sustainability of ONEOK Partners distributions and ONEOK’s dividend growth relative to operating cash flow and capital expenditures.
Outcomes of FERC rate reviews, environmental and pipeline-safety developments, and pending gas index pricing litigation.
Actual consolidated results should be evaluated separately from ONEOK Partners’ results because a substantial portion of consolidated earnings is attributable to noncontrolling interests.