ONEOK, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The filing is unaudited. ONEOK completed its acquisition of the remaining publicly held ONEOK Partners units on June 30, 2017, issuing 168.9 million common shares; therefore, year-over-year results and per-share metrics are not fully comparable.
Business context
ONEOK operates three reportable segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Management expects approximately 90% of consolidated earnings to be fee-based for the remainder of 2017. Growth is focused on the STACK and SCOOP, Williston and Permian basins, NGL infrastructure, transportation capacity and related processing projects.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $2.906 billion | $2.358 billion | $8.382 billion | $6.266 billion |
| Operating income | $351.9 million | $329.4 million | $983.1 million | $956.1 million |
| Net income | $166.5 million | $194.2 million | $528.7 million | $549.0 million |
| Net income attributable to ONEOK | $165.7 million | $92.1 million | $324.8 million | $261.5 million |
| Diluted EPS | $0.43 | $0.43 | $1.20 | $1.23 |
| Adjusted EBITDA | $517.2 million | $469.7 million | $1.439 billion | $1.376 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $936.0 million | $922.0 million |
| Capital expenditures | $135.2 million | $158.3 million | $330.4 million | $491.5 million |
Q3 revenue increased 23%, operating income increased 7%, and adjusted EBITDA increased 10%. Nine-month revenue increased 34%, operating income increased 3%, and adjusted EBITDA increased 5%. Q3 net income declined 14%, primarily reflecting higher income taxes, impairment charges and other unusual items.
Approximate operating margin was 12.1% in Q3 2017 versus 14.0% in Q3 2016, and 11.7% for the first nine months versus 15.3% in the prior-year period. Approximate consolidated net margin was 5.7% in Q3 versus 8.2%, and 6.3% for nine months versus 8.8%.
Segment results
- Natural Gas Gathering and Processing: Q3 adjusted EBITDA was $142.0 million, up 29%; nine-month adjusted EBITDA was $374.2 million, up 17%. Growth reflected higher volumes in the Williston Basin and STACK/SCOOP areas and higher fees from contract restructuring.
- Natural Gas Liquids: Q3 adjusted EBITDA was $293.9 million, up 5%; nine-month adjusted EBITDA was $845.5 million, up 2%. Higher exchange-service volumes and optimization earnings were partly offset by higher operating costs and Hurricane Harvey disruptions.
- Natural Gas Pipelines: Q3 adjusted EBITDA was $87.5 million, up 9%; nine-month adjusted EBITDA was $251.1 million, up 13%. Results benefited from higher firm transportation capacity and stronger Roadrunner equity earnings.
Cash flow, balance sheet and liquidity
- Operating cash flow was $936.0 million for the first nine months, compared with $922.0 million in 2016.
- Cash used in investing activities was $394.6 million, including $330.4 million of capital expenditures and $87.7 million of contributions to unconsolidated affiliates, principally Northern Border Pipeline.
- Cash used in financing activities was $778.6 million. The company paid $543.4 million of common dividends and $275.1 million of distributions to noncontrolling interests.
- Cash and cash equivalents declined to $11.7 million at September 30, 2017, from $248.9 million at December 31, 2016. Working capital deficits were $1.2 billion and $1.4 billion, respectively.
- Total debt was approximately $9.5 billion, including $932.3 million of commercial paper; long-term debt excluding current maturities was $8.092 billion. Estimated fair value of consolidated long-term debt, including current maturities, was $9.3 billion.
- ONEOK had approximately $1.6 billion of borrowing capacity under its $2.5 billion revolving credit facility. Its debt-to-adjusted-EBITDA covenant ratio was 4.9x versus a 5.75x limit at September 30, 2017, and all covenants were satisfied.
- Credit ratings were investment grade: Moody’s Baa3 and S&P BBB, both with stable outlooks.
Material changes versus the prior comparable period
- The ONEOK Partners merger eliminated public noncontrolling ownership in ONEOK Partners, increased ONEOK common shares outstanding and changed the company’s cash-flow and financing structure.
- ONEOK issued $1.2 billion of senior unsecured notes in July 2017, repaid $500 million of the ONEOK Partners term loan, repaid $400 million of notes due October 2017 and redeemed approximately $87 million of senior notes.
- The company established a $1 billion at-the-market equity program. It sold 1.2 million shares in Q3 for $64.7 million of net proceeds and sold an additional 2.1 million shares in October for $119.5 million.
- Common dividends increased to $0.745 per share for Q3 and the November 2017 dividend, compared with $0.615 per share in the comparable 2016 period.
- Nine-month capital expenditures decreased 33%, primarily because major growth projects were placed in service during 2016.
- Equity in earnings from investments increased 19% for nine months, primarily from higher Roadrunner transportation revenues.
Guidance, outlook, risks and unusual items
- Management expects 2017 growth capital expenditures of $450 million to $550 million and maintenance capital expenditures of $130 million to $150 million, excluding AFUDC and capitalized interest.
- Management expects continued volume growth into 2018 from the STACK/SCOOP, Williston and Permian regions, supported by producer activity, acreage dedications, minimum volume commitments and long-term contracts.
- Announced projects include the Canadian Valley processing expansion, STACK gathering infrastructure, Mid-Continent NGL and Sterling III expansions, and a planned Delaware Basin WTLPG extension.
- Hurricane Harvey reduced Q3 operating income and adjusted EBITDA by an estimated $4.5 million through lower volumes and higher operating costs; the company reported no significant asset damage.
- Q3 included $16.0 million of noncash impairment charges on nonstrategic gathering and processing assets and $4.3 million on a nonstrategic equity investment. Nine-month results also included a $20 million noncash contribution of Series E Preferred Stock to the ONEOK Foundation and approximately $29.5 million of merger-related costs.
- Key risks include commodity prices and basis differentials, production declines, ethane rejection, customer and counterparty credit, interest rates, substantial debt and guarantees, capital-market access, regulatory and environmental requirements, construction costs and schedules, severe weather, pipeline safety and litigation.
- Northern Border Pipeline is expected to file a rate case by December 2017. Management expects lower future rates but does not expect a material effect on ONEOK.
- Legal settlements and other litigation matters were not considered material by management; the Sinclair Oil matter remained subject to appeal.
Investor verification points
- Reconcile post-merger operating performance and per-share results with pre-merger periods, including the effect of 168.9 million newly issued shares and the elimination of public ONEOK Partners ownership.
- Verify debt maturities, commercial paper reliance, the 4.9x leverage ratio and available revolving-credit capacity under changing commodity and interest-rate conditions.
- Assess whether expected STACK/SCOOP, Williston and Permian volumes and announced projects remain supported by producer activity, contracts and permits.
- Monitor the sustainability of the increased dividend alongside capital expenditures, debt repayment and potential future equity issuance.
- Evaluate the sensitivity of earnings to ethane rejection, production declines, NGL price differentials, weather-related disruptions and counterparty credit.
- Review the final tax allocation and deferred tax asset associated with the ONEOK Partners merger, as the filing states the allocation remained preliminary.