ONEOK, Inc. 2011 First-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2011. Its operations comprise ONEOK Partners, which gathers, processes, transports and markets natural gas and NGLs; regulated and retail natural gas distribution; and Energy Services, which markets natural gas and provides storage, transportation and risk-management services. Results are seasonal and are not necessarily indicative of the full year.
Financial performance and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $3.867 billion | $3.924 billion | Down 1% |
| Net margin | $633.5 million | $619.3 million | Up 2% |
| Operating income | $330.0 million | $337.3 million | Down 2% |
| Net income | $199.3 million | $186.7 million | Up 7% |
| Net income attributable to ONEOK | $130.1 million | $154.5 million | Down 16% |
| Diluted EPS | $1.19 | $1.44 | Down 17% |
| Operating cash flow | $647.8 million | $558.7 million | Up $89.1 million |
| Capital expenditures | $194.7 million | $68.3 million | Up $126.4 million |
- Net margin was approximately 16.4% of revenue versus 15.8% in the prior-year quarter. Operating margin was approximately 8.5% versus 8.6%.
- Higher consolidated net income did not translate into higher ONEOK earnings because income attributable to noncontrolling interests increased to $69.2 million from $32.2 million, primarily reflecting stronger ONEOK Partners results.
- Cash and cash equivalents were $870.1 million at March 31, 2011, compared with $31.0 million at December 31, 2010. The increase primarily reflected ONEOK Partners’ January debt issuance and operating cash flow.
- Total long-term debt, including current maturities, was approximately $5.4 billion at March 31, 2011, versus approximately $4.3 billion at year-end 2010. Estimated fair value was $5.7 billion.
- Consolidated capitalization was 58% debt and 42% equity at March 31, 2011, compared with 52% debt and 48% equity at December 31, 2010.
- ONEOK declared a quarterly dividend of $0.52 per share, compared with $0.44 in the prior-year comparable period.
Material changes versus the prior comparable period
- ONEOK Partners: Operating income increased 48% to $177.6 million, with net margin up 26% to $329.5 million. Results benefited from improved NGL price differentials, additional fractionation and transportation capacity, higher gathered volumes and higher realized commodity prices. Capital expenditures increased to $144.8 million from $35.8 million.
- Distribution: Operating income declined 8% to $104.8 million. Net margin was essentially unchanged at $247.4 million, but operating costs and depreciation increased. Warmer weather reduced residential and commercial volumes, while weather-normalization mechanisms moderated the margin effect.
- Energy Services: Operating income declined 54% to $47.8 million and net margin declined 49% to $55.9 million. Lower seasonal storage price differentials, narrower Mid-Continent-to-Gulf Coast transportation differentials, lower premium-services margins and reduced financial trading margins were the principal factors.
- Equity earnings from investments increased 52% to $32.1 million, driven primarily by higher Northern Border Pipeline earnings and equity-method accounting for Overland Pass Pipeline Company beginning in September 2010.
- Operating cash flow increased because of higher cash generation before working-capital changes and favorable reductions in commodity inventories and storage balances.
- Comprehensive income declined to $157.6 million from $216.1 million because other comprehensive income shifted to a $41.8 million loss from a $29.3 million gain, principally from energy-marketing and pension-related items.
Guidance, outlook, risks and unusual items
- Management projected 2011 capital expenditures of approximately $1.362 billion, including $1.116 billion for ONEOK Partners, $224 million for Distribution and $22 million for other activities. The filing does not provide clear consolidated earnings guidance.
- ONEOK Partners announced planned NGL infrastructure investments of approximately $910 million to $1.2 billion, including the Sterling III Pipeline, reconfiguration of Sterling I and II, and the MB-2 fractionator. Additional previously announced gathering, processing, pipeline and fractionation projects brought significant construction and permitting requirements.
- ONEOK Partners issued $1.3 billion of senior notes in January 2011. Net proceeds of approximately $1.28 billion were used to repay commercial paper, redeem $225 million of notes maturing in March 2011 and fund capital projects and general partnership purposes. In April 2011, ONEOK repaid $400 million of maturing senior notes using cash and short-term borrowings.
- On April 5, 2011, ONEOK entered into a new five-year $1.2 billion revolving credit agreement expiring in April 2016. At March 31, ONEOK had no commercial paper outstanding, $2.0 million of letters of credit and approximately $1.2 billion of available credit under the former agreement. ONEOK Partners had approximately $617.4 million of cash and $772.0 million of available borrowings; its debt-to-adjusted-EBITDA ratio was 4.17 to 1 versus a 5.0-to-1 covenant limit.
- ONEOK and ONEOK Partners were rated investment grade at quarter-end: Baa2/Stable by Moody’s and BBB/Stable by S&P. A downgrade below investment grade could increase collateral requirements and restrict Energy Services trading activities; derivative contracts with credit-contingent collateral provisions had a $25.7 million net liability exposure.
- Key risks include commodity-price and basis volatility, weather, counterparty credit, access to capital markets, leverage, construction and permitting delays, pipeline integrity, environmental compliance, changing regulation and the ability to obtain adequate supplies and market pipeline capacity.
- Environmental remediation continued at 12 former manufactured-gas sites in Kansas, but environmental expenditures had no material effect on first-quarter earnings or cash flow. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- The company adopted ASU 2010-06 on fair-value disclosures; the filing states that the impact was not material. Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Reconcile consolidated net income growth with the 16% decline in ONEOK-attributable earnings and diluted EPS, including the effect of noncontrolling interests.
- Assess whether the substantial increase in ONEOK Partners capital spending can be funded while maintaining credit metrics, distributions and investment-grade ratings.
- Monitor execution, permitting, cost and timing for the announced NGL, gathering, processing and fractionation projects.
- Evaluate Energy Services exposure to storage spreads, transportation differentials, commodity prices, open positions and counterparty collateral requirements.
- Verify the effect of warmer weather, regulatory recovery mechanisms and cost inflation on Distribution earnings and future rate proceedings.
- Review debt maturities, the April 2011 refinancing and the separate liquidity and covenant capacity of ONEOK and ONEOK Partners.
- Track environmental, pipeline-safety, greenhouse-gas, Dodd-Frank and other regulatory developments that could increase compliance costs or restrict operations.