ONEOK, Inc. 2011 Q3 Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011, comparing results with the corresponding 2010 periods. Operations comprise ONEOK Partners, which gathers, processes, transports and markets natural gas and NGLs; regulated and nonregulated natural gas distribution; and Energy Services, which markets natural gas and provides transportation, storage and risk-management services. Results are seasonal and may not be indicative of a full year.
Financial results and key metrics
| Metric | Three months ended September 30 | Change | Nine months ended September 30 | Change |
|---|---|---|---|---|
| Revenue | $3,595.2 million | 22% | $10,976.6 million | 13% |
| Net margin | $534.0 million | 18% | $1,689.2 million | 10% |
| Operating income | $248.9 million | 33% | $795.8 million | 13% |
| Net income | $160.9 million | 34% | $495.0 million | 26% |
| Net income attributable to ONEOK | $60.3 million | 9% | $245.6 million | (2%) |
| Diluted EPS | $0.57 | From $0.51 | $2.28 | From $2.34 |
| Operating cash flow | Not separately provided for the quarter | — | $1,029.6 million | From $760.0 million |
| Capital expenditures | $338.5 million | 92% | $862.3 million | From $356.3 million |
Approximate consolidated margins were 14.9% net margin, 6.9% operating margin and 1.7% margin attributable to ONEOK for the third quarter. For the nine months, approximate margins were 15.4%, 7.3% and 2.2%, respectively. The filing does not present EBITDA as a consolidated primary metric in the supplied financial statements.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $148.4 million at September 30, 2011, versus $31.0 million at December 31, 2010.
- Total assets were $13.17 billion, up from $12.50 billion. Net property, plant and equipment increased to $8.02 billion from $7.31 billion, primarily reflecting substantial capital investment.
- Current maturities of long-term debt were $365.3 million; long-term debt excluding current maturities was $4.532 billion; and notes payable were $650.0 million. Consolidated long-term debt, including current maturities, had a book value of approximately $4.9 billion and an estimated fair value of $5.4 billion.
- Consolidated capitalization was 57% long-term debt and 43% equity; including notes payable, debt represented 60% of capitalization.
- ONEOK had $650.0 million of commercial paper outstanding, $2.0 million of letters of credit and approximately $548.0 million of available capacity under its $1.2 billion revolving credit agreement. Its stand-alone debt-to-capital ratio under the credit agreement was 42.4%, versus a maximum covenant level of 67.5%.
- ONEOK Partners had no commercial paper, letters of credit or borrowings under its $1.2 billion revolving credit agreement and approximately $127.9 million of cash. Its indebtedness-to-adjusted-EBITDA covenant ratio was 3.4 to 1, below the 5.0-to-1 limit.
- Credit ratings were investment grade: ONEOK and ONEOK Partners were each rated Baa2 by Moody’s and BBB by S&P, both with stable outlooks.
Cash flow, capital allocation and distributions
- Operating cash flow increased $269.6 million year over year to $1.0296 billion. Investing cash flow was a use of $896.9 million, principally because of growth-project spending, compared with a $79.5 million source in 2010 due largely to proceeds from the Overland Pass Pipeline transaction.
- Financing cash flow was a use of $15.4 million, compared with a use of $818.4 million in 2010. Financing activity included $1.295 billion of debt issuance, $724.4 million of debt repayment, a $300.1 million share repurchase, $169.3 million of dividends and $206.3 million of distributions to noncontrolling interests.
- ONEOK Partners issued $1.3 billion of senior notes in January 2011. ONEOK repaid $400 million of maturing senior notes and redeemed $90.5 million of 6.4% senior notes during 2011.
- ONEOK completed a $300 million accelerated share repurchase, receiving approximately 4.3 million shares in total. Approximately $450 million remained authorized under the broader $750 million repurchase program at September 30, 2011.
- ONEOK declared a quarterly dividend of $0.56 per share, or $2.24 annualized, a 17% increase from the $0.48 declared in October 2010. ONEOK Partners declared a distribution of $0.595 per unit, or $2.38 annualized, up approximately 5% on a split-adjusted basis.
Material changes versus the prior comparable period
- ONEOK Partners drove consolidated improvement. Third-quarter segment operating income rose 51% to $242.4 million, and nine-month operating income rose 46% to $622.0 million. Higher NGL price differentials, increased NGL volumes and additional fractionation and transportation capacity were principal drivers.
- ONEOK Partners’ nine-month capital expenditures increased to $662.4 million from $202.8 million, reflecting major natural gas gathering, processing and NGL infrastructure projects.
- Energy Services weakened materially: third-quarter operating income changed from $6.9 million to a $12.7 million loss, while nine-month operating income fell 74% to $29.2 million. Narrower location differentials, lower hedge settlements, reduced storage and transportation optimization opportunities and lower volatility were key factors.
- Distribution operating income declined 12% for the nine months to $145.0 million. Net margin was broadly stable, but operating costs and depreciation increased; warmer weather reduced residential and commercial volumes.
- Net income attributable to ONEOK declined 2% for the nine months despite a 26% increase in consolidated net income, primarily because a larger portion of earnings was attributable to noncontrolling interests in ONEOK Partners and because 2010 included different equity and asset-sale effects.
- Overland Pass Pipeline was deconsolidated after the September 2010 sale of a 49% interest and is now accounted for under the equity method, reducing comparability of certain segment revenue and volume measures.
Guidance, outlook, risks and unusual items
- Management announced approximately $2.7 billion to $3.3 billion of ONEOK Partners growth projects, including Williston Basin processing, NGL pipelines, fractionators, pump stations and related infrastructure. 2011 projected capital expenditures were $1.457 billion, including $1.186 billion for ONEOK Partners, $240 million for Distribution and $31 million for other activities.
- Management expected excess natural gas supply, narrower location and seasonal differentials and lower volatility to continue affecting Energy Services through 2012. Approximately 14% of transportation capacity and 20% of storage capacity was scheduled to expire by the end of 2012.
- ONEOK Partners intended to repay $350 million of 5.9% senior notes maturing in April 2012 using cash and short-term borrowings.
- At the September 30, 2011 goodwill and indefinite-lived intangible asset testing date, estimated fair values significantly exceeded carrying values; no impairment charges were required.
- Derivative and commodity exposure remains significant. The filing reports $333.4 million of derivative assets and $354.5 million of derivative liabilities at September 30, 2011, before balance-sheet netting. Energy Services value-at-risk was $3.2 million at period-end.
- A downgrade below investment grade could increase collateral and borrowing requirements and restrict Energy Services’ marketing and trading activities. Derivative agreements with credit-contingent provisions had $3.1 million of net liability exposure that could have required collateral if triggered.
- Risks include commodity-price volatility, weather, production declines, project execution and permitting, pipeline integrity, environmental compliance, changing EPA and pipeline-safety rules, Dodd-Frank implementation, litigation, pension obligations, counterparty credit and access to capital markets.
- Various gas-index pricing lawsuits remained on appeal. Management stated that pending litigation was not expected to have a material adverse effect, but reasonably possible losses could not be estimated.
- Disclosure controls and procedures were effective as of September 30, 2011, and no material changes to internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether ONEOK Partners’ large growth-project program remains on budget, on schedule and supported by producer supply commitments and customer contracts.
- ONEOK’s ability to fund capital expenditures, dividends, debt maturities and share repurchases while maintaining investment-grade ratings and credit-covenant compliance.
- The persistence of weak Energy Services margins as favorable legacy hedges expire and storage and transportation differentials remain narrow.
- The effect of NGL prices, price differentials, production volumes and fractionation capacity on ONEOK Partners’ earnings and cash distributions.
- The maturity and refinancing plan for ONEOK Partners’ $350 million of senior notes due April 2012 and other consolidated debt obligations.
- Potential financial effects of environmental, pipeline-safety, greenhouse-gas, Dodd-Frank and other regulatory developments, as well as the pending gas-index pricing litigation.