01—Abstract
Summary
Summary of the 10-K filed February 22, 2011. Cited figures are marked; the original filing is the authoritative source.
ONEOK, Inc. (NYSE: OKE) closed 2010 with net income attributable to ONEOK of $334.6 milliona, or $3.10 diluted EPS, up from $2.87 in 2009, on revenues of $13.03 billion.
Operating income rose 6% to $944.0 millionb, driven mainly by ONEOK Partners (OKS), where higher NGL volumes, storage margins, Williston Basin gathering volumes and a gain on the partial sale of Overland Pass Pipeline (OPPL) offset weaker NGL optimization margins. The Distribution segment benefited from new Oklahoma rates that shifted revenue toward fixed charges, reducing volumetric weather sensitivity, while Energy Services was essentially flat. The company's core economic exposure is its 42.8% stake in ONEOK Partners, which supplies a large share of parent-level cash flow through distributions.
The main forward-looking theme is ONEOK Partners' announced $1.8 billion to $2.1 billionc of growth projects, concentrated in the Williston Basin (Bakken/Three Forks), Cana-Woodford Shale and Granite Wash. Projected 2011 capital spending is $1.36 billion, of which $1.12 billion sits in ONEOK Partners. Management reports that 2010 dividends rose about 11% to $1.82 per share, and the January 2011 declared dividend of $0.52 implies an annualized $2.08 (about 18% higher year over year).
A three-year, $750 milliond share repurchase program was authorized in October 2010, but no shares had been bought as of February 21, 2011. Investors should weigh several items: parent-level debt of about $1.6 billion and a stand-alone debt-to-capital ratio of 39.4% against a covenant cap of 67.5%; credit ratings of Baa2/BBB (stable), with a downgrade below investment grade threatening Energy Services collateral needs; and exposure to commodity price and basis differentials, plus ongoing gas index pricing and Boles royalty litigation. Pension contributions of $96.8 million in 2010 and a mark-to-market earnings sensitivity in Energy Services are additional watch items.
02—Key points
Key Highlights
- Diluted EPS of $3.10 in 2010, up from $2.87 in 2009 (about 8%); net income attributable to ONEOK of $334.6 million, up from $305.5 million.
- Operating income rose 6% to $944.0 million; ONEOK Partners operating income increased 7% to $586.3 million, helped by a $16.3 million gain on the Overland Pass Pipeline partial sale.
- ONEOK Partners' announced $1.8–$2.1 billion of growth projects (Williston Basin processing and Bakken NGL pipeline, Cana-Woodford/Granite Wash) support future fee-based earnings growth.
- Dividend declared in January 2011 of $0.52 per share ($2.08 annualized), an 18.2% increase; 2010 dividends paid of $1.82 per share, up 11%.
- Liquidity is adequate: $1.0 billion available under the ONEOK credit agreement, $570 million under the ONEOK Partners facility, and about $956 million of ONEOK Partners cash at January 31, 2011, after a $1.3 billion senior notes offering.
- A $750 million three-year share repurchase program was authorized in October 2010, but no shares had been repurchased as of February 21, 2011.
- Credit ratings are investment grade (ONEOK Baa2/BBB, stable), but a downgrade below investment grade would increase collateral requirements for Energy Services and raise borrowing costs.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, ONEOK Inc kept $0.02.
- Revenue$14.81B100.0%
- Cost of revenue−$12.43B83.9%
- Gross profit$2.38B16.1%
- Operating costs−$1.22B8.2%
- Operating income$1.16B7.8%
- Interest, other & tax−$798.3M5.4%
- Net income$360.6M2.4%
Where FY2011 revenue went
$14.81B- Cost of revenue: $12.43B, 84% of revenue
- Net income: $360.6M, 2.4% of revenue
- Operating costs: $1.22B, 8.2% of revenue
- Interest, other & tax: $798.3M, 5.4% of revenue
Kept 2.4% as net incomeNet income $360.6M · 2.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 22, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $14.81B$12.68B | +16.8% |
| Cost of Revenue | $12.43B$10.62B | +17.0% |
| Gross Profit | $2.38B$2.06B | +15.4% |
| Operating Expenses | $1.22B$1.14B | +7.2% |
| Operating Income | $1.16B$942.65M | +22.9% |
| Interest Expense | $297.01M$292.23M | +1.6% |
| Net Income | $360.59M$334.63M | +7.8% |
| EPS (Basic) | $1.72$1.57 | +9.6% |
| EPS (Diluted) | $1.68$1.55 | +8.4% |
| Shares Outstanding (Basic) | 209.34M212.74M | −1.6% |
| Shares Outstanding (Diluted) | 214.50M215.57M | −0.5% |
05—Questions
Frequently Asked Questions
How dependent is ONEOK on ONEOK Partners for cash flow?
Heavily. ONEOK's cash flow depends largely on distributions from ONEOK Partners, which it controls as general partner and in which it owns a 42.8% interest. ONEOK received $303.8 million of cash distributions from ONEOK Partners in 2010, and the company identifies this dependence as a key risk factor.
What drove the earnings increase in 2010?
Higher NGL volumes gathered and fractionated, increased contracted transportation capacity, higher natural gas processing volumes in the Williston Basin, improved storage margins, and the Overland Pass gain. These were partly offset by lower NGL optimization margins and lower premium-services margins in Energy Services. Equity earnings also rose, mainly from Northern Border Pipeline.
What growth projects are planned, and how will they be financed?
ONEOK Partners plans about $1.8–$2.1 billion of projects, including three new 100 MMcf/d Williston Basin processing plants, a 525–615 mile Bakken NGL pipeline, Bushton fractionator expansion, and Cana-Woodford/Granite Wash gathering projects. Projected 2011 capital spending is $1.36 billion. Funding comes from operating cash flow, commercial paper, the $1.28 billion net proceeds of the January 2011 senior notes offering, and equity issuance.
Is the dividend safe, and what is the buyback status?
The dividend has grown each year (from $1.56 in 2008 to $1.82 in 2010) and the January 2011 declaration implies $2.08 annualized. Dividends are funded primarily from operating cash flow and ONEOK Partners distributions. The $750 million repurchase program, authorized in October 2010 with a $300 million annual cap, had no repurchases as of February 21, 2011.
What are the main risks highlighted in the filing?
Key risks include dependence on ONEOK Partners distributions; commodity price and basis volatility, partly unhedged; weather sensitivity; possible loss of investment-grade ratings, which would trigger collateral requirements at Energy Services; regulatory and environmental cost exposure, including greenhouse gas rules; and litigation, including gas index price reporting suits and the Boles royalty cases.
06—Continue