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| OKE > SEC Filings for OKE > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the Notes to Consolidated Financial Statements in this Quarterly Report, as well as our Annual Report. Due to the seasonal nature of our business, the results of operations for the three and nine months ended September 30, 2009, are not necessarily indicative of the results that may be expected for a 12-month period.
EXECUTIVE SUMMARY
The following discussion highlights some of our achievements and significant issues affecting us for the periods presented. Please refer to the "Capital Projects," "Financial Results and Operating Information," and "Liquidity and Capital Resources" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements for additional information:
Outlook - We expect improving economic conditions for the remainder of 2009 and into 2010, compared with the fourth quarter of 2008 and the first two quarters of 2009, when we began to experience reduced drilling activity, less supply growth and lower commodity prices for natural gas, NGLs and crude oil. Although ONEOK has been able to access the commercial paper markets and ONEOK Partners has been able to access the debt and equity markets to meet the liquidity and capital resource needs of each in 2009, we expect continued volatility in the financial markets, which could limit our access to these markets or increase the cost of issuing new securities in the future.
Operating Results - Diluted earnings per share of common stock from continuing operations (EPS) were $0.45 and $0.55 for the three months ended September 30, 2009, and 2008, respectively. For the nine-month period, EPS decreased to $2.00 from $2.30 for the same period last year. Operating income for the three months ended September 30, 2009, decreased to $173.8 million from $192.2 million for the same period last year. For the nine months ended September 30, 2009, operating income decreased to $621.6 million from $698.3 million for the same period last year. These decreases were due primarily to lower realized commodity prices and narrower NGL product price differentials in our ONEOK Partners segment and were partially offset by increased volumes gathered, fractionated and transported, primarily associated with the completion of the Overland Pass Pipeline and related expansion projects and the Arbuckle Pipeline, as well as new NGL supply connections in our ONEOK Partners segment.
ONEOK Partners' Equity Issuance - In June 2009, ONEOK Partners completed an underwritten public offering of 5,000,000 common units at $45.81 per common unit, generating net proceeds of approximately $219.9 million after deducting underwriting discounts but before offering expenses.
In July 2009, ONEOK Partners sold an additional 486,690 common units at $45.81 per common unit to the underwriters of the public offering upon the partial exercise of their option to purchase additional common units to cover over-allotments. ONEOK Partners received net proceeds of approximately $21.4 million from the sale of the common units after deducting underwriting discounts but before offering expenses.
In conjunction with the public offering and partial exercise by the underwriters of their overallotment option, ONEOK Partners GP contributed an aggregate of $5.1 million in order to maintain its 2 percent general partner interest. As a result of these transactions, our interest in ONEOK Partners is 45.1 percent.
ONEOK Partners used the proceeds from the sale of common units and the general partner contributions to repay borrowings under its $1.0 billion amended and restated revolving credit agreement dated March 30, 2007 (ONEOK Partners Credit Agreement) and for general partnership purposes.
ONEOK Partners' Debt Issuance - In March 2009, ONEOK Partners completed an underwritten public offering of $500 million aggregate principal amount of 8.625 percent Senior Notes due 2019. After deducting underwriting discounts, commissions and expenses, ONEOK Partners used the net proceeds of approximately $494.3 million from the offering to repay indebtedness outstanding under the ONEOK Partners Credit Agreement.
Dividends/Distributions - We declared a quarterly dividend of $0.42 per share ($1.68 per share on an annualized basis) in October 2009, an increase of approximately 5 percent from the $0.40 per share declared in October 2008. ONEOK Partners declared a cash distribution of $1.09 per unit ($4.36 per unit on an annualized basis) in October 2009, an increase of approximately 1 percent from the $1.08 per unit declared in October 2008.
Capital Projects - ONEOK Partners placed the following projects in service
during the first ten months of 2009:
· Guardian Pipeline's natural gas pipeline expansion and extension project;
· D-J Basin lateral natural gas liquids pipeline;
· Williston Basin natural gas processing plant expansion;
· Arbuckle natural gas liquids pipeline; and
· Piceance lateral natural gas liquids pipeline.
CAPITAL PROJECTS
All of the capital projects discussed below are in our ONEOK Partners segment.
Overland Pass Pipeline - In November 2008, Overland Pass Pipeline Company completed construction of a 760-mile natural gas liquids pipeline from Opal, Wyoming, to the Mid-Continent natural gas liquids market center in Conway, Kansas. The Overland Pass Pipeline is designed to transport approximately 110 MBbl/d of unfractionated NGLs and can be increased to approximately 255 MBbl/d with additional pump facilities. At the end of the third quarter 2009, average flow rates on the Overland Pass Pipeline were approximately 99 MBbl/d. Overland Pass Pipeline Company is a joint venture between ONEOK Partners and a subsidiary of The Williams Companies, Inc. (Williams). A subsidiary of ONEOK Partners owns 99 percent of the joint venture and is currently operating the pipeline. On or before November 17, 2010, Williams has the option to increase its ownership in Overland Pass Pipeline Company, which includes the Piceance Lateral and D-J Basin Lateral pipeline projects, up to 50 percent, with the purchase price being determined in accordance with the joint venture's operating agreement. If Williams exercises its option to increase its ownership to the full 50 percent, Williams would have the option to become operator. If Williams does not elect to increase its ownership to at least 10 percent, ONEOK Partners will have the right, but not the obligation, to purchase Williams' entire ownership interest, with the purchase price being determined in accordance with the joint venture's operating agreement. The project costs for the Overland Pass Pipeline, the Piceance Lateral Pipeline and the DJ Basin Lateral Pipeline in total are expected to be approximately $780 million, excluding AFUDC.
As part of a long-term agreement, Williams dedicated its NGL production from two of its natural gas processing plants in Wyoming, estimated to be approximately 70 MBbl/d to 80 MBbl/d, to the Overland Pass Pipeline. Subsidiaries of ONEOK Partners are providing downstream fractionation, storage and transportation services to Williams. ONEOK Partners has also reached agreements with certain producers for supply commitments from the D-J Basin and Piceance Lateral pipelines. During the fourth quarter of 2009 and following the completion of the Piceance Lateral, throughput on the Overland Pass Pipeline is expected to reach 130 MBbl/d to 140 MBbl/d, and ONEOK Partners is negotiating agreements with other producers for supply commitments that could add an additional 60 MBbl/d of supply to this pipeline within the next three to five years.
ONEOK Partners also invested approximately $239 million, excluding AFUDC, to expand its existing fractionation and storage capabilities and to increase the capacity of its natural gas liquids distribution pipelines. Part of this expansion included adding new fractionation facilities at ONEOK Partners' Bushton, Kansas, location, which increased the total fractionation capacity at the Bushton facility to 150 MBbl/d from 80 MBbl/d. The addition of the new facilities and the upgrade to the existing fractionator were completed in October 2008. Additionally, portions of the natural gas liquids distribution pipeline upgrades were completed in the second and third quarters of 2008.
Piceance Lateral Pipeline - In October 2008, Overland Pass Pipeline Company began construction of a 150-mile lateral pipeline with capacity to transport as much as 100 MBbl/d, from the Piceance Basin in Colorado to the Overland Pass Pipeline. Williams has dedicated its NGL production from its new Willow Creek natural gas processing plant, and will dedicate NGL production from an additional existing natural gas processing plant. Another plant owned by a third party has also been dedicated. We expect the total throughput on the lateral pipeline to reach approximately 30 MBbl/d during the fourth quarter of 2009. ONEOK Partners continues to negotiate with other producers for supply commitments. Construction was completed and the lateral pipeline was placed in service in October 2009. The project is currently estimated to cost in the range of $135 million to $140 million, excluding AFUDC.
D-J Basin Lateral Pipeline - In March 2009, Overland Pass Pipeline Company placed in service the 125-mile natural gas liquids lateral pipeline from the Denver-Julesburg Basin in northeastern Colorado to the Overland Pass Pipeline. The pipeline has capacity to transport as much as 55 MBbl/d of unfractionated NGLs. The project cost was approximately $70 million, excluding AFUDC. Daily volumes reached approximately 30 MBbl/d during the third quarter of 2009, with the potential for an additional 10 MBbl/d from new drilling and plant upgrades in the next two years.
Arbuckle Natural Gas Liquids Pipeline - In July 2009, ONEOK Partners completed construction of the 440-mile Arbuckle pipeline project, a natural gas liquids pipeline system that delivers unfractionated NGLs from points in southern Oklahoma and Texas to the Texas Gulf Coast. The Arbuckle pipeline system has the capacity to transport 160 MBbl/d of unfractionated NGLs, expandable to 240 MBbl/d with additional pump facilities, and connects ONEOK Partners' existing Mid-Continent infrastructure with its fractionation facility in Mont Belvieu, Texas, and other Gulf Coast region fractionators. ONEOK Partners has NGL production dedicated from existing and new natural gas processing plants that it expects to provide throughput of approximately 210 MBbl/d over the next three to five years.
The demand for surface easements increased dramatically in Texas and Oklahoma over the last two years because of increased oil and natural gas exploration and production activities, as well as pipeline construction. As previously reported, project costs have been more expensive than originally estimated due to delays associated with right-of-way acquisition, increased materials costs and difficult construction conditions associated with several weeks of heavy spring rains, resulting in greatly reduced construction productivity. ONEOK Partners also experienced increased costs due to a number of scope changes, arising primarily from additional supply development opportunities. As previously discussed, ONEOK Partners currently estimates project costs will be approximately $490 million, excluding AFUDC, for the current capacity. ONEOK Partners began filling the pipeline with product in July 2009 and placed the project in service in August 2009. Volumes reached 80 MBbl/d during the month of October 2009.
Williston Basin Gas Processing Plant Expansion - The expansion of ONEOK Partners' Grasslands natural gas processing facility in North Dakota was placed in service in March 2009. The expansion increased processing capacity to approximately 100 MMcf/d from its previous capacity of 63 MMcf/d and increased fractionation capacity to approximately 12 MBbl/d from 8 MBbl/d. The cost of the project was approximately $46 million, excluding AFUDC.
Guardian Pipeline Expansion and Extension - In February 2009, ONEOK Partners completed the 119-mile extension of its Guardian Pipeline. The pipeline has capacity to transport 537 MMcf/d of natural gas north from Ixonia, Wisconsin, to the Green Bay, Wisconsin, area. The project is supported by 15-year shipper commitments with We Energies and Wisconsin Public Service Corporation, and the capacity is close to fully subscribed. The project cost approximately $325 million, excluding AFUDC.
REGULATORY
Several regulatory initiatives impacted the earnings and future earnings potential for our Distribution segment. See discussion of our Distribution segment's regulatory initiatives on page 44.
IMPACT OF NEW ACCOUNTING STANDARDS
Information about the impact of new accounting standards is included in Note A of the Notes to Consolidated Financial Statements in this Quarterly Report.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amount of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates.
Information about our critical accounting estimates is included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates," in our Annual Report.
Goodwill and Indefinite-lived Intangible Assets Impairment Test - We assess our goodwill and indefinite-lived intangible assets for impairment at least annually. There were no impairment charges resulting from our July 1, 2009, impairment test.
As part of our goodwill impairment test, an initial assessment is made by comparing the fair value of a reporting unit with its book value, including goodwill. To estimate the fair value of our reporting units, we use two generally accepted valuation approaches, an income approach and a market approach. Under the income approach, we use anticipated cash flows over a period of years plus a terminal value and discount these amounts to their present value using appropriate rates of return.
Under the market approach, we apply multiples to forecasted EBITDA amounts. The multiples used are consistent with historical asset transactions, and the EBITDA amounts are based on average forecasted EBITDA for a reporting unit over a period of years.
As part of our indefinite-lived intangible asset impairment test, we compare the estimated fair value of our indefinite-lived intangible asset with its book value. The fair value of our indefinite-lived intangible asset is estimated using the market approach. Under the market approach, we apply multiples to forecasted cash flows of the assets associated with our indefinite-lived intangible asset. The multiples used are consistent with historical asset transactions.
Our estimates of fair value significantly exceeded the book value of our reporting units and indefinite-lived intangible asset in our July 1, 2009, impairment test. Even if the estimated fair values used in our July 1, 2009, impairment test were reduced by 10 percent, no impairment charges would have resulted. At September 30, 2009, and December 31, 2008, we had $602.8 million of goodwill and a $155.6 million indefinite-lived intangible asset recorded on our Consolidated Balance Sheets.
Derivatives and Risk Management - We utilize financial instruments to reduce our market risk exposure to commodity price and interest rate risk. We do not believe that changes in our fair value estimates of our derivative instruments have a material impact on our results of operations, as the majority of our derivatives are accounted for as hedges for which ineffectiveness is not material. See Notes B and C of the Notes to Consolidated Financial Statements in this Quarterly Report for additional discussion of our fair value measurements and derivatives and risk management activities.
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