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| OKS > SEC Filings for OKS > 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:
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:
Segment Realignment - As a result of increased integration within our natural gas liquids business, we implemented changes to the structure of our previous reportable business segments during the third quarter of 2009 to better align them with how we manage our businesses. Our financial results are now reported in these three segments: (i) Natural Gas Gathering and Processing; (ii) Natural Gas Pipelines, both of which remain unchanged; and (iii) Natural Gas Liquids, which is comprised of our former natural gas liquids gathering and fractionation segment and our former natural gas liquids pipelines segment. Prior period amounts have been recast to reflect these segment changes.
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 we have been able to access the capital markets for our debt and equity needs 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 debt or equity securities in the future.
Operating Results - Limited partners' net income per unit decreased to $1.00 for
the three months ended September 30, 2009, compared with $1.97 for the same
period in 2008. For the nine-month period, limited partners' net income per unit
decreased to $2.67 from $4.93 for the same period last year. The decrease in
limited partners' net income per unit for the three- and nine-month periods is
due primarily to the following:
· a decrease in net margin due primarily to:
- lower realized commodity prices in our Natural Gas Gathering and Processing segment;
- narrower NGL product price differentials in our Natural Gas Liquids segment; and
- a decrease related to prior-year operational measurement gains, primarily at NGL storage caverns; partially offset by
- higher NGL 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 Natural Gas Liquids segment;
- higher natural gas transportation margins from the Guardian Pipeline expansion and extension that was completed in February 2009 and an increase in volumes contracted on Midwestern Gas Transmission in our Natural Gas Pipelines segment; and
- higher volumes processed and sold in our Natural Gas Gathering and Processing segment.
· an increase in operating costs resulting from the operation of the Overland Pass Pipeline and the Arbuckle Pipeline and increased costs at our fractionation facilities, which includes the expanded Bushton Plant fractionator;
· an increase in depreciation expense associated with our completed capital projects;
· an increase in interest expense due primarily to our March 2009 debt issuance and a decrease in capitalized interest due to the completion of our capital projects; and
· an increase in the number of common units outstanding.
Equity Issuance - In June 2009, we 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, we 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. We 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 in us. As a result of these transactions, ONEOK and its subsidiaries now hold an aggregate 45.1 percent interest in us.
We used the proceeds from the sale of common units and the general partner contributions to repay borrowings under our Partnership Credit Agreement and for general partnership purposes.
Debt Issuance - In March 2009, we completed an underwritten public offering of $500 million aggregate principal amount of 8.625 percent Senior Notes due 2019. We used the net proceeds, after deducting underwriting discounts and commissions and expenses, of approximately $494.3 million from the offering to repay indebtedness outstanding under our Partnership Credit Agreement.
Cash Distributions - In October 2009, we declared a cash distribution of $1.09 per unit ($4.36 per unit on an annualized basis), an increase of approximately 1 percent over the $1.08 per unit declared in October 2008.
Capital Projects - The following projects were placed 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 expenditures in 2009 are expected to be significantly lower than in 2008, when we spent approximately $1.3 billion. We plan to spend approximately $583 million on capital expenditures in 2009, of which approximately $523 million is for growth projects.
CAPITAL PROJECTS
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 us and a subsidiary of The Williams Companies, Inc. (Williams). We own 99 percent of the joint venture and are 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, we 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. We provide downstream fractionation, storage and transportation services to Williams. We have 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 we are 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.
We also invested approximately $239 million, excluding AFUDC, to expand our existing fractionation and storage capabilities and to increase the capacity of our natural gas liquids distribution pipelines. Part of this expansion included adding new fractionation facilities at our 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 our natural gas liquids distribution pipeline upgrades were completed in the second and third quarters of 2008. Overland Pass Pipeline Company and the associated expansions are included in our Natural Gas Liquids segment.
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. We continue 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. This project is in our Natural Gas Liquids segment.
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. This project is in our Natural Gas Liquids segment.
Arbuckle Natural Gas Liquids Pipeline - In July 2009, we 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 our existing Mid-Continent infrastructure with our fractionation facility in Mont Belvieu, Texas, and other Gulf Coast region fractionators. We have NGL production dedicated from existing and new natural gas processing plants that we expect 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. We also experienced increased costs due to a number of scope changes, arising primarily from additional supply development opportunities. As previously discussed, we currently estimate project costs will be approximately $490 million, excluding AFUDC, for the current capacity. We 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. This project is in our Natural Gas Liquids segment.
Williston Basin Gas Processing Plant Expansion - The expansion of our 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. This project is in our Natural Gas Gathering and Processing segment.
Guardian Pipeline Expansion and Extension - In February 2009, we completed the 119-mile extension of our 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. This project is in our Natural Gas Pipelines segment.
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 Impairment Test - We assess our goodwill for impairment at least annually. There were no impairment charges resulting from our July 1, 2009, impairment test.
As part of our 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.
Our estimates of fair value significantly exceeded the book value of our reporting units 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 $396.7 million of goodwill 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 fluctuations and to achieve more predictable cash flows. 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 cash flow 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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