ONEOK, INC.. 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.
RECENT DEVELOPMENTS
Please refer to the "Financial Results and Operating Information" and "Liquidity and Capital Resources" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for additional information.
Market Conditions, COVID-19 and Business Update - We experienced earnings growth from increased volumes in the second quarter 2021, compared with the second quarter 2020, due primarily to increased producer activity in theRocky Mountain region and higher commodity prices, highlighting the economic recovery from the pandemic. Although the energy industry has experienced many up and down cycles, we have positioned ourselves to reduce exposure to direct commodity price volatility. Each of our three reportable segments are primarily fee-based, and we expect our consolidated earnings to be approximately 90% fee-based in 2021. While our Natural Gas Gathering and Processing segment's earnings are primarily fee-based, we have direct commodity price exposure related primarily to fee with POP contracts. In addition, our Natural Gas Gathering and Processing and Natural Gas Liquids segments are exposed to volumetric risk as a result of reduced drilling and completion activity, declining well productivity, severe weather disruption, operational outages and crude oil, NGL and natural gas demand. Our Natural Gas Pipelines segment is not exposed to significant volumetric risk due to nearly all of our capacity being subscribed under long-term firm fee-based contracts. In continued response to COVID-19, we remain committed to managing the impact of the pandemic on our employees. We continue to protect our workforce and, as always, we remain focused on operating our assets safely, reliably and in an environmentally responsible manner. We continue to monitor the COVID-19 outbreak and have previously implemented our business continuity plans.ONEOK is a critical infrastructure business as defined by theUnited States Department of Homeland Security and, therefore, our workforce has remained fully engaged within federal, state and local government issued guidelines and safety-related ordinances. We continue to practice remote work procedures when possible to protect the safety of our employees and their families and continue to take precautions for our employees who work in the field or need to report to aONEOK facility. As COVID-19 vaccinations are readily available, we anticipate implementing a return to office plan later this year. We continue to apply risk-management and cybersecurity measures designed so that our systems remain functional in order to both serve our operational needs and to provide service to our customers. Due to higher commodity prices and increased producer activity in the regions we operate, volumes in the second quarter 2021 increased, compared with the first quarter 2021, in both our Natural Gas Gathering andProcessing and Natural Gas Liquids segments. We expect volumes to remain strong for the remainder of 2021 due to continued increases in producer activity and increased ethane demand from the petrochemical industry. 29 -------------------------------------------------------------------------------- Table of Contents InFebruary 2021 , Winter Storm Uri brought significant challenges to the energy industry and our operating areas. Our employees were proactive in preparing for the severe winter weather, made the necessary operational adjustments to keep our assets operational and provided exceptional service to meet the needs of our customers during the difficult weather conditions as demand for natural gas, propane and electricity soared. This increased demand, coupled with supply reductions from wellhead freeze-offs and power outages to processing plants in the Mid-Continent andRocky Mountain regions and thePermian Basin and fractionators in the Mid-Continent region, resulted in record high commodity prices at certain market hubs, particularly in the Mid-Continent region and inTexas . Commodity prices quickly returned to previous levels as the weather improved and natural gas supply returned. Winter Storm Uri impacted all three of our operating segments, resulting in a net positive impact to our financial results, primarily in the first quarter 2021 and for the six months endedJune 30, 2021 , as our ability to meet increased demand for natural gas and to provide services during the period offset the unfavorable volume impacts. Our well-positioned natural gas storage assets and market connected pipelines in our Natural Gas Pipelines segment were able to meet critical needs during this period of severe winter weather. The reliability of our interstate and intrastate assets enabled us to continue to provide our customers access to transportation services, park-and-loan services and additional natural gas supply if available, which improved our financial results. However, wellhead freeze-offs reduced February volumes in our Natural Gas Gathering and Processing and Natural Gas Liquids segments, which negatively impacted our financial results in the first quarter 2021. We expect to maintain sufficient liquidity and financial stability in 2021 due to cash flows from operations, our undrawn$2.5 Billion Credit Agreement,$374.4 million in cash and cash equivalents and no debt maturities until 2022.
See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, in this Quarterly Report for more information on our exposure to market risk.
Sustainability and Social Responsibility - We continue to look for ways to reduce our environmental impact and utilize more efficient technologies. In 2021, we qualified for inclusion in the S&P Global Sustainability Yearbook and received Industry Mover status, which is awarded to a company that recorded the strongest year-over-year improvement in its industry. In addition, we received a perfect score of 100 in theHuman Rights Campaign 2021 Corporate Equality Index. We have a stand-alone environmental sustainability team, formed in 2017, that accelerated our ongoing environmental stewardship efforts and is exploring ways to lower our greenhouse gas emissions. Additionally, in 2020, we created a group dedicated to the commercial development of renewable energy and low-carbon projects. Together with our sustainability team, we are actively researching opportunities that will complement our extensive midstream assets and expertise, strengthening the vital role we expect to play in the transformation to a lower-carbon economy. Natural Gas - In our Natural Gas Gathering and Processing segment, gathered and processed volumes in theRocky Mountain region increased in the second quarter 2021, compared with the first quarter 2021, due primarily to increased production and the impact of seasonal winter weather in the first quarter 2021, and increased compared with the second quarter 2020, due primarily to increased production and the impact of curtailed production in the second quarter 2020. We expect volumes in theRocky Mountain region to continue to increase for the remainder of 2021 due to increased producer activity, which includes the completion of previously drilled but uncompleted wells. OurBear Creek plant expansion, which was previously paused, is expected to be completed in the fourth quarter 2021, which will increase our total processing capacity to approximately 1.7 Bcf/d in theWilliston Basin . In our Natural Gas Pipelines segment, our assets are connected to key supply areas and demand centers, including export markets inMexico via Roadrunner and supply areas inCanada andthe United States via our interstate and intrastate natural gas pipelines andNorthern Border Pipeline , which enable us to provide essential natural gas transportation and storage services. Continued demand from local distribution companies, electric-generation facilities and large industrial companies resulted in low-cost expansions in 2019, 2020, 2021 and expansions expected to be completed in 2022 that position us well to provide additional services to our customers when needed. InFebruary 2021 , severe winter weather impacted our operations. Due to the reliability of our pipeline and storage assets, we were able to continue to provide services to customers meeting critical needs during the winter storm. The contracted portion of our natural gas transportation capacity is not significantly impacted by commodity prices, as our end users rely on natural gas to support their business regardless of commodity price fluctuations. We continue to experience stable fee-based earnings with transportation capacity approximately 95% contracted with firm commitments, which we expect to continue throughout 2021 at similarly contracted levels. Our ability to provide reliable service throughout the extreme weather conditions highlighted the importance of market-connected pipelines and storage assets and the value of these services. Since the storm, we have received increased interest from customers seeking additional long-term transportation and storage capacity on our system, and we have recontracted storage services at higher rates and longer terms. In addition, during the first quarter 2021, we sold natural gas that we owned and held in storage, which benefited our 30 -------------------------------------------------------------------------------- Table of Contents segment's financial results. During the extreme winter weather periods, we maximized natural gas storage withdrawals for firm service customers serving critical needs. NGLs - In our Natural Gas Liquids segment, NGL volumes were higher in the second quarter 2021, compared with the first quarter 2021, due primarily to increased producer activity and ethane production across our system and the negative impact of Winter Storm Uri on volumes in the first quarter 2021. Volumes were also higher, compared with the second quarter 2020, due primarily to the impact of curtailed production in the second quarter 2020, and increased producer activity and ethane production across our system in 2021. We expect NGL volumes to continue to increase due to increased producer activity driven by stronger demand for energy as a result of economic recovery from the pandemic. We also expect volumes to increase as demand for ethane increases as new petrochemical plants come on-line. We expect to benefit from these higher volumes, without significant investment, due to our recently completed capital-growth projects. Ethane Production - Price differentials between ethane and natural gas can cause natural gas processors to extract ethane or leave it in the natural gas stream. As a result of these ethane economics, ethane volumes on our system can fluctuate period to period. Ethane volumes under long-term contracts delivered to our NGL system averaged 435 MBbl/d in the second quarter 2021, compared with 355 MBbl/d in the first quarter 2021, due primarily to changes in ethane extraction economics and the negative impact of Winter Storm Uri in the first quarter 2021. We estimate that there is approximately 225 MBbl/d of discretionary ethane, consisting of approximately 125 MBbl/d in theRocky Mountain region and approximately 100 MBbl/d in the Mid-Continent region, that can be recovered and transported on our system. Ethane recovery opportunities will fluctuate based on regional natural gas pricing, ethane economics and potential incentivized recovery. Growth Projects - We operate an integrated, reliable and diversified network of NGL and natural gas gathering, processing, fractionation, storage and transportation assets connecting supply in theRocky Mountain , Mid-Continent and Permian regions with key market centers. We have completed significant capital-growth projects that include NGL pipelines, NGL fractionators, natural gas processing plants and related natural gas and NGL infrastructure. These projects provide us the capacity to benefit from future supply growth without significant capital investment. Our announced capital-growth projects are outlined in the table below:
Approximate
Project Scope Costs (a) Expected Completion
Natural Gas Gathering and Processing (In millions)
$405 Q4 2021 related infrastructure related gathering infrastructure in theWilliston Basin Supported by acreage dedications with long-term primarily fee-based contracts Natural Gas Liquids
Arbuckle II pipeline expansion Increasing mainline capacity with additional
$60 Completed pump facilities Increases capacity to 500 MBbl/d
MB-5 fractionator and related 125 MBbl/d NGL fractionator in
$750 Paused (b) infrastructure Texas, and related infrastructure, which includes additional NGL storage in Mont Belvieu West Texas LPG pipeline Increasing mainline capacity by 40 MBbl/d$145 Paused (b) expansion Mid-Continent fractionation 65 MBbl/d of expansions at our Mid-Continent$150 Paused (b) facility expansions NGL facilities (a) - Excludes capitalized interest/AFUDC. (b) - We do not expect to complete construction by the original target completion date. While many of the construction activities on these projects were paused in 2020, some activity continued in order to complete the infrastructure necessary to support volumes until market conditions warrant full project completion.
Debt Repayments - In the first quarter 2021, we repurchased in the open market
outstanding principal of certain of our senior notes in the amount of
In
Dividends - InFebruary 2021 andMay 2021 , we maintained and paid a quarterly dividend of$0.935 per share ($3.74 per share on an annualized basis), which is consistent with the respective quarters in the prior year. We declared a quarterly dividend of$0.935 per share ($3.74 per share on an annualized basis) inJuly 2021 . The quarterly dividend will be paidAugust 16, 2021 , to shareholders of record at the close of business onAugust 2, 2021 . 31
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FINANCIAL RESULTS AND OPERATING INFORMATION
How We Evaluate Our Operations
Management uses a variety of financial and operating metrics to analyze our performance. Our consolidated financial metrics include: (1) operating income; (2) net income (loss); (3) diluted EPS; and (4) the following non-GAAP financial measures: adjusted EBITDA and distributable cash flow. We evaluate segment operating results using adjusted EBITDA and our operating metrics, which include various volume and rate statistics that are relevant for the respective segment. These operating metrics allow investors to analyze the various components of segment financial results in terms of volumes and rate/price. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. For additional information on our operating metrics, see the respective segment subsections of this "Financial Results and Operating Information" section. Non-GAAP Financial Measures - Adjusted EBITDA, distributable cash flow and dividend coverage ratio are non-GAAP measures of our financial performance. Adjusted EBITDA is defined as net income adjusted for interest expense, depreciation and amortization, noncash impairment charges, income taxes, allowance for equity funds used during construction, noncash compensation expense and certain other noncash items. Distributable cash flow is defined as adjusted EBITDA, computed as described above, less interest expense, maintenance capital expenditures and equity earnings from investments, excluding noncash impairment charges, adjusted for net cash distributions received from unconsolidated affiliates and certain other items. Dividend coverage ratio is defined as distributable cash flow to common shareholders divided by the dividends paid in the period. We believe these non-GAAP financial measures are useful to investors because they and similar measures are used by many companies in our industry as a measurement of financial performance and are commonly employed by financial analysts and others to evaluate our financial performance and to compare financial performance among companies in our industry. Adjusted EBITDA, distributable cash flow and dividend coverage ratio should not be considered alternatives to net income, EPS or any other measure of financial performance presented in accordance with GAAP. Additionally, these calculations may not be comparable with similarly titled measures of other companies.
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