There are three keys to understanding ONEOK's (NYSE:OKE) third-quarter report, which came out after the markets closed on Tuesday. First is the importance of fees to its business, which is followed in importance by volumes. However, both are driven solely by the assets owned by its MLP, ONEOK Partners (NYSE:OKS), which in a sense makes it the most important key to understanding ONEOK's results.

Drilling down into the numbers
That was clear from the comments from CEO Terry Spencer in ONEOK's earnings release: "As the general partner of ONEOK Partners, ONEOK's third-quarter results benefited from increased natural gas liquids volumes and natural gas gathered volumes at the partnership." For confirmation, investors need to look no further than ONEOK's income statement to see that the company's primary source of income was the distributions it received from ONEOK Partners, which in the third quarter totaled $197.5 million and was up 21.9% year over year.

Driving this increase in distributions was a 49% increase in NGLs transported by ONEOK Partners, primarily because of Permian Basin volumes transported on its recently acquired West Texas LPG pipeline system. In addition, NGLs fractionated increased by 7% year over year. This situation drove strong operating earnings growth in ONEOK Partners' NGL segment:

SegmentQ3 2015 ActualsQ3 2014 ActualsGrowth (YOY)
Natural gas liquids $207.5 million $173.8 million 19.4%
Natural gas pipelines $37.7 million $36.2 million 4.1%
Natural gas gathering and processing $42.3 million $82.9 billion (49%)

Data source: ONEOK. 

The company also delivered steady fee-based income from its natural gas pipeline segment. These two segments, when combined with equity earnings from ONEOK Partners' investments, more than offset weakness from its natural gas processing segment, which experienced a substantial drop in operating income because of its direct exposure to commodity prices.

However, it's worth noting that ONEOK Partners made steady progress to restructure many of the percent-of-proceeds contracts in its natural gas processing segment to fee-based contracts. It now expects that the segment's fee-based margin will increase to more than 70% next year, compared with just 50% this year. This focus on fees will provide even more stability to its operating income going forward.

Despite this weakness, ONEOK Partners still managed to grow its earnings and cash flow year over year, and that was the key to driving the aforementioned increase in distributions to ONEOK, which after expenses resulted in its producing $173 million in cash available for dividends. That number is up 26.3% from the year-ago quarter and more than covered the company's current dividend, leaving it with a very healthy 1.34 dividend coverage ratio.

A look ahead
Despite some headwinds in the market from lower oil and gas prices, ONEOK Partners expects to continue to grow its volumes. According to Spencer, "We expect NGL and natural gas volumes to continue to increase as a result of connecting seven third-party natural gas plants to our NGL system this year, reaching full capacity at our Williston Basin natural gas processing plants in September and the expected completion of our new 200 million cubic feet-per-day Lonesome Creek natural gas processing plant in the Williston Basin by the end of this month."

ONEOK Partners is therefore reaffirming its 2015 adjusted EBITDA guidance range of $1.51 billion to $1.73 billion and its distributable cash flow guidance range of $1.08 billion to $1.26 billion. This situation is leading ONEOK to reaffirm its full-year guidance for cash flow available for dividends to be in a range of $570 million to $650 million, with free cash flow guidance remaining in a range of $90 million to $120 million.

Investor takeaway
ONEOK reported solid third-quarter results thanks to a steady foundation of fee-based income and higher volumes at its MLP, ONEOK Partners. The company expects both to continue to grow because it remains focused on converting customers in its natural gas processing segment over to fee-based contracts while building additional fee-based assets to increase its processed volumes. This combination is the key to its ability to reaffirm its guidance, which is quite a feat, considering commodity prices have been extremely volatile.