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Oneok Sells Assets to Northern Border for $3B; TransCanada to Operate NBPL

February 20, 2006
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Shares of Oneok and Northern Border Partners rose sharply last week after the companies along with TransCanada Corp. announced a complex series of transactions that will include the sale of Oneok's gas liquids, pipelines, midstream and storage assets to Northern Border Partners (NBP) for $3 billion in cash and NBP partnership units. The deals also include the purchase by TransCanada of a larger stake in Northern Border Pipeline Co.

For its assets, Oneok will receive $1.35 billion in cash and 36.5 million limited partner units worth $1.65 billion. Oneok will use $40 million of the proceeds to buy TransCanada's 17.5% stake in Northern Border Partners. In the end, Oneok will hold a 45.7% stake in Northern Border Partners, which owns not only part of Northern Border Pipeline, but also Midwestern Gas Transmission, Viking Gas Transmission, Bear Paw Energy, Crestone Energy and Black Mesa Pipeline, a coal slurry system in Arizona and Nevada.

"These transactions deliver both immediate and long-term value to Oneok and Northern Border Partners, and position both companies for future growth," said Oneok Chairman David Kyle. "Oneok will have an expanded ownership position in a larger, more diversified master limited partnership with an increased capacity to grow." OKE shares soared about 14% last week ending the week at $30.36 after opening Monday at $26.61. NBP units rose 11% to $48.74 Friday from $43.80 at the opening bell last Monday.

Oneok has undergone a significant transformation since its relationship with Northern Border started two years ago. The company took a small stake in the partnership in late 2004, buying part of Northern Plains Natural Gas for $175 million (see NGI, Sept. 20, 2004). Since then, it purchased Koch's gas liquids business for $1.35 billion -- those assets will be among the holdings transferred to Northern Border -- and sold off a large amount of exploration and production assets and a substantial segment of its Texas gas gathering and processing assets (see NGI, Oct. 17, 2005; Sept. 26, 2005). The company now will be left with its gas utility operations, marketing business and stake in NBP.

"We are selling the assets at current market valuations and expect to have more clarity on the value of our remaining portfolio of businesses -- the three local gas distribution companies, our energy services business and our 45.7% investment in Northern Border Partners," said Kyle. Oneok's utilities serve more than two million customers in Oklahoma, Kansas and Texas.

Oneok's midstream, pipeline and storage assets will significantly boost the partnerships holdings. They are primarily located in the Midcontinent region and include about 14,000 miles of gathering, 2 Bcf/d of processing, 5,600 miles of integrated pipeline with 2.9 Bcf/d of peak-day transportation, and 51.6 Bcf of working storage capacity. Oneok also will sell the Koch gas liquids assets to Northern Border Partners for $1.35 billion, the price it paid to Koch in July 2005.

The proceeds from the sale will be used to reduce short-term debt, acquire other assets or repurchase Oneok common stock, the company said. Because of the deals, Oneok raised its net income guidance to $2.23-2.29 per diluted share for 2006. Previous guidance was $1.97-2.03 per diluted share.

NBP also sees significant benefits from the transactions. It said it will initially fund the cash portion of the Oneok acquisition with bridge financing and with the proceeds from the sale of a 20% interest in Northern Border Pipeline to TransCanada affiliate TC PipeLines LP for $300 million, excluding $120 million in associated debt.

NBP CEO William Cordes said the transactions are expected to be immediately accretive to NBP's distributable cash flow. "With these additional assets and the associated increases in cash flow, we hope to be able to increase our indicated annualized distribution to unit holders by approximately $0.55 to $3.75 by the end of the year," he said.

In addition, NBP is considering increasing quarterly distributions by $0.13 to $0.15 per unit. It expects its total debt-to-capitalization to improve to 45% after completion of the transaction, compared with 57% currently.

"In addition to improving our ability to increase distributions to unit holders, the acquisitions also provide us with a stronger balance sheet, with additional capacity to fund future growth," said Cordes. "Adding these assets to our existing base will provide us with a larger and more diversified portfolio that will provide more opportunities for organic growth."

TransCanada's share of the transactions will give it a much larger stake in yet another pipeline that links western Canadian gas production to U.S. markets. Northern Border Pipeline transports gas from the Montana-Saskatchewan border, where it connects with TransCanada's Foothills System, to interconnecting pipelines in the Upper Midwest.

"With capacity of 2.4 Bcf/d, Northern Border is the largest natural gas pipeline connecting the Alberta Hub with growing markets in the U.S. Midwest," noted TransCanada CEO Hal Kvisle. "In 2005, more than 20% of the total amount of natural gas exported from Canada to the United States was shipped on Northern Border."

TransCanada will become the operator of Northern Border Pipeline (NBPL) in early 2007, and its affiliate TC PipeLines LP will own a 50% general partner stake in the pipeline company; NBP retains the remaining 50% stake. TransCanada's additional stake in the pipeline comes on the heels of its purchase of Gas Transmission Northwest from PG&E Corp. in November 2004 for US$1.7 billion, including US$500 million of assumed debt (see NGI, Nov. 8, 2004).

Standard & Poor's Ratings Services placed the ratings of Oneok and NBP on CreditWatch with negative implications and placed the rating of Northern Border Pipeline on CreditWatch with positive implications. "The negative CreditWatch listing for NBP is prompted by the greater business risk implied by the sale of part of its stake in NBPL, the addition of Oneok's midstream assets, and the coming change in general partner ownership to the lower-rated Oneok," said credit analyst Todd A. Shipman. "Oneok joins the partnership on CreditWatch due to its transfer of a significant portion of its assets to the credit-constraining [master limited partnership] structure and the stronger tie to the possibly weakening credit profile of NBP."

Moody's Investors Service affirmed ratings on Oneok, NBP and NBPL all with stable outlooks. "Moody's expects these transactions and the related financing to have a neutral impact on OKE and NBP's credit profiles," said Moody's vice president Mihoko Manabe.

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