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Oneok Spinning Off Gas Distribution Business

July 29, 2013
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Oneok Inc. plans to spin off its natural gas distribution business to create ONE Gas Inc., which would be one of the largest gas utilities in the United States with more than two million customers in three states and the only publicly traded, 100% regulated, pure-play gas distribution utility.

ONE Gas is to consist of Oklahoma Natural Gas Co., Kansas Gas Service and Texas Gas Service, and would be headquartered in Tulsa, OK.

"This transaction should unlock the value of the assets currently in the Oneok structure and is consistent with the board of directors' commitment to create long-term, sustainable shareholder value," said Oneok CEO John Gibson. "Creating two well-capitalized entities will help ensure that each has the financial strength and flexibility to pursue its own independent strategic priorities."

During a conference call with financial analysts to discuss the reconfiguration of the company, Gibson outlined how Oneok and its investors have changed over the last decade or so.

"Ten years ago, a lot of our investors invested in Oneok because of the utility business, and we were emerging as a midstream player," he said. "They looked at the opportunity to invest in Oneok as an opportunity to continue to invest in the utility but at the same time have some exposure to the midstream space, and in particular exposure to the growth associated with an MLP without owning an MLP. As we continue to grow, primarily as a midstream player, we have become very much at Oneok, a GP [general partner], a pure-play GP that owns a distribution business."

Last month, Oneok shut down its natural gas marketing business in a nod to the reality of flattened basis spreads and the more challenging gas trading environment (see NGI, June 17).

Under the ONE Gas plan, Oneok shareholders would retain their current shares of Oneok and receive a pro-rata dividend of shares in the new company in a transaction that is expected to be tax-free to Oneok and its shareholders. The number of ONE Gas shares that will be distributed to Oneok shareholders will be determined prior to closing, which is expected during the first quarter of 2014.

After the transaction, Oneok will continue to hold its interests in Oneok Partners LP, which include the sole general partner interest and limited partner interests that together currently represent 43.3%. Oneok Partners is not affected by the proposed transaction. ONE Gas is to be listed on the New York Stock Exchange under the symbol "OGS." The transaction is expected to result in more tailored growth strategies, more efficient capital allocation, improved investor understanding and better shareholder alignment of the separate businesses, and is expected to lead to higher combined valuations of both companies.

"Oneok -- through its ownership of the general partner and limited partner interests in Oneok Partners -- will continue to pursue value-creating growth opportunities to benefit its shareholders. In addition, Oneok shareholders are expected to benefit from a higher dividend and a higher potential valuation based on current and future shareholders applying a cash-flow multiple and dividend yield consistent with other pure-play general partners," Gibson said.

After the transaction, Oneok's dividend will increase, and the company will be an option for investors looking for higher, pure-play general partner dividend payouts, Oneok said. The company will be valued as a multiple of cash flows and on a dividend yield basis, consistent with other pure-play general partners, unlocking value for shareholders, Oneok said.

ONE Gas will appeal to investors seeking stable dividend payouts in line with a pure-play natural gas utility, Oneok said. The company will likely be valued on a multiple of price to earnings consistent with other natural gas utilities.

At the time of separation, Oneok will reduce its long-term debt with the proceeds from a one-time cash distribution from ONE Gas, estimated to be $1.1 billion to $1.2 billion, as part of the transfer of gas distribution assets to ONE Gas. ONE Gas will fund this payment with its own long-term debt. Upon completion of the separation, Oneok expects to have $1.1 billion to $1.3 billion in total long-term debt outstanding. ONE Gas is expected to have $1.1 billion to $1.2 billion in total long-term debt outstanding and be rated higher than Oneok is currently rated by Standard & Poor's and Moody's Investor Service.

Standard & Poor's Ratings Services placed its "BBB" corporate credit rating and "A-2" short-term rating on Oneok Inc. on CreditWatch with "negative" implications, and affirmed the "BBB" corporate credit rating and "A-2" short-term rating on Oneok Partners, revising the outlook to "negative."

"We have reviewed the transaction and believe that Oneok's credit profile will be weaker pro forma for the spin-off of the natural gas distribution business because Oneok will be a stand-alone general partnership holding company whose assets will consist solely of its general and limited partners equity interests in its [master limited partnership] subsidiary Oneok Partners," said Standard & Poor's credit analyst Michael Grande. "Oneok will be solely reliant on distributions from Oneok Partners, whose business is focused on the gathering and processing segment, which we view as having a higher degree of business risk than other midstream businesses such as transportation and storage, which tend to have more stable cash flows backed by long-term take-or-pay contracts."

Oneok needs the Internal Revenue Service to approve the tax-free structure of the transaction and an approval from the Kansas Corporation Commission. Oneok shareholder approval is not required. Oneok said it does not expect the transaction will result in any job reductions among its current workforce of about 5,000 employees.

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