ONEOK Plans To Distribute ONEGas Via Spinoff

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Who says you can’t teach old dogs new tricks? 107 year old ONEOK (OKE), founded as the Oklahoma Natural Gas Company way back in 1906, recently announced that its board of directors had approved the spinoff of its natural gas distribution business. The new company will be known as ONE Gas and will be ‘the only publicly traded, 100% regulated, natural gas utility’ in the US. Whatever that means. The company will consist of the Oklahoma Natural Gas Company, Kansas Gas Service and Texas Gas Service and serve over 2m customers across three different states.

The parent will retain its GP and LP interests in ONEOK Partners (OKS) and is hoping to see a nice multiple expansion to something more in line with other GP’s. OKE also expects to pay out a higher dividend as it will no longer have to use some of its free cash flow to support the distribution business’ CapEx. As a result it plans to exceed its prior forecast of 55-65% dividend growth during the years ’12-’15. That is some pretty serious income growth. One Gas will also pay out a dividend in line with natural gas utilities and the total dividends from both companies is expected to be higher than OKE’s current payout. In addition to the aforementioned income growth and multiple expansion, some other reasons for pursuing a spin include creating more focused management teams and better shareholder alignment.

Both companies will have new leadership following the transaction as ONEOK’s current CEO and Chairman John Gibson will be retiring. Terry Spencer, ONEOK and ONEOK Partners’ President will assume the CEO & Chairman titles at those entities and Pierce Norton, currently an EVP, will become President and CEO of ONE Gas. Mr. Gibson won’t be totally abandoning the ONEOK family of companies though as he will become non-executive chairman of all three entities.

As part of the transaction, ONEOK will also receive a one time payment from One Gas of ~$1.2b which will be used to lighten its debt load. Despite this, One Gas is expected to be investment grade quality. For some additional information on the transaction, check out the investor presentation dated 7/26/13.

The plan to ‘unlock value’ worked right away as ONEOK jumped up sharply, ~25%, on the announcement. The spin is expected to be completed during Q1 2014 and the new company will trade on the NYSE under the ticker ‘OGS’. While the distribution ratio has yet to be set, the plan is for the transaction to be tax free to shareholders.

Disclosure: Author holds no position in any stock mentioned.

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