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ONEOK Inc. Message Board

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  • rrb1981 rrb1981 Feb 22, 2006 6:34 PM Flag


    Its arbitrage. The midstream assets are better suited for the MLP structure and OKE captures a nice boost in the IDR's. The GP buyout from SUG(followed by the subsequent buy from TransCanada (TRP)) was the final piece of the puzzle. They would not have dropped the assets into NBP without the final piece of the GP because TRP would have reaped 17.5% of the increase in the IDR's without contributing anything other than the nominal 2% equity cost to maintain the 2% economic interest. They have, essentially, positioned themselves as an almost pure play GP, with the exception of the LDC's. The pure play GP's have marvelous leverage with the IDR's, and with very few low growth assets or capital intensive assets on the balance sheet, the leverage doesn't get dilluted like it would with a bunch of other assets hanging around. Personally, I would like to see them unload the LDC's and use the capital to repurchase shares or pay down debt. If you look at the leverage that companies like EPE, ETE, NRGP and XTXI have by being a GP, you will see why OKE management dropped everything into NBP. That being said, they are not interested in selling the LDC's and in fact are interested in acquiring more. This gives them some operating assets at the GP level, whereas EPE, ETE, NRGP and XTXI are essentially cash cow holding companies (own LP units, and the GP and of course the IDR's but no operating assets are held at the c-corp level because it is better to own them through the LP ).

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    • IDRs=incentive distribution rights. NBP is a Master Limited Partnership (MLP) and Oneok is the General Partner (GP). In other words, it manages the partnerships day to day operations (not however that NBPL, which is an asset, will soon be operated by Transcanada (TRP) not TCLP). The GP receives cash based on the distribution at NBP. As the distribution grows, the GP gets a larger take. In other words, for an example, if the distribution was $1.00/unit, the GP might get .02 for every unit that is outstanding, meaning the MLP would need to have at least $1.02 in cash to pay out, now the next step might be that the GP gets 15% of any surplus cash between $1.00 and $1.25. So, for that payout to happen then MLP would need $1.31 total (that would be $1.00 to the LP, .02 to the GP, .25 to the LP and .06 to the GP). .06 if roughly 15% of .31, which is the amount needed to push the distribution from $1.00 to $1.25. Now after that they enter a tier where it is split 75% to the LP and 25% to the GP, and finally the beloved 50/50 splits where all surplus cash is split 50/50. This is a very simplistic explanation but it still shows the beauty of the LP structure. The other part that is important is that remember the GP take is calculated on a per unit basis, so everytime the MLP issues units, it means more cash to the GP (and the LP) so long as the deal is value adding (i.e. accretive). I oversimplified the IDR's, by leaving out the fact that the GP always get 2%, and then everything else is split through the various tiers, so that in reality, instead of 15%, its really 2% plus 13% etc etc. The math only changes a tiny amount when you do the calcs. One other thing to remember is that MLP's pay no taxes, that is why I stressed the arbitrage. They bought assets that OKE normally would pay up to 35% tax on, so they can bid higher than a corporation can. OKE essentially with this transaction boosted NBP from the low tier to the high tier meaning any acquistions in the future by NBP will add a lot of cash to Oneok, and Oneok only has to pay for 2% of the equity portion of the acquisition. Since most MLP's finance 50% equity and 50% debt, it means they pay for 1% of the deal and reap 50% of the accretive cash flow(remember accretive cash flow is after financing costs such as interest and cash paid on newly issued LP units). It is still a windfall. Oneok owns nearly half of NBP already, so they get half of the LP take, and all of the GP take, and OKE is out virtually no money.

      • 1 Reply to rrb1981
      • This has become a very complicated company to understand if you are not familiar with MLPs and MLP GPs.

        Why did the stock go up so much based on simply moving assets from OKE to its affiliate, NBP? All of the same assets still will be consolidated on OKE's balance sheet.

        Taxes and cash flow are key. You are no longer going to be able to value this company well based on PE and income, and will need to look through the earnings to the cash flow.

        Beginning this year, OKE should receive about $175 million in cash from NBP. That number hopefully will go up at a good clip going forward. Most of that money will be tax free or at reduced tax rates because of the way MLPs are structured. In addition, OKE will have very low capital expenditures tied to growing this NBP cash stream.

        The bottom line is that OKE moves from a capital intensive business to a free cash flow machine.

        How much cash will OKE generate going forward? The Energy Services business is a little volatile, so it is unclear. I am sure others can post the projected free cash flow from the LDCs and Energy Services. Combine those with $175 from NBP and you get 2006 cash flow. I would assign a higher multiple to the value of that cash flow given the low cap ex required to grow the NBP portion.

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