There is a growing trend among companies organized as master limited partnerships (MLPs) to focus the general partner (GP) interests into a separate company that can leverage the dividend growth rate of the operating MLP. Companies participating in the trend range from large caps like Kinder Morgan, Inc. (NYSE:KMI) down to small-cap rockets like Targa Resources Corp. (TRGP). Now, another one of the larger players in the MLP space, ONEOK, Inc. (NYSE:OKE), will spin off part of its business to focus on the GP potential of ONEOK Partners LP (NYSE:OKS).
(Note: MLP companies such as ONEOK Partners have units and pay distributions. The words "stock," "shares," and "dividends" may be used here with the understanding that the rules of MLP units apply, including the tax consequences of investing in MLP units.)
Spinning Off Public Gas Utility
ONEOK, Inc. has to this point existed as a two-part company. On one side was the regulated natural gas utility and on the other were the general partner operations for ONEOK Partners. On July 25, 2013, ONEOK, Inc. announced that in early 2014 the company will separate out the natural gas utility business as a separate company. ONEOK will be left with the general partner interests and the 43.3% of the ONEOK Partners units that it holds. This is how the press release describes the new spin-off company:
The new public company, to be called ONE Gas, Inc., will consist of Oklahoma Natural Gas Company, Kansas Gas Service and Texas Gas Service, and will be headquartered in Tulsa, Okla.
ONE Gas will be one of the largest natural gas utilities in the United States, serving more than 2 million customers in three states, and will be the only publicly traded, 100 percent regulated, pure-play natural gas distribution utility in the United States. ONE Gas is expected to be well positioned for earnings growth and will be listed on the New York Stock Exchange [under the ticker] OGS.
According to the press release and the conference call discussing the move, the dividend rate of the two resulting companies, OKE and OGS, will end up higher than the current distributions made by ONEOK, Inc. For 2012, the natural gas distribution business produced $216 million out of ONEOK's total of $1.1 billion, or just under 20% of the total.
ONEOK Partners was launched in 2003 to diversify the company that, at that time, functioned primarily as a public utility. Focused on the natural gas midstream segment, ONEOK Partners has grown to become just one of 10 MLP companies with a greater than $10 billion market cap. Growth has come primarily through the internal development of natural gas gathering and processing, natural gas pipelines, and natural gas liquids gathering, fractionation, pipelines, and storage.
Income investors have done very well with ONEOK Partners. The annual dividend has increased by a compound 7% rate since 2006. Through its current growth products, the company aims to increase the distribution increase rate to 10% to 12% through 2015.
General Partner Multiplies Distribution Growth
The shares investors own of an MLP are just that -- limited partners with no say in how the business is run. The GP's units are typically 2% of the company, and the GP often holds a large portion of the LP units as well. With many MLP organized companies, the GP is also entitled to incentive distribution rights. The IDRs dictate that if the distributions are increased to the limited partner units, the GP will receive a percentage of the total dollar increase to be paid out. The top IDR split is usually 50%, meaning if the dividend to the 220 million OKS units is increased by a penny per unit, the IDRs to the GP increase by $1.1 million. The OKS dividend has increased every quarter for the last four years and grew by a total of 6 cents per unit over the previous four quarters.
As a result, the GP company earns the growing dividend on the LP and GP units it holds, plus gets a 50% kicker on the dividend growth for the whole MLP company. This means that the pure-play GP companies have the ability to increase their dividends at a faster rate than the underlying MLP that does the work.
Post spin-off, ONEOK, Inc. with be a pure play MLP GP holding company. This stock should be able to pay rapidly rising dividends to investors. At this time, OKE has no plans to participate in the funding of the OKS growth. The regulated, public gas utility -- ONE Gas -- should end up with a yield similar to other public utilities and a steady, but slow dividend growth rate.
Since ONEOK, Inc. is a corporation, investors will receive a 1099 rather than the Schedule K-1 that partnerships use to report the investor share of results. During the conference call, management stated that December would be the earliest that projected dividend rates for the two companies could possibly shared with the investing public.
The OKE share price jumped by about 25% on the news of the spin-off, which is probably the close to the portion of the company that will go to ONE Gas when the split is complete. For those interested in just the resulting GP company, I think the current revenue slowdown being experienced by ONEOK Partners will eventually be reflected in the OKE share price. I would be looking to pick up shares if they drop back below $50, or just wait for the spin-off to be effective.