Moody's Downgrades ONEOK (OKE) to 'Ba1'; ONEOK Partners (OKS) Ratings Affirmed

Moody's Investors Service, ("Moody's") downgraded ONEOK, Inc.'s (NYSE: OKE) senior unsecured notes rating to Ba1 from Baa3, assigned OKE a Corporate Family Rating (CFR) of Ba1, a Probability of Default Rating (PDR) of Ba1-PD, and a Speculative Grade Liquidity Rating of SGL-2. The outlook is stable. Moody's also assigned a Ba1 rating to OKE's proposed $500 million unsecured notes offering. Concurrently, Moody's affirmed ONEOK Partners, L.P.'s (NYSE: OKS) Baa2 rating and P-2 commercial paper rating. The outlook was changed to negative from stable.

The downgrade was prompted by OKE's decision to undertake the proposed notes offering, which re-leverages OKE as a pure-play general partner (GP) whose holdings consist solely of the GP interest, Incentive Distribution Rights (IDRs) and limited partnership (LP) common units of OKS. Debt proceeds supplemented by balance sheet cash will be used by OKE to acquire $650 million of OKS LP units; concurrently, OKS will sell $100 million LP units to an existing institutional holder in a registered offering. OKS will use the net proceeds of the combined $750 million for debt reduction.

"Debt issuance at OKE is at odds with the expectation coincident with the January 2014 evolution of OKE into a pure-play GP that it would incur no additional debt, having reduced outstanding debt at the time by 50% with the proceeds of the spin of its gas utilities to shareholders," commented Andrew Brooks, Moody's Vice President. "However, while the re-leveraging of OKE for the purpose of facilitating debt reduction at OKS reduces balance sheet leverage, with the unrelenting pressure on energy prices Moody's remains concerned with execution risk in the context of OKS generating EBITDA growth sufficient to deliver a reduction in run-rate leverage to levels conforming to its Baa2 rating, prompting the outlook change to negative."

Issuer: ONEOK Partners, L.P.

..Outlook Actions:

....Outlook, Changed To Negative From Stable

..Affirmations:

....Senior Unsecured Commercial Paper (Local Currency) , Affirmed P-2

....Senior Unsecured Regular Bond/Debenture (Local Currency) , Affirmed Baa2

Issuer: ONEOK, Inc.

..Downgrades:

....Senior Unsecured Regular Bond/Debenture (Local Currency) , Downgraded to Ba1 from Baa3

..Assignments:

.... Probability of Default Rating , Assigned Ba1-PD

.... Speculative Grade Liquidity Rating , Assigned SGL-2

.... Corporate Family Rating , Assigned Ba1

....Senior Unsecured Regular Bond/Debenture (Local Currency) , Assigned Ba1 (LGD4)

..Outlook Actions:

....Outlook, Remains Stable

RATINGS RATIONALE

OKE's Ba1 CFR reflects the re-leveraging of its balance sheet on a stand-alone basis to about 2.1x (debt/distributions) from levels that had been trending below 2x, supported by the ongoing magnitude and quality of cash distributions from OKS. The rating also considers OKE's structural subordination to the $7.7 billion of debt at OKS as of June 30, and OKE's standing as a pure-play GP. OKE debt service is solely reliant on LP and GP distributions, including the GP's IDRs, from OKS, a distribution stream which is junior to the substantial financing and operating requirements at OKS.

OKE's Ba1 unsecured notes rating is equivalent to its CFR, reflecting the unsecured status of its $300 million revolving credit facility in accordance with Moody's LGD methodology

OKS's Baa2 rating reflects the integrated nature of its natural gas and NGL asset base, which has been augmented through approximately $5.0 billion of growth capital spending over the period 2012-2014. This investment has generated strong EBITDA growth, the majority of which is originated from fee-based sources in its Natural Gas Liquids and Natural Gas Pipelines segments. However, OKS's Natural Gas Gathering and Processing (G&P) segment, about 20% of operating income, has exposed it to downside commodity price risk largely through the percentage-of-proceeds (POP) contract design that in 2014 covered about two-thirds of its natural gas processing portfolio. The collapse in NGL prices, in particular has led to a flattening of 2015's EBITDA growth, increased the year's first-half leverage to 5.1x and driven six-month distribution coverage down to 0.74x (although second-quarter coverage improved markedly to 0.88x).

Leverage consolidated for OKE rose to 5.8x at June 30. Elevated debt leverage and depressed distribution coverage have weakened OKS's positioning with respect to its Baa2 rating in contrast to a number of its larger, more diversified midstream peers. However, Moody's expects the $750 million in proposed debt reduction, additional OKS assets being placed in service, continuing volume growth, reduced growth capital spending and a strong recontracting effort in G&P designed to improve the fee-based asset mix collectively beginning to reverse this deteriorating trend in the second half of 2015.

Based on the low end of OKS's 2015 EBITDA guidance of $1.51-$1.73 billion, whose range was reaffirmed in conjunction with OKS's August 4 second quarter earnings release, Moody's expects second half EBITDA to exceed that of the year's first six-months by upwards of 15%. Volume growth remains intact, with second quarter acquisition-aided gathered and fractionated NGLs increasing 51% and 7%, respectively, while gathered and processed natural gas volumes increased 17% and 16%, respectively, over 2014's second quarter. In G&P, OKS has hedged 72% of its NGL price exposure (excepting ethane) over the remainder of 2015, and 18% in 2016. Natural gas exposure has been 88% hedged in 2015, and 69% in 2016. Consequently, Moody's expects second half 2015 debt leverage on an annualized basis to approximate 4.4x, and 4.8x for the full year 2015, pro forma for debt reduction, dropping below 4.5x in 2016. Leverage consolidated for OKE should decline to about 5.25x in 2016. Moody's further expects OKS's LP distribution coverage to be restored to over 1.0x in early 2016.

OKE's SGL-2 Speculative Grade Liquidity Rating reflects Moody's view of good liquidity into 2016. With limited administrative overhead, OKE does not have significant liquidity needs as a pure-play GP and it should cover pro forma interest expense over 8x. Stand-alone dividend coverage at OKE should continue to range between 1.2x and 1.4x, enabling OKE to build modest cash balances. At June 30, OKE held a $173 million cash balance, whose availability will supplement the proposed note issuance proceeds to be used to purchase OKS units. OKE maintains a $300 million unsecured revolving credit facility whose scheduled maturity is January 2019, and which has seen little utilization.

OKS's revolving credit facility that matures in January 2019 was increased to $2.4 billion in 2015's first quarter from $1.7 billion. The revolver also serves as a backstop for the company's commercial paper program, which was also increased to $2.4 billion. At June 30, there were no borrowings under the revolver, and $870.5 million of commercial paper was outstanding. The $750 million in proceeds from OKS's sale of LP units will reduce CP outstandings. The revolving credit facility requires OKS to maintain a ratio of debt to adjusted EBITDA of no more than 5.0 to 1.0, which can be increased to 5.5 to 1.0 for three consecutive quarters in the event of one or more acquisitions whose purchase price exceeds $25 million. Reflecting OKS's Permian acquisition in 2014's fourth quarter, the allowable ratio of debt to EBITDA was increased to the 5.5x through the second quarter of 2015. At June 30, OKS was in compliance with all covenants under its credit facility. OKS has $1.1 billion in two series of notes maturing in 2016, $650 million in February and $450 million in October, which Moody's assumes will be refinanced with new debt capital markets financings.

OKE's rating outlook is stable, reflecting historically conservative financial policies at both OKE and OKS, modest financial leverage and Moody's expectation that all incremental financing to fund the growth at OKS will be sourced at the OKS level. An upgrade is unlikely in the near term, but could be considered if OKS's rating was upgraded. A downgrade would occur if OKS is downgraded, or if stand-alone OKE debt leverage grew to exceed 2.5x.

OKS's negative outlook reflects the negative commodity price pressure that has prompted weakness in OKS's G&P segment and the potential execution risk assumed in rebuilding EBITDA growth. Moody's assumes that OKS's overall business risk profile will remain modest as it targets and pursues growth opportunities within and adjacent to its existing operating footprint. Outside of the commodity price exposure which has weakened its natural gas G&P segment, the majority of OKS's EBITDA is derived under contractual, fee-based pricing arrangements which should limit material downside. Moody's views OKS to be weakly positioned at its Baa2 rating, reflecting the impact commodity price weakness is inflicting on 2015's EBITDA, leverage metrics and sub-par distribution coverage. A downgrade would be warranted should debt to EBITDA exceed 5.0x, however, leverage should improve to 4.5x or under in 2016 for OKS to be more appropriately positioned at its Baa2 rating. Additionally, should quarterly distribution coverage not be restored to and remain over 1x in 2016, a ratings downgrade would be considered. While size and scale could warrant consideration of a ratings upgrade, such an upgrade would be unlikely without debt to EBITDA consistently maintained in the area of 3x, a level that appears out of bounds with OKS's expected financial and operating performance in 2015.

The principal methodology used in these ratings was Global Midstream Energy published in December 2010.

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