Oneok, Inc. M&A announcement

Thank you, Taryn. Good morning, everyone, and thank you for joining today's 30-minute call. Along with last night's announcements, we provided a presentation deck with additional information. That is available on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Act of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer.

Thank you, Megan, and good morning, everyone, and thank you for joining us. On our call is Walt Hulse, the Chief Financial Officer, Randy Lentz, Chief Operating Officer, and Sheridan Swords, Chief Commercial Officer, are also available to take questions. Yesterday, we announced two transactions that significantly strengthen ONEOK. These announcements included a definitive agreement to acquire Brazos Midstream's Permian Midland Basin natural gas gathering and processing assets for $4.425 billion and a $9 billion minority equity investment from Apollo that will fund the acquisition and be used to extinguish approximately $5 billion of debt, lowering our debt to EBITDA to 3.25. Our strategic rationale is straightforward: acquire a premium, complementary Permian Midland Basin growth platform, growth that feeds and fills ONEOK's continuously integrated system, accelerate earnings and free cash flow per share, and strengthen the balance sheet without issuing common equity. These transactions begin creating value day one.

The acquisition is expected to be immediately accretive to earnings and free cash flow per share. It also increases momentum for the high end of our mid to high single-digit adjusted EBITDA growth target over the next five to seven years. The approximately 7.5 times 2027 EBITDA acquisition multiple includes approximately $80 million of full-year synergies. By 2028, expected significant Brazos growth and additional integration benefits have reduced the multiple to approximately six times. This is a decisive step in the strategy that we have executed for years, building scale in the most attractive producing regions and connecting that supply to ONEOK's integrated system to drive long-term shareholder value.

The Brazos assets provide an additional high-quality position in the core of the Permian Midland Basin, supported by approximately 600,000 dedicated acreage, leading producers, 14 active drilling rigs, and long-term fixed-fee contracts with weighted average remaining term of more than 12 years. This is contracted growth that creates exceptional visibility. Following completion of the Cassidy II plant, expected in the third quarter of 2027, Brazos will have approximately 1.2 Bcf/d of processing capacity and 700 miles of gathering infrastructure. These high-growth assets give ONEOK immediate scale, elevating our gathering and processing capacity position to the third-largest in the Midland Basin and provide a long runway of identified expansion opportunities in one of North America's most economic and attractive resource plays. The combination of quality, visibility, and growth is difficult to replicate. It is also important to recognize that Brazos builds on a position of strength.

ONEOK already operates nearly 1.8 Bcf/d of natural gas processing capacity in the Permian Basin with more than 1 billion cubic feet per day of processing capacity and approximately 1,200 miles of gathering infrastructure across the Midland Basin specifically. Earlier this year, we relocated the 150 million cubic feet a day Shadowfax plant into the Midland, further demonstrating our confidence in the basin's long-term growth outlook. ONEOK is uniquely positioned to maximize the value of these assets through our fully integrated value chain. We operate an extensive energy infrastructure system that spans from the Canadian border to the Gulf Coast, connecting gathering, processing, transportation, fractionation, storage, and export capabilities across multiple commodities. Brazos volumes connect directly into that system.

Natural gas and NGL production gathered and processed in the Midland can move through our West Texas NGL pipeline into our fractionation assets and ultimately to our Gulf Coast export facility as it comes online. We are not acquiring a standalone earnings stream. We are securing high-growth supply that can drive utilization and value creation across infrastructure throughout our system for years to come. Together, ONEOK and Brazos create one of the Midland Basin's largest integrated natural gas gathering and processing systems. With the transaction more than doubling our Midland Basin processing capacity to approximately 2.3 Bcf/d, including plants under construction. The combined footprint gives us greater commercial reach, operating flexibility, and future development opportunities. We can optimize capacity across systems, connect more volumes to downstream infrastructure already in place, and deploy capital more efficiently across a larger platform.

To support the next phase of producer growth, we have secured two additional processing plants that we can locate as needed once a final investment decision has been reached. This is another example of our disciplined and intentional approach to M&A, and we are equally deliberate in how we finance the transactions. We had two clear objectives: fund the acquisition without issuing common equity and diluting shareholders, continue accelerating our deleveraging trajectory and maintain our financial flexibility. Minority equity investment from Apollo accomplishes both. It funds the acquisition, supports our balance sheet objectives, and preserves future value creation above Apollo's cap return on ONEOK's common equity shareholders. Just as importantly, it also allows us to acquire a premier Midland Basin Permian platform while improving leverage to approximately 3.25x, well below our previously stated long-term target.

That stronger balance sheet positions ONEOK to fund our organic growth project backlog and accelerates flexibility for increasing capital returns over time, including potential dividend increases and share buybacks. I'll now turn the call over to Walt to discuss the financial aspects of the transactions in more detail.

Walt? Thank you, Pierce. Let's start with an overview of the financing transaction.

Funds and affiliates managed by Apollo will invest $9 billion in exchange for a non-voting Class B interest in the newly formed holding company that will sit below ONEOK and owns the operating company that holds all of ONEOK's assets. ONEOK will retain the Class A interest, and all the existing indebtedness will remain with the assets at the operating company. Many companies in the midstream space and other industries broadly have used variations of this insurance capital structure. However, to date, those capital raises have been done at the asset level. Our financing is the first to utilize this type of financing vehicle to raise non-dilutive equity capital at the corporate level.

The major difference between our transaction and the ones done previously by other companies is that the previous deals were done with a first call on the cash flow of an asset, and as such, are structurally senior to all existing company debt. Our transaction is the exact opposite. We have created another funding entity above the operating entity, so all of our senior notes and other debt remains at the entity with the operating assets. The equity financing we did is structurally subordinate to all of our other existing debt. By paying down debt at the operating entity and funding that debt repayment by raising equity capital one level up at a holding entity, we have materially improved the credit profile of our operating entity, where all existing senior notes and other indebtedness remains.

The Class B interest is expected to receive quarterly distributions equal to 15% of cash flow from operations, and its return is capped at a 7% internal rate of return for the first nine years of the investment. The cap is critical. The investors in the Class B units do not participate in Brazos growth, ONEOK's existing growth portfolio, or future value creation. All value creation above the cap return belongs to ONEOK's existing common equity shareholders. The structure we utilized is also self-amortizing. Cash distributions above the amount required to earn the cap return reduce the Class B capital account balance. As that balance declines, more of ONEOK's economic value accrues to common shareholders. Economically, this functions much like a built-in share repurchase program.

Every dollar distributed above the capped return permanently retires a portion of the outside capital account at a price we already know, and that value accrues to every common shareholder. The difference is that it requires no market timing, no incremental cash beyond what the business is already generating, and it happens automatically throughout the life of the investment. We can accelerate the Class B capital reduction by electing to increase the Class B distribution for any quarter from 15% to as much as 20% of cash flow from operations. Beginning on the eighth anniversary of closing, or sooner if the Class B capital account reaches a balance of $200 million, ONEOK has the unilateral option to acquire the remaining Class B interest. We expect the Class B capital balance to have declined substantially by the eighth anniversary of closing.