歐尼克 (OKE) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ONEOK and ONEOK Partners First Quarter Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to introduce your host of today's conference call, Mr. Dan Harrison. You may begin, sir.

Thank you. Good morning and welcome, everyone. As we begin this morning's conference call, I remind you that any statements that might include ONEOK, or ONEOK Partners expectations or predictions should be considered forward-looking statements, which are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. It's important to note that actual results could differ materially from those projected in such forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to ONEOK's and ONEOK partner's filings with the Securities and Exchange Commission.

And now, John Gibson, who serves as CEO of ONEOK, and Chairman, President and CEO of ONEOK partners. John?

Thanks, Dan. And good morning, everyone. Thank you for participating in our call today. Joining me are Jim Kneale, ONEOK President and Chief Operating Officer, Curtis Dinan, Senior Vice President and Chief Financial Officer for both ONEOK and ONEOK Partners, Pierce Norton, ONEOK Partners Executive Vice President of Natural Gas, and Terry Spencer, ONEOK Partners Executive Vice President of Natural Gas Liquids.

Here's our agenda this morning. Following a few opening remarks, we'll discuss ONEOK Partners first and then review ONEOK. Curtis will start us off and review ONEOK Partners financial performance, followed by Pierce and Terry, who will review the partnership's operating performance. Then Curtis will return to review ONEOK's financial performance, and Jim will review ONEOK's operating performance. Then I'll make a few closing comments before we take your questions.

ONEOK had a solid first quarter with strong performances by ONEOK Partners and the distribution segment. Energy services had a good quarter, although lower than the first quarter a year ago. ONEOK Partners was up more than 50% in the quarter. Higher commodity prices and wider NGO price spreads, as well as volume growth in all four of the partnership's business segments contributed to the increase.

Volume growth was exceptionally strong in both the natural gas liquid segments, which Terry will discuss in more detail. Our distribution segment's results were higher than a year ago, primarily as a result of colder temperatures and increased volumes in Kansas and Oklahoma. In addition, the segment's continued focus on reducing operating costs through its process improvement efforts is also yielding results.

Energy services earned $74.3 million in the quarter, which was lower than the same period last year, primarily because of fewer storage and marketing optimization opportunities, as a result of colder weather, but still a solid quarter. Jim will review both the distribution and energy services segments first quarter results in more detail in a few minutes.

Also, during the quarter, ONEOK purchased additional ONEOK Partners units, reflecting ONEOK's continued belief that investing in the partnership provides good opportunities to grow ONEOK's earnings and cash flow through a larger ownership interest. ONEOK Partners' equity offerings to both ONEOK and to the public allow the partnership to continue to fund its growth activities, while maintaining a balanced capital structure. Curtis will provide more detail on the equity offerings during his comments.

We are reaffirming both ONEOK and ONEOK Partners 2008 earnings guidance, provided to you in early January. We believe it's still too early in the year to make any adjustments either up or down. While there may be some ups and downs between the various segments, our year-end projections for both ONEOK and ONEOK Partners remain unchanged. As you will hear from Pierce, Terry, and Jim, there are still some uncertainties and opportunities that will unfold as the year progresses. As is our usual practice, we will update earnings guidance when we believe there are material changes.

Now, let's take a more detailed look at ONEOK Partners. Curtis Dinan will review the financial highlights and results. Curtis?

Thank you, John. And good morning. ONEOK Partners began 2008 with a really strong first quarter. Net income increased 51% to $145 million, or $1.48 per unit, compared with $96 million or $1.00 per unit in the first quarter of 2007. Distributable cash flow increased to $159 million, compared with $117 million in the first quarter of 2007. During the first quarter of 2008, our gathering and processing segment benefited primarily from strong commodity prices.

Looking forward in 2008, we have hedged in excess of 72% of our commodity price exposure, providing additional earnings stability. Our natural gas liquids gathering and fractionation business benefited from wider regional commodity price spreads and increased volumes. Our natural gas liquids pipeline segment benefited from the North System acquisition that was completed during the fourth quarter of 2007 and increased throughput related to new NGL supply connections.

During the first quarter of 2008, the partnership spent $259 million on its internal growth capital program, primarily for the overland pass pipeline and related NGL infrastructure upgrades, and the Arbuckle Pipeline. These expenditures were initially financed with our revolving credit agreement.

In March of this year, the partnership completed a public offering of $2.5 million common units and a private placement of 5.4 million common units with ONEOK Inc. Combined with the 2% general partner contribution and the underwriters' exercise of the over allotment option in April, the partnership received net proceeds of approximately $460 million. A portion of these proceeds were used to repay the amounts outstanding under the partnership's revolving credit agreement, and the remaining proceeds will be used to fund additional capital expenditures during this year.

With the completion of these equity offerings, a debt to capital ratio of 49%, and $1 billion available under the revolving credit agreement, the partnership is well positioned to continue executing on its growth capital program that is expected to contribute incremental EBITDA later this year as the various projects come online.

Recently, ONEOK Partners increased its quarterly distribution to an annualized rate of $4.16 per unit. This is the ninth consecutive distribution increase since the drop down of the ONEOK assets in April of 2006. During this period, the partnership has increased distributions by 30%, demonstrating our commitment to growing unit holder distributions.

John that concludes my remarks regarding the partnership's financial.

Thanks, Curtis. Let's now review the operating results of ONEOK Partners, which consists as a reminder of four segments. Two in natural gas and two in natural gas liquids. First, Pierce Norton will discuss the two natural gas segments, gathering and processing, and natural gas pipelines. Pierce?

Thanks, John, and good morning. The natural gas gathering and processing segment's first quarter operating income nearly doubled compared with the same period last year. Natural gas liquid, natural gas, and crude oil prices were the primary driver of the increase. This segment also benefited from increased throughput, primarily due to higher drilling activity. Our contract mix by volume remained relatively unchanged at 61% fee based, 31% percent of proceeds, and 8% keep hold, which are the contracts that are affected by processing spreads. In addition to having less than 10% of our volumes susceptible to the processing spread, 85% of our key pull contracts contain conditioning language, allowing them to convert to a fee when processing spreads are negative.

When you combine all of our commodity effective contracts, percent of proceeds, and key pull, the greatest sensitivities are to natural gas liquids and crude oil prices. We've taken steps to minimize the risk associated with price movement by locking in prices for the remainder of 2008 on 72% of our expected production on both NGLs and condensate at an average price of $1.39 per gallon. We've also placed hedges for the remainder of the year on our expected natural gas volumes, with 78% locked in at $9.23 per MMBtu.

Now taking a look at our growth activity in our natural gas gathering and processing segment. The final phase of the $110 million Fort Union gas gathering system expansion in the Powder River Basin is still expected to go into service during this second quarter. As a 37% owner of Fort Union, our equity earnings will continue to increase in the future with the completion of this project. As a reminder, the capital of this expansion was project financed, and the additional capacity as been fully subscribed for 10 years. We expect to complete the final phase of the Grasslands processing plant expansion later this year. We're poised to capture the growth in and around the Williston Basin in North Dakota and Montana.

The natural gas pipeline segment first quarter 2008 operating income results were stable, remaining relatively flat compared with the same period in 2007. Storage margins improved, primarily due to new negotiated contracts, but was offset by higher general operating expenses.

Equity earnings, which consist primarily of our 50% interest in Northern Border Pipeline, were up 10% in the first quarter when compared with last year. Higher throughput was the driver of the increased transportation revenues on the Northern Border Pipeline.

Looking at the growth projects for natural gas pipelines, this morning we received the notice to proceed on Guardian Pipeline from the Federal Energy Regulatory Commission. This allows us to begin construction on the 119-mile pipeline extension and expansion project into the Green Bay area. We've increase our cost of this project to $277 million from $260 million, or 6.5% to reflect expected costs associated with scope changes, labor, environmental, and inspections.

As with any construction project of this magnitude, there are several variables that could still impact our cost and completion date. Environmental, or cultural reroutes, the amount of actual rock encountered, and potentially escalating labor costs are some of the most common variables. Currently the completion of this project is still estimated to occur during the fourth quarter. The expansion of our Guardian Pipeline is anchored by two 15-year agreements, which will provide stable cash flows to the partnership. And because the additional volumes travel through our existing pipelines, it also brings stability to our base assets going forward.

Finally, we have stated -- have a stated strategy to connect our interstate pipelines to multiple supply basins. Consistent with this strategy, Northern Border Pipeline recently announced a binding open season on the Bison Pipeline, which will end mid-May. The 289-mile proposed pipeline would extend from the Powder River Basin and connect Northern Border Pipeline in Morton County, North Dakota. As John mentioned, ONEOK Partners reaffirmed its earnings guidance for the year, the natural gas business had an outstanding quarter, and we are reaffirming the guidance ranges provided in January.

John, that concludes my remarks.

Thanks, Pierce. Now Terry Spencer will review the two natural gas liquid segments, gathering and fractionation, and NGL pipelines. Terry?

Thank you, John, and good morning everyone. The natural gas liquid segment's had another exceptional quarter. Let's take a look at both NGL segments.

The natural gas liquids gathering infractionation segments first quarter operating income increased 42% over the same period last year. Higher product price spreads between Conway, Kansas and Mont Belvieu, Texas were the main driver of the increase, allowing us to capture optimization opportunities across the system.

Mid Continent NGLs gathered and fractionated continue to grow and have increased more than 20% when compared with the same period in 2007. And looking back over the time since we acquired the NGL assets in July 2005, we have grown volumes 30%, adding over 60,000 barrels of NGLs per day. This growth has led to the asset utilization rates of more than 90% and one of the key drivers for our $216 million in expansion projects underway in our NGL storage fractionation and pipeline infrastructure in Kansas and Oklahoma.

This increased infrastructure capacity coming online during 2008 will accommodate our new NGL supplies from the Rockies as well as future growth in the Mid Continent. We also recently announced another expansion of our Oklahoma gathering system to connect two new processing plants in the Woodford Shale in Southeast Oklahoma. The $25 million expansion of six and eight inch gathering pipeline is currently under construction and scheduled for completion in the second quarter of 2008.

These new plants will have the ability to produce approximately 25,000 barrels per day of NGLs. During 2008, we will remain focused on adding new NGL supplies to our Mid Continent system and by year-end we expect to have added approximately 36,000 barrels per day of NGLs from new plant connections.

Our natural gas liquids pipeline segment also had an outstanding first quarter with operating income increasing 60% over the same period in 2007 and NGL volumes transported increasing nearly 50% over the same time. Most of these increases are due primarily to the addition of the 1,600-mile NGL and refined petroleum products pipeline system we acquired in October 2007, as well as continued supply growth that I previously mentioned in our NGL gathering and fractionation segment.

Our NGL pipeline segment continues to develop new growth opportunities across the Rockies, Mid Continent, the Midwest, and in Texas. Primarily from these supplies, opportunities to expand our services to refineries and to provide products to dilute heavy crude oil entering the U.S. from Canada.

Now let's review the status of some of our large projects. Construction in on the Overland Pipeline continues. Considering the unusually severe winter conditions along the route, particularly in Southern Wyoming, we are very pleased with the progress we have made. We have essentially completed construction on more than 700 of the 760 total miles of the pipeline.

As you may recall from our last earnings call, the Wyoming office of the Bureau of Land Management requested that we temporarily idle pipeline construction in certain restricted areas to accommodate the seasonal migration patterns of big game animals, the nesting activities of birds of prey, and sage grouse habitat. We continue to work diligently in cooperation with the BLM to develop timely plans for the completion of construction within those restricted areas. However, due to continued construction restrictions imposed by the BLM, we are now targeting a third quarter 2008 partial startup of the pipeline.

In late 2007, we announced Overland Pass would cost approximately $535 million to construct. As a result of the numerous delays and interruptions we've encountered due to restrictions in wildlife sensitive areas I just mentioned, along with the worst winter weather in Southern Wyoming in recent history, project costs will likely rise. But we currently expect those increases to be less than 10% of our $535 million estimate.

Supply activities on Overland Pass continue to progress as we're negotiating with NGL suppliers to commit as much as 50,000 barrels per day of additional supplies to the pipeline, which would bring the total commitments to Overland Pass to approximately 140,000 barrels per day. Some of these negotiations have resulted in agreements subject to the completion of executed contracts.

The initial design capacity of Overland Pass is 110,000 barrels per day of unfractionated NGLs, and we have mentioned one pump facility can increase that capacity to 150,000 barrels per day. As a result of the continued strong NGL supply environment in Southern Wyoming, and in the Piceance Basin of Northwestern Colorado, we have the ability to increase the capacity of Overland Pass to over 220,000 barrels per day by the addition of more pump facilities.

So even though we will likely experience some cost increases on Overland Pass due to regulatory delays and weather, we remain confident in the economic merits of this project. New NGL development potential in the region continues to exceed our original expectations.

We also continue to make good progress on permitting and rights of way acquisition for the Arbuckle Pipeline. Today more than 90% of the total 440 mile Arbuckle route has been surveyed. Pipe at the steel mill continues to be rolled with more than 400 miles of pipe already delivered. The $260 million project is designed with the capacity to transport 160,000 barrels per day of unfractionated NGLs and can be expanded to over 210,000 barrels per day with additional pump facilities. As with any project of this magnitude and scope, completion timing and cost can be impacted by risk factors beyond our control such as the weather, land owner uncertainties relating to right of way acquisition, and increasing demand in the construction labor market.

The outlook for growth along the Arbuckle Pipeline is on track to exceed our expectations. Natural gas production growth from new drilling along the route, primarily in the Barnett Shale and North Texas continues at a rapid pace, leading to the development of new gas processing plant projects.

We are currently negotiating with the owners of pending new plant projects for supply dedications to our pipeline. At the time of startup in early 2009, we currently expect Arbuckle to be shipping approximately 65,000 barrels per day of dedicated NGLs to our Mont Belvieu fractionator and other facilities in the Texas Gulf Coast, with another 20,000 barrels per day expected from new plant dedications, also currently under negotiation. When combined with our existing infrastructure, we remain confident in the Arbuckle project's ability to serve the growth occurring in the Mid Continent and Texas.

With about 1.2 billion in growth activities underway in our NGL businesses, our focus remains on the successful execution of these projects, and continued growth in our NGL supply portfolio. We are currently evaluating more new expansion opportunities within our core footprint and in those regions that can be accessed by the large pipeline projects we have underway.

As John mentioned, ONEOK Partners reaffirmed its guidance for the year. The construction challenges we are facing on the Overland Pass Pipeline will have an impact on the timing of and earnings in our NGL pipeline segment, but because of better than expected performance on our NGL gathering and fractionation segment, we currently expect the combined earnings of our natural gas liquids businesses to remain in the guidance range provided in January.

John, that concludes my remarks.

Thanks, Terry. Let's now turn our focus to ONEOK, where Curtis Dinan will now review ONEOK's first quarter financial highlights. Curtis?

Thanks, John. ONEOK's net income in the first quarter of 2008 was $144 million, or $1.36 per diluted share, compared with net income of $153 million, or $1.36 per diluted share in 2007. While net income decreased slightly, the share repurchase we completed in 2007 positively affected earnings per share. All of ONEOK's segments performed very well during the quarter. As Jim will describe in more detail, the distribution segments operating income increased slightly to $109 million and energy services operating income was strong at $74 million, but under last year's $120 million.

As previously described, our ONEOK Partner segment performed very well during the quarter. Following the partnership's recent distribution announcement, its annualized distribution is increased by $0.20 compared with one year ago. This distribution increase creates an additional $8.5 million of annual cash flow from the limited partner units that ONEOK owns.

Also compared with one year ago, the incentive distributions to ONEOK's general partner interest have increased by $23 million annually. With the growth forecast by ONEOK Partners from its $1.6 billion of internal growth projects and the recently completed North System acquisition, we expect future distribution increases will continue to create earnings and cash flow growth for ONEOK.

During the quarter, ONEOK invested approximately $300 million to acquire an additional $5.4 million common units from ONEOK Partners in a private placement transaction, demonstrating a significant commitment to insure the continued growth of ONEOK Partners. Including the general partner interest, ONEOK now owns 47.7% of ONEOK Partners.

During the first quarter of 2008, ONEOK retired $400 million of matured long-term debt and ended the quarter with a stand-alone debt to capital ratio of 48%. Stand-alone cash flows from operations, excluding the effects of working capital, exceeded capital expenditures and dividends by $79 million. For 2008, we anticipate that free cash flows will be in the $160 million to $200 million range.

John, that concludes my remarks.

Thanks, Curtis. Now Jim Kneale will review ONEOK's operating performance. Jim?

Thanks, John and good morning. As Curtis just mentioned, the distribution segment delivered solid results with operating income of $109 million in the first quarter. Margins were up and expenses down as compared with the same period last year. Volumes were positively affected by colder weather in Oklahoma and Kansas, however margins were moderated somewhat by weather normalization mechanisms, but reflect the slight increase due to new rates in Oklahoma and Texas. Transportation volumes were also higher in both Oklahoma and Kansas.

From an expense standpoint, our focus on cost control that John mentioned through process improvement initiatives has helped us manage our operating cost as we improve and standardize business practices across our three utilities. In addition, our bad debt levels have remained stable, even in this high natural gas price environment.

We also continued to work on the regulatory front. A new capital recovery mechanism in Oklahoma that was approved in February is allowing us to recover and earn a return on certain capital investments more quickly. It is expected to add $7.6 million in margins this year.

Last week, the Texas Railroad Commission approved a $1 million rate case in our South Texas jurisdiction. Included in this decision are a return on equity of 10.425%, an increased monthly residential customer charge from $5 to $15, a weather normalization adjustment clause, recovery of gas related bad debts, and authorization to hedge the costs of gas using financial instruments. These new rates will become effective with the May billing cycles.

Looking forward, the distribution segment will continue to execute on its integrated strategy, focusing on rates and growth through efficient investment and cost control.

Now, turning to our energy services segment, we had a good first quarter and a challenging market environment with operating income of $74 million, which as Curtis mentioned was lower than 2007. The quarterly decrease was due to lower realized storage spreads and colder than forecasted and anticipated weather that increased our supply requirements to our LDC customers. As a result of the colder weather, we had to withdraw more gas from storage and purchase higher priced spot gas to meet our customer obligations, which were based on a lower first of the month index price. These additional supply requirements, combined with steadily increasing natural gas prices, left little volume available to sell into the market, which gave us few opportunities for storage optimization activities.

These events also affected our financial trading margins, which were down as compared with the first quarter last year. Our transportation margins were up $7 million because of improved hedging effectiveness on derivative instruments related to our hedge transport positions and the receipt of $2.4 million in insurance proceeds related to the 2007 Cheyenne Plains outage. Our retail marketing margins also increased as a result of higher sales margins and volumes. We ended the first quarter with 14.6 BCF of natural gas in the ground, compared with 37.3 BCF a year earlier.

As John mentioned, we are confirming our guidance for 2008. Looking at energy services specifically, currently the summer to winter spreads are tighter than in previous years, and natural gas volatility is low even though natural gas prices remain historically high. As we move forward, we will continue to manage our storage and transportation positions, and credit exposure in a very high-priced natural gas market, meaning that we will remain sharply focused on our injection and withdrawal strategies and the overall carrying costs associated with natural gas held in inventory.

With natural gas prices at more than $10 on the NYMEX, we believe opportunities may develop for volatility to increase and storage and transportation spreads to widen out to levels we have experienced over the past two and a half years throughout the remainder of this year and into next heating season.

John, that concludes my remarks.

Thanks, Jim. Before we open it up to questions, let me make just a few additional comments. As you just heard, ONEOK Partners is making good progress on its internally generated growth projects, closely managing those things we could control and staying top -- staying on top of costs and completion timelines. While execution of these projects is and will remain a top priority, we are looking toward the future. We are currently evaluating additional internal growth projects that will require an average of $300 million to $500 million per year of capital. And based on our current evaluations, these projects should occur in the 2010 to 2015 timeframe.

These future investments, along with strategic acquisitions, will enable us to continue to grow partnership distributions, benefiting not only ONEOK Partner unit holders, but also as we have discussed today, ONEOK shareholders.

As we have stated previously, ONEOK Partners is ONEOK's growth engine. To fund the partnership's growth, we have strategically redeployed capital from ONEOK to ONEOK Partners over the last year, enabling the partnership to finance these growth projects, which will allow ONEOK Partners to raise its distribution to unit holders in the future and allow ONEOK to grow its earnings and cash flow through its ownership position in the partnership.

Consider this. Over the last 12 months, ONEOK redeployed more than $1 billion of capital. $370 million to buy back 7.5 million shares of stock, $400 million to retire long-term debt, and more than $300 million to purchase additional units in the partnership. During that same period of time, the partnership has raised more than $1 billion to fund its growth, a $600 million long-term debt offering last fall, and more than $460 million in public and private placement unit offerings. These actions at ONEOK and ONEOK Partners we believe are creating and increasing shareholder and unit holder value.

In closing, I would like to thank all of our 4,500 plus employees who make our performance possible. Without their contributions and commitment, our continued success would not be possible. Again, many thanks to them.

Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Michael [Blum] with Wachovia.

Hey. Good morning, everyone.

Hello, Michael.

A couple of questions. One, if you just -- I just want to make sure I heard that right, your comment there, John at the end -- did you say you were looking at potential projects that would cost in the range of $300 million to $500 million per year for those five years that you outlined?

That's correct.

Okay.

But, just to be -- just to clarify that those expenditures would occur in that timeframe. They're not occurring between now and 2010.

Okay. Understood. Second question was, just as it relates to the guidance for ONEOK Partners. So, I guess the question really is, are you not increasing the guidance? Is that conservatism, do you have a particular view of commodity prices going forward or is it all -- is it just related to the comments you made on Overland Pass?

Well, actually I think you may have answered your question for us. The -- we do have a fairly wide range and we feel very confident in that range. As it relates to in particular gathering and fractionation as Terry pointed out, we see increasing margins, and have seen increasing margins, in that business. And that has helped us as we look forward today to potential offsets in the delay with Overland Pass Pipeline revenues inside the natural gas liquids pipeline segment. So, we feel pretty confident in that piece. So -- and this issue of [conservativism], I think that that is a long standing -- I started to say reputation -- but trade of our company.

Okay. Last question --

(Inaudible) the two. That's okay.

I'll be quick. Can -- do you see consolidation happening in OP space this year in the next 12 months and could you potentially see yourself being involved as a consolidator?

Well, that's an interesting question. If there is consolidation, we see ourselves as a participant and as a consolidator. Will we see it this year? As we stand here today, I don't see or know of any signs or -- so -- and going along with our [conservativism], we're probably also not going to be real disclosing about our views of the future either.

Thank you very much.

Yes, sir.

Our next question comes from Gabe Moreen with Merrill Lynch.

Hi. Good morning, everybody. It's Todd Kincaid calling for Gabe Moreen.

Good morning.

Firstly, could you talk a bit about the drivers behind the year-over-year increase in key pull contracts as a percentage of the net margin at the gathering and processing segment?

Pierce? Well, we'll throw that one to Pierce and then I'll add a little color.

I'll tell you what. I'm going to have to ask you to repeat the question, because I couldn't hardly hear you.

Oh, okay. Could you talk a bit about the drivers behind the year-over-year increase in key pull contracts as a percentage of the net margin at the GNP segment?

Well, I don't think that the percentage increase, number one, was material. But we take an enterprise look at all of our portfolio of -- that we have and we look at it in terms of natural gas liquids and natural gas, and assess our long or short position. So, hopefully I answered your question, but I don't think it's really a material look in that.

Yeah. I might add the margin increased. Not the volume under key pull, but the margin -- percent of margin increased and if that's what you're referring to, it's primarily because the spreads increase so much more relative to a year ago. I think in the press release, I can't remember. I think we went from 6% to 18% or 20% --

Yeah. That's 18 (inaudible).

If you look at the shrink volume or MMBtus, I think you'll see that that was relatively the same, which indicates the volume hasn't changed. But what has changed is that spread and off the top of my head I just can't remember what that was, but it's like maybe as much as twice as much.

Okay.

Which would make sense.

Okay. Thanks. And secondly, on some of your expense and projects, has your strategy with respect to signing on incremental volumes changed at all as a result of confidence in capital costs and any cost inflation there?

No it hasn't. I mean our philosophy has been if you just start from the beginning, we look for -- we try to understand as best we can what's going on in the world of supply, regardless of the commodity. And likewise, demand. And then we look for opportunities to remove constraints. And so we go out and try to get anchor tenants, if you will, to our projects, and then we optimize that position by adding incremental barrels. And as both Terry and Pierce have commented, we remain very active on -- with producers in particular, our primary customer -- on adding incremental barrels to our -- barrels or Mcfs to our projects.

Okay. Thanks very much.

Yes, sir.

(OPERATOR INSTRUCTIONS)

Our next question comes from Kathleen Vuchetich with W.H. Reaves.

Good morning.

Good morning, Kathleen.

How are you guys doing?

Fine, thank you.

Good. I was wondering if you could give me what the capital budget is currently for both OKS and OKE this year? Have you dialed in the higher cost into your capital budget expectations?

Let me turn that over to Curtis. I think he's got the numbers. He's frantically look --

And do you have a view of whether or not the '09 capital budgets for both companies will decline as a lot of these projects start to come online? Do you expect the budgets next year to be lower than the '08 number?

Well, let's -- I just want to make sure we make the distinction clear that the capital that you're referring to will be within cap -- ONEOK Partners.

Right. I understand that.

Okay. I'm sorry. Well, with that caveat, then we can --

Kathleen, at the partnership, growth capital is just a little bit under $1 billion in our updated for 2008 and then the maintenance dollars are flat still at $91 million.

Okay. And for distribution and energy services at OKE?

Distribution we haven't had any change. It's still at $170 million.

Okay.

And then the balance that we have at corporate and energy services is combined about $12 million.

Thank you. So should we expect the OKS $1.1 billion to decline in '09 as these projects start to near completion?

Yes. And then in the comments we gave you some color as to what we think you could assume --

Um-hmm.

-- going forward from say 2010 to 2015.

Okay. So '09 will be kind of a -- an interim year is what we're kind of thinking on capital spending.

Yeah. It's a year of completion. Let's --

Okay. That's fair.

(Inaudible) 2008, I had 2009, and then we have other things that we'll be kicking off.

Okay. Having had -- at energy services, having had a year where you had to buy some spike gas because of the real surge in demand due to cold weather, are you looking at adding additional storage capacity to avoid having that occur again? Or do you feel that because the winter was so extremely cold, it was an outlier and not really needing additional storage capacity?

Kathleen, good morning. This is Jim.

Hi, Jim.

Hi. That's a good question and the short answer -- and then let me give you more background -- is to overcome that phenomenon we don't anticipate acquiring more storage.

Okay.

And the longer answer is this is probably the third time that I can recall over our ten years that we've seen this phenomenon where it just all the weather forecast indicated it was going to be a warm first quarter and it turned out to be cold.

Um-hmm.

So, as we set up our months we weren't as long flowing gas as we could have been had we suspected it was going to be that cold.

Okay.

So, it -- but that said, the impact of that part of the business -- and that -- where we had to go out, wasn't the main driver of the change from '07 to '08 --

Um-hmm.

-- it was more -- and I'll just take you back -- there was still a lot of impact from the hurricanes in the first quarter of '06 --

Um-hmm.

-- '07.

Yup.

And the spreads were extremely high, summer to winter that we had been able to lock in.

Uh-huh.

As compared to what they were this first quarter. Which again gets back to the basis of this business, as I know you understand --

Sure.

-- it's summer/winter spread is important (inaudible).

Jim, what's the -- with the extraordinarily cold weather, have you had interests from additional utility customers given how difficult it was for some of them to manage supply with the cold surges? Has this helped your marketing effort?

Kathleen, not yet. I think everybody's still coming out of the winter, and then they'll begin assessing their next winter's supply probably in the next few months. I think that -- I mean that's probably a logical conclusion, but we haven't seen that yet.

Okay. Thanks so very much, guys.

You're welcome.

Our next question comes from Jonathan [Lanfear] with Wachovia.

Good morning, guys.

Good morning, Jonathan.

Just a quick question following up on the last caller. Energy services, can you give us an idea of what percentage of operating income is contracted and maybe not subject to some of the volatility and just secondly, if -- maybe you can comment -- if you continue to see some of this abnormal extraordinary weather patterns, I mean would you consider scaling back in that business?

Well, let me -- I mean we've known for some time that this business is a business that's subject to basis and spread. And on some of our past presentations, we've talked about how the -- what those sources of income are on a relative basis. And of course, our energy services people are always looking for opportunities to take advantage of market inconsistencies. The optimization piece that you're referring to in the past has represented roughly about 10% of our business or thereabouts, but scaling back, or the relative percentage, I don't know. Jim, I might ask if you have any comments you wanted to make.

Yeah. I would just probably add to that first, Jon, I mean -- and I don't mean this as an excuse, but the business is pretty complex and in past presentations we've tried to just kind of point to a few things that drive it. And of course what I just said, the summer to winter spread, when you have 90 BCF to 100 BCF of gas storage, that's one big driver. But you can't take it in a vacuum, because we also pay for leasing storage, we receive demand fees from customers.

If there's volatility in the market, we're able to roll gas in and out of storage and capture additional margins, so I guess what I'm trying to say is there's not any one indicator, but there are a couple of indicators that can give you a sense of the business, that summer to winter spread being one, and just the volatility in natural gas price being the other. So, in terms of us scaling the business back, we continually look at the assets we lease, the returns we're getting from those, and making decisions on what to renew or not renew. So that's just an ongoing part of our business.

Great. I appreciate the time.

Jonathan, did that answer your question?

I think so, yes.

Okay.

Our next question comes from Brook Glenn Mullin for JP Morgan.

Thank you. On the --

Good morning.

On the Overland Pass, you mentioned the ability to increase the capacity there with pump facilities. Could you give us a sense of the capital costs?

Well, as we mentioned there's a couple of traunches. The first one is an incremental move to I think 150, and then it'd go to like 220, so you have different levels. And Terry, do you have any direction?

Sure, John. As far as the increase in capacity, generally what we're looking at are additional pump facilities that we would install along the pipeline. And those pump facilities come generally at a cost in the neighborhood of $3 million to $5 million per pump station. So if you looked at an increase to 220,000 barrels per day, we're looking at an increase in pump facilities of about seven. That is seven separate pump stations. So you can do the math on that and get a feel for and a flavor for the costs. So, it's not like a major line loop that you might expect. So it's -- we designed the pipe with enough and sufficient diameter to where we could easily layer in fairly low cost incremental capacity expansions.

Great. Thank you.

Yeah. I would add that one of the unique things about expanding our NGO pipeline infrastructure is the low cost of capital required to add these increments, and you add these increments when you have a need or a demand. And so usually they are backed by a producer or a customer. But we always have the prerogative to increase the pipeline capacity at risk.

Our next question comes from Mark Easterbrook with RBC Capital Markets.

Good morning. A quick question again on CapEx. Aside from the Guardian project, has any cost of any project changed materially since January?

The only comment -- the answer's no. But the only comment that was made was by Terry Spencer, which not knowing where we're going to end up -- we know where we're going to end up, which is we're going to finish the last 60 miles of the pipeline. When we do that, we are in the process of working with the various Federal agencies involved, and so we're just -- I think we said something in the order of magnitude of we don't expect anything beyond 10%. But, certainly there are -- our inability to agree as to when we can go back in and finish that pipe is doing nothing but delaying us. And they're -- we're just saying there may some costs associated with that.

Okay.

But we're hopeful that a -- although we all have the best interests of the wildlife and the sage grouse in mind, we're hopeful that we're able to find a way we can move forward quickly.

Yeah. I guess my question was more related to projects outside of Guardian. You haven't seen any cost creep from materials or labor in other projects?

No. None.

Okay. And then secondly, just looking out into the futures market, I mean obviously you're benefiting from a very strong commodity pricing environment and the second quarter's probably going to play out in very much the same fashion. How much longer can this type of environment go for if you look out into the futures market? I guess my question is how far out can you guys hedge?

Well, I'm pretty sure in the press release, we're hedged -- we have information with regard to gathering and processing. We're -- which is where most of our exposure rests for the balance of this year. Pierce, is --?

I think the question was how far out have we had -- that's through 2008.

So it's just the balance of this year.

Right.

Your question as far as how long --

Yeah.

Boy, that's a tough one for us to answer. I think there are -- I think you all read the same things we read. There's just a whole lot of different external factors that affect the price of crude and affect the price of natural gas. We are not predictors, rather we structure our business so that we can make money in any environment and our people are always attempting to do so.

It appears -- this is editorial -- but it appears that this strong price environment will continue. And there are, as I said, others much smarter than we that are also saying the same.

Yeah. Thanks.

Um-hmm.

Our next question comes from Becca Followill with Tudor Pickering.

Hi. Two more questions for you. On storage, given the lower spread and a lower of all, would guys consider dropping some of the lease storage that you have?

Well, Becca, this is Jim.

Or not renewing contracts.

Well, we look at that constantly, but again the storage that we lease is, I mean it's sort of a continuous process. It -- as we sign up LDC customers to sell gas to, we've got to have storage to sell that service, and the variable there is how wide is the summer to winter spread going to be? That said, we every year go through and try to look at our various facilities and the returns we might make and try to make predictions about the summer/winter spread and volatility. So that's a long way to say yes. There's a potential we could not renew some storage and in fact there has been storage we have not renewed. So, the energy services people do, if you will, a marginal analysis on their storage positions to determine whether or not the value created by that storage position is flowing through to the demand fees that we're receiving.

Obviously we benefit from the partnership with rising storage fees that's -- the disadvantage to energy services, and so they're always in this risk/reward review.

Thanks. And then the other question is on the new areas that you talked about CapEx 2010 to 2015. Is that -- or the new capital that you would spend -- is that in existing core areas where you already operate? Or would you branch out?

Well, the short answer is we would branch out if we felt it was strategic and would benefit the company long-term. The numbers that we're referring to are primarily what I will say are either internal to the footprint expansions, or add on as opposed to step out.

Thank you very much.

You're welcome.

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Our next question comes from Robin Levine with JPMorgan.

Hi. How are you?

Hi, Robin. How are you doing?

Good. I had a question on the debt side. You mentioned your revolver availability at OKS is completely available to you. If you could give me the revolver availability at the OKE level. And if you might comment on your appetite, if any, to access debt markets at either entity.

Robin, this is Curtis. At ONEOK, we have a $1.2 billion revolver and we actually use that to backstop our commercial paper program. At the end of the quarter, we had about $265 million of commercial paper outstanding, so more than a billion of capacity there.

In terms of accessing the debt markets this next year or the balance of 2008, we don't have any current plans to do that. We feel a pretty good position with both of the companies.

Thank you.

You're welcome.

Okay. Well, thank you everyone. This concludes the ONEOK and ONEOK Partners call. As a reminder, our quiet period for the second quarter will start when we close our books in early July and will extend until earnings are released. We'll provide you with a reporting date and conference call information for the second quarter at a later date. Christy Williamson and I are available throughout the day for any follow-up questions. Thank you for joining us, and have a good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.