歐尼克 (OKE) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to the 2009 second quarter ONEOK and ONEOK Partners earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). I will like to introduce your host for today's conference call, Mr. Dan Harrison. You may begin, sir.

Thank you. Good morning and welcome, everyone. A reminder that any statements that might include ONEOK or ONEOK Partners expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Security Acts of 1933 and 1934. Please note actual results could differ materially from those projected in any forward-looking statements. For discussion of factors that could cause actual results to differ, please refer to Securities and Exchange Commission filings. Now, let me turn the call over to John Gibson, ONEOK CEO and ONEOK Partners Chairman and CEO. John?

Thanks, Dan. Good morning and many thanks for joining us today. And for your continued investment and interest in ONEOK and ONEOK Partners. Joining me today on the call are Jim Kneale, President of ONEOK and ONEOK Partners; Curtis Dinan, Chief Financial Officer for both ONEOK and ONEOK Partners and Terry Spencer, ONEOK Partners Chief Operating Officer; Rob Martinovich, ONEOK's Chief Operating Officer and Pierce Norton, President of ONEOK Distribution Companies. Terry, Rob and Pierce will be available during the question and answer period.

Both ONEOK and ONEOK Partners had strong second quarter and year-to-date performances in a challenging industry and economic environment. Based on our six month performance in what we currently anticipate for the second half of the year, we are updating our 2009 earnings guidance for both entities. Increasing the mid point and narrowing the range for ONEOK, while narrowing the range for ONEOK Partners. As noted in our news release, we are forecasting that each of ONEOK's operating segments, ONEOK Partners, Distribution and Energy Services will perform at or better than the levels we forecast last February. Guidance for all four ONEOK Partners operating segments are also at or better than what we forecasted earlier this year.

However, equity earnings are expected to be lower at the partnership primarily due to lower than anticipated throughput in our jointly owned Powder River Basin gathering systems, which I guess fortunately, also happens to be our lowest net margin business in the natural gas gathering and processing segment. All of that being said, the positive news is that while uncertainty still exists in the marketplace and in the economy, we are confident about our 2009 performance. We have a clear view of the operating environment and certainly much clearer than we did at the beginning the year. Which is why we are updating our guidance at both entities.

Now a just few brief highlights before I turn the call over to Curtis and Jim. Arbuckle Pipeline. The 440 mile NGL line running from southern Oklahoma through the Barnett Shale and into the NGL infrastructure along the Texas Gulf Coast is now flowing. I would like to take this opportunity to thank everyone who helped us complete this important, yet very challenging project. I will discuss the partnerships other growth projects and their contribution to ONEOK Partners and to ONEOK a bit later.

Based on ONEOK's strong cash flow and earnings, we recently increased the ONEOK dividend $0.02, reflecting our increasing confidence in ONEOK's ability to perform in a challenging environment. During the quarter, ONEOK Partners issued approximately 5.5 million units for more than $240 million in net proceeds. These proceeds, coupled with $500 million of proceeds from the long-term debt issuance in March, provide us with more than adequate liquidity to complete our growth program and to fund additional capital investments at the Partnership. Now, Curtis Dinan will provide a more detailed look at ONEOK Partners and review it's financial highlights. Curtis?

Thanks, John. And good morning, everyone. In the second quarter, ONEOK Partners reported net income of $98 million or $0.81 per unit compared with last year's second quarter net income of $155 million or $1.46 per unit. The decline reflects the impact of lower commodity prices in the Partnership's natural gas gathering and processing segment more than offsetting the benefits of natural gas and natural gas liquids volume increases from our completed capital projects. Distributable cash flow in the second quarter was lower by $46 million but more than adequate to cover the $1.08 per unit second quarter distribution and maintain a 1.08 times coverage ratio, well within our 1.05 to 1.15 times target.

As John noted earlier, ONEOK Partners updated its 2009 guidance to a range of $3.25 to $3.65 per unit. It is important to note that our previous guidance did not include any assumptions for financing and that the mid point of our updated guidance is unchanged even after completing a $500 million debt offering and $240 million equity offering. Our updated guidance includes an $11 million net interest expense increase primarily associated with our March debt offering and additional units from the June equity offering which will increase average total units outstanding for 2009 by slightly less than $3 million for the year.

During the quarter we increased our hedges to lock in margins on expected production in the Partnership's natural gas gathering and processing segment which has the most sensitivity to commodity price changes. For the remainder of 2009 we have hedged almost 75% of our expected NGL and condensate production at an average price of $1.29 per gallon. Our natural gas hedges are unchanged from the first quarter with 45% of our expected natural gas production hedged at $4.20 per MMBTU.

For 2010 we have hedged almost 15% of our expected NGL and condensate production at an average of $1.60 per gallon. Natural gas hedges for 2010 are unchanged from the previous quarter with almost 40% of our expected natural gas production hedged at $5.71 per MMBTU. As is our practice, we continually monitor the commodity markets and will place additional hedges as conditions warrant.

Our revised earnings guidance also reflects higher capital investments than originally forecast at $509 million for growth capital and $61 million for maintenance capital. This is an increase of $145 million from our previous 2009 guidance, but a decrease of approximately $680 million when compared with 2008. Most of the increase in our guidance relates to the Arbuckle Pipeline project which Jim will discuss in a few minutes.

We continue to develop growth capital projects that are expected to average $300 million per year in investments over the next five years, much of which are in our NGL businesses. Through the first six months of 2009, we made $322 million in capital investments, which includes about $300 million for growth and a little more than $20 million for maintenance, leaving less than $250 million in total investments remaining for 2009.

Our capital position and financial flexibility remains strong as a result of our successful completion of the debt and equity offerings earlier this year. During the second quarter we utilized some of the proceeds from the equity offering to reduce borrowings under our $1 billion revolving credit agreement. At the end of July, the Partnership has $325 million outstanding under this revolver which doesn't expire until 2012. The Partnership has no long-term debt due this year with the very manageable $250 million due in June of next year and another $225 million due in 2011. John, that concludes my remarks on the Partnership.

Thanks, Curtis. Now, Jim Kneale will discuss the Partnership's operating performance.

Thank you, John and good morning, everyone. I will start with the Partnership's natural gas businesses. The gathering and processing segment's second quarter results were down, as compared with 2008's record performance primarily as a result of significantly lower commodity prices. We also saw a 5% decline in natural gas gathered for the quarter and 3% decline for the six month period. Natural gas processed increased slightly for the quarter and was up about 3% year-to-date. We gather more gas than we process, due in part to gathering dry gas from coal bed methane wells in the Powder River Basin. This area is where we have seen the largest dropoff in drilling and volumes. Since the gas is not processed, as John mentioned, it is typically our lowest margin gas.

Across the five states where we operate, drilling rig counts appear to have bottomed out during the first week of June and have been increasing since then. The July average rig count across our areas was 6% above June. In our core growth areas in the Williston Basin and in western Oklahoma, particularly the Woodford Shale, we continue to see moderately active drilling which is responsible for the increase in volumes processed. In the Williston Basin, where we gather and process casinghead gas, we have connected more wells in the first six months of 2009 than we did in 2008. To some extent due to the backlog we had entered 2009 with.

Overall, our well connects year-to-date are down about 14% from 2008 levels but comparable with the number connected in the first six months of 2007. Our updated guidance contemplates gathered volumes on our system to be about 3% lower than 2008. While we do so bright spots in the shale plays with the decrease in rig counts across the country, we believe volumes may continue to decline. Based on the current view, we expect 2010 gathered volumes to be down about 3% from 2009 and process volumes to be up about 2%. To counter the impact on margins, we will continue to focus on improving contract terms, plant and system efficiencies and lost and unaccounted for.

Now, moving to the natural gas pipeline segment. Earnings for the quarter were down as compared to last year. Although we had the first full quarter of earnings from the Guardian Pipeline project which added $8.3 million of margin to second quarter results, this increase was offset by the impact of lower natural gas prices on our net retained fuel position. Our inter- and intra-state pipelines were more than 80% subscribed under demand based rates for the quarter.

At the end of June, our Midwestern Gas Transmission Pipeline interconnect with Kinder Morgan's Rockies Express Pipeline was completed. As a result, capacity on Midwestern is now fully subscribed. Equity earnings from investments were also down for the quarter due to lower subscription volumes and rates on our 50% interest in Northern Border Pipeline.

Now, we will take a look at our natural gas liquids businesses. The natural gas liquids gathering and fractionation segment's operating income decreased from the second quarter of 2008. Overall, net margins were unchanged. Increased volumes from Overland Pass and new supply connections were offset by higher tariff costs paid to our natural gas liquids pipeline segment and narrower NGL product price differentials.

NGL's fractionated increased 29% to 479,000 barrels a day in the quarter. Operating cost and appreciation expense both increased largely due to incremental expenses from the expansion of our Bushton fractionator that began operating in the third quarter of 2008. The natural gas liquid pipeline segment second quarter operating income increased 80% as compared to 2008. NGL's gathered were up 80% or 78,000 barrels per day and NGL's distributed increased 50% or 153,000 barrels per day. The main reason for these increases is Overland Pass Pipeline which is currently flowing more than 98,000 barrels per day, 20,000 of which are coming from the D-J Basin Lateral that went into service last quarter.

Overland Pass is still expected to flow approximately 140,000 barrels per day by the end of the third quarter following completion of the Piceance Lateral. We are in the process of adding additional pump stations to handle these increased volumes.

We also continue to see growth on our North system. In the first quarter of 2009, we saw increased propane shipments into the Chicago area due to cold weather. In the second quarter, we saw increased natural gas shipments to meet the higher demand in the diluent markets which is driven by Canadian heavy crude oil development.

Now, for a quick update on some of our other projects. We were pleased to announce that we completed construction on the Arbuckle Pipeline. At the end of July, we began receiving product into the pipeline. Once the line is filled, delivery will begin to our Mont Belvieu fractionators. Our cost estimate for Arbuckle is $490 million. During the third quarter, Arbuckle is expected to reach 65,000 barrels per day and we have sufficient commitments in place to fill the pipeline's capacity of 210,000 barrels per day in the next three to five years. The demand by the market on the pipeline has kept the economics of this project very favorable despite the cost. The project continues to exceed our expectations in attracting new mid- continent NGL supply seeking the price advantage Gulf Coast market.

We have also resumed construction on the Piceance Basin Lateral pipeline following the planned stoppage due to the big gain winter restrictions. We expect to complete this lateral in the third quarter and initial flow is expected to be approximately 37,000 barrels per day. It is also worth noting that most of the additional NGL barrels that will be moving across our system from the Rockies and the Barnett Shale are not incremental to the marketplace.

Now I want to talk about the overall NGL markets. As many of you already know, more than 50% of the NGL barrel is used in the petrol chemical industry. Our volumes delivered to the petchems have remained strong through the first six months of 2009. We think that has more to do with increasing demand by our customers for ONEOK Partners' reliability than with the overall increased demands for NGLs. The increased demand is driven by the customer's need for reliable supplies, services and infrastructure and the fact that NGL feedstocks had a competitive cost advantage over petroleum based feedstocks such as naphtha.

In the first half of 2009, ethane was a favored feedstock by a wide margin. We have just recently begun to see some feedstock switching from ethane to propane, butanes and to some extent, natural gasoline. As a result of the record high propane inventories and resulting lower propane prices, we expect propane to continue to compete favorably with ethane in the foreseeable future. In addition, it is not uncommon for the petrol companies to destock or reduce inventories at year end. These factors point to continued volatility in demand for NGL feedstocks throughout the remainder of 2009. Going into 2010, we expect and proven in the petchem markets as we are beginning to see, stabilization in the US economy as well as positive GDP growth in international markets. John, that concludes my remarks.

Thank you, Jim. Now, Curtis will return and share with us ONEOK's financial performance. Curtis?

Thanks, John. ONEOK's net income for the second quarter was $42 million or $0.39 per diluted share relatively unchanged from the second quarter last year. We also raised the mid-point of ONEOK's earnings guidance by $0.05 and tightened the range to $2.40 to $2.70 per share reflecting our confidence in our ability to perform in this challenging environment. ONEOK's year-to-date stand-alone free cash flow before changes in working capital exceeded capital expenditures and dividend payments by $127 million. We expect our stand-alone free cash flow for 2009 to be in the range of $200 million to $230 million.

By virtue of ONEOK's general partner interest and ownership position, ONEOK received almost $70 million in distributions from the Partnership in the second quarter. A 6% increase from the same period in 2008. At the Partnership's current distribution level, ONEOK will receive approximately $277 million in distributions in 2009, a 10% increase over 2008. This free cash flow continues to provide ONEOK with significant financial flexibility and liquidity, with opportunities to make acquisitions, increase our investment in ONEOK Partners, increase future dividends or repurchase shares. As John mentioned, we increased the ONEOK dividend $0.02 this quarter, representing the seventh time since January, 2006 that we have done so. And a 50% increase during that time frame.

ONEOK's liquidity position continues to improve. At the end of the second quarter and on a stand-alone basis, we had $330 million of commercial paper outstanding which is backed by our $1.2 million revolver which doesn't expire until 2011, $15 million in cash and cash equivalents and $400 million of natural gas in storage. During 2009, we have reduced our total debt by $1.2 billion from cash-on-hand, cash from operations and lower working capital levels.

At the end of July, our short term borrowings were under $300 million, with significantly lower commodity prices and reduced natural gas storage capacity under lease in our Energy Services segment. We do not expect our short term borrowings to exceed $400 million for the rest the year. As a result, we are letting our $400 million 364 day revolving credit agreement expire today. Our next scheduled debt maturity is not until 2011 when $400 million comes due. Our current stand-alone long-term debt-to-equity is 41% and our stand-alone total debt-to-equity was reduced to 46% from 59% at the end of the 2008. John, that concludes my remarks.

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

Thanks, John. I already covered ONEOK Partners, so I will start with Energy Services. We had a strong quarter driven primarily by an increase in transportation margins. We were able to realize higher margins because of hedges we put in place last year on the Rockies- to-Mid-Continent capacity. We also had higher retail margins, as a result of increased fees collected for providing the retail customers with the ability to lock in their commodity prices. Our natural gas and storage at the end of the quarter was about 70 BCF, up from last year's 41 BCF. The increase is partially due to warmer than usual regional weather that affected demand in the first quarter. In 2008, we had a larger than normal drawdown due to colder weather.

We currently have 83 BCF of storage capacity under lease, as compared to 91 BCF at this time last year. We anticipate further reductions to 72 BCF in the first half of 2010 and down to 65 BCF in 2011. This lower storage capacity, combined with much lower natural gas prices has significantly reduced Energy Services working capital needs as compared with prior years. As Curtis mentioned, we reaffirmed our Energy Services 2009 operating income guidance of $115 million. We have a high degree of confidence in our ability to achieve the 2009 guidance and believe there is upside potential. We continue to have good success in contracting our demand business and expect demands revenues will slightly exceed last year's. We also have nearly 100% of our storage margins and 90% of our transportation margins hedged for the remainder of 2009.

Now, let me talk about the Distribution segment. Our second quarter earnings were down compared to last year primarily due to higher employee related costs. Partially offsetting those increased costs were higher margins due to new rates in all three states and lower bad debt expenses. Year-to-date operating income is up primarily due to increased margins in all three states, even though we experienced warmer weather in our entire service territory.

On the regulatory front on June 26, we filed a rate case in Oklahoma under the recently approved performance based rate structure. The filing seeks a $66 million increase in base rates and is driven primarily by capital investments since our last capital recovery filing. The file rate structure includes a higher customer charge which reduces our volumetric exposure and request a return on equity of 11% as compared to the current 9.9%. It also moves several of our current riders into base rates, effectively reducing the requested rate increase to a net amount of $37.6 million. If approved as filed, it would increase annual operating income by about $19 million beginning in 2010.

Moving on to Kansas. The commission staff recommended that utilities pe permitted to defer pension and other post employment benefits expenses that are different from those recovered in rates. And that external funding be required for an amount equal to the cost recovered from rate payors. If approved, this has a potential impact of $2.7 million for 2009 and has been factored into our guidance.

And at Texas Gas Service, in June our central Texas service area, which includes Austin, received an increase of $1.1 million in base rates which also included a $5 million decrease in depreciation expense. Plus recovery of fuel related portion of bad debts and recovery of carrying costs for natural gas and storage. These new rates were effective in July and are factored into our 2009 guidance which remains at $200,000 of operating income. John, that concludes my remarks.

Thanks, Jim. As you heard, both ONEOK and ONEOK Partners are in a strong financial position and are performing well in a challenging industry and economic environment. As ONEOK Partners wraps up its $2 billion growth program, I would like to provide some perspective on this capital investment program that will conclude later this year with the completion of the Piceance NGL Lateral Pipeline. When we started this program three years ago the world, the economy and certainly the energy industry were a lot different than they are today. Despite some of the challenges we faced on various projects, whether regulatory hurdles related to sage-grouse and the worst winter in a generation on the Overland Pass Pipeline or rock and reroutes on the Guardian Pipeline in Wisconsin, or expensive right-of-way in mud, and I mean lots of it, along the Arbuckle Pipeline, these projects have exceeded our expectations and will continue to do so in the future. In spite of increased costs and delays, these projects will provide us with exceptional returns and will provide the Partnership and ONEOK with growing sustainable fee based earnings for years to come.

Several of these projects, Overland Pass and Arbuckle, can be easily and inexpensively expanded to accommodate growing NGL volumes. In addition to the earnings that these projects will provide to the Partnership and, of course, to ONEOK as general partner and significant owner, these projects also clearly establish us as one of the premiere NGL operators in the country, with the infrastructure, market knowledge and customer focus to compete effectively in this important business, creating value not only for our customers, but also for our investors both in ONEOK Partners and in ONEOK, while at the same time creating a gateway, if you will, to additional growth projects in the years ahead.

As any successful business does, we will apply the lessons we have learned on the largest capital investment program in our history, as we enter the next phase of the Partnership's growth program which is currently more than $300 million per year beginning in 2010 and continuing through 2015.

Finally, I would like to thank our employees for their commitment, their contributions, both of which allow us to create value for our investors and our customers. We would like to all say thanks to all of them for their dedication and hard work. Operator, we are now ready for questions.

(Operator Instructions). Our first question comes from Carl Kirst from BMO Capital.

Hi, good morning, everybody. Few questions and I will keep it it the ONEOK level. Great job you risking the marketing. Jim, if I understand you correctly when you said 100% of the storage margin is now locked in 90% of the transportation, if we can some how relate this to the $115 million of EBIT guidance. Is the only then remaining risk to that $115 million target really just that remainder of the transportation margin or are there other aspects we should be keeping our eye on?

Well, CarI I think, that's overall a pretty accurate assessment. We're almost 100% hedged on our storage margins and it is just a small piece that isn't. As we, as we are not calling on that -- as our customers aren't calling on that service in what I call the shoulder months, we often can make some money optimizing those positions, so that provides us a little opportunity. And then, factored into our guidance is the amount of storage draw we will have primarily in December, and based on the practice, that is fairly conservative. So those numbers are pretty firm. We do have our retail operation. It is looking good. And generally, as the way we are looking at that, we feel real confident in the $115 million and depending on what the winter does and gas prices do before winter, there is some upside to the business.

Carl, this is John. One thing I would add to Jim's comments. I think he is dead right. I think it also points out the difference in the way we are operating this segment is that we are at 100% hedged on storage spread and 90% on transport. And that's different than what we have done in the past. It eliminates a lot of upside potential but at the same time provides certainty to our earnings. What you don't know -- and although there is upside as Jim pointed out. What you don't know is how cold it is going to be in the areas where we serve our LDCs and what impact that will have not only on the optimization opportunities but also the draw on the services that we provide to our LDCs. So that provides some flexibility which allows us to not necessarily tie down 2009 at this point in time.

Fair enough. Second question, just to kind of micro on the LDC side. Noticed that this quarter, it looked like we had higher employee related expenses relative to the first quarter which is actually down. And I didn't know if that was pension related or if this was more lumpy abberation, just trying to get a feel for that going forward.

Carl, this is Jim. I think although they were up this quarter, it is more of a timing event. And I think as we get into the next quarter and fourth quarter, that will smooth out and you won't see a variance like that.

Great. And last question, if I could. And John, I know you get all the time, but with respect to the, perhaps, the current market we are in and the current opportunities you might see. And question, I know is prioritizing the cash flow at the OKE level between acquisitions et al. Are there more opportunities, perhaps, on the M&A front, given your guys' consolidation strategy over the last several years. Are you seeing more opportunities today than six months ago? Or is it more the same?

Carl, more opportunities are being discussed. Expectations of sellers continue to be high. As we have said before, over the next six to 18 months, we will continue to see opportunities and we are positioning the Company to be ready because from a priority standpoint, we want to buy earnings, then we'll build earnings.

Okay. Thank you.

The next question comes from [E. Siegel] with Credit Suisse.

Could you buy earnings and then build earnings, that a segue into the CapEx profile looking out into 2010 at the MLP level. And when you think of $300 million annually and projects, could you talk about what kind of returns are you looking at relative to the exceptional returns and I am not sure you how you define the exceptional returns. But the exceptional returns you had on the $2 billion projects, are those $300 million that you are thinking about, are those relatively quick return projects so that the risk involved would probably be less than the risk you have seen before and what do you think would have to happen in order for that $300 million of CapEx to be somewhat larger or smaller.

The $300 million does not include acquisitions. And that addresses your point on buying earnings versus building earnings. And when you look at the building earnings which will be dependent on the market need for these assets that we've contemplated building, they are quick return predominately. They are well connects to our gathering and processing segment. They are in the Partnership. They are going to be plant connections. They are going to be interconnects to our pipeline systems. So they are going to be a quick returns.

And from the definition of exceptional, if I can recall of all your questions. You are the one person that can put five questions into one. If I don't answer them all, let me know. And we will try to get them. Exceptional, I'd say that what we've said before is the money we've spent in the Partnership, we are looking on a weighted average basis in the mid-teens and all depends by segment the relative cost of capital that each of those segments face. And what that says is that a pipeline extension has two 15 year contracts with LDCs behind it. We will accept a lower result from the standpoint of return than we will where there's more risk involved, say in gathering and processing or, perhaps, in gathering and fractionation.

Okay. I am sorry.

No, I was just going -- I wanted to come back and ask you if I answered your questions.

Yes. The one that I think you missed was on the work circumstances could you see less than $300 million or more than $300 million going forward?

Less than $300 million is a more of a timing issue. So for example, what we anticipate in our origination efforts with the marketplace is that these assets or projects need to be built. What happens that delays it is, for example, drilling activity. Volume. The market does not need the capacity to be built today. An example would be a pipeline or a fractionator or some known volume addition. And that would cause you to, perhaps, not spend as much as the $300 million. And that would hit you later on. What would cause you to increase is going to once again be an increase in activity from the standpoint of volume and throughput needing to get either transported, gathered, processed or fractionated, stored.

I promise my very, very last question is, Jim gave some metrics on well connects and he said it is down 14%. Can you talk about what the expectations are for well connects in the second half of the year and what are you thinking about for 2010?

I will let Jim answer the question and then I have an editorial comment, to add to it. This is beyond metric.

E., I think on the big picture, I gave what our current view of volumes might be for next year. In the areas where we operate, we believe we do a very good job of being the low cost operator and because of our relationships with producers that helps us create a competitive advantage. Although our well connects are down this year, as I mentioned, they're comparable to 2007, which was a good year. And as we look forward, we think there will be like 2007 connections. So again, you got to look at the areas where we have focused and try to create a competitive advantage and to the complement of our people, that seems to be -- hold value for the producer.

And the editorial comment that I would add is simply that in addition to what Jim is saying is that we do have this competitive advantage, or we strive to maintain a competitive advantage from the standpoint of being a low cost provider to increase the net back to the producer. But at the same time, I believe strongly that to be successful in gathering and processing, you have to have an extremely strong gas supply capability. Which means we place a lot of importance on our gas supply's peoples ability to go out and effectively attract new supply to our system. Now, that is difficult when drilling is down. But there are other ways to maintain the existing volume that you have on your system through good service and helping them with enhanced netbacks. And the other way is to take gas away from our competitors. So our gas supply people are focused on those three ways in which we continue to maintain or grow our supply. But certainly our supply capability is as important as our operating efficiencies in gathering and processing.

Thank you.

Our next question comes from Michael Blum with Wells Fargo.

Hi, good morning, everyone. I just have a couple of questions on the guidance. The first is, since your last time that you have updated your guidance, we learned that Arbuckle would come on a little later than expected, yet your NGL pipeline guidance is up. So I just wanted to figure out what the drivers are there.

Yes, Michael, it is primarily, we have had more success than we estimated in connecting volumes. And I tried to speak to that a bit when I talked about Arbuckle and the demand by the market for space on Arbuckle. Same thing for Overland Pass. And then we have had -- our optimization has been higher than we had anticipated. If you can recall, we had estimated one marker that we give is that the Conway to Mont Belvieu differential would be $0.07, I believe, in our guidance. And it's averaged $0.10 and $0.11, so that helps also.

And, of course, in the gathering and fractionation business, much like the gathering and processing business, one of our key capabilities is that supply and we count on people to bring those new supplies to our system.

Okay. Helpful. Thank you. The second question is and I appreciate the comments on your market outlook for the NGL market. Just as it relates to the commodity deck you're using in your guidance. Your NGL price forecast for the rest of the year implied NGL crude correlation is lower than where we are today. So I just want to make sure I'm looking at that correctly. And are you actually assuming that prices in the relationship deteriorates over the rest of the year or is that just more conservatism on your part?

One thing I would say about that before we flood you with a myriad of numbers is that any relationship of an NGL to crude oil you can just, in our opinion, throw it out the window. We are just in a different market dynamic right now and perhaps -- and I think we have consistently been conservative, but I think we tend to be also fairly close to the market. It's a reflection of what we believe, how about if I answer you that way.

Fair enough. Thank you.

Michael, I might add, two other points. I just make is one, is that composite that we use is based on the barrels that we process. So, it is hard to make a direct correlation to crude oil from that and add it to what John said. The other thing is we have a significant amount of our NGL and natural gas hedged in the G&P business for the rest of the year. So commodity price will have some impact on the business. But not that much.

Thank you very much.

Our next question comes from Rebecca Followill with Tudor, Pickering, Holt.

Hi guys. I have several more questions for you. On Arbuckle, you are saying that 65,000 barrels per day now and that you've got commitments to sell 200,000 barrels per day over the next several years, or the next three to five years. Can you walk through how that works and how much capital is required to expand it, the timing, are these already signed, firm commitments, those kind of things?

Terry, why don't you answer Becca's question.

Becca, to provide a little color on the Arbuckle supply. All of those supplies that we are talking about, that 200.000 barrels a day, is under contract. And that production will come online gradually over the course of the next two to three years. And much of that production is from existing processing plants. So those processing plants will be coming off other pipelines and into Arbuckle. So from a commitment standpoint, we are very confident about where we are. And as far as capital, we're just talking about pump facilities. Likely there will be some smaller laterals, so from a capital standpoint, you're going to be talking in the range of probably $20 million to $30 million a year until we reach that peak. So we are not talking about a major CapEx or line looping or anything like that to accommodate that volume growth.

Great. Thanks, Terry. And the next question on Northern Border. The lower commitments, contract commitments and lower margins. Can you talk to how much -- what's the contracted capacity in Northern Border? And then how that will change once Bison comes back online?

Pierce is one of our representatives on that management committee, so Pierce, would you help us with that?

Becca, I'm actually going to refer you as far as the percentage contracted to Northern Borders website because of FERC oversight to that and making sure that everybody gets a notice appropriately but you can tell it is not fully subscribed. And the driver there has been that the Mid Continent supply pitcher has been, basically, [perm] there because of Rex delay going east. We have seen some betterment of that as Rex has gone on further east. So we see ourselves being able to compete on the basis standpoint there.

And then, once Bison comes online, how does it change things? (Inaudible) Won't they take a passing on Northern Border?

Yes, they will. And one of the things that changed, Becca, on Bison it that it was originally proposed as a 24-inch. They have now upsized that to a 30-inch. Although the capacity is sold out firm based on the capacity of the 24-inch, which is approximately $450 million to $500 million, we also anticipate that as the netbacks improve for the Powder River Basin to Ventura and to Chicago markets, that we would stand a chance of having some additional gas flow that way out of the Powder River.

Great, thank you.Then the last question on Energy Services. With reducing the amount of storage that you have and having transportation basis hedged for this year. I imagine it's probably much better than where we're seeing basis right now. I know it's too early to give outlook for 2010, but just directionally, is it correct to assume that it's going to be headed lower for 2010? Or am I jumping to too many conclusions?

Well, Becca, this is Jim. Yes, if you look at the market, the basis is lower for 2010. We have about two thirds of our transport hedged for next year. And about, well, 100% of first quarter storage margin. And (inaudible) in to some for later in the year. But, yes, right now as you look at the picture, especially the Rockies, the Mid Continent basis is lower.

Okay. Great. Thank you, guys and nice additions to the ONEOK Partner's board, that's a powerhouse group there

Thank you, Becca.

The next question comes from Louis Shamie with Zimmer Lucas.

Hey, it is actually Alex. Couple of questions just on the EM&T business. In terms of how much gas you have in terms of BCF wise in storage at the end of Q2 including the LDC?

Louis, you are cutting out. Couldn't hear you. Try that one again, please.

Could you guys tell me how much gas BCF wise you have in storage at the end of the second quarter, including the LDC?

Inside the -- which business, are you referring to?

Both the -- you guys disclosed the dollar amount of gas inventory you have.

Are you talking about the distribution business, Louis?

Yes, LDC plus the EM&T.

EM&T.

Well, Louis, I can tell you -- this is Jim. We have 70 BCFs around at Energy Services and little over 18 BCF at the distribution companies. I don't have the dollars available or I'd tell you.

That's great. And then, the second question just has to do with transportation margin. You guys have talked about how you hedged in about two thirds of that? When did you guys start putting on those hedges?

You mean what day?

Just roughly, I mean do you have a philosophy on how you layer on hedges for transportation roughly or --

The philosophy is, and I assume you are talking about our Energy Services segment.

Right, you are correct.

As part of our looking at that business differently, as we look at the transportation and storage, we need to serve our LDC customers. And as we see the relative values that we expect for the transport and the storage, when we see opportunities that are at or above those numbers, we've been executing hedges. And I don't know exactly what day or what time period but, Jim, do you --

Yes, I think again, John said we are always looking at it on our transport. Just what I recall is that we began putting some hedges on back in '08. And I think we added some in the first quarter this year. So we continually look at that and what we believe the relative value is, as John said, going forward. And then as the market moves, we'll be opportunistic and lock those in.

It is clear. But It is clear that we are increasing the amount that we are hedging relative to past. In other words, our open position is lower than it has been historically, which will limit our upside potential. But we will clearly have the ability, if you will, lowering the our risk to the downside.

Got you. And then just in terms of the transportation business. How much of that is driven by Mid Continent and Rockies' spreads in locking that in. Or are there other basis differentials that are a big driver of margin for that business?

Again, are talking about -- when you say our transport business, are you talking about our pipeline business in the Partnership or are you talking about transport that we have under contract in Energy Services?

Energy Services.

Alex, this is Jim. That number moves around a lot, but if I recall right, about 20% of our transport is Rockies to Mid Continent and about another 20% is Mid Continent to the Gulf and then a lot of other capacity.

Got you. I guess another admin question is just related about your disclosure. You talk about how you had volume shipped on your natural gas pipeline segment. And now you've changed that to contracted. I'm just curious if there's a difference or if the reporting has changed or is it the same?

Alex, this is Jim again. What we looked at, we used to give the, my words, the natural gas volume that flowed on those pipelines and didn't think that was really indicative, because a lot of that capacity is demand-based fixed transport. So probably more important and a better indicator of the revenue in that section was that new statistic versus the amount of gas that was actually flowing on those pipes.

Okay, great. Thanks a lot, guys.

You're welcome, thank you, Alex.

The next question comes from Helen Ryoo with Barclays Capital.

Good morning, my questions are on ONEOK Partners and first one is on the committed volumes contracted on your NGL pipelines including Overland and Arbuckle, I'm wondering if you get demand charges on these lines that you get get paid regardless of the usage of the pipeline?

Okay, Terry?

All of these structures, contract structures are on an interruptable basis. There is no firm demand charge like you will see in the natural gas business. That is traditional for the NGL business. So they will pay on a volumetric basis based upon what they actually produce. But as I indicated earlier, most of these -- a vast majority of these processing facilities that we are connecting to have a long history of NGL production and we feel very comfortable about our volumetric forecasts.

And what you mean by that is most of them are currently flowing barrels.

Correct.

Right, okay.Then on Arbuckle, I guess the project cost increased. Does that change your return assumption on the project? I mean I know you mentioned the economics still being very favorable. But I was just wondering if you are able to pass on the increased costs to the customers through the higher fees. And how that works.

To the extent that we entered into contracts with NGL producers before we actually completed the pipeline. Or actually realized what the costs were going to be, we've committed to those rates. But some of the producers have come in later. Some of the more recent producers that we've signed up. We've been actually able to pass some of these costs along. Overall, rate return on the project still looks very good, it's in the mid-teens. Hopefully, as we continue to sign up volume, we'll increase the fees that we collect from producers even more.

Okay, great. One question on the commodity assumption on the guidance. Does that -- under that commodity price scenario, do you have ethane rejection facing some of your systems?

No, we do not have any ethane rejection in that number. We are considering we are going to recover ethane.

Okay. And then final clarification on Jim's comment, I guess. With gathering volumes being down 3%, processing volume up 2%, was that for 2010?

Yes, Helen, this is Jim. Again, and I emphasize our current view, looking at the economy, the drilling and everything, yes, it was -- the gathering volumes would be down about 3% and processing volumes would be up about 2%.

For 2010.

Yes, ma'am.

And what is driving the processing volume being up despite gathering volume being down? It is the kind of gas you will be getting being more rich or --

Yes, it's two things. Our gathered volumes include volumes we gather in the Powder River from from cold bed methane wells that you don't process. It is some of our lowest margin gas. But then, in gas that we process, primarily from [bocken] wells that are being drilled that are primarily crude oil and the casinghead that comes off of them is very rich, there is a lot of drilling going on in that area of the country, our Grasslands plant area. And then in Oklahoma in the Woodford Shale, which is rich gas that we process, they're actually adding rigs there. So that's creating the increase in the process volumes although the gathered volumes appear to be, in our projection, down.

Okay. This is very helpful, thank you.

Our next question comes from Michael Cerasoli with Goldman Sachs

Just out of curiosity, what was the driving force behind adding board members?

Are you talking about ONEOK or ONEOK Partners?

Both.

The driving force behind both additions to board members is to continue to improve and enhance the board membership and the knowledge that they bring. Not to repeat each individual's capabilities and experience but I think when you look at both boards and their relative additions, we see a lot of industry expertise and financial expertise being added to both boards. At the ONEOK level, we had a retirement. We reduced the size of the board by one and the governance committee, in anticipation of that reduction and replacement, started looking for someone that they felt like could add considerable value to the ONEOK board. And they found someone who had served on the ONEOK Partners board that had tremendous financial background and capability. And felt like that was a good addition, which is Gerald Smith. And then when look at the additions to the ONEOK Partners board members, you don't have to read very long to understand that the four people added to that board have tremendous experience in the mid stream business.

Fair enough, thanks.

Our next question comes from John Tysseland with Citigroup.

Hi, guys. Just a quick couple of questions. One thing that we have been hearing from some of the Gulf Coast fractionators is that they are running at pretty much full capacity and are seeing positive pricing power? I want to know if you are seeing a similar dynamic in terms of utilization dynamics in pricing power in the Mid Continent fractionation marking.

Well, I won't speak to price of power but I will say, yes, it's tight. Capacity is tight. And as is typically the case in that business, you look across the supply and demand of fractionation capacity. You have some capability of creep like you do in the refining business. But at some point in time you got to put in a new fractionator and when you do, it's not a little one. It's got to be a big one. And you got to be willing to make the investment. And as soon as it goes in, it reduces the relative value of all remaining capacity, as you know. So there is a lot of discussion here, there is a lot of discussion, I'm sure, in other shops about the need to add fractionation capacity at some point in time. But in this uncertain market, we may work through this, we may swallow this and not need to add more fractionation capacity. Terry, is there anything you would like to add?

No, I think you pretty well covered it. In the Mid Continent, like the Gulf Coast, we are seeing frac capacity very, very tight. So just across the board, across the industry, frac capacity is tight. So there's not an imbalance in terms of -- we don't have -- like the Gulf Coast is tight and then Mid Continent's slack. It's tight everywhere.

Does that increase the value, I guess of Arbuckle or how does that change the movements of NGLs between the two regions, Mid Continent and Gulf Coast? How do you see that going forward?

The tight frac capacity is probably not going to change the movement because the market is going to affect the movement. And right now, the incremental market's in the Gulf Coast. So that, traditionally, product is going to want to flow south. And one of the things that -- the advantage of Arbuckle, obviously, is it's access to the Gulf Coast. And one of the things that's driving, as Jim indicated in his comments, one of the things driving the Arbuckle growth is, of course, the pricing advantage that producers see in Gulf relative to the Mid Continent.

If you look at that, does that change at all the basis differentials in terms of Mid Continent NGLs and Gulf Coast NGLs that you guys benefit from?

It could have some impact on it. Right now, our view is that it is not going to be much. Okay. Thanks guys, appreciate it.

Yes. Thank you, John.

Our next question comes from Jonathan Lanfear with Wells Fargo.

Good morning, guys.

Hello, Jonathan.

Just one quick question. Most of my questions have been answered. In terms of Energy Services, you are moving from 80 BCF of leased storage capacity to 65 BCF by the end of 2011. How should we think about that impacting the earnings potential over that time period? Will it ultimately limit the upside here or will there be enough margin left that we could still see a nice growth in that segment?

Well, one of the things that we are attempting to do is reduce some of the uncertainty associated with the earnings from Energy Services and better connect our transport and storage space to our core business which is serving LDCs. So, that's why you are seeing the reduction over time. And the reduction over time will, in effect, remove the opportunity for, "optimization" or being open or capturing significant upside on transporter storage basis. So, I mean, yes, you do give up some upside but, as I mentioned earlier, you also reduce downside. Jim, is there something?

No, I agree with that. And John, I think one of the things we are working on -- well, two things. As we reduce that capacity it also reduces our cost. Don't think of it in just pure margin that is leaving. But the other thing is, as we restructured this business as we are moving it towards this, right now, projected 65 BCF of capacity, we also are working on a model for this business. And I call this simplified model because of the very complex business. One that doesn't give away our competitive advantage. And something that we are targeting to try to roll out at our October 6th Investor Day. And it is a model much like we have for the G&P business on the website that will, in some way, create a baseline for this business and then show you what can move the needle. And you can make your own pricing assumptions as to where it goes. But without a doubt as we scale this back, I just can't imagine a year where we would have the $200 million, $230 million of operating income because we've scaled the business back. But what we are trying to do, as John said, is make it more steady, more predictable. It will still have some fluctuation in it because of the market, which should be much more predictable, and you all, hopefully with this model, will be able to understand it better, too.

Thanks, I appreciate that. And just one follow up. In terms of 2010, is there any ability to start hedging at Energy Services today or is it not liquid enough at this point?

I think we have been, both transport and storage.

John, you might have missed it. But we have got about two thirds of our transport capacity already hedged for next year. 100%, almost 100% of our storage margins are hedged in the first quarter and we are legging into later in the year.

Thanks very much.

Next question comes from [Feldman McCall] with Stifel Nicolaus.

Good morning. Thank you. Just one quick question. As it relates to the growing capacity at Overland Pass, how much of that is going to be third party volumes?

When you say third party, I am assuming you are meaning non-ONEOK?

Correct.

It is all non-ONEOK. None of it comes from any ONEOK processing plants.

Okay. Thanks very much.

Our next question comes from Ross Payne with Wells Fargo.

How are you doing, guys?

Hello, Ross.

First question is ONEOK is generating a significant amount of free cash flow here. You mentioned that it could purchase additional shares above KS. Can we look to that as potential backstop in the event that you have acquisitions down the road and you need to beef up the balance sheet somewhat?

I will be honest with you, I didn't hear all that question. would you mind terribly repeating that? I'm sorry.

Okay. Let me switch. That might be better.

Yes, sir, that is better, Ross.

Okay, thank you. ONEOK is generating a significant amount of free cash right now. And in the event that ONEOK, yes, does acquisitions down the road and needs some help with the balance sheets to achieve that, can we look to the free cash flow of OKE as a potential backstop for equity injection at OKS?

Another way of -- yes, but another way of saying it is that an investment in ONEOK Partners by ONEOK continues to be an attractive investment. Which would -- is another way of saying the same thing.

Okay. Second of all, some group assets are still out there. Is there much interest from your institution looking at some of those assets?

Are you referring to the private company or the public company?

The private.

The private company?

I think it is fair to say that we are not actively looking at assets.

Okay.

From sim group.

Okay. Fine. And last, if you could give us the available lines of credit both at OKS and OKE?

Curtis Dinan --

Sure, Ross. I mentioned in my remarks that at the end of July, ONEOK Partners had $325 million outstanding under it's $1 billion revolver and then at the ONEOK level at the end of July, borrowings were $300 million. Now that was all in the form of commercial paper but it's back stopped by the $1.2 billion revolver that ONEOK carries.

Okay. And I assume there are not many lines of credit that would constrict that availability?

At the Partnership, there is a slight amount but nothing of any significance.

Okay. And at quarter end, is that in the press release somewhere? I might have missed that.

What was the question?

I am sorry.

You just gave availability for July.

Yes, I just gave you the updates. It's in a little bit better position than the end of the quarter.

Okay, and quarter end? I might have missed that in the press release, is that in there? Quarter end availability?

Well, the amount is outstanding. Yes sir, it is in the press release.

Okay. Alright. Then I will just back that out then. Okay. Thanks so much. I was just curious on the LC side. Thanks.

You're welcome, Ross.

Next question comes from Mark Reichman with SMH Capital.

Morning. Well most of my questions have been answered. But I thought I would just follow up on your investment in Northern Border. And if you could just maybe address the outlook and what you see as the growth drivers. I know the Bison Pipeline was scheduled to go in to service November 15th of 2010. But also, just how you view that investment?

We own 50%. We like every asset we own. We are always constantly trying to understand what our hold value is. No different than any other asset that we own. But we have no plans at this point in time of increasing or decreasing, which I guess is an indication that is, we are satisfied with it's current earnings capability ,as well as its future earnings capability. Pierce?

Now I do think, as I mentioned before, the fact that the Bison Pipeline has been upsized to a 30-inch pipeline will bring the opportunity for a significant amount more volume to that pipe. And our strategy was to get more than one supply basin connected.

Okay. And what about the competitive situation with these other pipeline expansions? I mean, are things unfolding as you expected or are there any changes in the market dynamics as a result of what some of the other competitors are doing?

We actually like our competitive situation there and again, it is all predicated on what is happening with Bison. Because if you can imagine, one of leg of competition is to come basically out of the Rockies into some other markets that northern border has. But by Bison being upsized the way that it is, it is already half the way to the Rockies. So that allows it to expand at a lesser capital cost into the Rockies much more competitively than anybody else could do that. We actually are pretty pleased with the competitive position of Northern Border going forth.

Thank you, that's helpful.

Yes, sir.

Our next question comes from John Tysseland with Citigroup.

Hi, guys. Sorry about that. I have one quick follow up question regarding your fractionation capacity. And that is, what is the current contract structure regarding most of your capacity there around the fractionation assets? Is it long term or is it something that is more along the lines of first come, first serve.?

Well, actually all of that is correct. And a lot of it is first come, first serve. Some of the contracts are shorter term in nature like a year. Some are much longer term. As long as 10 years. But the primary predominant contract structures are fee based. A fee based type of charge with a fuel and power adjuster.

If you were to say, since it is such a mixture of long term and kind of first come first serve, if you were to say what amount of your capacity is on that kind of first come, first serve, versus long term?

I don't feel real comfortable giving you those numbers and I actually probably don't have those numbers with me. And even if I had them, I wouldn't tell you.

Alright, but it is fair to say that there is a fair amount that is still more or less as it gets there, it goes through your fractionators.

That's correct.

Okay. Thank you.

Okay. Well, thank you all. This concludes our ONEOK and ONEOK Partners call. As a reminder, our quiet period for the third quarter will start when we close our books in early October and will extend until our earnings are released. We will provide a reporting date and conference call information at a later date.

A couple of real quick announcements. Jim already mentioned this, but the annual ONEOK/ONEOK Partners Investment Day is scheduled for Tuesday, October 6th at the New York Hilton. Save the date notice went out to many of you last week and we will be following up with additional information, specifically times and meeting room locations in the next month or so.

Finally, Christy Williamson, who has been our Investment Relations manager for the last two and a half years has been promoted to Director of Corporate Planning. Andrew Ziola , who has been our manager of Financial Planning will succeed Christy as manager of Investor Relations. Best wishes and many thanks to Christy for her contributions and welcome to Andrew. These changes are going to be taking effect next week. Christy and I will be available throughout the day for any follow up questions. Thanks for joining us and have a good

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