歐尼克 (OKE) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the ONEOK and ONEOK Partners third quarter 2011 earnings call. Today's call is being recorded. For opening remarks and introduction, I will now turn the conference over to Mr. Dan Harrison. Please, go ahead, sir.

Good morning, and thanks for joining us. Any statements made during this call 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 Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward looking statements. Please refer to our SEC filings for a discussion of factors that could cause actual results to differ. And now let me turn the call over to John Gibson, ONEOK and ONEOK Partners' Chairman, President and CEO. John?

Thank you, Dan. Good morning. Many thanks for joining us today. As always, we appreciate your continued interest and investment in ONEOK and ONEOK Partners. Joining me on the call this morning are Rob Martinovich, ONEOK and ONEOK Partners' Chief Financial Officer who will review our quarterly results and updated earnings guidance. Terry Spencer, ONEOK Partners' Chief Operating Officer who will review the partnership's operating results and update you on growth projects, and Pierce Norton, ONEOK's Chief Operating Officer who will review the operating performance of ONEOK's other 2 segments, natural gas distribution and energy services. On this morning's conference call, I will briefly review our third quarter financial results and revised guidance, discuss the acquisition market and conclude with some perspective on how we intend to use the free cash that ONEOK generates.

Let's start with our third quarter financial performance at ONEOK Partners, which was exceptional. Our natural gas liquids business continues to benefit from historically wide NGL price differentials and our having more fractionation and transportation capacity available to use for optimization activities. This continued strong performance in the NGL operations -- optimization business has lead us to increase our 2011 guidance at ONEOK Partners and ONEOK. While our uniquely well positioned NGL assets enable us to capture the wide differentials, other factors contributed to the partnership's strong third quarter performance. Higher NGL and condensate prices, higher NGL volumes gathered and fractionated and higher natural gas volumes processed, particularly in the Williston basin where we're investing billions of dollars in new plants and infrastructure all played a part in the partnership's strong third quarter performance.

The growth in our base business as evidenced by volume growth is important since we do not believe that these wide NGL differentials are sustainable over the long term as new pipelines such as our Sterling 3 NGL line and other factors will eventually alleviate these transportation constraints, resulting in narrow differentials. Our natural gas distribution segment again performed as expected, essentially unchanged on a year over year basis and down slightly for the 9 month period primarily because of the higher share-based costs we highlighted last quarter.

Our energy services segment continues to face a challenging market environment, again experiencing the impact of low natural gas prices and low volatility which has narrowed location differentials and seasonal storage spreads. Our ability to achieve our year end guidance in this segment depends what happens in the natural gas markets during the next 2 months, and Pierce will discuss this issue in more detail a bit later.

Now Rob will review ONEOK Partners' financial highlights, and then Terry will review the partnership's operating performance. Rob?

Thanks, John, and good morning, everyone. In the third quarter, ONEOK Partners reported a 48% year over year increase in net income. For the first 9 months of 2011, net income increased 61% versus the same period in 2010. Distributable cash flow increased 50% compared with the third quarter last year, resulting in coverage ratio of 1.62 times.

For the first 9 months of 2011, distributable cash flow increased 50% compared to the same period last year, resulting in a coverage ratio of 1.46 times. The higher earnings and resulting higher coverage ratio were primarily due to strong NGL optimization margins from wider NGL price differentials between Conway and Mont Belvieu. Similar to 2008 when commodity prices were at record levels, resulting in a coverage ratio of 1.45 times, we do not believe the current wide NGL price differentials are sustainable long term. In 2008, we utilized the incremental distributable cash flow to finance a portion of our $2 billion capital investment program that was completed in 2009, and we plan to utilize the incremental distributable cash flow likewise in 2011 to help fund our current $3 billion capital growth program. We increased the distribution $0.01 per unit for the third quarter and, subject to Board approval, expect to increase it another $0.01 for the fourth quarter. The third quarter increase marked the 20th increase since ONEOK became sole general partner 5 years ago, a 49% increase.

With the strong performance in the NGL segment, we've increased the partnership's 2011 earnings guidance to a range of $740 million to $770 million compared with its previous range of $630 million to $660 million. We also estimated the partnership's 2011 distributable cash flow to be in the range of $850 million to $880 million compared with its previous range of $735 million to $765 million. We updated our 2011 capital expenditure guidance to $1.2 billion to reflect our latest forecast. This breaks down to $1.1 billion in growth capital and $97 million in maintenance capital. We have hedges in place to lock in margins on our expected equity volumes in the natural gas gathering and processing segment, which is the most sensitive to commodity price changes. Our news release contains information on these hedges.

At the end of the third quarter, the partnership had $128 million in cash and no commercial paper or other short-term borrowings. A debt to capital ratio of 54% and debt to EBITDA ratio of 3.4. Finally, we still do not anticipate any additional financing this year. However, we will continue to monitor the capital markets and be prepared to take advantage of any opportunities.

Now, Terry will review the partnership's operating performance.

Thank you, Rob, and good morning, everybody. This morning I will discuss our outstanding operating performance and updated 2011 guidance, briefly review our NGL market outlook and close with a status report on our growth projects.

The partnership had exceptional third quarter. Operating income increased by more than 50%, driven primarily by higher margins in the natural gas liquid segment from wider NGL price differentials between Conway and Mont Belvieu and increased fractionation and transportation capacity available for optimization activities. Earnings also increased as a result of contract renegotiations for some of our NGL exchange services activities and higher isomerization margins in our NGL business, as well as higher NGL and condensate prices in the natural gas gathering and processing segment. Even though the business continues to benefit from these favorable price differentials and higher commodity prices, our base business continues to grow. In the quarter, natural gas volumes processed increased, as did NGL volumes gathered and fractionated. More on that in a moment.

The natural gas gathering and processing segments third quarter financial results were higher than the same period of 2010, due primarily to higher net realized NGL and condensate prices and higher natural gas volumes processed, specifically in the Williston basin. We decreased slightly this segment's operating income guidance for 2011 reflecting higher operating costs, offset partially by higher earnings from our equity investments. We still expect processed volumes to be up 3% over last year and gathered volumes to be down 4% compared with last year.

These revised estimates reflect adjustments in drilling schedules by a western Oklahoma producer, weather related outages that occurred in the first quarter of this year and continued declines in the Powder River basin of Wyoming, offset by volume growth in the Williston basin and Cana-Woodford. The Powder River volumes represent approximately 12% of our total gathered volumes, but account for less than 4% of the gathering and processing segments' net margin.

The natural gas pipeline segment's third quarter results were lower compared with the third quarter last year due to lower transportation margins, front narrower regional natural gas price differentials that decreased contracted capacity on midwestern gas transmission and interruptible volumes across our pipeline. Northern Border's earnings were slightly lower due to selling a portion of this capacity at lower annual maximum rates compared with higher premium seasonal rates in the same period last year. Most, if not all, of Northern Border's capacity is contracted through October 2012.

Equity earnings for the first 9 months of this year are up 17%. We revised this segment's 2011 operating income guidance to reflect higher operating costs and narrower natural price location differentials that have reduced the demand for contracted capacity on midwestern and for interruptible transportation services on the balance of our transmission pipelines. However, as we said before, almost 90% of the contracted capacity on our wholly-owned pipes serves end users directly such as natural gas distribution companies and electric generators that need the natural gas to operate their businesses regardless of regional price differentials. We do expect higher earnings from the 50% interest in Northern Border pipeline due primarily to its continued low cost structure and market connectivity. In spite of the narrow price differentials environment, this business, due to its highly contracted capacity, continues to generate stable earnings. Approximately 80% of our own pipeline capacity and 100% of our storage capacity are contracted under firm long-term contracts.

Our natural gas liquids segment continues to benefit from record high NGL price differentials and having more fractionation and transportation capacity available for optimization activities. This segment also benefited from successful contract renegotiations associated with our exchange services activities and higher isomerization margins from wider price spreads between normal butane and iso- butane also helped earnings.

We fractionated 6% more volume during the quarter compared with the same period last year, averaging 529,000 barrels a day, which includes volumes fractionated at the target facility from the fractionation services agreement that began during the second quarter. We expect fractionation capacity to remain tight, but gradually become more available as new fractionators come online over the next few years.

NGLs transported on the gathering lines were up 15% during the quarter compared to the same period last year after adjusting for the sale of the 49% interest in Overland Pass pipeline that occurred in September of last year averaging 443,000 barrels a day during the quarter as a result of increased volumes gathered on the Arbuckle pipeline and in the mid-continent.

Arbuckle pipeline volumes increased to more than 160,000 barrels per day versus current capacity of 180,000 barrels per day. Arbuckle capacity will increase to 240,000 barrels per day in the first half of 2012 to accommodate the continued need to serve mid-continent NGL producers via our major NGL gathering system expansion where more than 230 miles of new pipelines are currently under construction in the Granite wash and Cana-Woodford shale play.

We increased our operating income guidance for this segment, again, to reflect wider NGL price differentials. For the fourth quarter 2011, we have assumed an average of $0.41 per gallon for Conway to Mont Belvieu ethane price differential. As we disclosed during our investor conference in September, we are assuming an average $0.12 per gallon Conway to Bellevue ethane price differentials in 2012. While this average may appear conservative, our experience tells us that the current wide differentials we are experiencing today may not be sustainable for a number of reasons.

Our previously mentioned Arbuckle pipeline capacity expansion will bring more new capacity to the Mont Belvieu market. Customers in Conway may seek short-term solutions such as rail or other transportation alternatives until additional new transportation capacity, our Sterling 3 line, for instance, comes online in 2013. Potential ethane rejection in the mid-continent due to weak Conway pricing could reduce ethane supplies to Conway. Pet cams may switch from ethane to other NGL feed stocks such as propane, reducing ethane demand and narrowing differentials. Traditional late fourth quarter inventory management by pet cams and others may result in reduced ethane demand. And finally, a softening of the currently strong ethyline economics also could reduce ethane demand.

Now for an update on our projects. The expansion of our mid-continent to Mont Belvieu NGL distribution pipeline by adding additional pump stations referred to as Sterling 1 is expected to be completed by the end of this month and will add 15,000 barrels per day of additional capacity to ship purity NGL products south to Mont Belvieu. The 570-mile Sterling 3 pipeline and the 75,000 barrel per day Mont Belvieu 2 fractionator are progressing as planned. We continue to secure supply commitments for both projects with approximately two-thirds committed on Sterling 3 and two-thirds committing for Mont Belvieu 2. We expect to have substantially all the available capacity committed well before these assets go into service in 2013.

Now, turning to the Bakken projects, we are investing almost $2 billion to build 3 new 100 million cubic feet per day natural gas processing plants and related infrastructure and the 500 plus mile 60,000-barrel per day Bakken NGL pipeline, along with the expansions of the Bushton fractionator in the Overland Pass pipeline. These projects are expected to resolve some of the challenges producers are facing in the Williston basin, in particular, the flaring of NGL rich natural gas.

Our natural gas processing plants under construction remain on schedule and on budget. We expect our first new processing plant, Garden Creek, to be in service by the end of this year and the Stateline 1 and 2 plants to be in service in 2012 and 2013 respectively. The Bakken NGL pipeline is also on time and on budget with engineering design and right away acquisition moving ahead.

We continue to develop and evaluate a lengthy backlog of natural gas and NGL related infrastructure products including investments in natural gas pipelines and processing plants and NGL storage facilities. Now that backlog totals more than $1 billion, and it's growing. Some of these investments will create additional redundancy and reliability and improve our connectivity to our pet cam customers while others will provide the critical infrastructure that producers and processors need to get their products to market. As we have done in the past, we will announce the projects when we have sufficient producer and/or customer commitments to make them economically viable. We expect these projects will generate attractive returns, incremental to our updated three-year outlook that we provided in September.

John, that concludes my remarks.

Thank you, Terry. Now, Rob will review ONEOK's financial performance, and then Pierce will follow-up with ONEOK's operating performance. Rob?

Thanks, John. ONEOK's third quarter net income increased by 9%, driven by the strong performance at ONEOK Partners. Results in the distribution segment were relatively flat year over year while energy services had lower results due primarily to lower transportation margins from narrower realized natural gas price location differentials. ONEOK's year to date 2011 stand alone cash flow before changes in working capital exceeded capital expenditures and dividend payments by $175.7 million. We expect to end the year in a range of approximately $210 million to $240 million, higher than the previous guidance range of $180 million to $210 million due primarily to revisions in depreciation estimates including bonus depreciation following the filing of our 2010 tax returns. With the partnership's 2011 cash distribution level, ONEOK will receive approximately $333 million in distributions this year, a 10% increase over 2010. ONEOK's income taxes on the distributions from the ONEOK Partners LP units it owns are deferred, contributing to ONEOK's strong cash flow.

We also updated guidance for ONEOK in 2011. Net income is expected to be in the range of $345 million to $365 million compared with its previous range of $325 million to $345 million. The updated guidance reflects higher anticipated earnings in the ONEOK Partner segment, offset partially by lower expected earnings in the distribution segment.

In October we declared a dividend for the third quarter of $0.56 a share, a 17% increase since September, 2010. ONEOK's liquidity position is excellent. At the end of the third quarter on a stand alone basis, we had $650 million of commercial paper outstanding, $20.5 million of cash and cash equivalents, $415.3 million of natural gas in storage and $548 million available under our new credit facility. At the end of the third quarter, our stand alone total debt to capitalization ratio was 43%. ONEOK's significant cash flow and excellent liquidity position continue to give us tremendous financial flexibility for acquisitions, dividend increases, purchasing additional ONEOK Partners units and share repurchases.

Now, Pierce will update you on ONEOK's operating performance.

Thanks, Rob, and good morning. Let's start with our natural gas distribution segment. Third quarter 2011 earnings were relatively unchanged compared with the same period last year. Year to date results are lower because of higher operating costs, primarily the share based compensation costs discussed on our previous conference calls, amounting to approximately $10 million year to date. The distribution segment's operating income guidance for 2011 has been updated $209 million, primarily to reflect anticipated higher employee related expenses.

Now, a brief regulatory update. In Kansas, we filed an application in September to increase the gas system reliability surcharge by an additional $2.9 million and expect to receive a final order by the end of the year. The capital recovery mechanism allows for the recovery of and the ability to earn a return on incremental safety related and government mandated capital investments made between rate cases. Also in Kansas, as discussed at our September investor meeting, we plan to file a rate case in mid 2012.

We continue our efforts to grow our rate base by investing in projects that provide benefits to our customers and our shareholders. Through the third quarter this year, we've invested $177 million in capital compared to $146 million for the same period last year. The increase is due to the continued installation of automated meters as well as continued investments for pipeline integrity and replacement projects. Finally, the United Steelworkers ratified a new 5-year contract on October 29 which represents approximately 400 Kansas gas service employees.

Now, let's turn to energy services. This segment's challenges continue. Our third quarter results were lower compared with the same quarter in 2010, primarily because of lower transportation margins, net of hedging due to narrower realized price location differentials and lower hedge settlements in 2011.

During the first 9 months of 2010, we benefited from the transportation hedges we placed in 2008 and early 2009 when there was ample liquidity in the marketplace. Since then, liquidity and volatility have been extremely limited, and consequently, it has not been advantageous to place forward hedges. We are holding our 2011 operating income guidance at $42 million. As John mentioned, November and December will be critical months for this business to achieve its 2011 target. This segment continues to face extraordinarily challenging market conditions that are the result of increase in transportation pipeline capacity in recent years and an oversupply of natural gas from the development of shale plays. This has resulted in significantly narrow location and season storage differentials from where they have been in past years.

We continue to assess how much transportation and storage capacity we need to service our premium service customers and look for opportunities to renegotiate transportation and storage rates. By the end of 2012, more than 20% of our leased storage capacity and 15% of our leased transportation capacity will be up for renewal, and more than 90% of the storage capacity and 75% of the transport capacity by 2015, thereby providing an opportunity to renew these leases or renew at a lower rate. These expirations also give us additional opportunities to realign our capacity with customers' needs, and more importantly, rebase our cost structure in the years ahead. We remain focused on adapting our strategy to meet these challenging market conditions.

Finally, an update in our environmental safety and health efforts. The US senate recently passed pipeline safety legislation to strengthen safety and environmental protection for oil and natural gas transportation. A similar measure is now in the house subcommittee. These bills will expand pipeline integrity management requirements to utilize addition measures to assure the safety and reliability of the US pipeline systems. ONEOK's 2012 capital expenditure budget includes replacement of pipe in the natural gas distribution segment that was identified using a risk based approach as a part of our pipeline integrity program.

We are also conducting extensive pipeline data reviews to verify the maximum allowable operating pressures for all of our regulated pipeline segments. All in all, many of the proposed revisions in the legislation make sense, and we continue our daily efforts to be responsible pipeline system operators, focusing on both personal and system safety.

John, that concludes my comments.

Thank you, Pierce. I would like to make some final comments before we take your questions.

The recent flurry of acquisition announcements has lead to more questions to us about our appetite to acquire assets. The answer remains, we are interested. As I have said on several occasions, it's our top priority for using our cash and balance sheet. Either acquisitions that enable us to add a new platform for growth or ones that build on our existing lines of business. But the expectation for returns on any acquisition remain high, especially given our current slate of $3 billion plus announced projects and the $1 billion plus and growing backlog of unannounced growth projects that Terry just mentioned. All of those with very attractive returns and certainly more attractive than some of the recently announced transactions. This means that while we remain interested in acquiring the right assets at the right price, we do not feel a heightened sense of urgency that other buyers might since we don't need to make an acquisition to meet our very attractive 3-year growth targets.

We also continue to get questions about our uses of the free cash generated at ONEOK, which is approximately $200 million a year during the next 3 years. Our priorities remain acquisitions, dividend increases, additional investments in ONEOK Partners and share repurchases. But our uses of cash are not determined by a formula or some set priority. We see these as dynamic and depending on both the market and the opportunities that exist. A case in point, in hindsight, we would like to have completed our $300 million share repurchase earlier than we did this year when our share price was, of course, lower. But at the time, we were involved in other opportunities that kept that repurchase from occurring earlier. Had those opportunities fallen into place, the share repurchase might have been smaller or even pushed back.

We also continue to validate that we are paying out the right amount of recurring earnings in the form of dividends. You will recall that a year ago we increased the targeted dividend payout to a range of 60% to 70% from a previous range of 50% to 55% first established in 2006. Also, when ONEOK Partners has equity needs, ONEOK evaluates investing in additional units versus other alternatives. ONEOK participated in 2008 and sat out the last 2 equity offerings, but has indicated an interest in future ONEOK Partners equity offerings. The good news is that we have businesses that generate a lot of cash and a structure that gives us a lot of flexibility and a variety of tools and options to deploy that cash. Over both the short and long-term, we believe we have been prudent investors of that cash in ways that create value for our investors and other stakeholders.

Finally, I would like to thank our employees who work safely and environmentally responsible every day to create value for our investors and customers. When describing our NGL success at the partnership, I mentioned our uniquely positioned assets, higher prices and higher volumes. But I did not recognize the leadership team that makes and did make this all happen. And of course, Terry leads that effort. Sheridan Swords is the President of that segment. Wes Christensen, our Senior Vice President responsible for operations of all of the assets in the partnership, and of course, as everyone knows, you can't capture spreads if you don't have assets, and our reliability creates significant value for our customers and our producers. And Randy Jordan, who's the quarterback that makes the calls on our optimization opportunities every day. And I might also add that these the same team that is executing these billions of dollars worth of projects that we have underway. We never forget that our success as a company depends on the contributions of all of our employees, and I appreciate their efforts.

Operator, at this time, we are ready to take questions.

Thank you. (Operator Instructions) Our first question today is from Ted Durbin with Goldman Sachs.

Thank you. My first question is really just around your 2012 guidance levels. It obviously raised '11 quite a bit. Directionally, should we be thinking about there is upside to any of these numbers, or are you sticking with where you came out at analyst day?

I think in general, Ted, this is John, if we were going to change our 2012 guidance, we would have done so today. I think as we have in the past, as we progress throughout the year, we will take the opportunity based on what has occurred and what we think will occur to revise that guidance. At this time, obviously, we don't see a need to do so. I might ask Terry or Pierce if they have anything they would like to add.

John, I really don't have much to add other than it's still very early. Once we get in the year, see how things go. Then, as we have done in the past, we will make adjustments as we deem necessary.

Rob, anything you want to add? Okay. Sorry, Ted, no new 2012 guidance.

There you have it. Thank you. And then if I could just ask about, just coming back to the Conway Belvieu spreads, and I appreciate, Terry, all the different factors you ran through about how they could close. I'm wondering if you could -- if you think about whether it's Arbuckle or rail out of Conway, ethylene rejection, what are the sort of -- if you had to say one or two ones that you think are the most likely that will bring it back to the $0.12 number that you are forecasting right now.

I think the fact that we're increasing the Arbuckle capacity, and I think that was one of the comments that I made, I think one will be significant. And I think -- clearly don't think we can discount rail possibilities as well.

Okay. And then, again, thinking about the spread, do you think your project and other announced projects, will that be sufficient to really close the gap here that you see, or is there a need for even more capacity than what has been announced so far?

Well, as I look at the landscape today, I think if those three projects happen, they will be sufficient to meet the need. Still, a tremendous amount of potential in the shale plays, particularly in the mid-continent, that we still see tremendous amount of opportunity there. But I think as we sit today, we think these three pipes, if they all happen, will get the job done.

Got it. Okay. That's it for me. Thank you.

Thank you, Ted.

We will go next to John Tysseland with Citi.

Hi, guys.

John.

Great quarter. From a strategic perspective, are there opportunities or are you working on opportunities to invest in processing capacity or even NGL take away capacity in Marcellus or Utica, or do you see the need to have an anchor asset in that region before you make those types of investments?

John, we have talked about our interest in the Marcellus for some time now. We stated that we were always interested in the Marcellus, but we were trying to figure out what our competitive advantage was. We saw an advantage -- a competitive vantage in the Bakken, so we chose to act upon that. We still feel the same way about the Marcellus. We continue to look for opportunities, but we have yet to come across one that seems to make a lot of sense for us. As it relates to the Utica, probably more potential for us than Marcellus, and our commercial people, our originators are working that area hard.

And then Terry, just for a follow-up question for you, you mentioned that Sterling 3 is two-thirds committed. Is that based on the initial 193,000 barrels a day of capacity, or is that based on potential capacity of 250,000 barrels a day? And then secondarily to that, how confident are you that the remaining of that capacity will -- of the project will get filled over the course of the next -- over the course of next year?

Well, to answer your first question, it's based on that initial tranche of capacity, that 193,000. I think we feel pretty good that we have got a good chance to fill the balance of that capacity just based upon all of the activity that we are seeing. As I indicated earlier, the mid-continent continues to produce. We still get -- are getting lots of requests for new processing plant connections. We feel good about our chance to filling it.

When do you break ground on that project, Sterling 3?

We break ground, actually, construction will be some time in the spring of 2012.

Great, thank you, guys. Take care.

Thank you, John.

(Operator Instructions) We will go next to Craig Shere with Tuohy Brothers.

Hi. Congratulations on another good quarter.

Thank you, Craig.

Two questions. John or Rob, I realize you don't think these wide optimization contributions are sustainable, but can you discuss how perhaps fortuitous the sublift may be as you think about the timing of any possible WPZ equity issuance in 2012 or beyond to fund the a accretive growth CapEx? Then I had another question.

Okay, the first question you asked me had something to do with WPZ.

Sorry. I'm getting confused with the morning calls. I meant OKS. Apologies.

Okay, no, that's okay. You threw me for a loop, too. I could easily walk in the wrong conference room in Tulsa. I don't think Allen would like that. But we, as Rob mentioned in his call, we have no plans this year. Rob, is there anything you want to add to that?

No. Craig, I think from, again, from our standpoint with regards to the -- back to the question on timing, the -- as the -- we're going to do what we did in 2008 and be able to utilize this cash flow to prefund at least a portion of that $3 billion. If that ends up sliding out timing on equity offering, that could be a result. But again, that's all part of the equation.

I think, Craig, maybe to answer your question more directly, from my part anyway, is just to say that, as we did in 2008, we will use that cash to fund our capital, and it will push out any equity offerings. If your question is when will the equity offering occur for that reason, it will occur later than we thought it would. But we, like everybody else, aren't going to tell you when we think that will be.

So, later and obviously smaller, given that you have more internal cash flow. So, to some degree the small -- the commodity uplift you are experiencing can heighten your longer term cash flows and distributions because you will presumably have a slightly smaller number of OKS units and distributing more in the high splits. Is that a reasonable analysis?

If you assume smaller, yes. But then -- and getting back to my comment about the market and the opportunities, Terry has $1 billion of unannounced projects. Now, if you think back, going back to Overland Pass pipeline, how quickly we have found these large capital projects and financed them and built them, I think we got to consider that the likelihood that that unannounced $1 billion projects are going to be two or three or four years down the road, I don't think that is very likely. I think they are coming fairly quickly. Your assumptions -- if your assumption is correct, then the balance falls, but I don't think we are done.

Fair enough. Appreciate that color. Can I just ask a quick question on energy services?

Sure.

You all were really kind in giving a little more color at the analyst day. And given the roll offs of the storage and transport contracts and assuming these are about 50% priced above market, kind of ballparking here that we might have maybe $90 million of overhead fall off, assuming you maintain the same contract positions or reup for that capacity post-2012, is this a reasonable ballpark? It seems inevitable that this [Boydred] unit is going to have better days.

As I've said before, we see this segment as a segment that can produce between $70 million and $125 million a year of EBIT or operating income. Obviously, this is a very difficult market. We've had quarters like this before in this business. Unfortunately, we will probably have quarters like this again. But we believe in executing our strategy. We're going to -- we'll be in that $70 million to $125 million range. Pierce, is there anything you would like to add to that?

The only thing I would like to add, John, is I think that that's in the ballpark. With reducing the amount of transport capacity that we currently have and slightly reducing our storage capacity, I think he is probably in the range.

Great, I appreciate it.

(Operator Instructions) And we will go next to Elvira Scotto with RBC Capital Markets.

Hi, good morning.

Good morning, Elvira.

A couple of questions from me. The $1 billion backlog of unannounced projects, is there any way to bucket those? Are they Bakken related, or any way to bucket those around sort of either geography or types?

Yes, there is, and they are. But right or wrong, typically, we've never -- we have not done that. I think what we have done is, if I remember Terry's comment specifically, they fall in the area of gathering and processing, natural gas liquids storage and possibly some more natural gas liquids pipelines.

Okay, no, that's -- okay, I'm sorry. Go ahead. Yes, that's helpful.

Sorry.

I know -- I think in the past, you had talked about potentially looking at ways of potentially taking Bakken ethane into Canada. No, I know there is that pipeline, that Vantage pipeline, but just curious what your latest thoughts are on taking ethane into Canada.

Terry?

Elvira, right now, as it sits today, we are still interested in the possibility of taking ethane to Canada. But of course, we are building the Bakken pipeline, which is going to be perfectly capable of handling ethane and delivering ethane into Overland Pass and then ultimately down to the gulf coast. That capital is going to be sunk, so we want are going to want to fill that pipeline first. The fact of the matter, as we sit today, as you look at the market prices for ethane in Canada versus down at Mont Belvieu and the net backs in this region, we get a better price sending the product to Belvieu than we do Canada. Until we really see something significantly change there, we're not going to have a whole lot of intensive to send ethane to Canada. Clearly it will be an option.

Okay, great. And then just couple of quick questions. I think some of the -- you had mentioned some of the guidance numbers came down in the natural gas gathering and processing and I believe on the pipeline side, and some of that is attributable to higher operating costs. Can you maybe elaborate on that a little bit and then how that carries over into 2012?

Yes, I think we'll -- I think that, Elvira, as far as the first question, with respect to operating costs, as we've indicated before, we had higher benefits and employer related costs are probably the biggest chunk of it. And then your second question related to capital?

No, (inaudible).

No, I think --

How those higher operating expenses carry into '12?

Yes.

Okay, well, certainly -- and Rob, maybe you could probably add more color to that than I as it relates to the benefit cost.

Really, a portion of those could slide in to '12, but not all of them will.

Okay, great. And then --

I would like to add one thing, Elvira. Part of this cost is share based, the shares that we give to employees, and then we accrue for incentives much like other businesses do. And as we have continued to increase our profitability, we are accruing more dollars and therefore having higher expense that we plan to pay out to our employees. So, that -- the benefit cost is included in, obviously, the 2011 numbers and is included in our 2012 guidance. But really, the variance that we were experiencing, much like we did at distribution, well, we are experiencing it in all of our segments.

Okay, great.

I think that's a big part of it.

That's very helpful. And then just the last question from me, in the Bakken, I think you said that right now the projects are proceeding on schedule, on budget. But as activity increases in the Bakken and there is some other -- some of your competitors also building out there, how do you see just costs going forward? Do you think that there's going to be some additional cost pressures as more activity happens in that area?

Certainly, Elvira. As it relates to labor costs, labor, as you probably read, is in short supply. Fortunately for us, our assets are much more capital intensive than they are labor intensive. We are not talking about a whole lot of people that we have to hire in order to execute and operate on our projects. We will be impacted by costs, but our jobs that we offer to our -- to operations personal are high quality jobs, long-term. They're not transient jobs. We will get impacted some by costs, but most of our costs are capital intensive. Does that help you?

Yes, that's very helpful. Thanks a lot.

Elvira, I want to say thing, I need to clarify something from a statement I made earlier about Sterling 3. Sterling 3, our right away work, acquisition work will begin in the spring of 2012. The construction where we actually start throwing dirt will begin in early 2013.

Our next question comes from Ross Payne with Wells Fargo.

How are you doing, guys?

Hello, Ross.

Quick question. Looking at your balance sheet for the quarter, your leverages is quite low, approaching industry best here. On an LTM basis, you are below the 4 times debt to EBITDA target. Your debt to cap target of 50/50, you are slightly above that. How do we think about those two metrics you guys like to target? Are you comfortable where it is, are you going to continue to look to reduce your leverage from a debt to cap standpoint? Thanks.

Well, let me make a couple of comments before I turn it over to Rob. I'm sure he'll have something he would like to add. Obviously, it's a strength for us right now as we sit here, particularly in reference to the comments about acquisition and additional capital. Of course, a lot of that additional capital we see at ONEOK Partners. But at ONEOK, we remain very engaged and active in opportunities to spend cash. And we will probably, if we find the right opportunities, spend more than the cash we got, which means we will be out to the banks to borrow money at ONEOK. So, I think, we have prepared ourselves with this balance sheet to be flexible so that we can transact when the right opportunity presents itself. Until that happens, I see us pretty much standing pat. But let me ask Rob if he has anything he would like to add.

Ross, certainly our targets remain a 50 to 50 capitalization and debt to EBITDA less than 4. And I think as we talked a little bit in New York, we flexed a little bit during our last capital spend in that 2006 to 2009 period of time, but then we're able to rebalance it prior to this latest spend. So, I think that remains our focus and with those metrics and certainly to become -- remain a strong investment grade credit rating.

Okay. Thanks so much, guys.

You are welcome.

(Operator Instructions) We will go now to Monroe Helm with Barrow Hanley.

Great performance. I got in on this a little bit late, so you may have already discussed this, but in response to a question earlier about expansion opportunities in the Marcellus and the fact that it doesn't meet your hurdle rates, I was curious, your take on the opportunities in the Eagle Ford shale? It's a project, it's an area that's going to have a lot of capital put to it for a long period of time.

Well, let me correct myself if I did say that. When we talked about the Marcellus, what we said was that we looked at investing in the Marcellus, but could not find our competitive advantage relative to others. We chose to invest in the Bakken. As it relates to the Eagle Ford, it's the same story, but it's actually a whole lot more -- it's a lot clearer to us that we are not advantaged because in the Eagle Ford there our already significant gatherers, fractiona -- processors, et cetera. So, the fact that we don't have a competitive advantage in the Eagle Ford is even more apparent to us than it is in the Marcellus.

Okay, so an area where there could be an opportunity to buy your way in?

Yes, it would be an opportunity to buy its way in, but it would be very large and very expensive, and I'm not sure at the end of the day we have created a whole lot of value other than just transferring value.

Okay. Thanks.

Yes, sir.

We will take our next question from Helen Ryoo with Barclays Capital.

Thank you. Good morning. A question on your NGL segment. Is it your plan to reduce the capacity used for optimization next year? Whatever you are using now, you will use less capacity next year?

Terry?

Helen, not necessarily. I think actually our view is from an optimization standpoint, we will -- our volumes will reduce. As we move through 2012, we will fill that volume with fee-based business as we continue to grow our infrastructure in the mid-continent and the Rockies. So, volumetrically, I think -- hopefully that answer your question. Volumetrically, we will reduce how much we ship in terms of optimization.

The absolute level of capacity used for optimization will go down next -- I'm sorry, I --

Helen, the physical capacity is going to be there. We are going to replace some of it, a portion of it with a fee-based business.

Okay. But you are saying that the actual capacity you will use for optimization will not necessarily go down?

The physical -- I'm not doing a very good job of explaining it. The physical hard capacity is going to be there. What we utilize for our optimization activity, how much of that capacity we use will reduce, okay?

Okay.

The volume that fills that optimization capacity we don't use will be fee-based business coming from the internal growth projects that we are doing upstream.

Okay. Got it, got it. Thank you. And then in terms of your fee-based business, are you able to get higher rates on that business as time goes by? Putting it another way, is your 2012 guidance assumes a higher rate on your fee-based business compared to what you are realizing in 2011?

Helen, the answer to that, the short answer is yes. As the demand for gathering system and fractionation capacity continues to be very strong, the fee for doing those businesses is going up, and our competition, competitors are charging higher rates as well. So, yes, they will be going up.

Okay. And then just a follow-up, the -- I guess you have talked about, in your analyst day, long-term spread outlook going down to maybe $0.10 to $0.12. Even at that environment, is it fair to assume that you still make up a slightly higher margin on your optimization business versus straight fee-based business?

It's hard to say that because, obviously, optimization margins, they are very volatile. So, you can't say that with a high degree of certainty that they are going to be at a certain level. What we are seeing is that our customers are willing to pay and commit under firm contracts at a rate that may be slightly below, somewhat below what we would generate in terms of optimization. That is a good bet for us, okay? We will give up that capacity -- that optimization capacity in exchange for long-term firm fees at a somewhat lower margin. We think that is a good bet for us, and that's what we have got built into our long-term plans.

Okay, got it. Thank you very much.

Thank you, Helen.

We will take next question from Stephen Maresca with Morgan Stanley.

Hey, good morning, everybody. Two quick ones. John, you made the comment on the cash flow at OKE priority being acquisition, dividend increase, OKS repurchase and share repurchases at OKE. My question is why wouldn't dividend increases go above acquisitions in this environment where you buys have an extremely unique footprint, a lot of organic opportunity, a growing organic opportunity set, a great balance sheet at OKE? Obviously, we've seen what one of your peers did and with a different strategy on dividend payout also being able to go out and make a big acquisition. So, just sort of a philosophical question, why not use the cash in more of a dividend payout way, knowing that you still could, if you found an acquisition, go and do it?

Well, my comments were -- and thank you for asking the question because it gives me an opportunity to clarify. We see all four of those as an opportunity. It sort of depends at a given point in time which one is at the top of the list. So, to say today that a dividend increase in a higher priority than an acquisition, it depends. It depends on our next economic alternative.

Those four -- and I think history has proven that those four areas are areas where we have in the past made changes. We have acquired assets, we've increased the dividend significantly. We've invested in ONEOK Partners, we've done all those things, and we will continue to do those things. Your comment about our peers and the acquisitions, I hear you, but at the same time, we have got $3 billion of projects underway at attractive rates of return, and we have over $1 billion -- I guess I just increased it, of unannounced projects. The returns on those projects are greater than if we were to go repeat an acquisition that one of our peers did at what the street tells us those returns are. Obviously, those companies know their situation much better than we do, and they -- like when we bought the coke assets, may see something that neither we nor the street sees.

I'm not trying to say that they haven't made good investments, I'm just saying relative to our next economic alternative, we are always choosing what we think creates the most value. I can sit here right now and tell you that, oh yes, we would much rather do an acquisition than increase the dividend, for example, or buy one ONEOK Partners shares, but until that baby shows up, what are we going to do? Keep the dividend where it is? Not buy any more in ONEOK Partners? It's kind of like, you've got to look at all that stuff at the same. And -- did I answer your question?

Yes, did you. I just want to be clear, I wasn't -- I hope you didn't think I was suggesting that you needed to go and do an acquisition. I was actually thinking more the opposite. You have a very nice slate of things going on there. So, I wasn't saying comparing that you had to or saying you should do or anything. It was just more -- you've got flexibility, and that's all, so --

I didn't take it that way. I thought it was a good question, and I appreciate you asking it so we could clarify that point.

Okay. Well, thanks for that. And then final one is just, and I appreciate more color again on the energy services, but you've -- it's an area where you deemphasized at OKE a bit, it's a little bit subject to market conditions. What is your view on -- what is the strategic value to having that business at OKE? How is that helping you guys out? Is it something -- I don't know, it could be -- it feels like something that's -- I don't know that you get credit for.

Well, perhaps we don't. There is some people that say we do, but that is a debate, to what end, I'm not quite sure. But the vision of the Company has been and remains to seek opportunities where we can further take advantage of our integrated operations. And by that, what I mean is we, for the last 10 years plus, have been putting back together the pieces of the value chain to create that integrated model because we believe it's the -- it provides the lowest cost to capital. When you look at what energy services has done for us and what it does for us today is it keeps us engaged in the marketplace. It allows us to see and participate in the downstream business of natural gas beyond what we do inside our distribution business, or for that fact, besides what we do inside the partnership. So, we feel that what it does do is it does create value for the business through that integration activity.

The other thing -- the other part of our vision, as you might recall, is that we seek to do those things -- where we can take advantage of those capabilities that we've developed and also provide opportunity to develop capabilities we don't have which might create value in the future. We do the energy services business, the gas marketing business uniquely and differently than our competitors. And yes, it is exposed to the volatility and the commodity price. But, as we've talked about earlier, by reducing costs we can continue to focus on creating value, and that's a business that we think we can -- that can generate between that $75 million and -- I think it's $70 million and $125 million. I can't recall exactly. But we still see it as something that makes us money.

Okay. Thanks very much.

You bet.

Okay, this concludes the ONEOK and ONEOK Partners conference call. As a reminder, our quiet period for the fourth quarter will start when we close our books in early January and will extend until earnings are released in February. We will provide the exact date and time of the release of fourth quarter earnings and the details of the conference call at a later date. Andrew Ziola and I will be available throughout the day to answer your follow-up questions. Thank you for joining us.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.