歐尼克 (OKE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's fourth-quarter 2011 ONEOK and ONEOK Partners earnings call. Please note, today's conference is being recorded. I will now turn the conference over to Mr. Dan Harrison. Please go ahead, sir.

Thank you and good morning, everyone. Thanks for joining us today. Just a reminder that statements made during this call that might include ONEOK or ONEOK Partners' expectations, predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.

And now, John Gibson, Chairman and CEO of ONEOK and ONEOK Partners -- John?

Thanks, Dan. Good morning and many thanks for joining us today. As always, we appreciate your continued investment and interest in ONEOK and ONEOK Partners.

Joining me this morning are Rob Martinovich, our Chief Financial Officer, who will review our quarterly results and updated earnings guidance; Pierce Norton, our Chief Operating Officer, who will review the operating performance of ONEOK and ONEOK Partners; and Terry Spencer, our President, who will review current market conditions, including our outlook on supply and demand for NGLs and the implications of lower commodity prices, followed by a status report on the ONEOK Partners growth projects.

On this morning's conference call, I will briefly review our fourth-quarter and year-end 2011 results, provide some perspective on our revised 2012 guidance and conclude with some comments about our current and future growth.

Let's start with ONEOK Partners' fourth-quarter and year-end performance. Both the year and the quarter were exceptional. Results were driven by wider NGL differentials as well as higher volumes in our Natural Gas Liquids and our Natural Gas Gathering and Processing segments. Our growth projects on time and on budget and we continue to increase volume commitments for these projects. Our Garden Creek Natural Gas Processing Plant in the Williston Basin is operational, allowing producers the ability to capture additional value while reducing the amount of the flaring occurring in the Bakken Shale.

Our Natural Gas Distribution segment performed well in the quarter and for the full year. Net margins were essentially flat with operating income affected primarily by higher share-based compensation costs. You will recall that we award all full-time employees with one share of stock each time the closing price reaches a new $1 high, and in 2011 we are awarded 31 shares of stock at a cost of $16 million. Since the Natural Gas Distribution segment has the largest number of employees and the allocations of these costs are on a per-employee basis, it incurred a large portion of that expense. We believe it is a small price to pay for outstanding share price appreciation in 2011.

Our Energy Services segment continues to struggle as a result of challenging market conditions narrow seasonal and location differentials, low natural gas prices and volatility, moderate weather conditions and an oversupply of natural gas. While we have lowered our expectations for this business in 2012, we continue to reduce our leased, storage and transportation capacity and operating cost. But the fact remains; it's a very challenging market.

We also updated our 2012 financial guidance, increasing our earnings expectation at ONEOK and ONEOK Partners and raising our dividend and distribution growth forecast for the year. Rob will provide more detail in a few minutes. Our updated 2012 ONEOK Partners guidance includes higher natural gas liquids operating income than we originally forecast, $528 million today versus last fall's 2012 forecast of $395 million, but lower than the segment's 2011 actual results. Our updated NGL segment guidance is the result of an expected increase in ethane differentials between the Mid-Continent and Gulf Coast compared with what we assumed in our original 2012 guidance. However, we expect lower NGL optimization margins in 2012 as we continue to convert some capacity to firm fee-based contracts.

In 2012, lower expected commodity prices will also impact the partnership's Natural Gas Gathering and Processing segment. We expect 2012 G&P segment results to be higher than 2011, but lower than we originally forecast last fall.

Rob will now review ONEOK's financial highlights and then Pierce will review ONEOK's operating performance.

Thanks, John, and good morning, everyone. ONEOK's fourth-quarter net income increased by 38% compared with the same period last year, driven by the strong performance at ONEOK Partners. For 2011, net income increased 8% versus 2010.

Results in the Distribution segment were lower due to higher employee-related costs while Energy Services had reduced results due primarily to lower storage, marketing and transportation margins resulting from narrower seasonal spreads and natural gas price location differentials. ONEOK's 2011 stand-alone cash flow before changes in working capital exceeded capital expenditures and dividend payments by $213.7 million. In 2011 ONEOK received approximately $333 million in distribution from ONEOK Partners, 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 2012. Net income is expected to be in the range of $360 million to $410 million compared with its previous range of $355 million to $400 million. The updated guidance reflects higher anticipated earnings in the ONEOK Partners segment offset partially by lower expected earnings in the Energy Services segment.

In January, ONEOK completed a $700 million public offering of 4.25% senior notes due 2022. We used the proceeds to repay amounts outstanding under our $1.2 billion commercial paper program and for general corporate purposes, providing additional capacity for various options which may include repurchasing ONEOK common stock under a previously approved share repurchase program, purchase of additional common units of ONEOK Partners and/or the payment of dividends to shareholders. Also in January, we declared a dividend for the fourth quarter of $0.61 per share, a 17% increase since January 2011. Since January 2006, the Company has increased the dividend 13 times, representing a 118% increase during that period. Subject to Board approval, we also expect to increase the dividend $0.05 per share in July compared with our expectation last September of $0.04 per share. This increase is consistent with our goal to grow the dividend by 50% by 2014.

ONEOK's liquidity position is excellent. At the end of the fourth quarter on a standalone basis we had $842 million of commercial paper outstanding, $30.9 million of cash and cash equivalents, $347.7 million of natural gas in storage, $356 million available under our new credit facility and our total debt to capitalization ratio was 45%.

ONEOK's significant cash flow and outstanding liquidity position continue to give us incredible financial flexibility.

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

Thanks, Rob, and good morning, everyone. Let's start with our Natural Gas Distribution segment. Fourth-quarter and full-year 2011 earnings were lower compared with the same period last year because of higher operating cost, primarily the share-based compensation cost discussed on previous conference calls. This segment's portion of the 31 shares of stock awarded to employees in 2011 was $10 million. 2012 operating income guidance has been updated to $223 million, reflecting the recent sale of the retail natural gas marketing business that is now accounted for as discontinued operations.

Now a brief regulatory update -- in Kansas, the Kansas Corporation Commission approved our application to increase the gas system reliability surcharge by an additional $2.9 million effective January 2012. This capital recovery mechanism allows us to recover and to earn a return on safety-related and government-mandated capital investments made between rate cases. Kansas Gas Service plans to file a rate case in mid-2012, its first since 2006.

As part of that rate case, we are exploring rate design options that reduce our volumetric sensitivity. Oklahoma Natural Gas will make its annual performance-based rates filing on or before March 1. We expect to request a modest increase in rates to recognize our investment in rate base and increases in operating cost.

We continue our efforts to grow our rate base by investing in projects that provide benefits to our customers and our shareholders. In 2011, the Distribution segment invested approximately $243 million of capital, including $25 million in automated meter reading devices. In 2012 we plan to invest approximately $270 million of capital. As in the past, this includes pipeline integrity projects, pipeline replacements, extending services to new areas, automated meter reading devices and increasing the system's delivery capabilities.

Now let's turn to Energy Services. The lower earnings results reflect lower storage and marketing margins, due primarily to lower realized seasonal storage price differentials and lower transportation margins, due primarily to narrow realized price location differentials and lower hedge settlements in 2011. Full-year 2011 operating income was $24 million. Location differentials are essentially nonexistent between several market delivery points. Seasonal differentials remain narrow for 2012 with little or no price volatility but have improved somewhat for 2013. We have reduced Energy Services' 2012 operating income guidance to zero as this segment will continue to face extraordinarily challenging market conditions because of the increase in transportation pipeline capacity in recent years and an oversupply of natural gas from shale plays.

We continue to assess how much transportation and storage capacity we need to service our premium customers and look for opportunities to renegotiate transportation and storage rates. By the end of this year, more than 20% of our leased storage capacity and 15% of our leased transportation capacity will be up for renewal, and by 2015 more than 90% of the storage capacity and 75% of the transport capacity will be up for renewal, providing an opportunity to either renew them at lower market rates or cancel the leases. These expirations also give us additional opportunities to realign our capacity with customers' needs and re-base our cost structure.

We now expect to reduce our targeted leased storage capacity from 65 Bcf at the end of 2012 to 60 Bcf by 2015, and our leased transportation capacity from 1 Bcf per day at the end of 2012 down to 0.8 Bcf per day by 2015.

John, that concludes my remarks for ONEOK.

Thank you, Pierce. Now we will ask Rob to review ONEOK Partners' financial performance, and then we will go back to Pierce to review the operating performance.

Thanks, John. In the fourth quarter, ONEOK Partners' net income more than doubled compared with the fourth quarter of 2010. For 2011, net income increased 76% versus 2010. Distributable cash flow increased 89% compared with the fourth quarter last year, resulting in a coverage ratio of 2.26 times. For 2011, distributable cash flow increased 61% compared with 2010, resulting in a coverage ratio of 1.66 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, we do not believe these wider NGL price differentials are sustainable long-term. In 2008 we utilized the incremental cash flow to finance a portion of our $2 billion capital investment program that was completed in 2009, and we plan to utilize a portion of the incremental cash flow likewise in 2012 to help fund our current $3 billion capital growth program, reducing our debt and equity financing needs.

At the same time, we are meaningfully increasing distributions to our unit holders. We increased the distribution $0.015 per unit for the fourth quarter and, subject to Board approval, expected to increase it another $0.025 per quarter in 2012, higher than the $0.02 per quarter increase we announced last September. With the strong performance of the NGL segment expected to continue in 2012, although at a lower level than we experienced in 2011, we have increased the partnership's 2012 earnings guidance by almost 10% to a range of $810 million to $870 million compared with its previous range of $740 million to $800 million. We also estimate the partnership's 2012 distributable cash flow to be in the range of $925 million to $985 million compared with its previous range of $845 million to $915 million.

We updated our 2012 capital expenditure guidance to $2 billion to reflect our latest forecast. This breaks down to $1.9 billion in growth capital and $109 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, where a portion of our margin is derived from the receipt of commodities. Our news release contains updated information on these hedges.

Our 2012 natural gas hedges have increased to 73% from 42%, while our 2012 NGL hedges have increased to 72% from 43%. As is our practice, we continually monitor the commodity markets and will place additional hedges as conditions warrant.

At the end of the fourth quarter, the Partnership had $35.1 million in cash and no commercial paper or other short-term borrowings, a debt to capitalization ratio of 53% and a debt to EBITDA ratio of 2.9 times.

Now Pierce will review the Partnership's operating performance.

Thank you, Rob. As John said, the Partnership had an exceptional fourth quarter. Operating income almost doubled compared with the same period last year, driven primarily by higher margins in the Natural Gas Liquids 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 result of higher isomerization margins in the NGL segment and solid performance in the Natural Gas Gathering and Processing segment from higher natural gas volumes processed.

While we benefited from these favorable NGL price differentials and higher NGL and condensate prices, our base business continues to grow. In the fourth quarter natural gas volumes processed increased, as did NGL volumes gathered, fractionated and NGL purity products distributed. More on that in a moment.

The Natural Gas Gathering and Processing segment's fourth-quarter financial results were higher due primarily to higher natural gas volumes processed, specifically in the Williston Basin, and higher net realized NGL and condensate prices. We decreased this segment's operating income guidance for 2012 to $247 million compared with the $297 million we provided last September to reflect lower commodity price assumptions. In 2012, we expect processed volumes to be up 24% and gathered volumes to be up 15%, both driven by our investments in the Williston Basin, the new Garden Creek plant that went into service in December and the Stateline I plant that we expect to be in service sometime in the third quarter of this year.

The Natural Gas Pipeline segment fourth-quarter results were lower compared with the fourth quarter last year due to lower transportation margins from narrow regional natural gas price differentials that decreased contracted capacity on Midwestern Gas Transmission and interruptible volumes across several of our pipelines. For 2011, equity earnings from Northern Border Pipeline increased by 12% compared with 2010 as it maintained its position as a low-cost provider in transporting Canadian-sourced supply to markets in the Midwest. Northern Border is substantially contracted for long-haul capacity through March 2013 and has been successful capturing three-year or longer extensions as current contracts expire.

We decreased this segment's 2012 operating income guidance to $135 million, reflecting a lower assumed natural gas price as it relates to our retained fuel position. Almost 90% of the contracted capacity on our wholly owned pipelines serve 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.

In spite of narrow price differential environment, this business, due to its highly contracted capacity, continues to generate stable earnings with 82% of our pipeline capacity and 100% of our storage capacity contracted under firm long-term contracts.

Our Natural Gas Liquids segment continued to benefit in 2011 from record wide NGL price differentials and having more fractionation and transportation capacity available for optimization activities. This segment also benefited from higher isomerization margins due to wider price differentials between normal butane and isobutane. Successful contract negotiations associated with our exchange and storage services activities also helped earnings.

We fractionated 10% more volume during the fourth quarter of 2011 compared with the same period last year, averaging 583,000 barrels per day, which includes volumes fractionated at the target facility from the fractionation services agreement that began during the second quarter in 2011.

NGLs transported on our gathering lines were up 17% during the quarter compared with the same period last year, averaging 473,000 barrels per day during the quarter as a result of increased volumes gathered on the Arbuckle Pipeline and in the Mid-Continent. Arbuckle Pipeline volumes are now reaching more than 200,000 barrels per day. Additional pump stations have been added as a part of the Arbuckle expansion that will increase capacity to 240,000 barrels per day in the early second quarter of 2012.

We significantly increased our 2012 operating income guidance for this segment to reflect the wider NGL price differentials. For 2012, we have updated the Conway to Mont Belvieu ethane price differential to average $0.32 per gallon compared with $0.12 per gallon provided in September. While the current ethane price differential has softened to levels below $0.32 due to a number of short-term maintenance outages at US petrochemical plants, we anticipate ethane differentials will increase as the pet chems return to normal operations during the second quarter.

Although we only provide expected Conway to Mont Belvieu differentials for ethane in our guidance, our opportunity to capture optimization margins is not solely based on the ethane differentials. Our well-positioned and vertically integrated assets can also benefit from Conway to Belvieu differentials from the other NGL products, such as propane and butane.

Additionally, we're also expecting to utilize less capacity for optimization activities in 2012 compared with 2011, contracting some of the capacity under fee-based long-term agreements with customers. We have a planned maintenance turnaround at our Mont Belvieu fractionator, MB-1, scheduled for May. During this turnaround, raw NGL volumes that were currently being fractionated at MB-1 either will be sent to other fractionators and/or placed in storage. Because of the advanced planning that goes into the turnaround, we expect this turnaround will not substantially affect our customers' operations.

John, that concludes my remarks.

Thank you, Pierce. Now Terry will give you an update on ONEOK Partners' growth projects, which I'm pleased to say are on time, on budget and continue to attract additional supply commitments, and discuss with you our view on current and longer-term market dynamics. Terry?

Thanks, John, and good morning, everyone. This morning I will discuss our outlook of the NGL markets and close with a status report on our growth projects.

On the demand side, the petrochemical industry continues to find ways to consume more ethane due to its strong price advantage versus oil-based feedstocks. In the short term, several petrochemical facilities are currently conducting maintenance turnarounds, reducing the immediate need for ethane, which is primarily responsible for the current lower ethane prices in the Mont Belvieu market. We also understand that several of these pet chems are in turnarounds to also increase their ethane cracking capabilities.

In addition, the price weakness is exacerbated by the pet chems that are down for maintenance, selling ethane into the market. The lower natural gas price environment also puts downward pressure on ethane prices. There has been some concern about the impact of lower natural gas prices on our businesses. On the supply side, rigs are continuing to move away from dry gas regions and producers are focusing specifically on crude oil and liquids-rich plays such as the Bakken, Cana Woodford, Woodford, Granite Wash, Niobrara, Mississippian Lime and the Eagle Ford Shale. Fortunately for us, our assets are well positioned in all but one of these areas.

From what we have seen and drilling schedules we have been provided, we do not expect any material impact on volumes that supply our plants or systems that serve these liquids-rich regions.

With oil prices showing little signs of pulling back, the weaker natural gas prices help to maintain or further widen the ethane to crude ratio, improving the US petrochems industries' competitive position globally and increasing demand for more NGL feedstock, which benefits our NGL business. Once these planned turnarounds are completed in the next few months, demand from the pet chems for ethane and the price of ethane should strengthen, particularly in Mont Belvieu. Some experts are projecting ethane demand will reach new record highs later this year and will continue to grow over the long-term, especially with the announcement of petrochemical plant restarts, expansions and development of new world-class petrochemical plants.

As a consequence, we expect NGL fractionation capacity to remain tight but gradually become more available as new fractionators come online over the next few years.

As NGL growth continues at a rapid pace, we believe that over the next couple of years there will be some periodic over-supplies of ethane as new NGL infrastructure brings additional NGLs to market. As we approach and move through the 2015 and 2017 time frame, we believe supply and demand will remain relatively balanced as new petrochemical plants and expansions come online.

Now an update on our projects -- first, our Bakken 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 first of three new processing plants in the Bakken, Garden Creek, was completed in late December. The Stateline I plant is expected to be in service in the third quarter of this year with completion of the Stateline II plant following in the first half of 2013. The Stateline natural gas processing plant projects remain on schedule and on budget.

Oil production in the Bakken continues to grow rapidly, and oil transportation infrastructure continues to be developed to meet producer needs, thus allowing the current pace of drilling to continue. As you all are aware, drilling economics in the Bakken are primarily driven by crude oil prices and not significantly impacted by the current low natural gas price environment. The 500-plus-mile, 60,000-barrel-per-day Bakken NGL Pipeline, along with the expansions of the Bushton fractionator and Overland Pass Pipeline, are either on schedule or ahead of schedule and on budget. We have acquired more than 85% of the right-of-way needed for the Bakken NGL pipeline. Engineering and design continues to move along, and steel pipe and many of the required materials have been purchased.

Of special note, the Bushton fractionator expansion is now ahead of our original schedule and is expected to be completed sometime in the fourth quarter of 2012 compared with our original plan to complete it in the first half of 2013.

Let's turn to our Mid-Continent and Gulf Coast projects. The expansion of our Mid-Continent to Mont Belvieu NGL distribution pipeline, Sterling I, is done, adding 15,000 barrels per day of additional capacity to ship purity NGL products South to Mont Belvieu. The construction of 230 miles of NGL gathering pipelines in the Cana Woodford and Granite Wash is on schedule with completion expected early in the second quarter of 2012, bringing 75,000 to 80,000 barrels per day of raw NGLs to our existing system in the Mid-Continent and the Arbuckle Pipeline. The expansion of Arbuckle to 240,000 barrels per day from 180,000 barrels per day by installing additional pump stations is well underway with incremental barrels already being transported, as Pierce noted, and we expect all the pump stations to be completed and in service also in the second quarter of 2012.

The 570-mile Sterling III pipeline and the 75,000-barrel-per day MB-2 fractionator are progressing as planned. We have increased our supply commitments for both projects with approximately 75% committed on the 193,000-barrel-per-day Sterling III. That's the level of supply commitment we target for this project to achieve its required returns.

All the capacity is committed on our 75,000-barrel-per-day MB-2 fractionator. Our commercial team has done a terrific job securing these supply commitments well before these assets go into service in 2013.

We continue to develop and evaluate a lengthy backlog of natural gas and NGL-related infrastructure projects, including investments in processing plants and NGL fractionation and storage facilities. This 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 chem 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 significant producer and/or customer commitments to make them economically viable.

John, that concludes my remarks.

Thank you, Terry. Before we take your questions I would like to provide you with some context on our 2011 results, our updated 2012 guidance and on our future growth. While Terry has provided you with a detailed rundown of our $3 billion in growth projects, it's important to keep in perspective these current projects and the $2 billion of projects we completed in 2009. While there has been a lot of current attention on the widening NGL differentials between the Mid-Continent and the Gulf Coast, short-term ethane price softness and declining natural gas prices, let's not lose sight of the fact that the assets we have built and are building increase our ability to add volumes to our system, both natural gas and natural gas liquids, and to collect a fee to gather, process fractionate, store and transport these commodities for producers, processors and customers.

These services provide us and our customers and investors with sustainable long-term value regardless of short-term moves and differentials in prices. It's the incremental earnings from these projects, now in service and now being built, that give us the ability to grow our earnings at ONEOK and ONEOK Partners by an average of approximately 20% per year for the next three years, to increase distributions to ONEOK Partner unit holders this year and beyond and to increase the ONEOK dividend 50% by 2014.

And while internal growth may not be as exciting or as headline grabbing as an acquisition, internal growth project opportunities provide our investors with far better returns than if we were to buy earnings at today's prices.

And we are not done. As you just heard, our internal growth backlog is in excess of $1 billion and growing, providing us with more earnings growth potential.

In closing, I would like to again thank our employees, who work safely, reliably and environmentally responsibly every day to operate our assets, creating exceptional value for our investors and customers. We never forget that our success as a Company depends on (technical difficulty) of all of our employees. And I, along with the rest of our management team, appreciate their efforts.

Holly, we are now ready to take questions.

(Operator instructions) Steven Maresca, Morgan Stanley.

Thanks for all the detail and color, as always. First question -- Terry, you mentioned -- or maybe it wasn't Terry -- the frac going down for maintenance in the second quarter and diverting the volumes to another facility. Is there capacity at other facilities to send these volumes to? And then as a subset to that, are you hearing that there's another -- or we are hearing that there's another fractionation facility that may go down for maintenance as well?

Pierce?

The way I would answer that is that our customers have access to other fracs as well as storage, so we don't think there's going to be any material impacts on that. So the short answer to your question is yes. They can divert to other storage, they can divert to other fracs and we can also put it in our own storage, plus put it in our own fracs up in the Mid-Continent.

Okay, and are you aware of any other facility having to go down for maintenance?

There are some others that are going down, I think one other. But again, we think that will be staggered. Ours is going to be in May. We do have a partial on our Bushton fractionator, but all that means is that we can still process approximately a half through that facility while it's down. But they won't be down at the same time.

Okay. On the differential, how much impact will possibly the Kinder line, the EP mix that -- the co-gen line starts on April 1 from Conway to Sarnia? Is that factored in at all to your $0.32 estimate of spread for this year? Do you think it is a material impact on supply leaving Conway?

No, we really don't. We are aware of it, but when we did our analysis, we really didn't view it as having a significant impact. The big driver is going to continue to be the strong supply build, and then, of course, the strong demand that we are seeing at Belvieu. And of course, in the short term, we're of course being impacted by these pet chem turnarounds.

Okay.

So, really, in our view, the spread, no, not a significant impact.

Okay, final question from me -- what do you think is an estimate of the possible oversupply in Conway in terms of -- I don't know -- how you would think about it in terms of number of barrels? Or when it gets alleviated, is it through once Sterling III comes online that you think you see the material normalization of it?

Well, to give you a specific number on supply at Conway would probably -- would not be accurate. I couldn't give you a specific number. What I can tell you is the capacity, the frac capacity that we are filling, the capacity that's being built, is about 500,000 barrels a day. And all of that capacity will be filled and all of that product will flow through pipelines, some of which will come from Conway, some of which will come from West Texas to fill that capacity.

So that will give you kind of a bracket of -- if you are going to try to narrow it down to Conway, that will give you a sense of what you might see. Okay? So does that answer your question or at least --

Yes.

-- give you a sense of the order of magnitude of barrels we're talking about?

Yes, absolutely.

And then I guess the final, final one -- with all this coming in the Gulf coast, do you see the need for more frac above and beyond what's out there now announced from you guys and others, and other issues to building more frac right now? Whether -- we've heard some issues about being harder to get permits nowadays. And that's it for me.

Yes. We absolutely do see the need for more frac capacity. It would be premature for me to tell to what that estimate is, but it's pretty significant. We think there will be more. We have the possibility -- and we've indicated this -- the possibility of announcing a project of our own. And there have been -- and we are hearing of others that may come down the pipe.

But certainly, there is room for more, and there is going to be a need for more frac capacity, and it's going to be primarily at Belvieu.

Okay, thanks a lot, everybody.

John Edwards, Morgan Keegan.

Just one -- just one macro question -- you were talking about the supply-demand balance being roughly in balance, 2015 to 2017. So just if you have any thoughts about when you think it's -- when you think you'll start to see oversupply and maybe how much, any thoughts you could share in that regard?

Sure. As I indicated in my comments, we will see -- over the course of 2012 and 2013, we will see periods of time, albeit short periods of time, where we will have some oversupply of ethane. And we may have periods, as we will see coming out of these turnarounds, we may see some undersupply.

But as we move into that, as I've indicated in that 2015 to 2017 time frame, we said the markets will be balance, but I think there will be a bias for it to be somewhat undersupplied during that time period, as these new petrochemical plants come online. Does that help you?

Yes. So I guess it sounds like, then, you think it will be a little bit oversupplied in 2014?

Yes. We don't think it will be a major -- actually, as you move into the 2014 time frame, it will be fairly balanced. Okay? But it will be 2012 and 2013 that we think there will be -- as I indicated, there will be periods where we are oversupplied, but not really significantly and for not an extended duration.

Okay, great, that's helpful, thank you very much.

Carl Kirst, BMO Capital.

Thank you, good morning, everybody, nice results. I guess I've got a question more looking perhaps at new areas. And one of the things that, as we have certainly been seeing all the activity, for instance, in Canada, obviously a couple of big purchases with the BP assets and then Provident -- but the conversation kind of going on up there as far as whether or not over the next five years, for instance, in the province of Alberta, does that get to be short in liquids? A few years ago, you guys had a possible project that would, I guess, compete against Southern Lights as far as bringing liquids up to Canada. Do you see anything like that percolating back up, by chance?

I'm trying to recall specifically a project where we were competing with Southern Lights. I know our North system that comes out of Conway and services the Midwest was actually a supplier, a supply point on Southern Lights. So it actually worked with enhancing that project.

I think, to answer your question as far as investments in Canada or other investments like that, certainly we are going to be very interested in participating in those kinds of projects, either acquiring assets or building assets. Canada is one that, while it's a target rich environment and there's a lot of activity, it's fertile ground, it's an area, quite frankly, we are not familiar with doing business there. So we would have -- we would be apprehensive a bit, to your point, as it relates to those BP assets, Provident assets in Canada. We would be very cautious moving into Canada.

Carl -- Terry, I remember the project Carl is talking about, and that was during that time frame, we were looking at whether or not possibly taking our liquids -- or, not our liquids -- making access available for our processors to take the liquids north to Canada or south all the way to Belvieu. We were looking at an alternative, and I think -- I don't think -- the Company came to the view that we could provide more value to the producers in the Bakken, in particular, by providing them access to Mont Belvieu as opposed to the Canadian market, where they don't pay as much for the liquids.

That's very helpful. And if in the future we see you guys sort of potentially extending, then, east to the Utica, I guess it would be the same sort of access to the Mid-Continent and Mont Belvieu that would primarily be the most benefit there?

Yes. I think that is what --

Absolutely.

-- what the processors want, is access to Belvieu, Mid-Continent.

And certainly, that North system that I mentioned earlier that serves the Midwest and the Chicago area would give us a stepping stone into that play, and we're certainly looking at that.

Great, and then one other question, if I could, on OKE on Energy Services, and kind of understanding what it is. But given how flat differentials are right now, both basis -- as far as transportation and storage -- and understanding we have this midpoint roughly around the breakeven, are there any hedges to be aware of that are propping that up? Or are we basically basing out here, do you think?

Did you say basing out or phasing out?

Basing -- B-A-S.

Yes -- no, I think B-A-S-I-N-G, basing, I wouldn't characterize it as that. If you -- I mean, Pierce and Pat McDonie have got a plan to reduce our capacity, both transportation and storage, under contract. I think -- I know Pierce shared that information with you.

So over time, from a cost perspective, those are going to change. The segment is just facing a really tough, tough market right now and we do have storage and transport costs that, as we've indicated in previous calls, we are obligated and honored to pay.

Great, thanks, guys.

Well, the only thing I would add to that, Carl, is that we are about 52% hedged on storage for 2012 and about 27% on our transportation book there. So that might give you a little (inaudible).

Yes. And I guess maybe the question that I was ultimately trying to get to -- are those hedges sort of significantly different than what we've seen in the last six months or kind of market indications, meaning that once those roll, we are not sort of stair-stepping down further into adverse market conditions, are we? Or are we?

Well, when you compare them to the positions that we're on in 2011 -- and we have said this in past conference calls -- a lot of those positions were put on several years ago. We haven't had as much opportunity to go out into the 2012 and 2013 market and get those same positions. So they are somewhat less than what they have been in the past.

That's very helpful color, thanks guys.

If you could limit your questions to one so that we can get everyone in, that would be helpful.

Yves Siegel, Credit Suisse.

I really appreciate the timing of that suggestion (laughter), so in good faith, I will honor that.

Just from a big strategic overview, the fact that you've done so well in liquids, is there a greater sense of urgency today to look for another leg to diversify the business away from liquids?

I don't think so. There is always, in our organization, a heightened sense of urgency to look for that next opportunity. So I don't want you to think that we are sitting here focused just on gas and gas liquids. We, as we've said many times before, are looking at other opportunities. But for us, it gets back to clearly understanding what our competitive advantage is, how will that could be integrated into our business and whether or not, by doing so, those investments create long-term, sustainable growth opportunities.

So with that, you don't see us -- we are not going to be bouncing around like, well, okay, now we are going to get into this business or now we are getting into that business. But I think it's obviously fair to say, we always have a high sense of urgency to look for other opportunities. And they are out there.

Got it, so just a follow-up question to that one question rule -- in all seriousness, you dramatically changed your view on the spread between Conway and Mont Belvieu. Did the market change that much, or were you just being ultraconservative when you came out with that initial guidance?

Well, that's a good question. It's a sub question to your original question.

A couple points -- one is, we presented that spread to our Board for approval in the 2012 plan in September. As we gathered information in the June, July, August time frame and tried to look forward, we had capacity coming on at Arbuckle. We had a -- traditionally, a sense in our gut that buying falls off in the fourth quarter. We had just a number of events that caused us to believe -- and you could also throw in there an element of conservatism in that we didn't necessarily believe -- we don't believe that these high spreads are sustainable over the long term. So we brought it back to where we thought it would average over the year. And then, as we moved into the winter and we saw certain things occur, it became obvious to us that those dynamics in the marketplace weren't going to result in a $0.12 or $0.10 spread, that it was going to be higher. And so we have subsequently gone back and readjusted not only that spread, but also our view on gas prices and NGL prices.

So it's a matter of better knowledge with time. And as the market gives you more transparency into what's happening.

Thank you.

Louis Shamie, Zimmer Lucas.

Just a quick question -- I was wondering about your contract mix on the G&P side, how that has changed. What percentage of your volumes were under keep-whole fee contracts in the fourth quarter?

Keep-whole, right now at the end of the three months at December 31, was about 6%, fee-based was about 32%, and the POP was about 62%. The thing that probably is worth noting there -- we did have two contracts within our G&P segment. One of them was a keep-whole contract that converted over to POP, and the other was a contract that actually was a POP contract that converted to fee.

So if you compare those three months ending December 31, that's on page 6 of our earnings release, to the year-end numbers, you will find a little bit of difference, and that's what's causing some of that movement around is those two contracts.

Got it. So looking forward to 2012, what is the mix expected to be?

Yes, we would expect those to stay relatively the same.

Thanks a lot, Pierce, and congratulations, everyone, on a great year.

Helen Ryoo, Barclays Capital.

My question is regarding your -- I guess it's related to the spread question that came up a couple of times. But just looking at your NGL operating income guidance, you are guiding $100 million down 2012 versus 2011, yet the spread assumption is about $0.04 higher, 2012 versus 2011. And you did indicate that you will be losing -- I guess using reduced capacity for optimization. I just wanted to clarify that -- it seems like you are going to use quite a bit lower capacity for optimization, since -- given what your guidance implies. Is that a fair assumption?

That is a fair assumption.

Okay, and is that something you will continue to reduce going forward, going into 2013 and 2014?

Yes, it's what we refer to as converting that to fee-based business.

Okay. And as far as the spread assumption in outer years, in your analyst day conference, you did talk about, I think, $0.09 to $0.13 kind of spread. Do you still see that happening by 2013-2014, that you will see a pretty big fall-off year-over-year?

Yes, particularly given the comments Terry made earlier about supply and demand of ethane, in particular.

Okay, great, thank you very much.

(inaudible), Stifel Nicolaus.

A quick question as it related to your comments regarding the backlog. I believe you characterized some of the projects as being critical infrastructure and some of it as being redundancy. Can you talk about, I guess, the difference and profitability between those two? And is there any more color you can shed on the mix?

In terms of profitability, the difference of those two -- we really don't look at it that way. Many of these projects will create some redundancy. Okay? So to do an economic analysis on just the redundant feature of that project is not how we look at it. All these projects and the assets that they serve are -- it's all integrated. Okay?

And so redundancy will come naturally on many of these assets, i.e., like the Sterling III pipeline project that we have been talking about. Inherent in its operation, it provides a level of redundancy as we already have multiple pipelines that serve the Gulf Coast. So there's an example of that. Does that help you?

Yes, it does.

Michael Blum, Wells Fargo.

Just a quick one for me, just, I guess, following up on Louis' question. In the fourth quarter, your NGL sales and condensate sales volumes were down slightly, looking at fourth quarter 2011 versus 2010. Does that relate to that shift -- the slight shift in a couple of those contracts, or is there something else going on there with the GPM of the gas? Just trying to understand that.

Yes, Michael, that is because of that shift from the keep-whole to the EOP and the POP, the fee.

Okay, great, thank you.

James Jampel, HITE.

If we go out like a year from now and we are looking and having this call and we see -- I imagine we are going to see three segments, a booming OKS segment, an LDC segment and a continuing struggling Energy Services segment. This imagined scenario of a year from now, what would have to change out there for us not to be having a similar conversation a year now, for you to be in different businesses or of having done a transforming transaction?

Well, I can't tell whether your question is specifically addressed to Energy Services or whether you are asking me a question about whether or not there will be a fourth leg or a different three legs. I'm sorry; if you could clarify the question, I'll try to answer it.

It's really both. There were discussions in the past about a transforming transaction, and that seems to have faded in the wayside. So -- and I guess I'm of the view that there is tremendous value to be unlocked at the OK level if we are not having exactly the same discussion a year from now than we are having today.

Okay. Well, let me give you a little bit of color, then. As it relates to transforming transaction, we obviously haven't made one. But in my comments, I also talked about the fact that we have created more value for our shareholders and our unit holders by the now $5 billion worth of investments in infrastructure, both in the gas and the gas liquids business. As I said, we can create more value investing in those projects than we can going out and buying earnings at today's prices.

So a transforming transaction -- which I have in the past compared to when we acquired the Coke NGL assets, when we acquired the gathering and processing assets from Dynegy and Kinder Morgan, when we acquired the Bushton plant and NGL storage from Kinder Morgan -- those, when we look back, although they may not be significant in size from a dollar perspective, they were significant in they gave us the opportunity to then invest more money as it relates to building that infrastructure. So we, to be clear, are not driven to do a transforming transaction so that we can go to the marketplace and say we've done one. We will continue to invest where we see opportunities to create more value.

As it relates to the future of ONEOK and what ONEOK might look like, it's hard to argue with success. We have been successful. We look at opportunities, as I indicated to Yves. We look for opportunities in other commodities where we think we can apply the same capabilities we have. We also look as an organization as to where we can increase our capabilities so that we can move into other markets.

It's all an iterative process that we apply all these techniques to, but I can't tell you a year from now whether we will have another school. There's been years where Energy Services has made $230 million and Gathering and Processing barely broke even. But our commitment is for the long-term, so if we have this discussion a year from now, it will be heavily influenced by what we perceive to be reality between now and then. Did that help you any, at all, James?

Yes, absolutely. And so the reality for Energy Services, you think, is a brighter one?

Yes. As Pierce laid out in his comments, he has a plan for reducing transportation and storage capacity and/or renegotiating those rates that are under contract to reduce his costs. And then we don't believe, over time, that price volatility is gone forever. We don't believe, over time, that basis differential is gone forever. And we don't believe, over time, that seasonal spreads are gone forever.

Okay, thank you.

Elvira Scotto, RBC Capital Markets.

Just a quick one from me -- can you talk a little bit about the thought process behind the increase in the Distribution growth guidance for 2012? Specifically, is that increase tied to the strength that you are seeing in the NGL segment and optimization? And then, if so, how do you think about balancing Distribution growth versus retaining some of the excess cash flow from these activities in order to fund future growth?

Well, Rob is probably the best person to take you through the logic.

Yes; I think, as we looked at our guidance that we gave in September with the expected performance of the Partnership at that point in time, and then as we updated it, as Terry and Pierce talked about with updated commodity prices and spreads, it felt appropriate that the distribution be increased. And it's always a balance, trying to target that coverage ratio that we've talked about before, in the 105 to 115, but be prudent with regards to long-term trends and where we see the business performing.

So we felt that it was an appropriate adjustment to reflect the increase in the Partnership and yet, at the same time, be mindful that as the comments have been made today that that long-term view on the optimization spread is not sustainable between Conway and Mont Belvieu, and thus be able to use that cash flow appropriately to partially fund our growth projects.

Thank you.

Okay, well, thank you all for joining us. This concludes our call. Our quiet period for the first quarter starts when we close our books in early April and extends until earnings are released after the market closes on May 1, followed by our conference call at 11 AM Eastern, 10 AM Central on May 2. We will provide you with details on that conference call at a later date. Andrew Ziola and I are available throughout the day to answer your follow-up questions. Thanks for joining us.

Thank you, and again, that does conclude our conference for today. We thank you for your participation. You may now disconnect.