歐尼克 (OKE) 2012 Q4 法說會逐字稿

Good day and welcome to the ONEOK and ONEOK Partners 2012 fourth-quarter earnings call. Today's conference is being recorded.

At this time I would like to turn the conference call over to your host, Mr. Andrew Ziola. Please go ahead, sir.

Thank you, Corinne. Welcome to ONEOK and ONEOK Partners fourth-quarter and year-end 2012 earnings conference call. A reminder that statements made during this call that might include ONEOK or ONEOK Partners' expectations or predictions could be considered forward-looking statements and are covered by the safe harbor provision of the Securities Act of 1933 and 1934.

Actual results could differ materially from those projected in any forward-looking statement. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.

Our first speaker will be John Gibson, Chairman and CEO of ONEOK and ONEOK Partners. John?

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

Joining me today are Derek Reiners, our newly named Chief Financial Officer, who will review our quarterly results and revised 2013 and three-year earnings guidance. Terry Spencer, our President, who will review our operating performance, update you on the Partnerships' growth projects which are on time and on budget, and also discuss current market conditions, including NGL supply and demand and the implications of lower NGL prices.

Also on the call and available to answer questions are Pierce Norton, Executive Vice President of Commercial, and Rob Martinovich, Executive Vice President of Operations. I would like at this time to thank Rob and Pierce for their contributions in their previous roles and congratulate them and others on their new assignments that we announced in December.

On this morning's call we will review our fourth-quarter and 2012 financial results, discuss our revised 2013 earnings guidance, and our revised three-year financial forecasts that have been updated to reflect lower expected results in the partnership, primarily in our NGL segment, due to the impact of anticipated prolonged ethane rejection. We will review our progress on our growth projects, including the projects we are about to complete, and close with some comments about our future growth prospects.

Let's start with our fourth-quarter and year-end performance.

ONEOK Partners turned in a solid performance for the year, reflecting continued volume growth in both the Natural Gas Liquids and Natural Gas Gathering and Processing businesses, primarily as a result of our past capital investments. However, our 2012 fourth-quarter results were lower compared with the same period in 2011 when we experienced historically wide NGL location price differentials.

Our Natural Gas Distribution segment turned in higher results for both the fourth quarter and the year, reflecting primarily higher rates and lower share-based compensation and other employee-related costs. And our Energy Services segment reported a loss due to the continued challenges it faces in a low natural gas price and oversupplied environment.

Terry will provide you more detail on each segment's operating performance in just a few minutes.

We have revised our 2013 earnings guidance and our three-year financial forecast, which include a reduction in our ONEOK dividend and ONEOK Partners distribution growth forecast for 2013 and for the three-year period through 2015. Half of the reduction in our revised 2013 operating income is in our NGL segment and is the result of lower expected NGL volumes due to anticipated widespread and prolonged ethane rejection, and to a lesser extent, tighter NGL location price differentials and lower commodity prices.

Of course, if industry conditions improve we will reevaluate our 2013 guidance, including our current dividend and distribution projections. These reductions in our distribution and dividend growth forecasts are based on our commitment to not sacrifice our investment grade credit ratings at ONEOK or at ONEOK Partners, or our distribution coverage ratio at the partnership for the sake of three-year dividend and distribution growth rates. Our projected 2013 distribution increase allows us to maintain a coverage ratio of 1.0 to 1.05 times at ONEOK Partners.

Although lower, our projected distribution and dividend growth rates still rank high among our peers. We remain confident in our ability to grow both ONEOK's dividends and ONEOK Partners' distributions over the next several years, delivering both value and wealth to our shareholders and unitholders, even in a challenging industry environment.

At this time Derek will now review ONEOK's financial highlights followed by Terry who will review ONEOK's operating performance. Derek?

Thanks, John, and good morning. ONEOK's fourth-quarter net income was $112 million, or $0.53 per diluted share, compared with $115 million, or $0.55 per diluted share, for the same period last year. Results in the partnership were lower in the fourth quarter compared with the same period in 2011 due to narrower NGL price differentials compared with historically wide differentials in 2011.

Natural gas and NGL volume growth at the partnership was solid as a result of several growth projects completed in 2012.

Results from the Natural Gas Distribution segment were higher due to increased rates in all three states and lower operating expenses. Challenges in the Energy Services segment continue with lower storage and marketing margins and lower premium services margins.

ONEOK's full-year net income was approximately $361 million, unchanged from 2011, and its 2012 stand-alone cash flow before changes in working capital of $709 million exceeded capital expenditures and dividend payments by $141 million. In 2012 ONEOK received $437 million in distributions from ONEOK Partners, a 31% increase over 2011.

As John mentioned, our 2013 net income guidance is now expected to be in the range of $350 million to $400 million due to lower anticipated earnings in the ONEOK Partners segment. Terry will discuss the specific segment guidance revisions in a moment. As stated in our news release, ONEOK now expects its net income to increase by an average of 15% to 20% annually over the three-year period ending in 2015.

In January, we increased our dividend $0.03 to $0.36 per share, an 18% increase since January 2012. The expected dividend increase in July of 2013 has been revised to $0.02 per share subject to Board approval. This increase will result in a total dividend increase of 17% for 2013 compared with 2012. As John indicated, if market conditions improve we will reevaluate our dividend.

We also revised ONEOK's expectations to increase dividends by approximately 55% to 65% between 2012 and 2015 subject to Board approval. And we have affirmed ONEOK's long-term dividend target payout of 60% to 70% of recurring earnings, but expect to exceed that target in the near term.

We increased our 2013 guidance for stand-alone cash flow after dividends and capital expenditures to a range of $195 million to $235 million. This increase is primarily driven by lower anticipated current taxes from the impact of bonus depreciation legislation extended by Congress in January.

ONEOK's liquidity position remains strong and we continue to take the necessary steps to maintain our investment grade credit rating, as John mentioned a moment ago. At the end of the fourth corner on a stand-alone basis we had $817 million of commercial paper outstanding, $47 million of cash and cash equivalents, and $282 million of natural gas in storage with $381 million available under our $1.2 billion credit facility. And our stand-alone long-term debt-to-capitalization ratio was at 45%.

ONEOK's cash flow and liquidity position continue to give us financial flexibility to further increase our dividend, purchase additional units of ONEOK Partners, and/or repurchase ONEOK stock under our approved share repurchase program. We have used all three of these options and do not view them as mutually exclusive.

Now Terry will update you on ONEOK's operating performance.

Thanks, Derek, and good morning. Let me begin my comments with our Natural Gas Distribution segment.

Fourth-quarter and full-year 2012 earnings were higher compared with the same periods last year, reflecting higher rates in Oklahoma, Kansas, and Texas and lower share-based compensation costs as a result of fewer shares of the Company's common stock being awarded to employees in 2012 as part of our stock award program. The Natural Gas Distribution segment's operating income guidance for 2013 remains at $227 million.

On the regulatory front, the Kansas Corporation commission in December 2012 approved an increase in Kansas Gas Service's annual rate by a net amount of $10 million, which became effective in January.

Energy Services continues to experience a very challenging market and for 2012 the segment realized an operating loss of $78 million due to low natural gas prices and low natural gas price volatility, and narrower location and seasonal natural gas price differentials. Energy Services segment 2013 guidance remains at an operating loss of $20 million as it continues to face tough market conditions, but we are making progress in our efforts to realign our leased storage and our transport capacities with the needs of our premium service customers.

John, that concludes my remarks for ONEOK.

Thank you, Terry. Now Derek will review ONEOK Partners' financial performance and then Terry will come back and review the Partnership's operating performance, its growth projects, and give you an update on our view of the current and long-term NGL market dynamics.

Thanks, John. ONEOK Partners' full-year 2012 net income was $888 million, a 7% increase compared with 2011's record performance. ONEOK Partners' fourth-quarter net income was $210 million compared with $299 million for the same period last year.

The fourth-quarter results reflect natural gas and NGL volume growth as a result of several growth projects completed in 2012, but results were offset by narrower NGL location price differentials. For 2012 distributable cash flow increased 7% compared with 2011, resulting in an annual coverage ratio of 1.34 times. Quarterly distributable cash flow decreased compared with the fourth quarter of 2011, resulting in a coverage ratio of 1.04 times.

Our long-term annual coverage ratio target remains at 1.05 to 1.15 times. However, in 2013, given ethane rejection and projected low commodity prices, our coverage ratio could be slightly below that, but we still expect to maintain a greater than 1.0 times coverage for 2013. Again, we will not sacrifice our credit metrics or investment grade credit ratings for the sake of holding to specific distribution growth rates.

We have reduced the Partnership's 2013 net income guidance range to $790 million to $870 million, and distributable cash flow is now expected to be in the range of $910 million to $1.0 billion. Both are slightly lower than 2012 actual results.

As mentioned in the news release, ONEOK Partners now expects EBITDA to increase by an average of 15% to 20% annually over a three-year period. We increased the distribution $0.025 per unit in the fourth quarter of 2012, an increase of 16% over the fourth-quarter 2011 distribution. Our 2013 revised guidance now includes a projected $0.005 per unit, per quarter increase in unitholder distribution subject to Board approval, which would result in a total distribution increase of 7% for 2013 compared with 2012.

The partnership now estimates an average annual distribution growth rate of 8% to 12% for the period between 2012 and 2015 subject to Board approval. The revision to the three-year forecasts are driven by expected 2013 results and also lower expected NGL exchange margins in the Rockies and lower expected commodity prices in 2014 and 2015.

In our updated hedging tables, we have increased our NGL hedges to 45% while 79% of our natural gas is hedged for 2013. Complete hedging information for 2013 and 2014 is included in the news release.

We updated our 2013 capital expenditure guidance to $2.6 billion to reflect our latest forecast that incorporates the cancellation of the Bakken Crude Express project, the additional growth projects we announced last month, and some planned 2012 capital spending that carried into 2013. One item to quickly point out in 2013 earnings guidance is a below-the-line reduction of approximately $20 million in the allowance for equity funds used during construction, or AFUDC, as a result of the cancellation of the Bakken Crude Express project and the 2012 capital spending carryover I just mentioned.

At the end of the fourth quarter the Partnership had $537 million in cash and cash equivalents, no commercial outstanding or borrowings on our $1.2 billion credit facility, a long-term debt-to-capitalization ratio of 52%, and a debt-to-adjusted EBITDA ratio of 3.0 times. Finally, from a financing perspective, we have multiple sources of liquidity available to us and we are confident in our ability to raise the necessary capital to fund the growth at ONEOK Partners.

A few key items to point out. We currently have cash on the balance sheet. We have full access to our $1.2 billion credit facility and the option to request an increase to $1.7 billion if necessary. And we now have in place an at-the-market, or ATM, program that allows the Partnership to offer common units up to $300 million.

These items enable us to be opportunistic from a timing perspective as we look to access the public equity and debt markets.

This concludes my remarks. Now Terry will update you on the Partnership's operating performance.

Thank you, Derek. As John said, the partnership performed well in 2012. Natural Gas Gathering and Processing segment's fourth-quarter financial results were higher due primarily to volume growth driven by increased well connections within our Williston Basin footprint. This volume growth was offset partially by higher compression costs and lower margins realized from new contracts as we compete for new and existing volumes in the Williston and lower realized natural gas and Natural Gas Liquids prices.

For 2012 natural gas volumes gathered increased more than 8% and natural gas volumes processed increased more than 20%, driven by the new processing plants and related infrastructure projects completed last year. The Garden Creek natural gas processing plant continues to operate near its 100 million cubic feet per day capacity.

Our State Line I plant in the Williston Basin went into service in September 2012 and is also operating at near capacity. Our State Line II plant is expected to be in service this quarter with volumes steadily ramping up over the next several months, particularly after the completion of the Divide County natural gas gathering system in the third quarter of this year.

In 2013 we expect processed volumes to be up 30% and gathered volumes to be up 22%. We also had a record year for new well connections; 940 wells in 2012 compared with 600 wells in 2011. This year we expect to connect over 1,000 wells.

Crude oil production in the Williston Basin continues to grow along with the associated NGL-rich natural gas. We are working hard to quickly connect new wells and build the infrastructure required to reduce the continued flaring of natural gas.

We reduced this segment's 2013 operating income guidance to $238 million compared with $253 million, reflecting our expectation of lower commodity prices. We have provided our 2013 price assumptions in our earnings release. We will provide more detail on our NGL price assumptions in a few moments.

The Natural Gas Pipeline segment's fourth-quarter financial results were higher due primarily to lower employee-related costs and a $5.7 million pretax gain on the sale of a nonstrategic natural gas pipeline lateral. Equity earnings from Northern Border Pipeline were slightly lower in 2012 driven by increased maintenance expenses.

In January, the FERC approved Northern Border Pipeline's settlement with its shippers and the lower rates became effective in January. 2013 operating income guidance has been increased to $153 million compared with its previous guidance of $144 million, reflecting anticipated incremental demand from shippers for services to transport their natural gas to market and increased services to electric generation customers.

Our Natural Gas Liquids segment fourth-quarter results were significantly lower, due primarily to narrower Conway to Mont Belvieu NGL location price differentials which negatively impacted our optimization activities. The fourth-quarter 2012 Conway to Mont Belvieu ethane price differential was $0.07 compared with $0.49 in the fourth quarter 2011. This decrease was partially offset by higher NGL volumes gathered and fractionated in our fee-based exchange services activity.

For 2012 NGLs transported on our gathering lines increased almost 20% from last year. NGLs fractionated were up 7% year over year and included a scheduled maintenance turnaround last summer at the MB-1 fractionator. We decreased our 2013 operating income guidance for the NGL segment to $545 million compared with the previous guidance of $630 million to reflect the impact of widespread and prolonged ethane rejection and, to a lesser extent, narrower expected NGL location price differential.

Given the persistent excess inventories for ethane in the Gulf Coast, we expect our volume throughput in the Natural Gas Liquids business to be impacted by ethane rejection throughout much of 2013 with a return to a normal days of ethane supply inventory level in 2013 and consistent ethane recovery in 2014 and 2015. More on ethane and propane fundamentals in a moment.

We updated our 2013 Conway to Mont Belvieu ethane price differential to $0.05 per gallon compared with $0.19 previously as high Gulf Coast ethane inventories and Mid-Continent and Rockies ethane rejection persist.

As a reminder, the ethane price differential is only one component of the optimization picture. Our integrated NGL assets and marketing strategies provide us with opportunities to generate optimization margins on NGL products other than ethane. We expect 2013 NGL gathering volumes to be up 13% over last year and fractionation volumes to be up 8% as more projects are completed, including the Bakken NGL pipeline and our new MB-2 fractionator.

Now an update on our projects. All of our previously announced internal growth projects are on budget and on schedule. As I previously mentioned, the State Line II natural gas processing plant and the 60,000 barrel per day Bakken NGL pipeline are expected to be in service this quarter.

While our processing plants in the Williston are fully capable of deep ethane recovery, the economic justification of our processing plants and our Bakken NGL pipeline were based primarily upon the recovery of propane and heavier NGLs with little or no ethane. When ethane pricing improves to the point of recovery in the Williston Basin our Bakken NGL pipeline throughput will increase.

We continue to develop and evaluate our backlog of natural gas and NGL-related infrastructure projects that still total more than $2 billion-plus. It includes investments in processing plants, natural gas pipelines, and NGL fractionation and storage facilities.

Now an update on the NGL market. Production growth from shale drilling continues in crude oil and NGL-rich supply areas, driven by relatively strong and stable crude oil prices and the uplift from the economic value of NGLs. This increased production has resulted in excessive inventory levels for propane and ethane, and this oversupply has become a key factor in how ethane and propane are currently being valued.

Propane inventories are still well above the five-year average with almost all of the surplus on the Gulf Coast, primarily from the lack of winter demand last year and increased production, while propane inventories in the Midwest and Mid-Continent are decreasing and are much lower than last year. The propane oversupply on the Gulf Coast and softer pricing has made it more economical for many petchems to crack propane instead of ethane. According to many industry reports, the amount of propane being cracked today is at record levels.

The attractive economics for propane as a petrochemical feedstock has kept ethane prices low, especially at Mont Belvieu, leading to historically high and prolonged ethane rejection levels in the regions we serve. Several industry experts have estimated that ethane rejection volumes are between 150,000 and 175,000 barrels per day.

We believe the ethane rejection number is higher based upon what we have seen from Mid-Continent and Rockies plants connected to our NGL systems. We are currently experiencing over 90,000 barrels per day of ethane rejection across our NGL systems and expect it to remain at those levels for much of this year.

Ethane inventories are above historical levels due to increasing production, coupled with the large number of petchem plant turnarounds during the first half of 2012. However, the growth rate of ethane inventories at Conway and Mont Belvieu has been steadily decreasing due to ethane rejection and high petchem utilization rates. And we expect that trend to continue.

In recent weeks we have seen Conway to Mont Belvieu ethane price differentials narrow to breakeven levels due to the continued Gulf Coast ethane inventory overhang and Mid-Continent buying interest, due primarily to ethane rejection in the Rockies and Mid-Continent. As we have stated many times, we expect the Conway to Mont Belvieu differential to stay relatively narrow as new transportation capacity between these market hubs comes online this year, including our new Sterling III Pipeline.

Now let's take a look at our NGL pricing assumption. We updated our 2013 equity NGL composite price assumption for the Natural Gas Gathering and Processing segment to $0.66 per gallon and, in our case, is weighted more to a Conway basis due to contractual commitments. To be clear, this price is at the market hubs before transportation and fractionation fee deductions.

For comparative reasons the $0.66 is calculated on a full ethane recovery basis. Assuming reduced ethane recovery in 2013, our realized NGL composite price is expected to be closer to $0.85 per gallon. The updated price assumptions for 2013 ethane at Conway are in the low $0.20 per gallon range and for propane about $0.90 per gallon.

During 2014 and 2015 our equity NGL composite price will be primarily on a Mont Belvieu basis and will range from the upper $0.80s to low $0.90 per gallon. The change to Mont Belvieu pricing reflects the expected completion of our Sterling III Pipeline in late 2013, providing more access to Mont Belvieu market. In 2014 and 2015 Mont Belvieu ethane prices are assumed in the mid to upper $0.40 per gallon range and propane prices are assumed in the $1.10 to $1.20 per gallon range.

Additionally, we assume crude oil prices for WTI to average $88, $100, and $102 per barrel for 2013, 2014, and 2015, respectively. Natural gas on the NYMEX is assumed to be $3.75, $3.80, and $4.20 per in Mmbtu for 2013, 2014, and 2015, respectively.

Because of NGL supply and demand, a number of market responses have been in play to take advantage of the attractive ethane and propane value. For propane in the near term, demand is being created by new export terminals coming on line -- one in a few weeks and another this summer. This should create price strength for propane and allow ethane prices to strengthen as well.

Propane heating demand has been stronger compared with last winter since this winter has been somewhat more normal than last year. And, more importantly, with the abundant supply of NGLs expected for many years to come at very competitive prices, North American petrochemical companies are in an extremely favorable competitive position around the globe for their product.

This abundant NGL supply and its price advantage over oil-based feedstocks is driving a significant increase in long-term petchem demand for NGLs. With the announced expansions and newbuilds of ethane crackers, ethane demand is expected to increase by more than 700,000 barrels per day by 2016 to 2017.

As NGL growth continues at a rapid pace we expect the ethane market to be oversupplied through 2013 with widespread and prolonged ethane rejection. We expect natural gas processors to resume full ethane recoveries during most of 2014 and 2015 with intermittent periods of ethane rejection. Now as we move through 2016 into 2017 we anticipate an undersupplied position as ethane demand will increase when these cracker expansions and new world-class petrochemical facilities are completed.

While growing NGL production has moved ahead of end-use demand in the near term, our strategically unique fee-based and fully integrated midstream assets remain well positioned in basins with abundant and growing supplies of natural gas and NGLs. Over the long term our opportunities for growth remain strong as our customers demand more of our essential services.

Our NGL business remains in an attractive position, even in a prolonged low ethane recovery environment, as our systems are readily able to accommodate the expected NGL volume growth should the markets desire more of a lower ethane, higher propane plus blend.

Although we revised our 2013 earnings guidance and three-year outlook, we remain confident in our ability to continue delivering value to our shareholders and unitholders with our current assets in operation, the assets we are building, and our backlog of viable projects.

John, that concludes my remarks.

Thank you, Terry. Before we take your questions I would like to provide at this time some additional comments regarding our future growth. The assets that we have built and are building increased our ability to add volumes to our system. And it's our volumes, our natural gas and natural gas liquids, that enable us to collect a fee when we gather, process, fractionate, store, and transport these volumes for our producers, our processors, and our customers.

While there has been a lot of attention on the contraction of NGL differentials between the Mid-Continent and the Gulf Coast market centers and short-term ethane price softness, our business model is based on collecting a fee for the service we provide on the volumes we touch. So while in the past our assets have enabled us to benefit from the wider differentials experienced early in 2012 and in late 2011, our long-term strategy remains to convert optimization capacity to fee-for-service business.

A significant portion of the volumes we are adding to our systems deliver fee-based earnings. And even in an environment of lower commodity price and narrow NGL differentials, we can continue to generate stable and sustainable earnings by providing nondiscretionary services to our customers. These services will provide us, and our customers, producers, and investors, with sustainable earnings over the longer term regardless of short-term moves and differentials in prices.

The incremental earnings from our projects, both past and present, will continue to give us the opportunity to grow our earnings at ONEOK and ONEOK Partners over the next three years, increase distributions to ONEOK Partner unitholders this year and beyond, and increase the ONEOK dividend by 55% to 65% between now and 2015.

While internal growth may not be as exciting or as headline grabbing as an acquisition, our internal growth opportunities provide investors with far better returns today than if we were to buy earnings at today's prices. And we are not done. As you have heard, our internal growth backlog is in excess of $2 billion, providing us with more earnings growth potential in the future.

Of course, before we take our questions, most importantly I would like to express my thanks to our more than 4,800 employees whose dedication and commitment allow us to operate our assets safely, reliably, and environmentally responsibly every day and create exceptional value for our investors and our customers. Our entire management team appreciates their efforts to make our company successful.

At this time we are now ready to take your questions.

(Operator Instructions) Chris Sighinolfi, UBS.

Good morning. John, just curious, following on your last comments around moving towards fee-for-service business, it was stated in last night's release that you are experiencing less favorable contract terms associated with the Williston Basin volume growth. Just wondering what you meant by that.

Is it worse than what you were expecting, or as it sort of interfaces with the rest of your business is it just lower than what was there to begin with? Can you just give more color on that?

It is a term that we have used consistently in our Qs, our Ks, and our previous press releases. It drew a bit more attention than it probably deserves at this point in time because we are reducing 2013 and everyone is trying to understand why. But the basic is as we renegotiate expiring contracts and extract for new we are having to revise those terms to meet current market conditions, and those are less favorable than perhaps either we thought they would be or they have been in the past.

Okay. So tied to the incremental growth that you have planned in that basin it doesn't change your forecast for what you plan to spend versus what the returns on those projects are?

That is correct.

Okay, thanks for that. Switching quickly, I was just curious from Terry, with a $0.19 spread I think the optimization was estimated to comprise about 15% of the margin for the NGL segment in 2013. I am just curious, at $0.05 what the rough figure, if you have one, is on your expectation.

Well, it is going to be much less than 10%.

Okay. And I guess finally, John, you have been able to grow the dividend very strongly within the framework of a targeted payout ratio of 60% to 70%, with a lot of peers are sort of increasingly looking towards cash flow coverage as a guiding post for dividend policy. I am curious, given that, if there has been any internal discussion with you and the Board as to maybe longer term how to approach dividend growth.

There has been discussion at the Board about that and we will continue, as we have indicated here, along our current practice. But, yes, there has been discussion.

Okay. I will hop back in the queue. Thanks, guys.

Thank you.

Steve Maresca, Morgan Stanley.

Good morning, everybody, and thanks for taking my question.

First, if you could talk, John or others, on your latest thoughts on oil project opportunities. How aggressive do you plan on being in that area in light of the Bakken cancellation? Can you go back to the drawing board with a different project in that region? Leave it at that.

All right, I will take that one. Of course, we were disappointed to postpone, but we all know the reasons why. Since that time if you look -- and in particular you have written a lot about the fact that producers are putting more and more of their crude on rail as opposed to long-haul pipelines. There also has been a recent announcement of utilizing existing pipeline to move crude from the producing region to the consuming region, and that always is a smart use of capital dollars.

So when you look at those it doesn't appear that the market is screaming quite as loudly for the Bakken NGL Pipeline as it once was. But, to your other point or question, we are able to quickly knock off the dust, so to speak, and get engaged if the market needs that pipeline or one similar to it.

If you were to focus on oil, would it be in that region or are there other areas that you would look at oil opportunities?

Would look at other areas, but obviously where we feel we have a competitive advantage. And it is clear that we have a competitive advantage in the Bakken and Williston and that area, as opposed to, say, in the Eagle Ford. But we have an effort within our organization focused on looking for crude oil opportunities.

Okay. My one follow up on a different topic, and I don't want to beat this horse because you have a lot of projected dividend growth, but you have a lot of extra cash flow per share at OKE and you actually raised the cash flow guidance in 2013 a little bit. I know it was due to bonus depreciation.

But is there any particular reason you don't feel comfortable keeping that OKE dividend growth given what I think is a substantial cushion you have there to support it? Are you worried at all about that being a drag on share price, meaning lowering that dividend growth to shareholders?

Well, I am concerned. I think there are other things that we in the past have chosen to do with our cash. For example, we have used our cash at ONEOK to buy more equity in ONEOK Partners; that has been an awfully good investment for us. We have purchased shares.

We will continue -- we want the flexibility to continue to do as we have in the past. I think as we look, and Derek made mention of this, forward we do lose some benefit associated with bonus depreciation. As I read, we are prescribed to be or thought to be very conservative. I look at it as much more long-term focused than I do momentarily conservative. But we just want to make sure we have the flexibility to do the things that we see opportunities to execute.

To answer you -- I'm more than happy to keep going if I haven't answered your question.

No, I think you have. We can touch base offline. Thanks a lot. I will get back in the queue.

You probably got -- there is probably many others that have the same question.

Carl Kirst, BMO Capital Markets.

Sorry, John, I am laughing because that was my same question. Maybe just to paraphrase or perhaps just to make clear, we may say conservative; you say long-term focused. But it is not a -- it is from a prudency standpoint. It is not from a, perhaps, skewing of the bias down to fundamentals, perhaps, deteriorating from here rather than improving.

We don't want to misread this into essentially thinking that maybe you guys have a more negative outlook on the industry than we otherwise should.

Yes, that is -- no. I said yes and no; let me be clear, we do not have that view. We are very optimistic.

We look at continuing at the $0.03 level going forward. We made a judgment of that relative to what we see in 2013 through 2015 and felt like it was prudent for us to come back to 2012. Particularly given the fact that we have reduced our distribution at ONEOK Partners so we will have a little bit less cash coming over from ONEOK Partners to ONEOK.

So all those things -- although maybe perhaps not everyone agrees with them, they do tie together and I think make good economic sense.

Fair enough. Then if I could just ask a clarification on, Terry, you made a mention of, and appreciate the better framework for, the $0.66 NGL assumption for 2013 about ethane prices being in the low $0.20s. And, I'm sorry, did you say propane at Conway at $0.90?

That is correct.

Okay. So it was essentially not too far away from what we have seen year-to-date?

That is correct, you are in the range.

Okay, fair enough. Then, lastly, if I could, just on ONEOK Partners gathering and processing. Just noting that the gathering volumes, the fee-based gathering volumes were a little bit lighter in the fourth quarter than we were expecting.

By the same token it looks like you bumped up the growth rate in 2013 to kind of account for a little bit lighter. And I didn't know, was there something that happened in November and December that caused the growth rate not to be quite as robust or is it just kind a generic activity of well hookups? And is it possible to actually give us what the current run rate is?

As far as the volumes go, we are in the midst of a pretty significant weather trend that started in about November and December of last year. So we were impacted pretty significantly by that. So what you are seeing there in the fourth quarter is certainly an impact -- is an impact from that. And your last question was about (multiple speakers).

I didn't know if you could give us a run rate for where those gathering and processing volumes stood today if possible?

Well, we are running about -- in the range of about 250 million a day in the three processing plants that are currently operating there. But certainly as we bring on a new plant, the State Line II plant, we will be ramping up those volumes, as I mentioned in my comments.

Okay, thank you.

One of the things we have to remember is those assets up north are up north. It's like running an operation in Canada. And, of course, for those of you that are watching the weather channel, we are experiencing some severe and heavy snow in western Oklahoma which undoubtedly will impact our processing plants and pipelines. But we will report on that when we talk to you about first quarter.

Okay, all right, thank you.

(Operator Instructions) Ted Durbin, Goldman Sachs.

Thanks. I wanted to just ask about your commodity mix. I think you had previously said your margin composition at OKS would be about 65% fee based. With the new guidance here, sort of what component of your margin do you see as fee based now?

Ted, you are going to be in about the 80% range, roughly.

Okay, and as you (multiple speakers) yes, sir?

Ted, about 70% is where you are going to be.

70%.

Sorry.

Got it. That is okay. Then as we think about on a three-year forward basis, you have taken the Bakken pipeline, the oil pipeline, out. You have added some gathering and processing.

Do you see that mix staying in that 70% range, or maybe it gets a little bit more commodity heavy as you have this growth in NGL prices? How are you seeing that over the three-year view?

As we bring on the NGL projects those are all fee-based projects so they will be pushing up -- it will be pushing up our percentage of fee-based margin as we go forward.

Okay. Thanks, Terry. Just on the macro, you talked about how much ethane rejection; you think it might be more than 175,000 a day. I guess I am just curious; if there is that much ethane that is still waiting to come in, what gives you confidence that we will turnaround in 2014 and not still be in sort of ethane rejection mode? Or at least still have pressure on prices?

Ted, I think the key driver in all this is strong ethane demand. I mean the petrochemicals; I mean their consumption is pushing 1 million barrels a day and we are expecting it to go even higher.

Once we get this ethane inventory overhang worked off, which we expect to happen in 2013, then we should be in the clear as we move into 2014 and 2015. Of course, we will have some periods of ethane rejection. But we are really confident just from what we are seeing, and as I indicated in my comments, we think the ethane rejection is happening at a significantly greater level just as evidenced by the ethane rejection we are experiencing on our own systems.

But we really think this thing will get worked off this year. Many of the experts and those in the industry believe the same thing, and by 2014 we should be in pretty good shape as well as we move into 2015. Hopefully, we will get to 2016 and 2017 and be in really good shape.

Great. Then the last one for me is just you mentioned the credit metrics as being in sort of descending investment grade as being a reason for the lower dividends and distribution growth. I guess I am wondering if you can quantify those metrics that you are targeting, whether it is at OKS or OKE; how you think about that mix of maybe getting a little bit more of fee based and the ability to run a little bit more leverage.

Well, we are talking about both equity, both credit ratings. We stay in contact with the rating agencies. We listen to what they say and others to guide our decisions.

As you know, there is no specific formula for what we are trying to accomplish other than maintain that 50% level. Is there anything you would like to add?

The only thing I would add to that is a debt-to-EBITDA ratio we have said before keeping that around 4 times or less.

Okay, that is great. That is it. That is very helpful, thank you.

Timm Schneider, Citigroup.

Most of my questions have actually been answered, just one quick one. What is driving the lower CapEx number in the NGL segments, if I look at old guidance versus new?

The Bakken crude pipeline was in those numbers and is now out, so that is the bulk of it.

Okay, got it. Then, if you can, what are you guys assuming for some of the heavier end of the barrel, the butanes and the nat gasolines, in 2013?

You are going to be somewhere in that $1.40, $1.50 range on (multiple speakers). On C5s you could be pushing $2.

Okay, got it. That is it for me, thank you.

Helen Ryoo, Barclays.

Good morning. I will just start with a clarification question on your NGL price assumption for this year. Did you say that that was before T&F and that was mostly based on Conway exposure?

That is correct, Helen.

Okay. Then what is your NGL equity barrel mix, assuming full recovery of ethane? Is ethane much higher than 50% level?

No, you are going to be somewhere in the neighborhood of 45% to 50%. It is going to be pretty typical for the industry; 45% to 50% range is going to get you there. Propane, Helen, you will probably be in that 30%, 35%.

Okay. So the assumption of $0.66 before T&F, are you assuming price to get lower from the current level? How should I compare that number to what the current Conway price is?

We are actually on ethane in our assumption and ethane prices are probably a bit lower than what we are actually seeing today. Propane prices in our assumption are a bit higher, just slightly higher. I mean you are in the range, so it makes sense if you compare it to today's spot postings and look at the forward curve it makes sense.

Okay, got it. Then just one quick follow up on a different topic. Your interest expense guidance, does that assume some of your high-cost bonds being called or tendered this year?

No, it does not.

Okay, great. Thank you very much.

John Edwards, Credit Suisse.

Thanks for all the helpful comments on the NGL market. I just had a follow up to Ted's questions there. Just looking out I think you said about a 700,000 barrel a day increase in ethane. I didn't catch through what timeframe. Was that 2015, 2016? I didn't catch.

2016 to 2017.

Okay, all right, that is helpful. Then I think you made the comment that you are expecting, I guess, things to swing into possibly short supply then. What I guess I'm having trouble figuring out is, if that is the case, how some of the petchems would invest in steam crackers without secure supply. So I'm trying to figure out are you really thinking the market is relatively balanced, or are you really thinking it will be short?

Well, I think that is a great question. I think that the petrochemical companies recognize that as we map this thing out and look over at this time frame that we could very well be in short supply. I don't think they truly believe that or they wouldn't be making these investments.

They have a lot of confidence in the development, in the midstream developing that is happening upstream. They have got a lot of confidence in the shale plays. They are actively engaged with midstream companies, talking about all the drilling and the development that is going on. So I think they really do, though, have a lot of confidence.

But as you look at the curves today, we could very well be in short supply, but I strongly do not believe that is what they think.

Okay. Then I guess last question along those lines is what kind of increase -- you were speaking about increase in consumption I guess this year being up 15% to 20% in consumption. What are you thinking, I guess, 2014, 2015, 2016 timeframe?

I guess you are talking about consumption of --

Of ethane, consumption of ethane.

Yes. When you look at the 2014 to 2015 timeframe we are going to be in about that 1.3 million to 1.4 million barrels per day range. There is actually a chart that we produced that would show that to you.

So we will see it ramping up from the 1 million barrels a day pretty quickly over the 2013. As we move into 2014/2015 we will be in that, like I say, 1.3 million barrels a day range or so.

Okay, great. That is very helpful. Thank you very much.

You bet.

Craig Shere, Tuohy Brothers.

I want to come back to the distribution question, but kind of think about it more longer term. If I am looking at this correct, shaving I think it was something like 1.5 point off the CAGR on EBITDA growth through 2015 results in a much lower or a modest EBITDA reduction. Maybe $60 million or so.

But the distribution guidance seems much greater relative to the EBITDA adjustment and it seems like that is driving a potential extremely conservative distribution coverage ratio into 2014, 2015. Am I thinking about that wrong? And as you have these fee-based projects coming online is there any reason you would want to be going above your targeted cap of 1.15 times coverage in outer years?

As we move more heavily weighted toward the fee-based arrangements we will be more comfortable moving towards the 1.15; stay within that 1.05 to 1.15, but clearly we have been above that in the past. I believe in the 2014 and 2015 we are above that as well. I guess you are thinking about it correctly.

Okay. So it sounds like, without even any change in guidance, if your comfort level is that your expectations will not be worse than what you have laid out that just on current guidance you could probably look at juicing the distribution growth rate as far as 2015.

Well, as we typically do, we will look at that the quarter before, but not now for 2015. I mean the message is clear that, in particular our exposure to NGL barrels, ethane rejection is taking volume off of our system. And that volume, as I mentioned earlier, has dollars associated with it.

We know we are not going to have as many dollars as we thought we would in 2013, primarily because of this prolonged expected ethane rejection, which is far longer than any of us with any industry experience would anticipate or did anticipate. Our view is that we spend most of the year at this level.

Do we have perfect knowledge? Of course not, and if those volumes come back on to our system, ethane rejection in other words, is not as long as we anticipated then you may rest assured that we will look at our distribution at ONEOK Partners as well as our dividend at ONEOK Inc. But we will also be looking at that while at the same time we look at our credit rating and those other metrics that we discussed earlier.

Great, that is good color. In addition, if I could revisit the cash at OKE level. You mentioned that you have, obviously, historically used kind of one-time annual free cash flow to buy back shares and for other things besides committing to long-term dividend growth that may not be there in the outer years. Trying to be a little more conservative.

If my math is correct, you are now guiding $215 million of free cash flow for 2013. Up about $50 million because of the tax benefits, and you have still got $300 million on your share repurchase program that expires this year. Is it fair to say that that dovetails very well, and with the weakness today in the shares that that is an active consideration?

As I mentioned earlier about what we have done historically with our cash in the past that increasing the dividend is certainly one of the things we have done and we obviously are going to continue to do. Investment in ONEOK Partners; we have bought back shares. We still have, as you point out, the ability to buy back more.

So, yes, we have all of those available to us and, as indicated earlier, we want to retain the flexibility to do those things that we think make good economic sense for the Company, its shareholders, and unitholders.

Fair enough. Last question, it is probably for Terri. The re-contracting that you were talking about, did that relate to the condensate keep-whole volumes being down so much from third quarter and year over year?

No, it did not.

What was driving that, if I could ask?

It is just the growth in the POP business and it's -- we are ending up with keep-wholes around 3%, down from like 6%. So it is just growth in the other contract is what is driving those numbers.

But if it is not -- the keep-whole volumes aren't stable against a growing pie because the total volumes were down.

Well, I think it is just fair to say that the keep-wholes are not material is probably the best way to look at it for gathering and processing in our company.

Less than 5%.

So you may not want to spend a lot of time on that one.

Okay, fair enough. Thank you, gentlemen.

Michael Blum, Wells Fargo.

Thank you. First question just as you have all this new processing capacity coming online over the next couple of years, once that is all built out what does your contract mix look like? Does it change much in terms of POP versus keep-whole versus fee?

It will actually increase. If you are looking at just the G&P segment, as we bring on these new plants in the Bakken we will become more commodity price sensitive. So I can't remember what the percentage maxes out, at least in the 2015 timeframe.

But it is not a huge increase, but it will go up slightly as you look at just the G&P segment. But you got to remember much of that at the partnership level gets offset because in our NGL segment all of our growth projects are fee based.

Got it, okay. Then in terms of your new forecast or assumptions for the Conway to Mont Belvieu spread, have you changed your fundamental view of what that spread will look like? I think historically your view was, and correct me if I am wrong, that it would move ultimately to effectively the transport costs.

But it seems like you're, at least for 2013, expecting that to be even tighter than that. I'm just trying to reconcile those.

Mike, you just got to understand there are more products than just ethane and we are giving you this $0.05 to $0.06 ethane forward view. But there are other products that will be optimized that could be above that. So when you look at the overall average barrel, which we don't advertise that number for competitive reasons, you could be more in that cost to build range.

So our view really hasn't changed. We expect these spreads to narrow. We have got an unusual situation with very high ethane inventories and this heavy rejection that is happening has really brought these spreads in. But our long-term view is that the spreads would narrow because of the capacity that others and ourselves are bringing online over the course of the next couple years.

Does that help you?

Yes, it does. Then last quick question for me. In the release you have a table that shows the percent of NGLs you have hedged for 2013 at 45%. I am assuming, based on the price that you show there, that there is no ethane that is hedged today in that. I was wondering if there is also any propane in that number, or if it is just all just heavier than that.

That is correct. There is little to no ethane in that number and there is some propane. And then heavier.

Thank you very much.

Thank you, Michael.

Thank you for joining us, everybody. For ONEOK Partners unitholders K-1s are now available online and will be mailed out by tomorrow, Wednesday, February 27.

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 April 30. Followed by our conference call at 11 a.m. Eastern, 10 a.m. Central on May 1. We will provide details on the conference call at a later date.

(inaudible) and I will be available throughout the day to answer your follow-up questions. Thank you for joining us and have a good day.

Again, ladies and gentlemen, that does conclude today's conference. We thank you for your participation; have a great day.