歐尼克 (OKE) 2014 Q1 法說會逐字稿

Good day and welcome to the first-quarter 2014 ONEOK and ONEOK Partners earnings call.

Today's conference is being recorded.

At this time, I would hike to turn the conference over to T.D. Eureste. Please go ahead.

Thank you, and welcome to ONEOK and ONEOK Partners first-quarter 2014 earnings conference call.

A reminder that statements made during this call that might include ONEOK or ONEOK Partners expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor Provisions of the Security Acts of 1933 and 1934. 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.

Starting our earnings conference call is Terry Spencer, President and CEO of ONEOK and ONEOK Partners. Terry?

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

Joining me on the conference call today is Derek Reiners, our Chief Financial Officer, who will review our financial results. Also with me and available to answer your questions are Rob Martinovich, our Executive Vice President of Commercial; Sheridan Swords, our Senior Vice President of Natural Gas Liquids; and Wes Christensen, our Senior Vice President of Operations.

On this morning's call, we will review our first-quarter 2014 financial and operating results. We'll discuss the repositioning of ONEOK as a pure play general partner. We'll discuss our increased project backlog and bring you up-to-date on our completed capital growth projects, and then we'll review the NGL markets.

Let's start with our first-quarter performance. ONEOK's income from continuing operations attributable to ONEOK was up more than 60% and reflects higher operating results at ONEOK Partners from higher natural gas volumes gathered, processed and sold; wider natural gas liquids location and product price differentials, primarily related to increased seasonal demand for NGLs; and higher natural gas transportation and storage revenues, due to increased park and loan services, due to strong seasonal demand for natural gas in the Midwest.

Today, we are re-affirming our 2014 financial guidance, both at ONEOK and ONEOK Partners, but as is our practice, we will continue to review our expected performance as the year progresses and make any adjustments as appropriate. We also expect our natural gas liquids volumes to continue to increase during the year. I'll provide more color on that in a few minutes.

This is our first quarter during which ONEOK operated as a pure play general partner. Our primary purpose now is to provide the management and resources to ONEOK Partners to execute on its growth strategies so that the partnership can increase its distributions to unit holders, including ONEOK, enabling ONEOK to maximize its dividend payout to shareholders.

In April, the board approved a 40% increase, clearly demonstrating our commitment to payout the majority of our cash in the form of dividends. We plan additional dividends increases in 2014, and expect an average dividend increase of 20% to 25% between 2013 and 2016.

Derek now will review ONEOK Partners -- ONEOK and ONEOK Partners' financial highlights, including the one-time expenses and charges that we mentioned in our news release. And then I'll review our operating performance. Derek?

Thanks, Terry, and good morning.

First-quarter of 2014 net income attributable to ONEOK was approximately $94 million, or $0.45 per diluted share. Both the former natural gas distribution and energy services segments have been re-classified as discontinued operations for all periods presented. Income from continuing operations attributable to ONEOK was approximately $92 million, or $0.44 per diluted share, compared with first-quarter 2013 income from continuing operations of approximately $57 million, or $0.27 per diluted share.

First-quarter 2014 net income was affected by onetime items reflected in continuing operations and discontinued operations related to the separation of One Gas, and the wind down of the energy services segments as follows. Income from continuing operations includes net one-time benefits of $4 million, or $0.02 per diluted share, which includes a net increase in deferred income tax expense of $26 million, or $0.13 per diluted share, associated primarily with the reduction in ONEOK's estimated effective state income tax rate, and an after-tax expense of $22 million, or $0.11 per diluted share, as a result of the early retirement of debt.

Income from discontinued operations includes net one-time benefits of $2 million, or $0.01 per diluted share, which includes $48 million of operating income from the former natural gas distribution segment in January, $15 million operating loss from energy services segment, $22 million in costs associated with the One Gas separation, and $9 million in other expenses, primarily interest in income taxes.

As a reminder, our 2014 guidance assumed a January 1, 2014, effective date for the separation of the natural gas distribution segment into One Gas versus the actual January 31 date. We received approximately $61 million of cash flow from that segment in January, and funded One Gas with $60 million on January 31st, so the impact of the later separation date on our guidance for cash flow available for dividends was insignificant.

In the first quarter 2014, ONEOK received $141 million in distributions from ONEOK Partners, an 8% increase over the first quarter of 2013. First-quarter 2014 cash flow available for dividends was $211 million, providing 1.82 times coverage.

ONEOK increased its quarterly 2014 dividend $0.16 per share to $0.56 per share, effective for the first quarter 2014, resulting in an annual -- an annualized cash dividend of $2.24 per share. During the first quarter, we deleveraged our balance sheet and reduced our credit facility to $300 million, supporting our pure play general partner strategy. We used a onetime cash payment of approximately $1.13 billion received from One Gas in January to repay $600 million of commercial paper borrowings and repay early $552 million of senior notes. We do not anticipate any short-term borrowings going forward, and now have $1.1 billion of long-term debt with the next scheduled maturity in 2022.

And a clarification in our news release, a word was inadvertently dropped from the initial release in one paragraph regarding our 2014 dividend guidance. Our dividend declared in April of $0.56 per share represented a 40% increase, rather than a $0.40 increase.

Now, let's move onto ONEOK Partners. ONEOK Partners first-quarter net income was approximately $265 million, or $0.81 per unit, compared with $157 million, or $0.42 per unit, in the first quarter of 2013. In the first quarter, distributable cash flow was $298 million, a 54% increase compared with the previous period, resulting in a coverage ratio of 1.28 times for the quarter. We increased our first-quarter 2014 distribution to $0.745 cents per unit, an increase of 4% from our first-quarter 2013 distribution of $0.715 per unit.

In the news release we provided some updates on our hedges, as we continue to hedge commodity risk when appropriate. At the end of the first quarter, the Partnership had $115 million in cash and cash equivalents, $125 million of commercial out -- commercial paper outstanding, and no borrowings outstanding on our credit facility, a long-term debt-to-capitalization ratio of 55%, and a debt-to-adjusted EBITDA ratio of 3.7 times.

During the quarter, we issued $57 million, or 1.1 million common units, through our at-the-market equity program, compared to 680,000 common units issued all of last year. We expect to continue to utilize this program to manage our equity issuances over time. We have ample liquidity to support the Partnership's ongoing capital growth program, including access to nearly $1.6 billion under our credit facility as of March 31st.

Terry, that concludes my remarks.

Thank you, Derek. At ONEOK Partners, the natural gas gathering and processing segment's first-quarter operating income was up 78%, due to higher natural gas volumes gathered, processed and sold, and higher natural gas liquids volumes sold as a result of recently completed capital growth projects and higher realized natural gas liquid prices. The segment continues to grow natural gas volumes in the Williston and add well connections.

Growth volume in the first quarter 2014, compared with the fourth quarter 2013, did increase slightly. However, natural gas volumes were affected by well freeze offs across our system, due to severe cold weather. We have already seen a significant ramp up in natural gas volumes across our system as the weather has improved since February.

Our 2014 natural gas gathered and processed volume growth is heavily weighted toward the second half of 2014. As you know, we proactively hedged to mitigate our commodity exposure, created by our percent of proceeds contracts. Since we were approximately 70% hedged in the first quarter 2014, prices were of less of a factor. The natural gas liquids segment's first-quarter�s results were 65% higher, due to significantly wider natural gas liquids location price differentials, related primarily to weather-related increased seasonal demand for propane.

Midwest propane demand increased in the first quarter 2014, due to much colder than normal temperatures, and propane demand and prices were higher at the mid-continent market center in Conway, Kansas, than they were in the Gulf Coast market center in Mont Belvieu, Texas. We were able to benefit from these market conditions because of the operational flexibility of our integrated assets, which enabled us to quickly respond to the needs of our customers.

The severe cold weather temporarily affected our natural gas liquid supply deliveries into our systems. Natural gas liquids volumes gathered and fractionated were sequentially down for a second consecutive quarter as a result of severely cold weather and the termination of a contract. While our natural gas liquids volumes were down sequentially, our fee-based exchange services revenue has increased each year as our customers secure more capacity under long-term, firm contracts.

As I mentioned earlier, our natural gas liquids volume guidance is weighted more toward the second half of the year. We expect natural gas liquids volumes to increase during the remainder of the year, as weather-related conditions continue to improve along with the continued ramp up of previously connected natural gas processing plants. Also, 5 of the 10 connections to new processing plants we planned for 2014 have been completed through April, with the balance occurring between now and the end of the year.

The natural gas pipeline segments first-quarter 2014 results were significantly higher, up 53% due to increased rates and park and loan services as a result of strong weather-related seasonal demand. This level of park and loan activity was driven by strong Midwest weather-related demand and clearly demonstrates the value of our market connected natural gas pipeline assets, particularly during periods of peak demand.

These assets primarily serve on-system customers such as local natural gas distribution companies, electric generation facilities, and large industrial customers -- or consumers, that is, that require natural gas to operate their business. In general, ONEOK Partners natural gas pipeline customers need natural gas supply to run their businesses, regardless of location price differentials.

As oil and liquids rich natural gas development continues within our core areas, the need for midstream infrastructure grows. We are increasing our unannounced capital project backlog estimate to a range of $3 billion to $4 billion from the previous range of $2 billion to $3 billion. This updated backlog does not include any potential acquisitions or the multi-billion dollar crude oil pipeline project that we continue to discuss with producers in the Williston basin. The backlog represents more of the same type of midstream projects that we continue to successfully develop and execute.

This capital backlog reflects our continued commitment to serve our customer's needs in the mid-continent, Midwest, and Gulf Coast regions and, in particular, the Williston and Powder River basins, where the majority of this incremental capital increase is targeted and where producers continue to successfully develop acreage positions within our asset footprint. As we've said previously, once we receive sufficient contractual commitments, we will announce these projects.

Now, an update on our announced capital growth program, in March, we completed approximately $1 billion of capital growth projects on top of the almost $4 billion in previously completed projects and acquisitions since 2010. The recently completed projects include the 550-mile Sterling III NGL pipeline that has the ability to transport up to 193,000 barrels per day of either unfractionated NGLs or NGL purity products from the mid-continent to the Texas Gulf Coast; the Canadian Valley plant, a 200 million cubic feet-per-day natural gas processing facility in the Cana Woodford shale of Oklahoma; and the Mount Belvieu ethane propane splitter, a 40,000-barrel per day deethanizer. All of these completed projects will contribute to earnings during the remainder of 2014.

Now, a brief review of our outlook on the NGL markets. We still believe that ethane rejection by natural gas processing plants connected to our natural gas liquid system will continue through at least 2016, after which new worldscale ethylene production capacity is expected to begin coming on line. We believe the propane location price differentials between Conway and Mount Belvieu will continue to widen as Midwest inventories have been increasing more rapidly than Gulf Coast inventories.

Current Midwest inventories are down 9% compared with last year and 11% lower than the five-year average, while current Gulf Coast inventories are down 36% compared with last year and 14% below the five-year average. The industry has experienced deep ethane rejection since late 2012 and has experienced some market distribution due to the extreme weather conditions. Our integrated assets have performed well in these extreme conditions, further demonstrating their value.

In closing, I'd like to thank the employees of the new ONEOK, whose skills, experience, commitment and dedication allow us to operate our assets safely, reliably and environmentally responsibly every day and create exceptional value for our investors and customers. Our Management team and Board appreciate their hard work and commitment to make our Company successful.

Operator, we're now ready for questions.

Thank you, sir.

(Operator Instructions)

We'll take our first question from Ethan Bellamy with Baird.

Hey guys, good morning. Congrats on the good quarter. Do you guys want to be in the ethane export business?

Well, Ethan, we do. For us, it's still a bit early. We obviously have been listening to Enterprise's project updates with respect to ethane exports. We've always been supportive of it. We've always believed that ethane exports in this industry will happen.

The right time for us will be a function of our relationships with customers, developing international markets. It's still a bit early for us. Certainly, it's something that we're, that we consider along with other export opportunities, particularly as it relates to propane and LPGs.

Okay.

I guess the short answer is yes.

Okay. With respect, something a little bit more granular. With respect to potential incremental restrictions on gas slurring in the Bakken-Williston. Is that a risk or an opportunity for you guys, and is it changing your strategy at all there, or are you just pedal to the metal in terms of construction activity?

Well, the flaring certainly creates a very high sense of urgency from our producers, and that in and of itself creates the opportunity. We are absolutely committed to reducing the flaring, building the infrastructure necessary to allow these producers to not only reduce their impact to the environment, but also enhance their sales revenue. So certainly as the flaring continues in the Bakken, it is clearly creating opportunity for us.

A little bit -- Sorry, go ahead.

Yes. Ethan, let me just make one comment going back to the ethane question, which I think was a great question. With respect to ethane exports, our role does not necessarily have to be operating or managing export docks, okay? Our role could be on the upstream side, and most likely will be on the upstream side, providing that infrastructure, transportation infrastructure, storage and fractionation infrastructure necessary to get that ethane to those facilities. So I just wanted to add that comment.

Okay. Thanks. And then from a perspective of OKE tax rate, can you give us any guidance over long term what we should expect there, current thinking?

Sure, Ethan. I think what we've guided there is 15% to 25% cash tax rate. As we look at 2014, we have a net operating loss that we would be working off, but we expect to pay cash taxes beginning in 2015. Of course, that's all subject to any legislation that may come down, particularly as it relates to bonus depreciation.

Could you elaborate a little bit on that? I just want to make sure I understand that.

Sure. If bonus depreciation were enacted for 2014, say, then that would generate additional deductions for the unit holders. ONEOK, of course, being a large unit holder, and so that would provide those additional deductions, would push out further the cash taxes that we'd have to pay.

Can you quantify that? Is that low end of that range, or --

No. I really can't. We've provided that 15% to 25%. It's a fairly difficult number to get to as you think about the timing of projects coming on, and capital spend and that sort of thing. That, all those things influence the depreciation deduction to the unit holder, so I think we'll stick with that 15% to 25%.

All right. Thank you.

Our next question comes from Carl Kirst with BMO Capital.

Thanks. Good morning, everybody. Terry, can we get a little more color, if possible, on the sequential drop in the NGL volumes? I guess what I'm trying to get at is how much of the impact came from the contract termination versus perhaps the well freeze off? Was that contract termination something that you had envisioned in the 2014 guidance? Do you still think the numbers that perhaps we discussed in December are still feasible to get to for the year?

Well, first of all, the impact from weather as it relates to the natural gas liquids business is about 5% to 10%, roughly. The, contract that we referenced, the termination of the contract, we're not going to talk and provide any details. We typically don't, as it relates to our relationships with our -- contractual relationships with our customers, so I can't comment on that. What I can tell you about that contract is that it was a sizable contract, and that it was one of our very thin, thin margin arrangements. It was, I would say, out of the market, so that was the reason why that contract was terminated. As far as the last, I think --

Just as far as being able to still make the guidance as far as the NGLs fractionated, gathered, et cetera, for the year?

Absolutely. We have a number of things going on in that segment, supplies from new process and plant connections. We've got the Sterling III Pipeline now. We're going to have nine months of that. We've got the impact from NGL supplies coming from our own affiliated processing plants. So we've got a lot of things, a lot of things happening, ramping up, back-end loading that financial performance. That's kind of how we fill that gap.

Understood. And maybe then last question, if I could, just shifting gears. Certainly nice to see the growth in the unannounced backlog. I didn't know really two things off of that. One is you see more projects going into the development, evaluation, perhaps even competitive bid phase. Do you see any changes in the returns, perhaps, as more competition has come into the Williston basin, for instance? So that's one question. And the second is, is there any sense of -- notwithstanding whenever shippers refine, but any sense of timing if we're looking at things that are possible over the next 12, 18 months or if these are much more back-end 2-, 3-year type of baking horizons?

Well, first of all, from an economic performance perspective, these projects, we're still seeing these things come in, in that 5 to 7 times, so we really don't -- because of the strength of our footprint, in particular in the Bakken, we haven't seen much pressure on the economics.

From a timing standpoint, it runs the whole gamut. I mean, we certainly -- the projects that are more infrastructure related. That is, projects that are gathering upstream of our processing facilities in the Bakken. Those projects are going to happen faster. That is well-connect type projects.

The ones that will be longer lead time will be processing plants, large trunk lines, compression facilities, that type of thing, will take more time. Infrastructure projects, like fractionators, will take longer time. Those -- certainly, the construction period for a fractionator is a couple years.

So maybe that gives you a sense. We've not been real specific on the timing of our growth, capital growth backlog, but hopefully that gives you a sense --

No, that's very helpful.

Of the timing.

Thank you, guys.

You bet.

Our next question comes from Jeremy Tonet with JPMorgan.

Good morning.

Hey, Jeremy.

Congrats on the strong quarter there. Question on the nat gas pipelines. Given the strength that you guys saw in the segment, and given the low levels of supply out there and storage, did you guys have an opportunity to lengthen out average contract duration on the pipes or on the storage? Did that -- did market conditions tightening up and helping you on that front?

Jeremy, this is Rob. With regards to our contract term, it's about, it's pretty similar to what we talked about last quarter, in that approximately 7- to 7.5-year time frame, so as renewals, obviously, as renewals come up, they've coming up all throughout the year. So you certainly had some come up in the first quarter, but it wasn't markedly different, because at the end of the day, as we stated in the release and as Terry did, we don't see this as sustainable and people recognize that.

Got you. Okay. And then just going back to the unannounced project backlog, I was wondering if you might be able to provide a little bit of color as far as which segments might be seeing more of this backlog increase? And also, could this potentially include LPG exports or just any updated thoughts on that?

Sure. I guess, Jeremy, with regards to the incremental, where Terry kind of focused in on was specifically in the Williston Basin and the Powder River Basin. That would be the gathering processing plants infrastructure and then appropriate connects from a standpoint of a liquid stand point.

But certainly as you broaden out that, and look at the overall kind of the $3 billion to $4 billion, excluding that incremental increase over the $2 billion to $3 billion, those are exactly the type of things that we're talking about that, from GNP but also get into the NGL functions with regards to fracs, pipelines, and certainly we're still evaluating export opportunities, both from the supply as well as facilities themselves.

Great. That's it for me. Thank you.

Our next question comes from Ted Durbin with Goldman Sachs.

Thanks. I just want to dig in a little bit more on this $73 million pick up in the optimization revenues here. And it looks like, you guys talk a little bit more about, it sounds like propane location differentials versus ethane, and then maybe come back to some of your comments around the differences and where we're seeing in storage for Gulf Coast versus mid-con and how that impacts -- how you're thinking about the optimization opportunity going forward?

Sheridan?

On the -- as we said, the $71 million relates a lot to propane. Just by using our infrastructure and everything we have, we're able to capture a portion of that Conway to Bellevue spread on some volume that helped us going forward. On the propane spread between Conway and Bellevue going forward, we do believe that as export demand continues to be strong and as we get -- as we're in the field season in Conway, that, that spread will widen out from where it is today. On the ethane side as more crackers -- more demand comes on this summer, with Geismar and La Porte coming on, that will also increase the demand in Bellevue for ethane, which will allow ethane spreads to widen as well.

I see. So you're thinking the spread, because we obviously had it reversed in the first quarter on propane, where Conway was higher, you're just thinking the Gulf Coast is going to be higher priced for both products? I'm just trying to -- making sure I understand.

Yes. We think --

Okay.

From here forward. Not from an average for the year, from here forward, that will be there and it will widen a little bit from where it is today.

Fair enough. I was going to ask about the -- any shifts that you're seeing, and coming back to the question on flaring, on the contracts that you're going to sign in the Williston here for potential new processing plants, moving beyond maybe just acreage dedication, giving us some minimum volumes? Do you want to stick with sort of the POP contracts? Would you rather do some more fee-based, given that you're probably going to see higher demand, I would imagine, from your producer customers?

Ted, we're going to stick with the current structure. I mean that's what the market wants. Those POP structures with a fee-based flavor to them are what's working for us, what has worked for us, and we expect will continue to work for us as we go into the future.

Okay. And then a last one for me. You've increased the backlog, it sounds like, for OKS, and then presumably that would then push through to higher cash flows and distributions, and then up to OK. I'm just wondering if we can talk about, as you look out to 2015 and 2016 and your dividend growth guidance, maybe just focusing on OK, you have 10%. Could we see that number notch higher that's we bring these projects in?

Yes. I mean, potentially you could. Certainly we -- as far as our dividend strategy is certainly to be in line with our peer group.

Got it. And then, sorry I did have one more if I could ask, just on the balance sheet for OKE. Any thoughts, updated thoughts, now that you've closed the One Gas spin in terms of where you want to target the leverage matrix? Do you want to be investment grade there?

Yes. Ted we'd sure like to be investment grade there. Of course, Moody's does have us there. S&P has got us a notch below. It's not critical to our strategy to be investment grade at OKE, but I think it would be nice to have a differentiator for us to be there. Our leverage is going to be sub-two times I think as you look out.

Okay. I'll leave it there. Thanks.

Our next question comes from Chris Sighinolfi with Jefferies.

Hey, Terry, how are you?

Hey, Chris, how are you doing?

I'm well, I'm well. Thanks.

Good.

I wanted to circle back on basis. You probably have a feeling I'm going to ask you this every quarter, seemingly. On the gas side, it did seem like the price realizations, given the level of hedging and the price of the hedging, suffered some basis disconnect again. I know we saw this in the third quarter and you mentioned some Bakken issues that were resolved and we saw them resolve in the fourth quarter. But curious with the first quarter if that was weather driven, if there was something else going on? If you could sort of help me understand how it might resolve itself as we move through the year?

I would say that certainly on the spot side or cash side of the business, the unhedged side, certainly there were some realizations due to the weather. Some impacts due to the weather, rather, but Rob, do you got anything you can add to --

I don't think there's any additional color on that, Terry.

I mean, the prices, the net realized prices stayed pretty close to the same in line quarter over quarter.

Quarter over quarter, they do.

It's a function, Chris, of where you set the hedge prices at, and we set them at a price that -- we've got that clearly in our hedge tables. We set it at a low $4 price. That's reflected in this net realized price. It's -- as we, our hedging policy, we target a 75% hedging level, okay?

We don't try to pick prices as we move throughout the year, because we're not very good at picking prices. We try to exercise discipline and systematically hedge ourselves as we move through the year, regardless of where the prices trade. They fall out where they fall out. I hope that helps.

Okay. Yes, I just, I guess given the hedge level, the price and then sort of what happened, certainly with gas pricing in the quarter, I would have thought we would have maybe seen a better aggregate realization. I'll just dig in a little bit deeper on that offline, Terry.

I guess switching real quick, Sterling III, congrats on having that come in. I did notice in last night's release there was some very minor adjustments to some of the specs listed there in terms of capacity, expandable capacity, CapEx length, things like that. I was just wondering if you could talk a little bit about those amendments. The implementation was a little bit delayed over the winter. Was it tied to that, and did you get any additional commitment to carry for that line? I think we were about 75% before.

Rob, take that one?

Sure. With regards to the timing, it was weather. Weather got us at the tail-end of the fourth quarter, and then the severe weather that we saw in the first quarter was the reason for the delay. With regards to the costs, we're still feeling good with regards to the -- where we've got that bracketed, where we just have, and obviously there's some invoices still coming in on that as we wrap up the payment. But at the end of the day, I don't think we're concerned with regards to where that CapEx is going.

Wes, do you have anything you'd want to add?

No, I agree with Rob's comments. I believe we were confident in our range.

Okay. I guess there was an extra 10,000 barrels a day of the expandable capacity. Is that just -- I realize it's very minor, but I was just curious, is that better understanding of the project itself, or what would change the scope on that upper end?

As we continue to look at that pipeline and where we positioned boosters and everything else like that, there's a potential that we can move the expandable capacity higher as we continue to go forward. That's what you're seeing in that number.

Okay. Great. A final question from me, guys. Just realize 1Q was seemingly all about propane and propane spread, but we've seen consistently strong deltas on isobutane and just wondering, Terry, if you can offer commentary about the ability to capture. I know you have an isome unit in the mid-con and we're still seeing some nice premiums up there.

Yes, and I can assure you it's running flat out. Sheridan, you got anything to add?

Yes, obviously we capture the spread in the isome unit, but also that demand up in Conway allows us to increase throughput on our north system as we deliver iso into the refineries in the Upper Midwest as well.

Okay. Great. Thanks a lot guys. Appreciate it.

Thanks, Chris.

Our next question comes from Becca Followill, with US Capital Advisors.

Hi, guys. Just a quick one.

Hey, Becca.

Cimarex talked today on their earnings release about an upsized frac new completion technology on the Cana Woodford. Do you guys have exposure to them there as they ramp up drilling?

Yes, we have lots of exposure to that.

All right. Thank you.

Our next question comes from Craig Shere with Tuohy Brothers.

Hi, guys.

Hey, Craig.

Congrats. Very good quarter. So picking up on Ted's question on spreads and Sheridan's comments about Geismar and I think a Lyondell planned expansion coming on line in the summer and, Terry, your comments around the changes in propane supply and demand creating some permanently expanding basis differentials. Can you put some more color around what exactly you all expect to see in terms of the Conway to Bellevue spreads? Are you still thinking the high single-digits? How do you see ethane exports impacting this going out a couple years?

Yes. I'll take this and then Sheridan can kind of follow up with it. Yes, as we look -- as we move into the balance of the year, we see spreads widening out from where they currently are, particularly for ethane and propane. Both spreads we expect to be in that $0.08 to $0.10 a gallon range as we move through the balance of the year driven by those very things that Sheridan mentioned earlier -- stronger petrochemical demand, lower inventories, inventories for ethane are coming down and of course, the strong export demand for propane. Sheridan, you got anything else to add to that?

The only thing I'd add is, your other question was on exports. That exports, obviously, that is just like bringing on more demand in 2016 that we didn't see. It's not as dependent upon the big build out of the crackers, so that's --

Right.

And in long term held ethane prices.

Right. No one has been modeling that up until now in their supply and demand picture. All right. And digging more into the expanded growth CapEx pipeline line of sight, can you elaborate on the capacity to expand into the Niobrara and specifically to break into oil opportunities?

Yes. We can, Craig. That footprint was a natural extension of our existing footprint. And it's connected by our NGL position. It's a great platform for us to get into a new basin, to participate in gathering and processing as well as liquids. I think the opportunity for us to invest in the crude oil side of the business up there as well is there.

So yes, it's a great extension, and it is going to afford us lots of opportunity. I think the drilling results have been very good and we're continuing to see a lot of development. We're having success at signing up new acreage packages to our facilities, and our expectation is for this asset footprint to be a big part of our business.

Sounds good. Last question I've got, on the credit side. The credit agencies kind of take a jaundiced view of assets that as cash flows trickles down, or in this case trickle up, to support debt that's not at the entity that actually directly owns the asset. If it's just too tough to run up a down escalator here and you're just not going to get an S&P investment grade credit, at a certain point do you say to yourselves, well, given that we have such a strong balance sheet, should we think about this as dry powder and instead of worrying about keeping the -- or achieving investment grade, should we just think about maybe levering up, up to a comfortable point to support very economic ongoing expansion, be it acquisition or organic growth at OKS or even temporarily at OKE?

Well, Craig, certainly that's something you could consider, but certainly not high on our list. Our strategy's very clear, to operate ONEOK as a pure play holding company. Really don't have any plans on the horizon to make investments or to lever up OKE.

The strategy of maximizing the cash dividend to our shareholders is top priority. We won't operate with blinders on. We'll always be aware of opportunities that are out there. We'll have, we'll be flexible, but as we sit today, this is our priority.

Understood. Thank you.

Thanks, Craig.

Our next question comes from John Edwards with Credit Suisse.

Yes. Good morning, everybody. Just one more follow up on the increased in the backlog. What kind of changes to the mix of those projects are you seeing?

Rob?

Hey, John. Well, with regard to that incremental, it's going possible more weighted toward G & P, as Terry mentioned, from a processing opportunity in both the Bakken and the Powder River basins.

Okay. That's on the incremental. Are you seeing any changes to that underlying?

The underlying? No. I mean, there's little things that flow around, but pretty much it's staying within what we've previously thought the backlog would turn out.

Okay. Great. My other questions have been answered. Thank you.

Great. Thank you.

Our next question comes from Helen Ryoo with Barclays.

Thank you. Good morning.

Hey, Helen.

Hi. On the optimization margin, was there a change in the capacity you've allocated to the optimization business this quarter versus a year ago?

Sheridan, let me take this first part and you can follow up with it. Helen, we don't, and have not historically, talked about our optimization capacity and optimization throughput, so we won't change that now. Sheridan, have you got anything you want to say?

The only thing I would say is that actually, we continue to try to turn that into fee base. Turn our optimization capacity into fee base revenue.

And you can certainly see that. You can certainly see that in the exchange revenue portion of our business as it continues to grow.

Okay. Helen, for competitive reasons, that's why.

Okay. Okay. I understand. I just directionally, I was wondering. I know you don't give out the actual capacity number, but just directionally, this quarter versus a year ago, whether there has been a significant change in how much optimization volume you were running or not, but I understand.

And then just, I guess related to this, and maybe you won't be able to answer this, but I'll just throw it out. You just talked about how you expect the ethane and propane spread to widen going forward. Sheridan kind of answered just now that despite sort of your outlook, you expect to have more capacity allocated to the third-party business rather than trying to keep a bit more in optimization capacity than before. Am I understanding you correctly?

Absolutely. I mean, that's a well-defined strategy that we've employed for those -- for several years, and will continue to do so. We'll have some level of optimization capacity, I'm confident, but it will be greatly diminished from where it has been in the past.

Okay. Got it. And then just last one. Your Canadian Valley plant just came on line in March. What do you see in terms of your volume ramp up expectation there?

Rob.

Hey, Helen, this is Rob. It's doing very well. We're pushing capacity as we speak. We had a large tranche of gas that we had, that we're off-loading to several other facilities that we're bringing back on to our system, as well as we balanced our overall system. So we've got that benefit plus just the continued strong growth that we've seen from our producers over the last couple of months. It's doing very well. Very quick ramp up.

In terms of when you see that plant filling up, is there sort of a rule of thumb we should think about?

It's going to vary by area. I mean, this one ramped up, we thought it would ramp up within 45 days, or be full effectively within 45 days, and we're there. Plants that we have in the Bakken, Garden Creek II, that comes on in the third quarter, we expect also a very quick ramp up on that, because it's going to be waiting for processing capacity. When you get to Garden Creek III in the first quarter of next year, that's going to be a bit slower ramp up just because of the short interval between those two plants coming on line. It really demands on the area and volume.

Did you say full in 45 days after coming into service? The plants that fill up quickly, would fill up that quickly?

If the gas is there, and we can bring it on, it definitely can, and that means both infrastructure-wise as well as the gas available. And like I said, for Canadian Valley, we knew that that was -- we had the opportunity to ramp it up very quickly because of the amount of gas that we were off-loading to third-party processing facilities as well as the pent up demand that we had on our system itself.

Okay. Great. Thank you very much.

Thank you, Helen.

Our next question comes from Carl Kirst with BMO Capital.

Thanks for the time guys. Just a quick follow up. I noticed in the first quarter on the G&P side, the equity NGL volumes at 18,000 a day seemed a little bit stronger than we were expecting, I guess in part because of some of the well freeze offs. I'm not sure if I'm looking at apples and oranges, but when we look, for instance, on a go-forward basis and the hedging profile and how much is sort of expected to be hedged, if you will, it kind of backs into sort of a go-forward number closer to 13,000 to 15,000 barrels. I just didn't know if anything was going on in the first quarter that we should be aware of?

No. There's really not, Carl. I mean, that's just, I think, showing the growth that we've seen with regards to the Bakken plants coming on line, State Line II coming on line last April, the 30% of Maysville that we now have, as well as just your continued ramp up of volumes in each of our existing facilities, both in the Bakken and the mid-continent.

Rob, perhaps a better way I should have asked that question is, as we look forward, is there any reason why those equity NGL volumes would be going back down?

As we go forward that they'd go back down? I guess as you -- as Canadian Valley comes on and you're rejecting more ethane, than that would tend to drive those volumes down.

Okay. All right. Thank you.

And that concludes the question-and-answer session. I would like to turn the conference back over to our speaker, T.D. Eureste, for any additional or closing remarks.

Thank you for joining us. Our quiet period for the second quarter starts when we close our books in early July and extends till earnings are released after the market closes on August 5th, followed by a conference call on August 6th. We'll provide details on the conference call at a later date. I'll be available throughout the day to answer your follow-up questions. Thank you for joining us today and have a great day.

Thank you.

And that concludes today's teleconference. Thank you for your participation.