ONEOK, Inc. (OKE)

OKE 
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ONEOK, Inc. (OKE)

Q1 2011 Earnings Call

May 4, 2011 11:00 am ET

Executives

Dan Harrison – VP, IR and Public Affairs

John Gibson – Vice Chairman, President and CEO

Rob Martinovich – SVP, CFO and Treasurer

Terry Spencer – COO, ONEOK Partners

Pierce Norton – COO

Analysts

Stephen Maresca – Morgan Stanley

Craig Shere – Calyon Securities

Ted Durbin – Goldman Sachs

John Tysseland – Citigroup

Michael Blum – Wells Fargo

Yves Siegel – Credit Suisse

Monroe Helm – Barrow Hanley

Helen Ryoo – Barclays Capital

Andrew Gundlach – First Eagle

Bernie Colson – Oppenheimer

Rick Gross – Barclays Capital

Presentation

Operator

Good day ladies and gentlemen and thank you for your patience. You joined the first quarter 2011 ONEOK and ONEOK Partners earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the call over to your host, Mr. Dan Harrison. Sir, you may begin.

Dan Harrison

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

And now, let me turn the call over to John Gibson, ONEOK’s Vice Chairman, President and CEO and ONEOK Partners’ Chairman, President and CEO. John?

John Gibson

Thanks Dan. Good morning and thank you all for joining us. We appreciate your continued interested and investment in ONEOK and ONEOK Partners. Joining me today are Rob Martinovich, Chief Financial Officer of both ONEOK and ONEOK Partners; Terry Spencer, ONEOK Partners’ Chief Operating Officer; and Pierce Norton, ONEOK’s Chief Operating Officer.

Before we begin, I would like to make a few comments about our announcement two days ago to build a new NGL pipeline and fractionator. Then, I will briefly review our first quarter performance, discuss our 2011 earnings guidance, turn things over to Rob, Terry and Pierce to review our financial and operating results in more detail, and then make a few final comments before taking your questions.

Our decision to build a new pipeline between Medford, Oklahoma and Mont Belvieu, Texas and a new fractionators at Mont Belvieu was driven by a market demand, in particular from producers, processors and petrochemical companies. This new pipeline project will alleviate the infrastructure constraints that currently exists for producers and processors in the Mid-Continent and limit the ability of NGLs to get from the Mid-Continent to the Gulf Coast.

We will also build additional fractionation capacity on the Gulf Coast to serve the growing NGL feedstock needs of petrochemical companies. Both projects are yet another extension of our NGL infrastructure and will provide producers, processors, and customers with the critical services needed to monetize their respective investments and meet their customers’ needs.

Terry will provide additional information about these new NGL investments and we will answer your questions later in the call. Now, let’s talk about our first quarter results. We had a successful quarter at ONEOK and ONEOK Partners, while continuing to meet some challenges in the marketplace. ONEOK Partners first quarter performance was exceptional, posting an 80% earnings increase from last year’s first quarter. These strong results were led by our natural gas liquids business, which benefited from favorable natural gas liquids price differentials and having more fractionation and transportation capacity available to use for optimization activities.

In spite of extremely cold weather and record snowfalls as well as some NGL market disruptions caused by fire at a competitor’s facility, our assets and people performed extremely well. The partnership continues to benefit from the new assets built during our $2 billion growth program that was completed in 2009. And we are executing on the next tranche of growth projects that Terry will discuss later.

Our ONEOK Distribution segment performed as expected, but was adversely impacted by higher operating costs, primarily due to higher share-based compensation expenses in the quarter that Rob will explain in a few minutes. Energy services had a good quarter in a very difficult industry environment. Seasonal storage and location price differentials remained extremely narrow and were mitigated somewhat by our ability to place hedges. As we stated in our news release, we are reaffirming our financial guidance for the year at ONEOK and at ONEOK Partners. We believe the continued strong performance at ONEOK Partners will offset lower expected results and energy services. Due to current and projected market conditions, we now expect energy services 2011 operating income to be at the low end of the earnings range of $75 million to $125 million, which is the range we announced in 2009 with our plan to reduce our contracted storage and transportation capacity.

Seasonal storage and location differentials are not where we expected them to be, and with the continued oversupply of natural gas, we don’t expect them to improve significantly during the rest of the year, absent of course a weather-related event. Pierce will explain energy services performance and outlook in more detail.

Rob will now review ONEOK Partners’ financial highlights, and then we will ask Terry to review the partnership’s operating performance. Rob?

Rob Martinovich

Thanks John and good morning to everyone. In the first quarter ONEOK Partners reported net income of $151 million or $1.16 per unit compared with last year’s first quarter net income of $84 million of $0.57 per unit, an 80% year-over-year increase. Distributable cash flow in the first quarter was $185 million, a 51% increase compared with first quarter 2010, resulted in a coverage ratio of 1.30 times. We reaffirmed the partnership’s 2011 net income guidance in the range of $525 million to $575 million, with distributable cash flow in the range of $625 million to $675 million. We expect the partnership’s interest expense to be approximately $12 million higher compared with what we announced in January. This amount will be offset by a projected $12 million increase in equity earnings for Overland Pass Pipeline. This line item shift reflects financing of Overland Pass Pipeline at the ONEOK Partners level versus at the joint venture level that we assumed in our initial 2011 financial guidance

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