ONEOK, Inc. (OKE)

OKE 
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ONEOK, Inc. (OKE)

Q2 2011 Earnings Call

August 3, 2011 11:00 AM ET

Executives

Dan Harrison – VP, Communications and IR

John Gibson – Chairman, President and CEO

Robert Martinovich – CFO

Terry Spencer – COO, ONEOK Partners

Pierce Norton – COO

Analysts

Stephen Maresca – Morgan Stanley & Co. LLC

Ted Durbin – Goldman Sachs & Co.

Yves Siegel – Credit Suisse

Ross Payne – Wells Fargo Advisors LLC

Craig Shere – Tuohy Brothers Investment Research, Inc.

John Tysseland – Citigroup Global Markets

Michael Blum – Wells Fargo Advisors LLC

Andrew Gundlach – First Eagle Investment Management LLC

Carl Kirst – BMO Capital Markets

Jack Moore – Harpswell Capital Management LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 ONEOK and ONEOK Partners Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to introduce your host for today’s conference call, Mr. Dan Harrison. You may begin, sir.

Dan Harrison

Thank you. Good morning and thanks, 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, Chairman, President and CEO of ONEOK and ONEOK Partners. John?

John Gibson

Thank you, Dan. Good morning and many thanks for joining us today. We appreciate your continued investment and interest in ONEOK and ONEOK Partners. Joining me are Rob Martinovich, Chief Financial Officer for ONEOK and ONEOK Partners, who will review our quarterly results and updated guidance; Terry Spencer, ONEOK Partners’ Chief Operating Officer, who will discuss the partnerships’ operating results; and Pierce Norton, ONEOK’s Chief Operating Officer, who will discuss the performance of our Natural Gas Distribution and Energy Services segments.

As we begin the call this morning, in my remarks, I will provide some perspective on our second quarter financial results and updated guidance, and discuss the impact of our share based compensation programs on our results.

I’ll also comment on the acquisition market in the context of the recent Southern Union transaction, and then conclude with an update on our efforts to deal with a recently enacted Oklahoma law requiring us to have a classified board.

So, let’s start with the second quarter financial performance. ONEOK Partners’ second quarter performance was exceptional. Our natural gas liquids business continues to benefit from favorable NGL price differentials and by having more fractionation and transportation capacity available to use for optimization activities.

While the wider natural gas liquid differentials played a key role in the natural gas liquids business exceeding our expectations, it is more important to note that the base business, the fee-based exchange services business, exceeded our plan as we continue to add new NGL volumes to our system.

The point is that our natural gas liquids business, in particular our key fee-based earnings component, exchange services, performed well without those unprecedented wide differentials. That is important because we recognize that as we and others add transportation capacity between the two NGL market centers, the bases will contract.

While we have built a business capable of capturing the upside present in the market, we have most importantly built one that creates growing value based on providing fee-based services to the market. It has been gratifying to see our investments and strategies pay off for our customers and investors, not only in the first half of the year but also in our expectations for the full year and beyond.

At the ONEOK level, we believe the partnership’s continued strong performance will cover the shortfall we are experiencing in other parts of the company this year. Our Natural Gas Distribution segment performed as we expected.

However, the largest portion of the share-based costs, the company incurred in the first half of the year, were allocated to this segment because it has the largest number of employees. This resulted in lower second quarter earnings and an adjustment to the 2011 operating income guidance in the distribution segment. Without these expenses, this segment would be meeting its plan. More on the share-based expenses in a moment.

Energy Services’ quarterly results were disappointing. While the Energy Services team has worked hard and done a good job, realigning its leased storage and transportation capacity to meet the needs of premium service customers to reduce earnings volatility, extremely challenging market conditions have more than offset their efforts. Low natural gas prices and volatility due to a supply surplus as a result of shale gas plays have tightened seasonal storage and location price differentials to unprecedentedly narrow levels.

While we are not pleased with Energy Services’ results or its revised expectations, they are based on the current market with low prices and narrow basis differentials resulting in our not being able to meet the original guidance for this segment. Pierce will update you on our efforts to address these issues.

Despite our reduced expectations for Energy Services, we are confident in our ability to achieve our revised 2011 guidance at ONEOK. We believe that the continued performance at the partnership will offset the weaker performance at energy services.

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