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Oneok Partners, L.P. (NYSE:OKS)

Investor Day Conference

December 03, 2013 9:00 am ET

Executives

Andrew J. Ziola - Vice President of Investor Relations and Communications

John W. Gibson - Chairman, Chief Executive Officer and Chairman of Executive Committee

Pierce H. Norton - Executive Vice President of Commercial

Curtis L. Dinan - Senior Vice President of Natural Gas - Oneok Partners

Caron A. Lawhorn - Senior Vice President of Commercial & Natural Gas Distribution

Terry K. Spencer - President and Director

Derek S. Reiners - Chief Financial Officer, Senior Vice President and Treasurer

Sheridan C. Swords - Senior Vice President of Natural Gas Liquids

Analysts

Craig Shere - Tuohy Brothers Investment Research, Inc.

Carl L. Kirst - BMO Capital Markets U.S.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

H. Monroe Helm - Barrow, Hanley, Mewhinney & Strauss, Inc.

Andrew J. Ziola

Good morning, everyone.

John W. Gibson

Good morning, Andrew.

Andrew J. Ziola

Thanks, again, for joining us, and especially coming downtown, I know it's a little more of a trek for a lot of you, but we appreciate it. Hopefully, this will be a little change from our typical hotel conference room setup. So thanks, again, and welcome to the ONEOK, ONEOK Partners and ONE Gas Investor Conference.

Just a reminder that some of the comments we make today will be considered forward-looking statements and, as such, are subject to the Safe Harbor provisions under the Securities Act. Please note that all future cash dividends and distributions, either declared or paid, discussed in this presentation today are subject to the approval of each entity's Board of Directors are referenced to 2013 and 2014 guidance are based on news releases issued on November 5 and December 2, which was yesterday. And we have extra copies in the back if you want a print out of the guidance releases.

All right. Just a quick -- this is our batting lineup for today. John will begin with some opening remarks, and then Pierce will cut the ribbon, if you will, on ONE Gas. And then we will have a ONE Gas Q&A and take a quick break, then Terry will give an overview of both ONEOK and ONEOK Partners. And then Derek will discuss OKE and OKS financials, with Terry wrapping up the day with the NGL markets and discuss our environment, safety and health program, and then have our Q&A session. After that, we'll have a luncheon that will be served in this -- the food will be set up in the back, and you'll grab your meal and sit down strategically at these tables. We will spread out the management team amongst the areas, so you could pick who you like to have lunch with. When we begin Q&A, if you have a question, our IR folks and my team will be around with microphones. We'll just wave them down.

So with that, I will introduce John Gibson, Chairman and CEO.

John W. Gibson

Thank you, Andrew. Thank you. Good morning. Let's get started here, get us a little quicker to lunch. As most of you know, we will have a transition -- or we are in a transition and we will have a new management team on the effective date of the separation of ONE Gas from ONEOK, at which time I'll step down or retire as CEO.

So as -- at ONEOK and ONEOK Partners, one of our future speakers, Terry Spencer, will become the President and Chief Executive Officer. The Chief Financial Officer will remain, Derek Reiners, if you look up here. And Derek, would you mind standing up so they know what they got to look forward to, not much. And then we have Steve Lake, who's not with us, as a General Counsel should not be; and then Rob Martinovich, who will lead the commercial business; Wes Christiansen who's not here because he's taking care of all the operations; Dan Harrison, who could not be with us today, he's the Senior Vice President Administrative Services; and then Bobby Mareburger leads our Corporate Planning & Development.

In addition to those officers shown in the back, you had the opportunity to meet T.D. Eureste. He's the fellow with the really bad tattoo on his forehead, which he didn't have before he came to New York. At least, I don't remember it. He said something about a burning leaf, I don't know what that boy has been doing. But T.D. will start reporting to Dan Harrison and lead the Investor Relations for ONEOK and ONEOK Partners, and assisting him will be Grace Durbin who is at the table when you all came in.

Looking now at the ONE Gas leadership team. Again, upon the separation, Pierce Norton, who you'll hear from in a just a moment, will become our President and Chief Executive Officer. Curtis Dinan will become -- would you mind standing up, although you feel everybody in here knows you? Curtis Dinan, when I became CEO, was the person I picked -- first personnel decision I made as CEO is to pick Curtis as the Chief Financial Officer. And we sent him off to the operations world and he has run our natural gas business inside the partnership. And is right now, that will become the Chief Financial Officer. Joe McCormick will become our Senior Vice President and General Counsel. He's not with us today. Caron Lawhorn, better known as the professor. She -- also, many of you may remember, when we sent Curtis off to school and try to be educated, Caron stepped in. I think it was a critical time, sometime in 2008 as the Chief Financial Officer and did an outstanding job for us, while Curtis was attending football games. And then finally, Greg Phillips, if you'd stand up, is -- will lead the operations of the business.

All these people that I introduced will be part of the panels for you to ask questions. But I will tell you that, from my perspective and the years that I've been in this role and the years that I've been at ONEOK, I've seen these individuals grow. And I'm proud to introduce them. I need to go back because when I said the word grow, I remember one of my buddies here that I did not -- I don't know how to go backwards. Anybody know? Here we ago. I don't see -- Oh, he's not on there, but I want to introduce him because he's very important to our company. His name is Sheridan Swords. And if you'll stand up, you will know why I said something about growing. He's the -- he's our NGL man. And I've known Sheridan from his days at Koch Industries and he's an outstanding leader for our company and has, as many of you know, done tremendous things for us in the natural gas liquids business.

Okay. So here's what we'll cover today. And let's just talk about some of the highlights. In case you hadn't read the press release, or nobody had talked to you about this, we are significantly -- we're returning significant value to our shareholders through a 53% increase in dividends declared. We announced that we expect, in 2014, the dividend declared at $2.33 per share. That's as compared to dividend declared in 2013 of $1.52. Here's a slide a little bit later to make it even more clear as to what that increase covers. And, of course, no surprise, this is pretty consistent with what we've talked about all along. We expect future increases to that dividend to be driven by ONEOK Partners, and we believe that those increases will be competitive with our peers.

Obviously, a continuation of the story as well is continued earnings growth at ONEOK Partners. And what I would point out here is the continued earnings growth is not driven by commodity prices. It's not driven by spread, it's driven by volumes, it's driven by the volumes that are coming onto the system, that touch the system. All aspects of gathering, processing, transportation, fractionation, marketing, storage, all of those that those increased volumes touch will drive the earnings growth at ONEOK Partners, with more than 25% distributable cash flow growth estimated or expected in 2014. And also, expected is a 6% to 8% increase average annual distribution growth between 2013 and 2018, which we believe is competitive with our peers.

And then, finally, ONE Gas. And today is the first day that we've unveiled some of our thinking about ONE Gas, an average annual dividend growth of 5% between 2014 and 2018.

Since the last time we met, which I think was in September of last year, we have been busy. We've been busy. Well, we tried to be productive and create value and wealth. Between 2010 and 2016, we have now announced internal growth projects and acquisitions at ONEOK Partners totaling more than $6 billion. We've completed approximately $3 billion of internal growth projects to date. We've increased ONEOK's quarterly dividend twice to $0.38 per share. We've increased ONEOK Partners' quarterly distribution 5x to $0.725 per unit. We announced in June the wind down of our energy services business or segment, which we -- which will be substantially completed by April of this year -- of this next year. And then, we announced in July 2013, the plan to separate our natural gas distribution business into a stand-alone publicly traded company called ONE Gas to be completed in the first quarter of this year. And I have some more information to share with you here in just a little bit.

And then, our CFO has been busy. He's issued about $550 million of equity and $1.25 billion of debt, not bad for a day's work.

So as we talked about, the board unanimously authorized us to pursue this separation of our distribution segment into this new entity called ONE Gas, which will be a 100% regulated natural gas utility in Oklahoma, Kansas and Texas, with more than 2 million customers and one of the largest in the United States. It will be accomplished through a pro rata, tax-free distribution of the ONE Gas shares to ONEOK shareholders, at which time ONEOK then becomes a pure-play general partner, with the initial focus certainly being to pay higher dividends than anticipated or experienced in the past. This separation creates no material -- or has no material impact on ONEOK Partners. As I mentioned, we expect the separation to be completed during the first quarter, and there's no shareholder vote required. So we've got a few things in our way. Once we get those done, we're off and running.

Now this next slide is to further demonstrate what we intend to do with the ONEOK dividend. And as you could see, the ONEOK current dividend declared for 2013 of $1.52 as compared to the $2.33 is this 53% increase. And as you will also note, it does not include the estimated $0.28 dividend that the ONEOK shareholder would receive through its ownership of an OGS share. So therefore, when you add that altogether and look at the sum of $2.33 and the $0.28, relative to the $1.52, you'll see a 71% increase to $2.61 combined, postseparation. And I might add that ONE Gas will -- as ONEOK will focus on our peers, on our competitors.

And then, to give you a bit of an update on what's happening as it relates to the separation, the -- we say here, obtain regulatory approvals. We updated, just recently. Last week, in fact, we received the private letter ruling from the IRS. So we have that one ticked off. As far as the Kansas Corporation Commission, we expect the KCC to rule on our application by December 20. The parties have reached an agreement in principle regarding the transaction. The agreement will be filed on or before December 6 and will become public at that time. So we are making progress and receiving the anticipated approvals from the Kansas Corporation Commission. And then we'll have a ONEOK board meeting for final approval, and then we begin the activities that many of us had been focused on for some time, which is, our vernacular, the Day 1 activities, transitioning the employees and the operations. We'll then complete the ONE Gas debt offering, and then complete the ONE Gas spin-off of the common stock. So that's what we have before us. As we have said before, we anticipate it will take us 5 to 6 weeks to complete those things we need to do. Once we receive the KCC approval, I'll let you look at the calendar and figure out when you think that close might occur, but it's probably sooner rather than later.

So to now, I think, as Andrew said, unveil, for the first time, ONE Gas. Although we have no music, without further ado, I'd like to introduce to you, fresh-off, both Terry and Pierce, by the way, are Alabama grads. Terry was a former field goal kicker, which I understand that he's gotten a front goal from saving money [ph], I don't know if he could come back. But these boys have been pretty subdued here recently. But I think we've got them pumped up enough to get through the day. So let me introduce the doctor, Pierce Norton.

Pierce H. Norton

I will admit, it's been a tough couple of days. I'll wait for my team to get up here with me. Echo what John said, we're very fortunate to have the group of people that's up here today and representing ONE Gas going forward. So first of all, good morning. I'm excited about the opportunity to bring this inaugural ONE Gas story to you. It is a story of execution that represents over 3,000 employees, dedicated employees, at a new but incredibly experienced company.

We just announced our new graphic identity and logos to our employees yesterday. So I think our employees now feel, if they hadn't already, that this transaction is coming sooner rather than later.

Our intent of our vision statement is to have each word reinforced, both what we are and what we're striving to be. We are focused on being a 100% regulated utility, setting the -- setting us apart from our peers. Our mission, becoming ONE, has been and will continue to be the company's cultural brand that defines what we will do and will not do as an organization. Becoming ONE is about adapting to the demands of our business environment. It's about asking these simple questions related to our core principles: ONE in Responsibility. Is the decision or actions that we're about to take the most responsible thing to do? ONE in Value. Are we adding or creating value to one of our stakeholders? And more importantly, are we actually detracting value from one of the other stakeholders? ONE in the Industry. We want to benchmark ourselves against the best. Are our actions moving us toward being the very best, or are they moving us backwards?

ONE Gas has one line of business: regulated natural gas distribution. Our philosophy is to communicate frequently, openly and transparently with our regulators. We believe that contributes to a constructive regulatory environment, and it is an important factor in strengthening our business. Our high customer concentration in metropolitan areas and significant market share creates opportunities for operating efficiencies. And from the very beginning, ONE Gas, we want to establish a tone of a conservative financial profile.

Our margin profile is designed for stability. As you can see, over 80% of our net sales margin in 2 of our states are derived from fixed fee charges to residential customers, with an average being 73%. In Kansas, where we do have a lower percentage of fixed fees, we experienced our highest number of heating degree days, which actually helps mitigate the volume risk. Although often named differently, we have multiple risk and lag mechanisms in each state designed to deal with cost recovery, recovery of and return on capital, weather normalization and energy efficiency in the state of Oklahoma and Austin, Texas service area.

The high percentage weighting to the residential customer class is a key investment consideration. 92% of our customers are residential customers, which translates into 83% of our net sales margin. This higher weighting toward the residential sector makes the company less susceptible to economic swings as opposed to higher concentrations toward industrial and commercial loads that can swing more dramatically. Our assets and end-users are located very near to some of the largest proven natural gas reserves in the United States. These basins and shale plays should be very familiar to this audience. The Permian Basin, the Eagle Ford, Barnett, Woodford, Granite Wash, Cana-Woodford and Mississippian Lime are all supply basins affordably accessible through existing pipeline networks. This is a major factor in our ability to maintain a competitive pricing advantage when compared to the electrical alternative for the 4 largest energy consuming appliances in the residential sector. These are the furnace, the water heater, cooking ranges and clothes dryers.

Our growth strategies will focus in these areas. For the foreseeable future, we see plenty of opportunities to continue to invest in growth, system integrity, efficiency projects at our current levels that will benefit all stakeholders. We're currently experiencing a gap between our allowed and actual returns that Curtis is actually going to address in the next section. In my view, this is our opportunity to be intentional, focused and execute on, significantly narrowing this gap over the next several years.

We actually get a lot of questions about what we see our CNG role is. Our focus is to supply natural gas to the current and potential new retail locations, not particularly investing in the CNG retail stations themselves. We believe this strategy is working. We now have 66 privately owned stations in our territory and our year-over-year volume consumption has increased by 45%. This strategy is providing incremental transport revenue with minimum capital investment.

Our 2014 capital expenditure plans are slightly lower when compared with 2013, primarily driven by a large project in Austin, Texas that is not expected to be replicated in 2014. Our decrease in system integrity spending is driven primarily through the improvements in our capital processes, whereby we can get the same amount of work done for less capital dollars.

Based on our future plans, we do believe our capital spending will range between $240 million and $285 million over the next several years.

In conclusion, how do we compare? We are 100% regulated. Our peers have anywhere from 8% to 37% of nonregulated business in their portfolio. Our allowed returns are clearly in the range and in line with our peer averages. We have a strong equity capital ratio and our dividend payout ratio is expected to be very comparable.

Now Curtis will take us through our ONE Gas financials. So Curtis?

Curtis L. Dinan

Good morning. Thank you, Pierce. I'm also excited to be here and to be part of ONE Gas. It's not very often that you get to be a part of a brand-new 107-year-old company. So yesterday, we released our initial ONE Gas guidance, with net income expected to be in the range of $95 million to $105 million, and operating income midpoint of $217 million and a cash flows from operations midpoint of $236 million. Please note, that for guidance purposes, we have assumed January 1 as the effective date for the separation, although we expect the separation, as John described earlier, to occur sometime during the first quarter.

For future accounting and reporting purposes, the financial results of ONE Gas will be presented as though the separation did actually occur on January 1 because the entities are under common control, so the actual transaction date and the reporting date will be a little bit different because of that.

We are also giving guidance of a quarterly dividend of $0.28 per share or $1.12 per share annually. That assumes a 0.25 OGS share per each OKE share outstanding. So in the slide that John reviewed earlier, with the $0.28, that was a pretty split number, and this $0.28, or $1.12 annually, is a projected post-split number.

Now a major assumption in our guidance relates to our planned issuance of $1.2 billion of long-term debt. Our guidance assumes an effective interest rate on that debt of approximately 4.3%. So to the extent our debt issuance differs, so, too, will our guidance.

We're also providing 5-year forecast for ONE Gas, which include average annual net income growth of 4% to 6%; annual dividend growth of approximately 5%, with an expected dividend payout ratio of 55% to 65% of net income. We also anticipate capital spending of $240 million to $285 million per year, resulting in an expected annual growth and rate base of 5% to 6%.

Finally, our 5-year outlook assumes a performance-based rate filing in Oklahoma for 2014 followed by a full rate case in 2015 to reset the PBR; and a 2016 rate case in Kansas, with new rates taking place in 2017.

One of our strategies -- one of our growth strategies is to reduce the gap between our allowed ROE of a little less than 10% and our actual returns. In 2013, we are expecting an achieved ROE of 8.3%, and our ROE for 2014 is expected to be 7.4%. The decline from 2013 is primarily driven by increased costs from the separation, which we estimate to be approximately $11 million. To narrow this gap in earned ROE, we will look for ways to reduce costs to sustainable levels, reduce the amount of disallowed costs and continue to get recovery of our system investments.

As described earlier, our dividend is targeted at 55% to 65% of net income, leaving the remaining cash flows from operations to fund approximately [indiscernible] of our capital expenditures. The balance will be funded in the interim through short-term borrowings until long-term funding is put in place.

As initially disclosed when the separation was announced, we anticipate ONE Gas having a higher credit rating than ONEOK. And as important, we are committed to having a high investment-grade credit rating consistent with our peer group. We anticipate an initial capital structure of approximately 55% equity, and listed on this slide are our other key metrics.

We're in the process of securing a $700 million credit facility and expect to have commitments in place later this month, with closing at separation.

Finally, we are projecting that our pension liabilities will be approximately 98% funded at separation, which will further reduce volatility in our earnings and our cash flows on a go-forward basis.

Pierce H. Norton

So we'll pause here just a second so we can kind of position the microphones around the room. So if you will, raise you hand if you got a question, so we can capture that question for the listening audience. So if you got a question, please raise your hand and go ahead.

Question-and-Answer Session

Craig Shere - Tuohy Brothers Investment Research, Inc.

Is the PBR the primary strategy you're thinking to narrow that gap between allowed and actual rates of return? Or as you enter the rate cases, what other strategies would you be looking to implement?

Pierce H. Norton

Well, I think Curtis probably laid this out probably the best, Craig. It's just actually continuing to deploy the mechanisms that we already have. And then, he also mentioned some of this disallowed cost. So we're going to continue to work on getting recovery of those costs or certain things that we're not getting recovery of now that we think, over time, we can get those disallowed costs recovered and actually, narrow that gap significantly.

Unknown Attendee

Can you be more specific on the gap between your earned and your allowed ROE? If you earn it, what the impact to net income is? And at what point you expect to be earning that allowed ROE?

Pierce H. Norton

Okay. I'm going to actually let Caron answer that question. Caron is over our commercial area, so I'll let her answer that.

Caron A. Lawhorn

We estimate that the gap is about $30 million in 2013 and it will actually increase a bit in 2014. As Curtis mentioned, we have some additional separation costs that we will incur. So it will -- as Chris has laid out, our strategy is to close that gap over time. It's not been the regulatory environment. As you probably realized, it's not possible to completely close the gap because you're going to drop below that ROE in order for you to be in a position to reset your rates. But we expect significant improvement over this 2014, 2018 time horizon that we're looking at.

Carl L. Kirst - BMO Capital Markets U.S.

Pierce, Carl Kirst from BMO. With respect to the size of the gap, is it Kansas, Oklahoma, Texas? Does this one jurisdiction outweigh the others, as far as one we should be focused on? And also, just noting the 55% equity layer for ONE Gas as a whole. How does that compare to what your allowed equity layer is up 1 to 3?

Pierce H. Norton

Okay. I'll take the first part of that question, and then I'll let Curtis answer the second part. Actually, as for the gap, it's fairly equal, Carl. I wouldn't focus on one particular area over the other, so it's just some work to be done in all the different areas, when focused on one over the other. So Curtis?

Curtis L. Dinan

In terms of the capital structure that's allowed, it's generally around a 50-50 in that neighborhood. But keep in mind that a lot of the rate cases are settled in a black box forum. So the exact amount that's in there is not 100% quantifiable.

Pierce H. Norton

And the only thing I'd add to that, Carl, is that if you look at some of the peers, I think that, that average is probably somewhere in that range of where we are right now. It's a little bit higher equity than 50% -- between that 50% and 55%.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

I know you're just giving that -- getting going. But can you talk about your -- on the industry itself? Does it need to consolidate? Is it too fragmented? The gas utility industry, do you see this as being -- you guys in a potential roll-up kind of a company? On the flip side, do you have any operations -- I mean, obviously, in Texas, you're kind of scattered, that you might consider selling down the road to get some more operational efficiencies?

Pierce H. Norton

Okay. As far as, in general, I think you're kind of talking about M&A kind of activity, Ted. We really look at that as, what is our balance to our capital spending. So when you're looking at that $240 million to $285 million, if you look at that over a 3-year period, that's almost $1 billion. If you look at the last 2 acquisitions that are done in this arena, they were about $1 billion. So literally, within a 3-year period, we're kind of there. So we really don't feel a lot of pressure to go out and look for that M&A activity. We're well aware that these assets do not come on the market very often. So they're out there for us to look, but it's not going to be our priority. Our priorities are going to be to focus internally close this gap that we've been talking about, continue to invest in our assets, continue to improve our mechanisms and close that gap. So any other questions? If that's all the questions, we will take a short break and call you back whenever we get started with the second part of the presentation.

[Break]

Terry K. Spencer

2-minute warning, folks, 2-minute warning.

All right. Welcome, everybody. Before we get started, I just want to say great job by Pierce, Curtis and the rest of the ONE Gas team. Excellent presentation and Q&A session.

Well, it's good to be here and a pleasure to speak with you, all, here today. And again, welcome, everyone. Glad you're here. Today, I'm going to start with a brief look at the new ONEOK post spin, followed by an overview of ONEOK Partners. And then we'll go dig a little deeper into the ONEOK Partners growth projects and the execution of those projects. And then I'll break loose, let Derek follow up with the financial discussion. And then I'll jump back in and talk about the NGL markets.

Well, starting with ONEOK. With the discontinuation of energy services and the separation of the distribution assets, ONEOK will be able to continue its focus on providing resources, allowing ONEOK Partners to execute on its growth strategies and thereby, allowing ONEOK to grow its dividend. ONEOK will maximize its dividend payout while maintaining a very prudent financial strength. And it is extremely important to us as well to attract, select and develop a diverse group of employees that we need in order to execute on this vision, our growth strategies. And most importantly, we need to continue operating our assets safely and reliably. Our folks in the field work in a potentially dangerous environment 24/7, and we are very grateful for their dedication to operating our assets safely and reliably.

Following the separation, ONEOK will be one of the largest pure-play publicly-traded general partners, and its cash flow, of course, will be driven by the general partner and limited partner distributions that it receives from ONEOK Partners, predominantly fee-based business earnings. We've said publicly that our financial measures will be competitive with other pure-play general partner peers. Derek will discuss the financial measures in a bit more detail from what we've issued in our news release last night. But I do want to highlight just a couple of our peers who we think make sense or a great comparison to us, Energy Transfer Equity and Kinder Morgan.

Well, as you would expect, the partnership provides ONEOK with significant cash, and it's growing as a result of the partnership's completed growth projects and ongoing growth programs, enabling ONEOK to increase its cash available for dividends in 2014 and beyond. As you can see, ONEOK Partners distributions to ONEOK have increased at a 20% compound annual growth rate since 2006, when ONEOK assumed the role of sole general partnership -- or the sole general partner. Since 2011, ONEOK Partners distributions have increased at a 22% compound annual growth rate.

So let's move on to the partnership. Over the last decade, our growth, whether it be through internal growth projects or acquisitions, has been the result of executing on our vision: re-bundling services across the value chain, primarily through vertical integration to provide our customers with premium services at a lower cost; and of course, applying our key capabilities as a natural gas company to other products and other energy commodities. We do this by providing nondiscretionary services to our customers and to our producers, processors, which means that our services are absolutely necessary and essential for them to get their products to market.

Well, this slide pretty well sums up what's important to the partnership and what's very key to us. We have very strategically located assets in shale plays, including the Williston Basin, and we'll discuss more about some of the other activities going on around the Williston, as well as some of the other shale plays. We have increasing volumes from new suppliers of natural gas and NGLs that continue to drive our EBITDA growth. We have over $6 billion in growth projects, with more than $3 billion of those dollars concentrated in the Williston Basin, and we'll talk more about that here as we get into the presentation. And even with our Lonesome Creek announcement for new capacity in the Williston, our backlog continues to be in that $2 billion to $3 billion range that we've discussed publicly over the past several months.

At the partnership, the projects we completed in 2009 are contributing to our volume and earnings growth, and we currently have more than $6 billion of announced internal growth projects and acquisitions in the Rockies, the Mid-Continent and the Gulf Coast in the natural gas liquids and natural gas gathering and processing segments that are expected to deliver strong returns in, we've always said, in that 5 to 7x EBITDA range.

Now looking into 2014. I like this slide. It's a great representation of our asset footprint by business segment and how much operating income and equity earnings we expect each of those segments to contribute. As you're well aware, our assets are in a number of NGL-rich shale plays within each of the segment's fairway, which includes high-growth areas, such as the Bakken, the Cana-Woodford and the emerging Powder River in Niobrara, and we'll talk about all those here a bit more.

2014 guidance growth is primarily driven by higher anticipated earnings from increased natural gas gathering and processing volumes and higher expected natural gas liquids volumes gathered and fractionated. These increased volumes are the result of full year operations and earnings growth from growth projects completed throughout 2013 and reflect expected earnings from the completion of growth projects through 2014 in the natural gas gathering and processing and natural gas liquids segments.

Our fee-based margins have increased through the completion of certain growth projects and the conversion of our NGL optimization volumes to fee-based structure. One of our ongoing strategies in the NGL segment that we've talked quite a bit about is to reduce earnings volatility attributable to that location basis differential or Conway-to-Mont Belvieu spread activities. Our commodity price risk that we have in the partnership does, though, reside primarily in our gathering and processing segment, where we use hedging to mitigate risk. And we do provide, in the slides, as we always do, a summary of our hedging and sensitivities. And I think it's actually on Page 105, back in the deck. And our natural gas pipelines mitigate some of this volumetric risk through the predominantly firm demand-based structure contracts we have in that segment.

We're estimating continued healthy volume growth in both the Rockies and the Mid-Continent. You can see that, clearly, here on this slide, the largest gathered volume growth is expected in the Rockies, fueled by our Bakken activities, with the total ramp-up and gathered volumes projected in 2014 to increase by 26%. We expect to connect approximately 1,300 wells in 2014. That's more than twice the number of wells we connected just a few years ago. So continued growth in the Bakken is key.

As our gathered volumes across our systems increase, of course, our -- the volumes that we deliver into our processing plants will increase as well, and you can see that from this chart. Processing volumes are expected to increase by 30% in 2014, primarily by the completion of our Stateline II plant back in April of 2013, the Garden Creek II plant in the third quarter of 2014. And the Canadian Valley processing plant in Oklahoma in the Cana-Woodford shale, that will complete -- be completed in January 2014.

As our gathering and processing business has grown, so, too, has our natural gas liquids segment. And that has continued to experience tremendous growth, as you can see from this chart, since we acquired this business back in 2005. This is primarily due to our continued success in contracting these supplies. Since 2006, we've more than doubled NGL gathering volumes, and NGL fractionating volumes have increased by more than 88%. With our MB-2 fractionator going into service and our MB-3 fractionator in service in the fourth quarter of 2014, we expect to continue this growth trajectory out into the future.

Again, the partnership has a proven track record of growing through disciplined economic thinking and the commitment to efficiently and economically meet customers' needs by matching supply with demand.

Well, as you can see from this chart, over half of our future announced large-growth capital projects are meeting customer demand in the Williston Basin. We'll talk more about this here in just a moment, about some of the specific projects. The graph on the right shows an even split of growth project spend between natural gas gathering and processing and our natural gas liquids segments.

Well, in the Williston Basin, there's no surprise that our strength in this area comes from our size and scale, as ONEOK Partners is the largest independent operator of natural gas gathering and processing capacity and NGL infrastructure in the basin. Resource development in the basin is primarily focused on crude oil, with the associated natural gas having a very high NGL content. More than 60% of the available acreage within our natural gas gathering footprint is dedicated to us. And that's at 3 million acres out of about 5 million-acre footprint, and that 3 million acres continues to grow as time passes, as producers continue to develop the play.

I think this chart is remarkable and thinking that it shows you the tremendous growth that we're seeing with respect to crude oil. But I think what's not on this chart also is the corresponding growth in associated natural gas, and that's the high-NGL-content natural gas that I mentioned earlier. What the key takeaway from this slide is that as the growth continues, the need for more natural gas gathering and processing infrastructure is clearly, clearly evident beyond what is currently announced. And I think the other key takeaway from this is, as you're probably already well aware, 90% of the producers' revenues in this basin comes from the development of crude oil.

This is a great slide that gives you a nice list of the processing capacity that we're developing in the basin. We're investing almost $2.5 billion to construct these new plants. And in particular, we announced, a couple of weeks ago, the proposed construction of the new 200 million cubic foot per day Lonesome Creek processing plant to be completed by year-end 2015. The 16 plants you see here will increase our natural gas gathering and processing capacity in the Williston Basin to approximately 800 million cubic feet per day, more than 8x what it was in 2009. We're also investing in new well connections, expansions and upgrades to our gathering and compression assets associated with these the new processing plants.

Well, a little more on Lonesome Creek. The plant will be at 200 million cubic foot per day natural gas processing facility located in the heart of the Bakken, in McKenzie County. When Lonesome Creek is completed by the end of 2015, it will be our largest processing plant in North Dakota, twice the capacity of each of the 5 plants I mentioned previously and the sixth new plant we've announced here since 2010.

We are committed to being a part of the solution to the challenge that natural gas flaring, as you are aware, occurs in this basin. And in the areas we operate, approximately 29% of current natural gas that's produced is being flared. When complete, the Lonesome Creek plant, coupled with our other plants that are in various stages of construction, is expected to reduce that significantly. And one of the things that we've learned as we work in this basin, the fastest way to increase capacity to reduce the flares are to big -- build bigger plants, and that's our strategy here.

Again, in the Williston, our integrated full-service business model is working. In April, the Bakken NGL pipeline was placed in service and is already transporting unfractionated NGLs out of the basin. The unfractionated NGLs are delivered through our integrated system to the Conway and Mont Belvieu markets, adding an essential component to the producers, you not only have to have gathering and processing, but you have to have NGL takeaway to meet their needs.

This second expansion of the Bakken NGL pipeline that we discussed here, which we also announced a couple of weeks ago, is expected to be completed during the first half of 2016 and will increase the pipeline's capacity to 160,000 barrels per day to accommodate NGL volumes from the new Lonesome Creek processing plant. Just a reminder, and we've said this a number of times in the past, the economics on the Bakken NGL pipeline and the second expansion, assumed that it's filled with propane plus, so there are no ethane -- there's no ethane in the supporting economics for this project.

As many of you are aware, in September, we closed a $305 million acquisition of Sage Creek, a natural gas processing facility. It's a 50 million a day processing plant, along with related gathering assets. We plan to expand the facilities and invest $135 million to upgrade the natural gas processing plant and gathering-related infrastructure, provide well connects, including an NGL gathering pipeline lateral to interconnect these assets with our existing Bakken NGL pipeline. The acquisition adds assets that are, again, located within our footprint, our existing operating footprint that can be integrated into our system in this historically underserved area. So it really just puts us in a great position to continue to or -- and to further develop the services for the producers' need in this really historically underserved area.

All right. Let's talk a little bit about the Mid-Continent and Gulf Coast activities. Our gathering and processing business continues to see significant activity in western Oklahoma, and in particular, in the NGL-rich Cana-Woodford shale play. The Canadian Valley processing plant that we discussed here on this slide is currently under construction and is set to be completed in January of 2014. This 200 million cubic foot per day natural gas processing facility and related infrastructure are backed by percent-of-proceeds contracts that also include a fee-based component. We also have a significant acreage dedications in some of the most active development areas within the Cana-Woodford shale play.

We continue to make significant investments in our natural gas liquids business, and we're investing approximately $700 million to construct additional NGL infrastructure between the Mid-Continent and the Gulf Coast markets. We've talked about this project many times in the past. This new NGL pipeline, referred to as the Sterling III pipeline, is being built to accommodate growing NGL supplies in the market and providing more access to Mont Belvieu markets. The 540-mile pipeline will transport unfractionated NGLs or NGL purity products to the Texas Gulf Coast and is expected to complete -- be completed in January of 2014. We'll also reconfigure our existing Sterling I and Sterling II NGL distribution pipelines so that they'll have the ability and the flexibility to transport unfractionated or NGL purity products.

Well, you can have NGL pipeline, but if you're really going to make hay in this NGL business, you got to have fractionation capacity. So we're, as you all are probably well aware, investing about $1 billion to construct 2 new 75,000-barrel a day fractionators in Mont Belvieu, and we're also building related infrastructure, including NGL storage and ethane and propane splitter in the Belvieu area. Our MB-2 fractionator is 100% contracted and is now in service. Our MB-3 fractionator is 80% contracted and is expected to be completed in the fourth quarter next year. The E/P splitter in our Mont Belvieu storage facility will have the capacity -- capability to split E/P mix into purity ethane in order to meet the growing needs of petrochemical customers located in the area.

We spent a lot of growth capital in this business. But one tranche of growth capital we don't talk a whole lot about is our routine growth capital. This slide breaks that out for you. This kind of other stuff, as we call it, is not necessarily newsworthy. It doesn't always hit the headlines, but it's still a very important component of our growth story. These routine growth dollars typically have higher rates of return, oftentimes more than the 5 to 7x EBITDA multiple we state as it relates to our larger-growth projects. It can consist of anything from well connects, NGL storage expansions, truck racks, laterals, capacity Creek projects a number -- are the types of things that can exist in this bucket.

One interesting item of note in the second bullet. We continually look for opportunities to maximize our asset performance, and through the optimization of our assets, really only take a minimal amount of capital, we can add 75 million a day of capacity in the Bakken, okay? Based upon our current forecast, we expect to fill most of this capacity by late 2015, when the Lonesome Creek plant comes online, okay? So it's a great, great opportunity for us at a relatively low cost to create considerable amount of capacity in the Bakken. And certainly, with the flaring that's been going on, it's very important to develop as much of this capacity as fast as we can.

Future growth. That $2 billion to $3 billion pops up again. We continue to announce new projects. And guess what? Our backlog continues to grow. So we've maintained it today at the $2 billion to $3 billion level. And it consists of all of those things that we do well in this business, natural gas, infrastructure, gathering and processing, NGL and some crude-related infrastructure projects, NGL fractionation, storage facilities, NGL export infrastructures, possibility, crude oil rail-loading facilities and the list goes on. But as we said before, as we continue to develop these projects, as we get contracts put in place to underwrite these projects, we'll announce them at that time, okay? So backlog continues.

So I'll turn it over to Derek.

Derek S. Reiners

Good. Thank you, Terry. I'm sure, by now, you've had an opportunity to review the news release we issued yesterday. I'll review the financial highlights for both ONEOK and ONEOK Partners, including our 2014 guidance and the new 3-year outlook. Important point to reiterate, as Curtis mentioned, the guidance that you see today has an assumption of a January 1 effective date for the separation. The financial results for ONE Gas will be included in ONEOK's financials through the actual date of the separation. So these numbers will need to be adjusted based on the actual closing date.

Okay. So let's begin with ONEOK. Going forward, ONEOK will be highlighting dividends, cash flow available for dividends and our dividend coverage ratio since our structure is changing to a pure-play general partner. The 2014 cash flow available for dividends midpoint is expected to be $600 million, driven by ONEOK Partners' cash distributions. We have the calculation in the news release and in the slide deck on Page 136 for your convenience. We expect to increase dividends declared by 53% compared with 2013, which includes an increase to $0.56 per share expected to be declared in April.

In the following quarters, in 2014, we expect an increase of $0.015 per share per quarter. Our dividend coverage ratio is expected to be 1.2 to 1.3x in 2014. I'll expand on that in just a moment. From a financing perspective, after the close of the ONE Gas separation, ONEOK will no longer be required to fund natural gas purchases during the summer months for use during the winter heating season. Also, as a reminder, the wind-down of our energy services segment will be completed by April 1, 2014. So with all these, ONEOK's capital and liquidity needs will be significantly reduced. And accordingly, we expect to reduce the size of ONEOK's credit facility to $300 million.

We expect our average annual dividend growth rate to be 20% to 25% between 2013 and 2016. Investors will receive a significant increase in the dividend expected to be declared in April, as I mentioned previously. So after that initial increase in 2014, we expect our dividend growth rate to average 10% per year in 2015 and 2016. We expect to retain a little extra cash for liquidity as we transition through the ONE Gas separation and the energy services wind-down. Accordingly, we're planning a higher dividend coverage ratio in 2014 compared with our long-term dividend coverage ratio target of 1.05x.

And I know many of you have had questions about our cash tax expectations. We assume bonus depreciation will expire in 2013, and no material cash taxes are expected to be paid in 2014, as we carry a net operating loss forward. Beyond 2014, ONEOK's cash tax rate is expected to be 15% to 25%. So to be clear, we've estimated this percentage based on the cash taxes expected to be paid by ONEOK divided by the total expected distributions received from ONEOK Partners.

Okay. Moving on to ONEOK Partners. The partnership's 2014 net income midpoint is expected to be more than $1 billion, a 27% increase compared with our current 2013 net income guidance, midpoint of $810 million. As a reminder, we expect the earnings to increase throughout the year as several projects we completed and volumes ramp up over that time. So they should be a bit more back-end loaded. The EBITDA midpoint is approximately $1.6 billion, a 26% increase compared with 2013 EBITDA guidance. Our 2014 distributable cash flow guidance midpoint is expected to be approximately $1.2 billion, and we expect to have more than $2.2 billion in capital expenditures in 2014.

You can see the various metrics in our 2014 guidance on this slide compared with previous periods. Our guidance includes a $0.015 per unit per quarter increase in distributions declared in 2014, and our coverage ratio is expected to be within our target range of 1.05 to 1.15x. This slide is a nice historical look at the ONEOK Partners' history of delivering cash to our unitholders. We're committed to prudent distribution coverage and to maintaining investment-grade credit ratings, which are very important to us as we pursue the capital program Terry described a few minutes ago.

At ONEOK Partners, we're projecting a 15% to 20% average annual EBITDA growth rate over the next 3 years. This growth is a result of the $2 billion in projects we completed in 2009 and the completion of projects that are part of our $6 billion program of announced projects, giving us the opportunity to continue to increase distributions to our unitholders. We expect 6% to 8% average annual distribution growth between 2013 and 2016, a healthy growth rate compared with our peers, especially considering the equity financings that, in many cases, precede the completion of our projects and the associated earnings.

This slide shows both distributions declared and distributions paid to help you in updating your models. Since ONEOK became a general partner in 2006, we've created an exceptional value for ONEOK Partners' unitholders, increasing distributions paid 67% since 2006, almost 30% since 2011. Comparing 2006 to our 2014 guidance, distributions paid per year represents a 7% compound annual growth rate. More recently, since 2010, the compound annual growth rate is 8% or a 35% total increase in distributions paid.

From a balance sheet perspective, we have good liquidity and a solid balance sheet. We expect to increase the size of the credit facility at ONEOK Partners to provide even greater support for the growth Terry talked about. The larger size will provide us greater flexibility and timing our access to the public debt and equity markets. And we'll also have an established commercial paper program, and we remain confident in our ability to raise the necessary capital in the public markets for debt and equity.

We also have a $300 million aftermarket or ATM program that allows us to issue equity on an ongoing basis, to reduce dependency on the large public equity offerings. We plan to utilize that ATM program a bit more aggressively going forward. And finally, we remain committed to our long-term goal of a balanced capital structure, 50% debt, 50% equity, and remain committed to our investment-grade rating.

So with that, Terry, I'll turn it back to you.

Terry K. Spencer

All right. Thanks, Derek. Appreciate that very much.

So let's talk about the NGL markets for a bit. Some of the key industry dynamics affecting the NGL markets today continue to be in the areas of supply growth in NGL-rich regions, slow but steady reductions in ethane inventory, strong propane demand fundamentals, record petrochemical demand and narrow Conway-to-Mont Belvieu spreads and a continued ethane rejection necessary to balance the ethane markets. We continue to see capacity creek from the petchems, and we appear to be on track to see the expected surge in ethane demand as the new world-class petrochemical plants start to come online in the 2017 time horizon.

This is a handy chart, and it depicts our view of ethane demand. It's very consistent to -- with some of the industry analysts who have charts up there as well. Ethane rejection has become the new normal. And until the world-class petrochemical plants come online in about the 2017 time frame, ethane rejection will continue to be a phenomenon that affects the marketplace. This slide is a graphical representation of when we see that ethane cracking capacity flip, if you will, to exceed the operating capability of the fractionation capacity in the industry. Until that flip happens, ethane prices will continue to be under pressure.

Well, you heard a lot of talk about growing exports, and we expect to see continued improvement and strengthening in propane prices going forward. There was about a -- recently, about a 2.4 million-barrel draw-off of inventory versus the forecasted 1.7 million-barrel draw-off, so that was pretty significant for the industry. We're seeing strong demand due to this growing export capacity. Seasonal heating demand is also affecting the markets today. And we saw a very strong crop growing demand this year, as compared to previous years, in particular in the farm belt.

We also expect to see more demand overseas from propane, as one of the industries -- we are one of the industry's largest suppliers of propane in the U.S. Our Gulf Coast infrastructure is certainly well positioned to serve export markets. So providing our infrastructure, fractionation, storage, services that we have, that capability we have in the Belvieu area, it puts us in a good position to be a supplier for those markets.

Our growth story is really about getting supply to market, and one of the key stories affecting NGL markets today, of course, continues to be the strong ethane demand. Petrochemical companies are executing on their strategies to capture the strong economic incentives from the low-cost and abundant ethane feedstocks. And accordingly, they have chosen to build a lot of capacity right here in the Gulf Coast.

So last but certainly not the least, here's a quick update on environment, safety and health. Certainly, we have a lot of priorities in this company, but none higher or greater than protecting the environment, the safety and health of our employees and the public domain. This remains at the very top of our priority list. Our efforts and focus will continue to be the prevention of serious job-related incidents and injuries, continued improvement in the area of asset integrity and mechanical reliability and the reduction of natural gas flaring in the Williston Basin. Those are key focus areas for us.

Okay. Well, that wraps up my slides. So we want to get rolling with questions and answers. We're ready.

Carl L. Kirst - BMO Capital Markets U.S.

Terry, Carl Kirst from BMO. A couple of questions. Actually, first just on the NGL market, maybe kind of keying off of that. In addition to ethane and propane, if you think that ethane rejection is going to last for some time, the rest of the barrel, I would say, is roughly half propane and half heaviers. There's certainly some question of what happens with the heaviers. We have more light oil and conde come on. So, one, can you give me a sense of what you're thinking there? And I'd like to see if you can put that in context of the $1.25 NGL commodity assumption for next year because relative to today, that seems a little conservative.

Terry K. Spencer

Okay. So let me answer the first part of the question, and then I'll give Sheridan the opportunity. If he wants to add anything, he can add something. But let me tell you, with respect to the heavy end of the barrel, strong export demand is going to be the future for normal butane, okay? That's our view. Export capability is being developed, as we speak, to put us in a position to export more normal. The markets, international markets need it and want it. I think the C5 end of the barrel, it's destiny, is Canadian dealing with demand. And certainly, our company's certain extreme be well-positioned with our infrastructure, particularly up into the Chicago area to connect those barrels and deliver those barrels into the markets that -- into those pipes and rail facilities that ultimately will take that C5 into the market. The $1.25 commodity price assumption that we have, certainly, looks a little odd because it presumes ethane rejection. If you were to recalculate this, and this -- maybe this will help you more than anything else. If you were to recalculate it and just assume the ethane prices that we have in our deck, you'd be back down into that $0.85 a gallon range. So when you do your comparison to try to determine whether you think it's a conservative price or not, take that $0.85 and compare it to the industry analysts who also run at a more typical composite price. I think you'll find it's pretty much in line.

Unknown Analyst

Couple of quick questions about the growth. In terms of crude-oil opportunities and transportation, and also expanding into the Niobrara, could you discuss what -- how that might fit into that $2 billion to $3-plus billion of unannounced potential growth CapEx, and what kind of timeframe you might have for thinking about expanding to some of these areas? And can you discuss the maintenance CapEx? It's not a huge deal, but we're up maybe 44% year-over-year into 2014. Is that a new good base case? Or should we think there's some less recurring items in that?

Terry K. Spencer

Well, certainly, let me talk about the first question first, crude oil. Certainly, crude oil infrastructure is in our $2 billion to $3 billion backlog. We don't have a major crude oil project in that backlog well, okay? What we have is more infrastructure-related rail and storage related to serve crude markets. Yes, across the spectrum, the Rockies, in particular, is where, from a crude standpoint, we see the most opportunity, in particular the Bakken. Let me just make one comment as it relates to crude. We continue to work and develop the large Bakken crude oil pipeline project, still though have yet to have sufficient contracts with which or announced contracts to make that project happen. But we haven't gone to sleep on it. We continue to work and develop it, okay? As you're well aware, that Brent to WTI basis continues to expand and contract wildly. And obviously, that affects the economics of this project. And it's certainly -- more importantly, it affects the perception of the producers and their willingness to sign the long-term contracts required to make a project like that happen, okay? As far as the maintenance CapEx is concerned, that increase, we -- our estimate in maintenance capital is about $100 million in 2013. We expect it to go up to about $144 million for 2014. A big chunk of that increase are some IT-related type infrastructure projects, certainly rated to the growth that we're experiencing. And then the balance of it is certainly just simply to accommodate the growth we're seeing across our assets. I think a new normal run rate is going to be that $120 million to $140 million going forward.

Unknown Analyst

Yes, Terry, if you could just comment on the volume ramp on MB-2 and MB-3. It looked like the capacity you have coming on is quite a bit larger than kind of what your fractionation volume outlook was. And so maybe you could just give a little detail on that?

Terry K. Spencer

A great question. This is where I turn it over to Mr. Swords.

Sheridan C. Swords

So would you repeat that question one more time?

Unknown Analyst

Just the volume ramp for MB-2 and MB-3, the fractionation capacity, just what like it was out running, what the volumetric guidance was, from '13 to '14? I think you're adding like 150,000 barrels a day of capacity, but I think you're showing the fractionation volume was running up maybe 45,000 barrels a day from '14 over '13?

Sheridan C. Swords

Well, and that is obviously a lot of the contracts for MB-2. MB-2 is 100% committed, but there is a ramp-up period for those plants that come on. So you're seeing that you don't build for what's there today, you build what the producer wants out forward as well. I think that answers your question.

Unknown Analyst

What's the ramp? I mean, what's the volume ramp [indiscernible] going on?

Sheridan C. Swords

MB-2 will be in 2015. And then MB-3 will probably be closer to 2016.

Terry K. Spencer

Before they're filled.

Sheridan C. Swords

Before they fill.

Unknown Analyst

Two questions, one of the growth capital side and then one on the financial side for Derek. Of the $6 billion to $6.4 billion of growth projects, a lot of it's going to be completed by 2014. So can you just give a little bit more color on the $2 billion to $3 billion of project backlog in terms of how confident you are in that, how soon to become real, and what sort of size, bites of projects are we talking about for that, for 2015 and beyond?

Terry K. Spencer

Steve, I'll make a general comment about that and these guys, if they have anything else to say, they can step in. But the backlog of growth projects at $2 billion to $3 billion, of course, I've already laid out what those are. There's more projects than this. Now we've -- these are kind of high-quality projects, okay, or projects that we believe that we've got a good chance of executing on them and being successful from a contractual standpoint. We've got a lot of other things back there that have not made this list, okay? So our confidence level in terms of, relative to everything that we're looking at from an infrastructure standpoint, our confidence level is pretty high in that $2 billion to $3 billion.

Unknown Analyst

And then one on the financial side for Derek. You talked about getting to a long-term coverage at OKE of 1.05x. Is that a 2015 event? And then also, the tax rate of 15% to 25%, what causes you to be at the low or high end of that?

Derek S. Reiners

Sure. The -- I'm sorry, Steve, your first question again?

Unknown Analyst

Sorry, the 1.05 coverage long term, when -- what is long term? Is that at 2015, 2016? Because you're up 1, 2, 3 for last year.

Derek S. Reiners

Actually, we expect to slide down in 2015 pretty considerably. You'll notice that the 2014 guidance that we've given you has 0 cash taxes being paid in 2014. That's a result of net operating loss carryforwards which basically gets back to bonus depreciation, shielding those taxes in the prior years. So we expect to roll through that in 2015 and to have a higher tax rate then. In terms of what puts us on the 15% end of the scale versus the 25% end of the the scale, it's a very difficult number, actually, to project because the big driver, of course, is the earnings from ONEOK Partners, which is heavily influenced by the depreciation rates. And so the timing of when those projects go into service, exactly what dollars we end up spending, as well as some complicating factors from a tax point of view in terms of tax book of events when you issue new equity units. So the 1.05 coverage that we're targeting here gives us a little bit of room to move within that band for the cash taxes. The interest expense, we expect, will be pretty stable going forward. So really, the cash tax number is a significant driver.

Unknown Analyst

Just a couple of questions. First one, on maintenance capital, what's the underlying sort of decline rate from the legacy valves that are connected to your system in the maintenance capital number? Being that I assume that you don't -- because the wells don't keep producing at the same rate forever. So is there an underlying sort of decline rate associated with that maintenance capital...

Sheridan C. Swords

Let me take a crack at this, and then some of our panel experts may jump in. But the maintenance capital that we have does not include well connects, okay? Well connects are in the routine growth that I mentioned, okay? So this is all about overhauling compressors and pumps. And that's what's in our maintenance capital numbers, okay? So there won't be a decline unless, of course, we start stripping away assets or get -- divesting of assets. That maintenance capital requirement will continue to grow as we continue to grow the asset base, okay?

Unknown Analyst

Sorry. The maintenance capital assumes sort of gathering and processing volumes remain flat throughout time of the legacy assets.

Terry K. Spencer

It's actually more driven by just -- not so much the throughput activity or the well connect activity. It's just driven by the bulk, the size of the infrastructure, okay? The amount of horsepower you have, we've got -- we operate a lot of compression horsepower and a lot of electric pump horsepower, that growth as we continue to build this infrastructure. And in lockstep with that, quite naturally, you'll have higher maintenance capital costs.

Unknown Analyst

Okay. And just a financial question, under guidance for '14. So in your '14 operating income guidance, you have energy services losing $15 million a year. And then in your '14 sort of cash flow available for dividend guidance, you have energy services cash flow as a positive $39 million. So is that just a working capital being returned to the company? And how does that kind of evolve going forward?

Sheridan C. Swords

That's exactly right. We will enter the year with significant gas in storage, which will be withdrawn during the first quarter. So that will convert to cash. So that's really that delta there. Going forward, beyond the first quarter, really all that you will see is a cash impact from energy services. And that's the payout of the capacity releases that we've done. And those numbers are in the release as well.

Unknown Analyst

Terry, just a few follow-up. Can you help me with the evolution of the Bakken? Lonesome Creek, I guess, is now the sixth plant, the largest plant. Has there been any change in some of the associated gas as far as the liquids content has gotten richer over time, leaner over time, staying roughly 10 ppm? And if you look at the acreage of 3 million acres, and I understand this is kind of a pay for development question, but how many plants or what kind of capacity can that kind of acreage ultimately build out to?

Terry K. Spencer

Sure. Great questions. Let me -- I'm going to answer the last one, and then Curtis -- I'll let Curtis talk about some of the more technical aspects. But the acreage, the development that's happening on our acreage, of course, is very significant. We're still seeing rig counts, 180, 190 rigs. What we're seeing that's occurring is the old drilling spacing, at 1,280 acres, they used to complete 3 to 6 wells on the average per drilling unit. Today, they're shifting to the 10 to 12 wells per drilling unit with the advent of multi-well pad drilling, okay? That's really changed the game for the Bakken. And what it's done is we've got 8,000 wells we produced out of the Bakken today, with a projected total to go to 40,000 wells. But that was before any adjustments were made with respect to the increased density from the multi-well pad drilling, okay? So you can do the math on that. They're finding new reserves. Every time they infill or they increase the density, they're finding new reserves. They're finding oil they haven't found before. And so, obviously, that gives you a sense of how much potential we think there is in the basin. We agree with it. You can get online and you can look at any of these producers' investor presentations that are very active in the multi-well pad drilling and you'll see what I'm talking about, okay? Curtis, did you want to make a comment about the changes in the NGL content or...

Curtis L. Dinan

Well, I think, probably, Terry, what we're seeing more of is where producers are moving to. So you're seeing them move into some of the areas that they're getting much better production out of their wells. We're seeing a little bit higher GPM, but I wouldn't call it a drastic change from what we've been seeing in the past few years. But we've seen, again, producers moving to these multi-pad well sites much more drilling into particular spacing units. And again, a little bit higher than GPM, but not drastically different.

Unknown Analyst

Can I just ask about the ONEOK, the OKE dividend for 2015 and 2016? I guess if you feel a little conservative, I'll just say it because with your 6% to 8% growth at OKS, usually you'd say rule of thumb is kind of 2x the growth of the GP, but you're still saying 10% in '15 and '16. Is there -- should we think about there's some upside with the '15 and '16 dividend? Or how should we think about that?

Curtis L. Dinan

Well, I think the key that I talked about before was the cash taxes that will turn around in 2015. And so that does, in fact, limit the ability there. The upside is really from ONEOK Partners, I think, in terms its distribution growth. And if that increases, then obviously that has a direct follow through the ONEOK.

Terry K. Spencer

Certainly, Ted, what's factoring the numbers at OKS, of course, is the current environment we're in, sustained ethane rejection, narrow Conway-to-Belvieu spreads, relatively soft product prices on the lighter end of the barrel. Obviously, if those things turn around, it could create some opportunity.

Unknown Analyst

And then can we just talk about the Bakken a little bit more in terms of the contracts. You said there's some fee based within some of the new processing plants you're building. There's a lot of percentage of proceeds. Maybe give us a flavor of is it mostly POP and a little bit of fee? Kind of are there [indiscernible] equipments embedded in the contracts? Just give us a sense of what happens if for whatever reason, the Bakken doesn't work out in 2 or 3 years and drilling rolls over, et cetera?

Terry K. Spencer

Sure. Curtis, do you want to take the contract question?

Curtis L. Dinan

Yes. It really varies by producer and by the different areas that we're in. But as a general rule of thumb, it's a little bit more POP and not quite as much on a fee basis. It will depend, again, upon where the particular production is coming from. So an area that may be a step out or an extension that requires a little bit more capital. There's going to be a little bit more of a fee component related to that or other assistance with that capital. So not every contract's the same, but those are probably pretty good rules of thumb.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Terry, let's pick up on what you're just discussing about those drivers for the 3-year growth at OKS. I think everybody is very happy what's announced for 2014, but we basically elongated, reduced the 3-year growth guidance from a year ago. And it seems like there's some specific drivers maybe down from $0.10 to $0.07 on the long-term spreads between Conway and Belvieu. You're saying 45% to 50% propane correlation. I don't quite remember what that was a year ago. If there's been any changes, maybe you can update us? Ethane rejection, certainly through all of '15 and '16 is change from what you're seeing a year ago. Is that driving all this? Or are there other factors? And can you comment on what your assumptions are around WTI itself? And also, what, if any growth CapEx coming online that's not an existing announced project is baked into any of these numbers?

Terry K. Spencer

Boy, that's a long question, Craig. Okay, let me talk -- the first one, you pretty much hit on. I mean, those fundamentals are out there. And certainly, that's been baked into our 3-year guidance, okay? We see sustained ethane rejection happening. That has been a change from when we last spoke about our 3-year guidance, okay? Our expectation in 2014 was for the market to rebalance itself. And that's -- that hasn't happened, okay? So our view is it is going to -- we're going to be in hard ethane rejection in the Mid-Continent and the Rockies in 2014. We expect to see some recovery in '15, still rejection in '15. So that has impacted our guidance numbers a bit, okay? From the neck -- what was the next question? You guys remember what it was?

Curtis L. Dinan

Terry, the other factor you might talk about is the capital spend as it relates to that distribution growth. And as I mentioned, we --

Terry K. Spencer

You got it.

Curtis L. Dinan

We do need to issue debt and equity as we construct these projects before they contribute to the cash flows and the partnership. And so that also has an impact and the announcements we've made. And we do have some of that $2 billion to $3 billion baked in to our forward book.

Craig Shere - Tuohy Brothers Investment Research, Inc.

[indiscernible] that baked in more in terms of debt and equity you'll need to finance things versus a net drag because those projects probably won't be coming online deep into 2016.

Curtis L. Dinan

Yes, that's right. It's really that lag between the issuance and when the assets get fully ramped up.

Craig Shere - Tuohy Brothers Investment Research, Inc.

And what were you assuming on WTI over the 3 years out?

Terry K. Spencer

Yes, we've got a slide that we're in that $95, $96 a barrel range. So it's, Craig, it's a bit lower. And we were carrying close to $100 a barrel back in -- out in those outyears last time we talked about this.

Unknown Analyst

Terry, just a quick question on the M&A side of things. I mean, we've known, over the years, there's a preference for organic build versus M&A given what the multiples are in that marketplace. But thinking about your crude oil aspirations, obviously have a nice buildout going on the Bakken. You like to capture that. As you noted, with NGL pipeline, things are progressing a little bit slower there. We've seen some peers with aspirations for crude oil sort of have a sense of getting iron in the ground, getting expertise around a crude oil program in order to sort of create a platform from which to build. And so I'm wondering, given that slower pace of buildout, given the change going on with the company, you're assuming the lead role from ONEOK Partners. If there's a change at all in the way you think about, perhaps, pursuing some acquisitions on the crude side to get that platform sort of kickstarted?

Terry K. Spencer

Certainly. It's a great question. Yes, we do have aspirations in the crude business. Certainly, our strategy has been to organically develop those opportunities, particularly because our footprint is so well positioned. We felt like, particularly in the case of the Bakken crude pipeline, we felt like we're at advantage because many of those producers we have relationships with today. That's really what drove that project other than the need. Acquiring our way into the crude business is certainly a possibility and something that we're on an increasing basis considered, okay? Again, those assets have to be the right kind of crude assets. We like pipelines. We like storage. Trucking business is probably not something unless it's something just really incidental and fairly minor. It's not something that we're going to be outwardly interested in going out and acquiring. Certainly, we'll continue to prospect and are prospecting the acquisition markets for crude oil assets. That help you, Chris? David.

Unknown Analyst

Terry, a few questions. First, on the Bakken NGL pipeline system, if you could just talk about, I guess, what's actually flowing on that system, and then your volume expectations with the 2 subsequent expansions, particularly in light of ethane rejection. And then the second question about Sage Creek, how has it been going with respect to being able to capture some of that incremental production out there? You've got the front range pipeline system that will, in theory, be a relatively close interconnect. How is that, I guess, those discussions going with some of those producers? And I guess how confident are you in terms of being able to realize that incremental $40 million to $60 million EBITDA?

Terry K. Spencer

Okay. So the first question is the throughput on the Bakken NGL pipeline today running 30,000 to 35,000 barrels a day. As we continue to develop opportunities not just around Sage Creek, but in the Bakken as well, we expect that capacity, which -- up to 160,000 barrels a day to be full in the 2018 timeframe. That's not assuming any ethane. That's assuming pretty much all C3-plus, okay? There are some firm obligations with respect to ethane that might cause some ethane to be shipped on the pipeline, but at a pretty low level. At least, that's in our plans. But does that help you there?

Unknown Analyst

Sheridan, with respect to adding the -- with the new 100,000 barrel -- or to get to the 135,000, and I guess the third quarter of '14, if you're flowing 30,000 to 35,000 now, then how do you expect that, I guess, to ramp once you get into third quarter next year, into the fourth quarter? Is it -- are you been able to fill up the initial 60,000 at that point? How do you see that kind of rolling out?

Terry K. Spencer

Well, I'll let Sheridan make a comment here.

Sheridan C. Swords

We need the 135,000 to be online by the end of next year to meet because the 60,000 is not enough. Now we won't fill the 135,000 when it comes online. That's just the next incremental expansion of the pipeline. And then when the 60 -- when we go to 160,000, we will need that to be on at the timeframe it is because we will be full at that time. And we'll need the 60,000 to capture the Lonesome Creek plant coming on. And when the Lonesome Creek fills, that's when the pipeline will be full. David, does that answer your question?

Terry K. Spencer

Now, David, one other comment I'll make that -- and we're not going to provide this information today, but there's going to be some third-party barrels that will come from third-party processing plants, okay, not just our own processing plant. So we're actively contracting to provide services to processors in the Powder River Basin, as well as in the Bakken. Then you had another question, second, Sage Creek?

Unknown Analyst

Yes, Sage Creek, Just how are those conversations going in order to aggregate, I guess, that production that you're seeing up there given that there's already a competitor that's in relative close proximity?

Terry K. Spencer

Right. Actually, it's going very well. Curtis probably won't provide you much detail because it's highly competitive information. But it's been going well. Our gathering and processing team's been very active in and around the assets and has been successful. And that's probably about all Curtis will let me say.

Unknown Analyst

If I look at your gathering and processing slides, I see that the Rockies well connections has gone up about 300 in recent years. From '13 to '14, it's going to 1/4 of that at 75, yet your gathered volumes for the Rockies are more than double than what it historically has been. Can you talk about what's driving that?

Terry K. Spencer

You got it, Curtis?

Curtis L. Dinan

Sure. Page 43. 43 is the exact deck slide. Well, part of what's going on is I mentioned earlier, producers moving to these multi-pad well sites. And so where, a few years ago, they were drilling, 1 maybe 2 wells on a section, now they're coming in and more the number's anywhere from 6 to some 10 or 12 per section. So as we're going in and connecting wells, we're connecting that whole well pad site at one time, even though all of those wells may not be flowing at that point in time. But we're ahead of the producer in that situation. So when they complete the wells and complete their frac jobs and those wells start producing, we're already there at that point.

Unknown Analyst

And then when I kind of think about your projects that has subsequent expansions, such as the Bakken NGL line, when you say 5 to 7x, is that collectively all the initial projects and all the expansions that you expected? So meaning the initial project is actually more than 5 to 7x and the subsequent expansions are probably less than 5x and collectively, it's 5 to 7x? How should we think about that?

Terry K. Spencer

Yes. I mean, that's probably the right way to look at it. It is collective. I mean, while we sit down with our board and we discuss our growth outlook and our specific projects, we group them into lots of buckets. And we talk about the incremental EBITDA. And here's where the fundamental, sound fundamental economic thinking prevails. We look at the income or EBITDA generated from each individual investment, okay? And then collectively, when we talk to you all about the kind of returns we generate, we're giving you the bucket in its entirety.

Unknown Analyst

One last question. You talked about the C5-plus going to Chicago and then to Canada for diluent. Do you have a sense of, I guess, what the price demand differential is? I'm just trying to get a sense of how long can that go on. Everyone talks about having lots of liquids and taking their C5 plus up there. And Marcellus, Utica all -- is that area as rich as everyone thinks it is? I mean, it's much closer. So are you concerned about some backing you out at some point?

Terry K. Spencer

I'm going to let Mr. diluent answer that question.

Curtis L. Dinan

You are correct. I mean, there's a lot of barrels being looked to go into the Canadian diluent market. But the question is if they get oversupplied, where does it go next? Then you're also seeing down on the Gulf Coast, people starting to announce condensate splitters and stuff like that. So that will end up being exported as well. There is a demand. We're getting demand for natural gasoline, people interested, international parties to take natural gasoline overseas.

Terry K. Spencer

Monroe's got a question.

H. Monroe Helm - Barrow, Hanley, Mewhinney & Strauss, Inc.

You mentioned the benefits from pad drilling, but recently, EOG Resources are winding up talked about changing their frac techniques and putting more sand in, trying to get the frac closer to the well bore. You're talking about a 30% to 40% uplift in IP rates. Do you see that in areas you operate in? And is there an opportunity for you to fill up these facilities at a faster rate than what's in your current plans?

Terry K. Spencer

Well, I'll let Curtis talk about that some, but your comment, what I will say is that the remarkable thing that's happening within our footprint is these producers have reassessed where they're finding new reserves, okay? And what they found is if you just imagine 2 640 sections laying right side-by-side, now imagine 12 well bores laying down side-by-side in those sections. And now we're talking going from 800-feet spacing between the well bores down to 600-feet spacing, in some cases. They're convinced they're finding new oil through their testing. Now certainly, their evaluating frac techniques in -- to continue. But I think the most remarkable thing for us has not been, in our area, has not been the frac technique, it's been their assessment of the increased density within the spacing unit going to 10 to 12 wells, and I've heard, in some cases, going to as many as 30 wells in a spacing unit. Curtis, you got anything else to add?

Curtis L. Dinan

We have probably seen some better wells. I don't know if I can comment as much on -- is it that -- what's going on with some of the techniques that you're describing as opposed to producers moving into sort of hydrating the place. So there's a little bit of that. But probably, what's more important to us as part of the -- maybe an add-on to the answer I gave earlier about the increase in the volumes compared to the number of well connects is, that by being there and being in front of producers, being able to connect the whole multi-pad well site at one time, we're also capturing a lot more of the initial flows. And so the high production that may be, if you were 30 days behind in the past and you're able to capture that now, you're seeing a much higher volume per well that gets captured over the life of that well. So that's being reflected in those volume numbers as well.

Terry K. Spencer

All right. Well, I think that wraps us up. I appreciate it. Oh, John's got closing remarks? And I'll sit down now.

John W. Gibson

Okay, will just take a moment to summarize what we've tried to communicate today. Obviously, we're focused on completing the separation. And as I indicated, we're making good progress on our timeline. And knock on wood, we will continue to accelerate that closing.

Following the separation, the new ONEOK, as we have called it, will become a pure-play general partner. And we expect higher than historical dividend payout. And all of that tied to our ONEOK Partners growth, and again, that growth competitive with her peers. ONEOK Partners, as I'm sure you've picked up, has a lot of runway in front of it. The growth that they've experienced or we've experienced has been driven by that volume growth as opposed to commodity or spreads. And we expect that to continue. We have a lot of projects on our plate. And although not specifically closed today, we have a lot of projects in the hopper. We look for opportunities to expand out of that footprint, but it's always good to stay focused on where you have a competitive advantage. And that continues to be as part of the sound economic thinking overarching and overriding to move into other areas just for the sake of moving in there. And then as we have in the past, we will continue to look for opportunities to grow through acquisition.

And finally, ONE Gas is, we believe, well-positioned to grow long-term, 100% regulated natural gas utility, stable earnings and cash flow through a very strategic plan put together by Pierce and his team. As you -- some of you may have noticed, Dan Harrison, who handles our day-to-day investor relations activities, and has done so since 2005, and currently is, among other things, responsible for IR and many things. But -- and I think as some of you know, Dan is a very close friend of mine going back into the '80s when we both worked for Phillips Petroleum. It was just very fortunate to have Dan come to work for ONEOK. And sitting in the audience, I think in each and every one of you would agree that after Dan joined our company, our ability to communicate our strategy, our expected results and our results has been much improved because of his efforts. He's been a great addition to our company. Unfortunately, as we speak, Dan is undergoing his second in a series of chemotherapy treatments for Stage IV esophageal cancer at M.D. Anderson in Houston. And I know that -- I know Dan, and I know many of you here do as well, that while his battle will be challenging, he has a very positive attitude, he's focused, some would argue as even hardheaded, and has the support of his family, his friends, all of the ONEOK employees, and has a very strong faith, as well as the best doctors in the world. So I hate to deliver that news to you, but Dan asked, as you would expect, that he do so.

And I guess, this is my last Investor Day. I should make a few comments and I'll keep them few because I see the lunch slide up there, and nobody here values food more than I. But it has been my privilege to serve as the CEO and Chairman of these companies. I'm very confident that each of these 3 companies has a lot of success in front of them, a very bright future. I'm even more confident in these management teams that you've seen today and even more confident in the ONEOK employees which you've not even seen. One thing we have been able to do over time is develop depth in our company as it relates to talent. As I look back over the 40-some-odd years starting Exxon and Phillips and Koch Industries and now ONEOK, for me, it's always been about the people. I've been fortunate to be involved in a lot of transactions, a lot of neat stuff, a lot of opportunities to learn. But for me, it's always been about the people, whether that'd be our employees, our customers, our investors and even our analysts. I've enjoyed the opportunity to meet people and to be with people. And I appreciate the opportunity to get to know all of you, some of you a bit better than others. But nonetheless, I wish you the very best as you go forward as well. And finally, I would ask for those of you of faith, that you take some time to pray for and think about our friend, Dan Harrison. I can assure you that this world is better with Dan Harrison. So with that, there's no need for any Q&A.

I will ask you to think of our next step is to break for lunch. And Andrew, do you have any particular, other than using utensils, anything else we should...

Andrew J. Ziola

Yes. You have to do that in Oklahoma. It's in the picnic. We'll have to put up the tablecloth, I guess. If we can have the ONEOK Partners team, they will have lunch in this little area over here. They probably don't see. I guess, it's some secret room. But it's got some tables and chairs. Though Sheridan and Rob and Derek had sit over there and they'll have lunch. The ONE Gas team will hover around this area here, as well as Terry Spencer. So feel free to grab your food, sit down and we'll mingle around here for a while. We will be in this room for at least an hour or so. Thank you very much. This concludes our 2014 Investor Day.

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