ONEOK Partners, L.P.'s (OKS) CEO Terry Spencer on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: ONEOK Partners, (OKS)

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

Q1 2014 Earnings Call

May 07, 2014 11:00 am ET

Executives

T.D. Eureste -

Terry K. Spencer - Chief Executive Officer, President, Director and Member of Executive Committee

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

Robert F. Martinovich - Executive Vice President of Commercial

Sheridan C. Swords - Senior Vice President of Natural Gas Liquids of Oneok Partners gp, llc

Wesley John Christensen - Senior Vice President of Operations

Analysts

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Carl L. Kirst - BMO Capital Markets Canada

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division

Theodore Durbin - Goldman Sachs Group Inc., Research Division

John K. Tysseland - Citigroup Inc, Research Division

Christopher P. Sighinolfi - Jefferies LLC, Research Division

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

John D. Edwards - Crédit Suisse AG, Research Division

Heejung Ryoo - Barclays Capital, Research Division

Operator

Good day, and welcome to the First Quarter 2014 ONEOK and ONEOK Partners Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to T.D. Eureste. Please go ahead.

T.D. Eureste

Thank you, and welcome to ONEOK and ONEOK Partners' first quarter 2014 earnings conference call. A reminder that statements made during this call that might include ONEOK or ONEOK Partners' expectations or predictions should be considered forward-looking statements, and are covered by the Safe Harbor Provisions of the Security Acts of 1933 and 1934. Actual results could differ materially from the project -- from -- for those projected in these forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Starting our earnings conference call is Terry Spencer, President and CEO of ONEOK and ONEOK Partners. Terry?

Terry K. Spencer

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

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

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

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

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

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

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

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

Derek S. Reiners

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

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

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

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

In the first quarter of 2014, ONEOK received $141 million in distributions from ONEOK Partners, an 8% increase over the first quarter of 2013. First quarter 2014 cash flow available for dividends was $211 million, providing 1.82x coverage. ONEOK increased its quarterly 2014 dividend, $0.16 per share to $0.56 per share, effective for the first quarter 2014, resulting in an annual -- an annualized cash dividend of $2.24 per share.

During the first quarter, we deleveraged our balance sheet and reduced our credit facility to $300 million, supporting our pure-play general partner strategy. We used a one-time cash payment of approximately $1.13 billion received from ONE Gas in January to repay $600 million of commercial paper borrowings and repay early $552 million of senior notes. We do not anticipate any short-term borrowings going forward, and now have $1.1 billion of long-term debt, with the next scheduled maturity in 2022.

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

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

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

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

Terry, that concludes my remarks.

Terry K. Spencer

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

Growth volume in the first quarter 2014 compared with the fourth quarter 2013 did increase slightly. However, natural gas volumes were affected by well freeze offs across our system due to severe cold weather. We have already seen a significant ramp-up in natural gas volumes across our system as the weather has improved since February. Our 2014 natural gas gathered and processed volume growth is heavily weighted towards the second half of 2014.

As you know, we proactively hedge to mitigate our commodity exposure, created by our percent-of-proceeds contracts. Since we were approximately 70% hedged in the first quarter 2014, prices were less of a factor.

The Natural Gas Liquid segment's first quarter results were 65% higher, due to significantly wider natural gas liquids location price differentials, related primarily to weather-related increased seasonal demand for propane. Midwest propane demand increased in the first quarter 2014 due to much colder-than-normal temperatures. And propane demand and prices were higher at the Mid-Continent market center in Conway, Kansas than they were in the Gulf Coast market center in Mont Belvieu, Texas. We were able to benefit from these market conditions because of the operational flexibility of our integrated assets, which enabled us to quickly respond to the needs of our customers.

The severe cold weather temporarily affected our natural gas liquids supply deliveries into our systems. Natural gas liquids volumes gathered and fractionated were sequentially down for a second consecutive quarter, as a result of severely cold weather and the termination of a contract. While our natural gas liquids volumes were down sequentially, our fee-based exchange services revenue has increased each year, as our customers secure more capacity under long-term firm contracts. As I mentioned earlier, our natural gas liquids volume guidance is weighted more toward the second half of the year. We expect natural gas liquids volumes to increase during the remainder of the year, as weather-related conditions continue to improve, along with the continued ramp-up of previously connected natural gas processing plants. Also, 5 of the 10 connections to new processing plants we plan for 2014 have been completed through April, with the balance occurring between now and the end of the year.

The Natural Gas Pipeline segment's first quarter 2014 results were significantly higher, up 53% due to increased rates and park-and-loan services as a result of strong weather-related seasonal demand. This level of park-and-loan activity was driven by strong Midwest weather-related demand, and clearly demonstrates the value of our market-connected natural gas pipeline assets, particularly during periods of peak demand. These assets primarily serve on-system customers, such as local natural gas distribution companies, electric generation facilities and large industrial customers -- or consumers, that is, that require natural gas to operate their business.

In general, ONEOK Partners' natural gas pipeline customers need natural gas supply to run their businesses, regardless of location price differentials.

As oil and liquids-rich natural gas development continues within our core areas, the need for midstream infrastructure grows. We are increasing our unannounced capital project backlog estimate to a range of $3 billion to $4 billion, from the previous range of $2 billion to $3 billion. This updated backlog does not include any potential acquisitions or the multibillion dollar crude oil pipeline project that we continue to discuss with producers in the Williston Basin. The backlog represents more of the same type of midstream projects that we continue to successfully develop and execute. This capital backlog reflects our continued commitment to serve our customers' needs in the Mid-Continent, Midwest and Gulf Coast regions and in particular, the Williston and Powder River Basins, where the majority of this incremental capital increase is targeted, and where producers continue to successfully develop acreage positions within our asset footprint. As we said previously, once we receive sufficient contractual commitments, we will announce these projects.

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

Now a brief review of our outlook on the NGL markets. We still believe that ethane rejection by natural gas processing plants connected to our natural gas liquids system will continue through at least 2016, after which new worldscale ethylene production capacity is expected to begin coming online. We believe the propane location price differentials between Conway and Mont Belvieu will continue to widen, as Midwest inventories have been increasing more rapidly than Gulf Coast inventories. Current Midwest inventories are down 9% compared with last year, and 11% lower than the 5-year average, while current Gulf Coast inventories are down 36% compared with last year, and 14% below the 5-year average.

The industry has experienced deep ethane rejection since late 2012, and has experienced some market disruption due to the extreme weather conditions. Our integrated assets have performed well in these extreme conditions, further demonstrating their value. In closing, I'd like to thank the employees of the new ONEOK, whose skills, experience, commitment and dedication allow us to operate our assets safely, reliably and environmentally responsibly every day, and create exceptional value for our investors and customers. Our management team and Board appreciate their hard work and commitment to make our company successful.

Operator, we're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Ethan Bellamy with Baird.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Do you guys want to be in the ethane export business?

Terry K. Spencer

Well, Ethan, we do. And for us, it's still a bit early. We obviously have been listening to the enterprise's project updates, with respect to ethane exports. We've always been supportive of it. We've always believed that ethane exports in this industry will happen. The right time for us will be a function of our relationships with customers, developing international markets. But it's still a bit early for us. Certainly, it's something that we're -- that we consider, along with other export opportunities, particularly as it relates to propane and LPGs. But I guess, the short answer is yes.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

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

Terry K. Spencer

Well, the flaring certainly creates a very high sense of urgency from our producers. And that in and of itself creates the opportunity. We are absolutely committed to reducing the flaring, building the infrastructure necessary to allow these producers to not only reduce their impact to the environment, but also enhance their sales revenues. So certainly, as the flaring continues in the Bakken, it is clearly creating opportunity for us. Ethan, let me just make one comment, going back to the ethane question, which, I think was a great question. With respect to ethane exports, our role does not necessarily have to be operating or managing export docks, okay? Our role could be on the upstream side, and most likely will be on the upstream side, providing that infrastructure -- transportation infrastructure, storage and fractionation infrastructure necessary to get that ethane to those facilities. So I just wanted to add that comment.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

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

Derek S. Reiners

Sure, Ethan. That -- I think what we have guided there is a 15% to 25% cash tax rate. As we look at 2014, we haven't -- a net operating loss it would be working off. But we expect to pay cash taxes beginning in 2015. Of course, that's all subject to any legislation that may come down, particularly as it relates to bonus depreciation.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

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

Derek S. Reiners

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

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Can you quantify that? Is that low end of that range or...

Derek S. Reiners

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

Operator

Our next question comes from Carl Kirst with BMO Capital.

Carl L. Kirst - BMO Capital Markets Canada

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

Terry K. Spencer

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

Carl L. Kirst - BMO Capital Markets Canada

It's just as far as being able to still make the guidance as far as the NGLs fractionated, gathered, et cetera for the year?

Terry K. Spencer

Absolutely. We have a number of things going on in that segment, supplies from new process and plant connections. We've got the Sterling III Pipeline, and that we're going to have 9 months of that. We got the impact from NGL supplies coming from our own affiliated processing plants. So we got a lot of things -- a lot of things happening, ramping up, back-end loading that financial performance. So that's kind of how we fill that gap.

Carl L. Kirst - BMO Capital Markets Canada

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

Terry K. Spencer

Well, first of all, from an economic performance perspective, these projects, we're still seeing these things come in, and at 5x to 7x. So we really don't -- because of the strength of our footprint, and in particular, in the Bakken, we haven't seen much pressure on the economics. From a timing standpoint, it runs the whole gambit [sic] [gamut]. I mean, we -- certainly, the projects that are more infrastructure-related, it is projects that are gathering upstream of our processing facilities in the Bakken. Those projects are going to happen faster. That is well-connect type projects. But the ones that will be longer lead time will be processing plants, large trunk lines, compression facilities. That type of thing will take more time. Infrastructure projects, like fractionators, will take longer time. Those will -- certainly, the construction period for fractionator's a couple of years. But -- so I hope that maybe that gives you a sense. We've not been real specific on the timing of our growth -- capital growth backlog, but hopefully, that gives you a sense.

Operator

Our next question comes from Jeremy Tonet with JPMorgan.

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division

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

Robert F. Martinovich

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

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division

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

Robert F. Martinovich

Sure. I guess, Jeremy, with regards to the kind of the incremental, where Terry kind of focused in on was specifically in the Williston Basin and the Powder River Basin. So that would be the gathering, processing plant's infrastructure, and then appropriate connects from a standpoint -- of a liquids standpoint. But certainly, as you broaden out that, and look at the overall, kind of the $3 billion to $4 billion, excluding that incremental increase over the 2 to 3, those are exactly the type of things that we're talking about, that from G&P, but also get into the NGL functions, with regards to fracs, pipelines. And certainly, we're still evaluating export opportunities, both from a supply, as well as facilities themselves.

Operator

Our next question comes from Ted Durbin with Goldman Sachs.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

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

Terry K. Spencer

Sheridan?

Sheridan C. Swords

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

Theodore Durbin - Goldman Sachs Group Inc., Research Division

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

John K. Tysseland - Citigroup Inc, Research Division

Yes. From here forth, not from an average for the year, but from here forth, that, that will be there and it will widen a little bit from where it is today.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

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

Sheridan C. Swords

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

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Okay. And then a last one for me. Just -- you've increased the backlog, it sounds like, for OKS. And then, presumably that would then push through to higher cash flows and distributions, and then up to OKE. I'm just wondering if we can talk about, as you look out to '15 and '16, and your dividend growth guidance, maybe just focusing on OKE of 10%. Could we see that number notch higher as we bring these projects in?

Terry K. Spencer

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

Theodore Durbin - Goldman Sachs Group Inc., Research Division

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

Derek S. Reiners

Yes, Ted. We'd sure like to be investment grade there. Of course, Moody's does have us there. S&P's got us a notch below. It's not critical to our strategy to be investment grade at OKE. But I think it'd be nice to have a differentiator for us to be there. Our leverage is going to be sub 2x, I think, as you look out.

Operator

Our next question comes from Chris Sighinolfi with Jefferies.

Christopher P. Sighinolfi - Jefferies LLC, Research Division

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

Terry K. Spencer

Well, I would say that certainly on the spot side or cash side of the business, the unhedged side, certainly, there were some realizations due to the weather -- some impacts due to weather, rather. But Rob, did you get -- anything you can add to...

Robert F. Martinovich

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

Terry K. Spencer

I mean we've -- the prices -- the net realized prices stay pretty close to the same in-line, quarter-over-quarter. It's a function, Chris, of where you set the hedge prices at. And we set them at a price that -- that, I mean, we've got that clearly in our hedge tables. We set it at a low $4 price. That's reflected in this net realized price. It's -- as we -- our hedging policy, we target a 75% hedging level, okay? We don't try to pick prices as we move throughout the year, because we're not very good at picking prices. We try to exercise discipline and systematically hedge ourselves as we move through the year, regardless of where the prices trade. And so, they fall out where they fall out. I hope that helps.

Christopher P. Sighinolfi - Jefferies LLC, Research Division

Okay. Yes, just, I guess, given the hedge level, the price and then sort of what happened, certainly with gas pricing in the quarter, I would've thought -- we would've maybe seen a better aggregate realization. But I'll just dig in a little bit deeper on that off-line, Terry. I guess, switching real quick to Sterling III. Congrats on having that come in. I did notice in last night's release there were some very minor adjustments to some of these specs listed there, in terms of capacity -- expandable capacity, CapEx link, things like that. I was just wondering, if you could talk a little bit about those amendments, the implementation was a little bit delayed over the winter. Was it tied to that? And did you get any additional commitment to carry for that line? I think we were at about 75% before.

Terry K. Spencer

Rob? Take that one?

Robert F. Martinovich

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

Terry K. Spencer

Wes, do you have anything you want to add to that?

Wesley John Christensen

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

Christopher P. Sighinolfi - Jefferies LLC, Research Division

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

Terry K. Spencer

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

Christopher P. Sighinolfi - Jefferies LLC, Research Division

Okay, great. Final question for me, guys. Just realize 1Q was seemingly all about propane and propane spread. But we've seen consistently strong deltas on isobutane. And just wondering, Terry, if you can offer any commentary about the, sort of the ability to capture. I know you have an isom unit in the Mid-Con. And we're still seeing some nice premiums up there.

Terry K. Spencer

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

Sheridan C. Swords

I mean, yes, obviously we capture the spread in the isom unit, but also that demand up in Conway allows us to increase throughput on our door system as we deliver ISO into the refineries in the upper Midwest as well.

Operator

Our next question comes from Becca Followill with U.S. Capital Advisors.

Rebecca Followill - U.S. Capital Advisors LLC, Research Division

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

Terry K. Spencer

Yes, we have lots of exposure to that.

Operator

Our next question comes from Craig Shere with Tuohy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

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

Terry K. Spencer

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

Sheridan C. Swords

The only thing I'd add is your other question was on exports. That exports, obviously, that -- it's just like bringing on more demand in '16 that we didn't see. And it's not as dependent upon the big buildout of the crackers. So that's -- and in long-term helped ethane prices.

Craig Shere - Tuohy Brothers Investment Research, Inc.

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

Terry K. Spencer

Yes, we can, Craig. That footprint was a natural extension of our existing footprint. And it's connected by our NGL position. It's a great platform for us to get into a new basin, to participate in gathering and processing, as well as liquids. I think the opportunity for us to invest in the crude oil side of the business up there as well is there. So, yes. I mean, it's a great extension, and it is going to afford us lots of opportunity. I think the drilling results have been very good, and we're continuing to see a lot of development. We're having success at signing up new acreage packages to our facilities, and our expectation is for this asset footprint to be a big part of our business.

Craig Shere - Tuohy Brothers Investment Research, Inc.

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

Terry K. Spencer

Well, Craig, certainty, that's something you could consider. But certainly not high on our list. Our strategy is very clear, to operate ONEOK as the, a pure-play holding company. We really don't have any plans on the horizon to make investments or to lever up OKE. The strategy of maximizing the cash dividend to our shareholders is top priority. And we won't operate with blinders on. We'll always be aware of opportunities that are out there. We'll have -- we'll be flexible. But as we sit today, this is our priority.

Operator

Our next question comes from John Edwards with Credit Suisse.

John D. Edwards - Crédit Suisse AG, Research Division

Just one more follow-up on the increase in the backlog. What kind of changes to the mix of those projects are you seeing?

Terry K. Spencer

Rob?

Robert F. Martinovich

Hey John. Well, with regard to that incremental, it's going to be more weighted towards GNP, as Terry mentioned, from a processing opportunity, in both the Bakken and the Powder River basins.

John D. Edwards - Crédit Suisse AG, Research Division

Okay. That's something incremental. And are you seeing any changes to that underlying?

Robert F. Martinovich

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

Operator

Our next question comes from Helen Ryoo with Barclays.

Heejung Ryoo - Barclays Capital, Research Division

The -- on the optimization margin, the -- was there a change in the capacity you've allocated to the optimization business this quarter versus a year ago?

Terry K. Spencer

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

Sheridan C. Swords

The only thing I can say is that actually, we continue to try to turn that into fee-based. Return our optimization capacity into fee-based revenue.

Terry K. Spencer

And you certainly see that in the exchange revenue portion of our business as it continues to grow. So Helen, for competitive reasons, that's why.

Heejung Ryoo - Barclays Capital, Research Division

Okay, I understand. I -- Just directionally, I was wondering, I know you don't give out the actual capacity number, but just directionally, this quarter versus a year ago, whether there has been a significant change in how much optimization volume you were running or not. But I understand. And then just, I guess, related to this and maybe you won't be able to answer this, but I'll just throw it out. You just talked about how you expect the ethane and propane spread to widen going forward. And I guess, Sheridan kind of answered just now that despite sort of your outlook, you expect to have sort of more capacity allocated to the third-party business, rather than trying to keep a bit more optimization capacity than before. Am I understanding you correctly?

Terry K. Spencer

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

Heejung Ryoo - Barclays Capital, Research Division

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

Terry K. Spencer

Rob?

Robert F. Martinovich

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

Heejung Ryoo - Barclays Capital, Research Division

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

Robert F. Martinovich

It's going to vary by area. I mean, this one ramped up -- we thought it would ramp up within 45 days, or be full effectively within 45 days. And we're there. Plants that we have in the Bakken, Garden Creek II that comes on in the third quarter, we expect also a very quick ramp-up on that because it's going to be waiting for processing capacity. When you get to Garden Creek III in the first quarter of next year, that's going to be a little bit slower ramp-up, just because of the short interval between those 2 plants coming online. So it really depends on the area and the volume.

Heejung Ryoo - Barclays Capital, Research Division

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

Robert F. Martinovich

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

Operator

Our next question comes from Carl Kirst with BMO Capital.

Carl L. Kirst - BMO Capital Markets Canada

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

Robert F. Martinovich

No, there's really not, Carl. I mean, that just, I think is showing the growth that we've seen with regards to the Bakken plants coming online, Stateline II coming online last April, the 30% of Maysville that we now have, as well as just your continued ramp-up of volumes in each of our existing facilities, both in the Bakken and the Mid-Continent.

Carl L. Kirst - BMO Capital Markets Canada

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

Robert F. Martinovich

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

Operator

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

T.D. Eureste

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

Operator

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

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