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Executives

Dan Harrison – VP, Communications and IR

John Gibson – Chairman, President and CEO

Robert Martinovich – CFO

Terry Spencer – COO, ONEOK Partners

Pierce Norton – COO

Analysts

Stephen Maresca – Morgan Stanley & Co. LLC

Ted Durbin – Goldman Sachs & Co.

Yves Siegel – Credit Suisse

Ross Payne – Wells Fargo Advisors LLC

Craig Shere – Tuohy Brothers Investment Research, Inc.

John Tysseland – Citigroup Global Markets

Michael Blum – Wells Fargo Advisors LLC

Andrew Gundlach – First Eagle Investment Management LLC

Carl Kirst – BMO Capital Markets

Jack Moore – Harpswell Capital Management LLC

ONEOK, Inc. (OKE) Q2 2011 Earnings Call August 3, 2011 11:00 AM ET

Operator

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

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

Dan Harrison

Thank you. Good morning and thanks, everyone, for joining us. A reminder that any statements made during this call that might include ONEOK or ONEOK Partners’ expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934.

Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.

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

John Gibson

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

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

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

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

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

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

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

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

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

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

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

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

Now some perspective on the share-based costs that affected our second quarter results, primarily in the Natural Gas Distribution segment. As you know, the ONEOK share price has increased significantly this year.

Our employee stock award plan awards one share of stock to each employee whenever we hit an all-time high in $1 increments. This program is part of our total compensation package and was created to reward employees for their contributions in creating shareholder value and to align their interest with shareholders.

Since the program’s inception in 2004, we’ve awarded 50 shares of ONEOK stock to employees and 20 shares so far this year, 19 in the first six months and a 20th share in early July. It is important to note that employees went three and a half years from May of 2007 until December of 2010 without an award.

As the cost for these awards amounted this year, a suggestion was made to me to terminate the program to address these rising costs and unplanned expenses. We considered this suggestion but decided to continue the program for several reasons.

First, while the expense is not insignificant, it is a small price to pay for the value our employees have created, which is more than $2 billion in share price appreciation since the beginning of this year. Second, the program did what it was supposed to do, align employees’ interest with shareholders.

And finally and perhaps more importantly, what would it say about us as a company and as a leadership team if when the program starts to significantly reward employees, we terminate it. It’s our leadership teams’ responsibility to find ways to overcome these costs and with the help of our employees, we’re looking for ways to do just that through cost savings or revenue growth within the company.

At this time, Rob will now review ONEOK Partners’ financial highlights and then he will hand it off to Terry, so that he may review the partnership’s operating performance. Rob?

Robert Martinovich

Thanks, John, and good morning, everyone. In the second quarter, ONEOK Partners reported a 63% year-over-year increase in net income. Distributable cash flow increased 48% compared with the second quarter last year resulting in a coverage ratio of 1.44 times.

In July, ONEOK Partners completed a two-for-one split of the partnership’s common units and Class B units. This split enhances liquidity and makes our units more accessible to a broader base of potential investors.

Also in July, we increased the distribution by $0.01 per unit on the split adjusted basis or $0.02 per unit on a pre-split basis, twice the amount we had in 2011 guidance due to the strong NGL performance that Terry will discuss in a moment. Pending board approval, the partnership now anticipates increase in the distribution $0.01 per unit per quarter for the remainder of 2011, building on the second quarter 2011 distribution increase which marks the 19th increase since ONEOK became sole general partner five years ago, a 46% increase.

We’ve updated the partnership’s 2011 earnings guidance to a range of $630 million to $660 million to reflect higher than anticipated earnings in the natural gas liquids segment. We increased our 2011 capital expenditure guidance to $1.3 billion to reflect the partnership’s purchase of the Bushton plant leased equipment for approximately $94 million, plus acceleration of G&P infrastructure projects in the Bakken Shale. This breaks down to $1.2 billion in growth capital and $102 million in maintenance capital.

We now estimate the partnership’s 2011 distributable cash flow to be in the range of $735 million to $765 million compared with its previous range of $625 million to $675 million.

We are still confident in the three-year financial plan guidance on EBITDA and distribution growth we provided last October and expect to update that three-year plan in September at our Investor Day. We will also release our 2012 financial guidance at that time.

We have hedges in place to lock-in margins on our expected equity volumes in the natural gas gathering and processing segment, which is the most sensitive to commodity price changes. Our news release contains information on the updated hedges.

At the end of the second quarter, the partnership had $432.2 million in cash and no commercial paper or other short-term borrowings. Our debt-to-capital ratio was 54% and a debt-to-EBITDA ratio of 3.85.

Earlier this week, ONEOK Partners entered into a new $1.2 billion revolving credit facility that expires in August 2016, expanding the capacity and flexibility of our previous agreement. Finally, we still do not anticipate any additional financing this year, but we’ll continue to monitor the capital markets and be prepared to take advantage of any opportunities.

Now, Terry will review the partnership’s operating performance.

Terry Spencer

Thanks, Rob, and good morning, everyone. The partnership had an exceptional second quarter. Operating income increased almost 40%, driven primarily by higher optimization margins in the natural gas liquids segment due to wider NGL price differentials between Conway and Mont Belvieu, due to increased fractionation and transportation capacity available for optimization activity.

Earnings also increased as a result of contract renegotiations for some of our NGL exchange services activities and higher isomerization margins in our NGL business, as well as higher commodity prices in the natural gas gathering and processing segment.

This morning, I’ll discuss our operating performance and updated 2011 guidance, discuss our outlook of the NGL markets, and close with a status report on our growth projects.

The natural gas gathering and processing segment’s second quarter financial results were higher than the same period in 2010 due primarily to higher net realized commodity prices and changes in contract terms.

We increased slightly this segment’s operating income guidance for 2011 reflecting, lower than expected gathering and processing volumes compared with our original 2011 guidance. Offsetting the operating income reduction are higher earnings from our equity investments.

We now expect processed volumes to be up 3% over last year and gathered volumes to be down 3% compared with last year. These estimates reflect adjustments in drilling schedules by a Western Oklahoma producer, weather-related outages and continued declines in the Powder River Basin of Wyoming, offset by volume growth in the Williston basin and Cana-Woodford. The Powder River volumes represent approximately 12% of our total gathered volumes but generate less than 4% of our gathering and processing segment’s net margin.

The natural gas pipeline segment’s second quarter results were lower compared with the second quarter last year due to increased operating expenses and lower transportation margins from narrower regional natural gas price differentials that decreased interruptible volumes and contracted capacity on Midwestern gas transmission.

Northern Border’s earning were up more than 30% as it maintained its competitive position by transporting Canadian sourced supply to markets in the Midwestern United States. Most, if not all, of Northern Border’s capacity is contracted through October 2012.

We reduced this segment’s operating income to reflect narrower natural gas price location differentials that have lowered the demand for interruptible transportation services on Midwestern and on the balance of our transmission pipelines.

We do expect higher earnings from our 50% interest in Northern Border pipeline. Almost 85% of our wholly-owned pipelines’ subscribed capacity serves end users such as natural gas distribution companies and electric generators that need gas to operate their businesses regardless of regional price differentials. Approximately 82% of our pipeline capacity and 100% of our storage capacity is contracted under firm long-term contracts.

Our natural gas liquids segment continues to benefit from more available fractionation and transportation capacity for optimization activities and favorable NGL price differentials. Contract re-negotiations associated with our exchange services activities and higher isomerization margins from wider price spreads between normal butane and isobutane also helped earnings.

Excluding the impact from these favorable differentials, our base business exceeded our expectations. We fractionated approximately 541,000 barrels per day including barrels fractionated at the target facility from the fractionation services agreement that began during the second quarter. We expect fractionation capacity to remain tight but gradually become more available as new frac capacity comes on line over the next few years.

NGLs transported on our gathering lines were 432,000 barrels per day and exclude the Overland Pass volumes that were de-consolidated last September. If you back out the Overland Pass barrels for the second quarter of last year, NGL gathered volumes were up 15% and up 9% compared with the first quarter as a result of increased volumes gathered on the Arbuckle Pipeline and in the Mid-Continent.

Arbuckle Pipeline volumes have increased more than 160,000 barrels per day versus current capacity of 180,000 barrels per day that will increase to 240,000 barrels per day in 2012.

We increased our operating income guidance for this segment significantly to reflect higher than expected NGL optimization margins from wider NGL price differentials and increased NGL transportation capacity available for our optimization activities. For the remainder of 2011, we have assumed a $0.15 per gallon Conway to Mont Belvieu average ethane price differential.

Now, an update on our projects. In May, we announced plans to build the 570-mile Sterling III pipeline and the 75,000 barrel per day Mont Belvieu II fractionators, enabling us to serve the rapid NGL supply growth within our footprint. Producers continued to aggressively drill in a number of unconventional NGL-rich resource plays in the Mid-Continent and Rockies.

As a result, many new natural gas processing plants are being constructed in Oklahoma and the Texas Panhandle to process NGL-rich natural gas that’s being produced in the Cana-Woodford Shale, the Granite Wash, the Woodford Shale, and now the emerging Mississippian Lime formation. Development also continues in the Rockies, specifically in the Bakken and Niobrara plays.

Due to this strong supply growth, NGL prices in the Mid-Continent market center at Conway, Kansas, are significantly lower relative to prices at Mont Belvieu, Texas. Current NGL price differentials between Conway and Mont Belvieu for ethane exceed $0.20 per gallon. These wide differentials have steadily trended upward climbing from about $0.03 per gallon in 2005 to more than $0.15 per gallon for much of this year.

Another factor driving the wide location price differential is strong ethane demands from the petrochemical sector located primarily on the Gulf Coast due to the price advantage ethane has had over other feedstocks.

A number of petrochemical companies have announced additional heavy-to-light feed conversions, expansions of existing plants and construction of new world scale petrochemical plants on the Gulf Coast that will add more than 400,000 barrels per day of incremental ethane cracking capacity by 2017.

Consequently, pipeline capacity between the two NGL market centers remains constrained. NGL producers need more capacity to accommodate their growing NGL volumes and the producers supplying their plants continue to drill in NGL-rich plays. The current wide NGL price differential exceeds the level necessary to support a new pipeline.

As new capacity between Conway and Mont Belvieu is developed, we believe the price differentials will narrow considerably, possibly to the $0.08 to $0.10 per gallon range over the next few years. We believe that now is the ideal time to contract capacity on a new pipeline, while NGL price location differentials are high and demand for capacity is high.

Our existing Sterling I and II Pipelines, which transport NGL purity products, are near capacity today. And our Arbuckle Pipeline, which transports unfractionate NGLs from the Mid-Continent to the Gulf Coast, is expected to approach its capacity in 2012.

Our new Sterling III Pipeline will nearly double our existing NGL transportation capacity between Conway and Mont Belvieu and provide our NGL infrastructure with added flexibility as all three Sterling pipelines will be able to transport either unfractionated NGLs or purity NGL products.

The Mont Belvieu II fractionator is integral to our strategy of providing our customers with a full range of services. We received our air quality permit from the Texas Commission on Environmental Quality and construction is now underway. We continue to secure supply commitments for both Sterling III and Mont Belvieu II and expect to have substantially all of the available capacity committed well before these assets go into service.

Turning to our Bakken projects. We are investing approximately $1.5 billion to $1.8 billion to build three new 100 million cubic feet per day natural gas processing plants and related infrastructure and the 500 plus mile, 60,000 barrel per day Bakken NGL pipeline along with the expansions of the Bushton fractionator and the Overland Pass pipeline.

Despite flooding and highway restrictions, our projects remain on schedule. We expect our first processing plant, Garden Creek, to be in service by the end of this year and the Stateline I and II plants to be in service in 2012 and 2013 respectively. The Bakken NGL pipeline is also on time and on budget with engineering and design, right away acquisition and ground surveying moving ahead.

In addition to growth projects we have already announced, we are continuing to evaluate a lengthy backlog of natural gas and NGL-related infrastructure projects including investments in natural gas pipelines, processing plants and NGL storage facilities.

John, that concludes my remarks.

John Gibson

Thank you, Terry. Now Rob will review ONEOK’s financial performance and then Pierce Norton will review ONEOK’s operating performance. Rob?

Robert Martinovich

Thanks, John. ONEOK’s second quarter net income increased by 32%, driven primarily by the strong performance at ONEOK Partners. Operating costs were higher primarily due to increased share-based compensation and other benefit costs.

Share-based compensation costs include stocks issued to employees and directors under the company’s long-term incentive plans and the employee stock award program that John mentioned that awards one share of stock each time ONEOK stock closes at or above a new $1 benchmark. Through the first six months of 2011, we have awarded an unprecedented 19 shares of stock at a cost of $8.9 million, a relatively small price to pay we believe, for creating the additional shareholder value that John mentioned.

In May, ONEOK executed a $300 million accelerated share repurchase agreement with Barclays Capital. The repurchase will be funded by available cash and short-term borrowings.

This repurchase is part of a $750 million share repurchase program through 2013, with an annual maximum of $300 million authorized by our board last fall. Based on the repurchase of shares and the issuance of shares under our share-based compensation programs, we expect the average amount of diluted shares outstanding for 2011 to be approximately 107 million, a net decrease of approximately 1 million shares compared with the average for 2010.

ONEOK’s year-to-date 2011 standalone cash flow before changes in working capital exceeded capital expenditures and dividend payments by $153.2 million. This includes the benefit of bonus depreciation which will continue to benefit us through 2012. With the partnership’s updated 2011 distribution level, ONEOK will receive approximately $333 million in distributions this year, a 10% increase over 2010. ONEOK’s income taxes on the distributions from the LP units it owns are deferred contributing to ONEOK’s strong cash flow.

We also updated guidance for ONEOK in 2011. Net income is expected to be in the range of $325 million to $345 million compared with its previous range of $325 million to $360 million. The updated guidance reflects higher anticipated earnings in the ONEOK Partners segment offset partially by lower expected earnings in the Distribution and Energy Services segments.

Our updated standalone cash flow before changes in working capital is expected to exceed capital expenditures and dividends by a range of $180 million to $210 million versus our previous guidance range of $235 million to $275 million. The change reflects our revised ONEOK earnings guidance.

The standalone cash flow includes the benefit from the bonus depreciation I mentioned earlier. We anticipate standalone cash flow before changes in working capital to exceed capital expenditures and dividends by a range of $150 million to $200 million per year over the next three years. Embedded within that expectation are the more aggressive dividend growth and the targeted payout ratio we provided last fall.

In July, we increased our dividend by $0.04 a share which represents an 8% increase since the beginning of the year and a 17% increase since last fall when we announced plans to increase the dividend by 50% to 60% over a three-year period while maintaining a 60% to 70% payout ratio.

ONEOK’s liquidity position is very strong. At the end of the second quarter on a standalone basis, we had $526.6 million of commercial paper outstanding, $45.4 million of cash and cash equivalents, $302.3 million of natural gas and storage, and $671.4 million available under our new credit facilities. Our standalone total debt to capitalization ratio at June 30th was 42%.

ONEOK’s significant cash flow and excellent liquidity position continues to give us tremendous financial flexibility for dividend increases, share repurchases, purchasing additional ONEOK Partners’ units and acquisitions.

Now, Pierce will update you on ONEOK’s operating performance.

Pierce Norton

Thanks, Rob, and good morning, everyone. Let’s start with our Distribution segment. Similar to the first quarter of this year, second quarter 2011 earnings were lower because of higher operating cost, primarily the share-based compensation cost previously mentioned.

Because the Distribution segment has the most ONEOK employees, it was allocated the largest portion of these share-based compensation costs which accounted for $5.5 million of the quarter-over-quarter operating expense increase and more than $11 million of the year-to-date increase. As John mentioned, absent these costs, the segment performed as we expected it would.

Net margin was relatively unchanged compared to the same period last year. The Distribution segment operating income guidance for 2011 has been updated to $218 million to reflect the higher year-to-date share-based compensation and employee-related benefits cost. Our revenues for this segment remains strong and are on plan.

Now, a brief regulatory update. In July, the Oklahoma Corporation Commission approved Oklahoma Natural Gas’ first annual performance-based rate filing. We had not sought any modifications to the customer’s rate since our return on equity was within the range approved by the Commission. In May, the Commission also approved Oklahoma Natural Gas’ energy efficiency application allowing us to recover cost and receive performance incentives for various energy efficiency programs.

In Texas, the annual filing of our Gas Reliability Infrastructure Program, known as GRIP, was approved for $1.5 million in May for Austin jurisdiction with new rates taking effect in June. We are waiting to hear from the City of El Paso on our $1.1 million GRIP filing there. Upon approval, these new rates would take effect in August.

We continue our efforts to grow our rate base by investing in projects that provide benefits to our customers and our shareholders. Year-to-date in 2011, the Distribution segment invested $109 million of capital compared with a $78 million for the same period last year. The increase is due to the timing of routine construction activities in 2011 as well as the earlier installation of automated meters in 2011 compared with 2010.

This year, we are reinvesting $25 million to install these automated meters. We’ve completed 50% of this year’s planned installations in areas of Oklahoma and Texas. These meters are safer, more accurate and more efficient and allow us to return on investments creating a win-win for the customers and the company.

Now, let’s turn to Energy Services. Our second quarter results were lower compared with the same quarter in 2010, primarily because of lower transportation margins, net of hedging due to lower hedge settlements in 2011 compared with 2010. In last year’s first and second quarters, we benefited from the transportation hedges we placed in 2008 and earlier in 2009 when there was ample liquidity in the marketplace. Since then, liquidity and volatility have been extremely limited and it is currently disadvantageous for us to place forward hedges.

For the remainder of 2011, we have hedged approximately 41% of our transportation margins and 64% of our storage margin. We expect the midpoint of our 2011 operating income to be $42 million, lower than our previous guidance of $91 million and the $75 million to $125 million range we expected for this business.

This segment continues to face extraordinarily challenging market conditions that are the results of an increase in transportation pipeline capacity in recent years and abundance of supply of natural gas from the development of shale plays. This has resulted in significantly narrowed location and seasonal storage differentials from where they had been in past years.

In our initial guidance, we expected locations spreads to widen to 2010 levels. But in fact, they have narrowed driven by market conditions. We are also experiencing lower seasonal storage spreads compared to those we’d forecasted given stronger supplier growth and warmer than normal weather.

As I mentioned last quarter, we have a plan to help address these adverse market conditions. Here’s where we stand on those efforts.

Number one, maintaining our existing premium services customers and while adding new ones. We have retained more than 90% of our customers by maintaining a strong long-term relationship. However, the fees we charge are lower due to low prices of natural gas.

Number two, maximizing earnings through reflective optimization activities. With extremely low and narrow location spreads and seasonal spreads, our opportunities to optimize in the daily marketplace have been somewhat limited. The spreads we’re experiencing are much tighter than we expected, which still allows for opportunities to optimize but at lower margins. Regardless, we are looking for niche opportunities to do so every day.

Number three, growing our market share with electric generation customers. With the extreme heat in the Central U.S., we, as our competitors, are actively selling gas to growing electric generation customer base. We have been successful in this endeavor but at a very competitive environment, the margins are limited.

Number four, work with producers to move their supply in constrained areas. Our efforts continue and have been successful. However, producers are focused on 2012 and 2013, not 2011.

We’re also rebasing our cost structure, assessing how much capacity we need to contract for, what we need, what we don’t need and where and renegotiating transportation and storage rates whenever and wherever possible.

By the end of the 2012, more than 20% of our leased transportation and store capacity will be up for renegotiation and more than 80% by 2015, giving us additional opportunities to realign our market positions and more importantly rebase our cost structure. Rest assured that this management team is focused on doing what we can to adapt our strategy to these challenging market conditions.

John, that concludes my remarks.

John Gibson

Thank you, Pierce. Some final comments before we take your questions. We’ve received a number of questions on the sale of Southern Union. What did we think of the proposed transactions? Could we, would we submit a bid? And now that the transaction appears to have concluded, would we be interested in acquiring any of Southern Union’s assets? Here are the facts.

We, along with a long list of others, have had several discussions with Southern Union management over the years about a potential transaction, with my last conversation being less than a week before the initial transaction announcement. And yes, we were prepared to submit a competing bid before the first counter offer was made.

However, as the price of the transaction increased, it did not make economic sense for us. Simply put, our current growth and future opportunities at ONEOK Partners are more accretive than acquiring Southern Union at the prices being contemplated.

At the right price, Southern Union would have been a great fit for us. Is it a good deal as now proposed? That’s for the management of the other parties involved in the transaction to answer. As you know, we are a disciplined buyer of assets and measure acquisition opportunities against our other growth alternatives, which for us are our current and future internal growth projects from a return and value creation standpoint as well as a strategic fit.

Having said that, if certain Southern Union assets become available for purchase, we are interested.

The final point I’d like to touch on involves a recent and unwelcome change in our corporate governance at ONEOK. ONEOK is incorporated in the State of Oklahoma and we recently learned that the Oklahoma Legislature in 2010 passed last-minute legislation requiring all large publicly traded companies incorporated in Oklahoma to have classified, or staggered, boards of directors. As a result, the directors of ONEOK have been classified automatically by the Oklahoma statute into three classes with staggered terms.

This law runs counter to the wishes of our Board and our shareholders. In 2008, our Board recommended and our shareholders overwhelmingly approved the elimination of our classified Board and the institution of the annual election of directors. Despite the Oklahoma law change, we continue to believe that the annual election of directors is good governance and that companies should be able to work with their shareholders to determine which board structure is appropriate.

Obviously, we are disappointed that the legislature took this action and did so in a manner that did not afford us, as the largest publicly company in the state, the opportunity to participate in a debate regarding the advisability of this legislation.

I have spoken to Oklahoma Governor Mary Fallin twice about the issue and she said she is committed to working with ONEOK and the Oklahoma Legislature to resolve this situation. This legislation by the way was passed before Governor Fallin became governor. We will keep you updated on our progress.

And finally, as always, I’d like to thank our 4,800 employees who create value every day for our investors and customers through their dedication and commitment to excellence. Our success as a company depends upon their contributions and I appreciate their efforts.

We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Stephen Maresca with Morgan Stanley.

Stephen Maresca – Morgan Stanley & Co. LLC

Hey, good morning, everybody.

Good morning.

John Gibson

Good morning.

Stephen Maresca – Morgan Stanley & Co. LLC

Thanks, John, very much for the Southern Union candor. That is quite appreciated. I want to talk a little bit about the differential and the (inaudible) that are going on in the NGL market. And you stated that we’re currently at $0.20 or $0.22 right now but you look at the rest of the year and kind of factor in a $0.15 number, and is that more conservatism on your part or do you really think it will be that quickly it will start to alleviate?

John Gibson

Well, I think Terry probably in the best position to answer that question for us.

Terry Spencer

Steve, when we look forward at our spreads, my view is, is that as you, and the way the industry works is that as you move into the fourth quarter, you will start to historically see that spread compress. And as you get into the last couple of months of the year you’ll see things like petrochemical companies de-stocking their inventory and doing things to manage their books. And so that’s pretty normal. So, when we look at where we are today in that $0.22, $0.23 range, we’ll gradually see that decline as we move into the year. Our view is that it’ll average out about $0.15.

Stephen Maresca – Morgan Stanley & Co. LLC

Okay. And then you mentioned that you think longer term we could settle on some sort of high single-digit level. How long do you think it takes for us to get to that?

Terry Spencer

Well, I think that what you’re going to see over 2012 and 2013 is you’ll see that ethane spread probably in that $0.12 to $0.13 a gallon range but then in 2014 when our Sterling III capacity comes on line, we’ll see it compress into that $0.08 to $0.10 range.

Stephen Maresca – Morgan Stanley & Co. LLC

Okay. And then as you see forecast right now for producers, do you think there is enough being proposed between yourself and DCP in terms of takeaway to bring down to the Gulf on the NGL side?

Terry Spencer

I think – is your question supply?

Stephen Maresca – Morgan Stanley & Co. LLC

Yes, I mean, do you think – do we have enough takeaway capacity being proposed right now with all the supply that you see from producers?

Terry Spencer

Well, probably the simple answer to that question is there room for two pipes and I think the answer to that question is yes, based upon the supply picture that we see. We see 250,000 barrels a day plus potentially being developed from new processing plants. Much of that is currently under development. So, I think there’s going to be room for two pipes. I will say that we believe our pipe is advantaged for a number of reasons. I think the DCP pipe, there’s room for that pipe but I think their pipe will be very focused on their own equity production. So, short answer is yes, I think there is room for two pipes.

Stephen Maresca – Morgan Stanley & Co. LLC

Okay. And final question and I’ll get back in queue, maybe for John, just bigger picture with the free cash flow story at OKE and the color that you said around Southern Union, do you think there are other opportunities like Southern Union out there or did you view this as something that was kind of came along once every whatever many years, several years?

John Gibson

Well, I think once every is a pretty good description. There are other opportunities out there, and as the facts have unfolded, it becomes no surprise as presented that many people were in discussions with Southern Union. There are other companies that many of us are in discussion with and you just have to, as part of the process, stay in touch with those that you think might be good fits for acquisition in the future, so that when the conditions are right you’re advantaged and prepared to transact. So yes, we keep an eye on that always.

Stephen Maresca – Morgan Stanley & Co. LLC

Okay. Thanks a lot everybody.

John Gibson

Thank you, Steve.

Terry Spencer

Thanks, Steve.

Operator

Our next question comes from Ted Durbin with Goldman Sachs.

Ted Durbin – Goldman Sachs & Co.

Hi, guys.

Terry Spencer

Hi, Ted.

John Gibson

Hi, Ted.

Ted Durbin – Goldman Sachs & Co.

Not to beat on the Conway-Belvieu spread but can you give us a sense of maybe a sensitivity, you said $0.15. What sort of a dollar impact if that spread moves by, say, $0.1 because you put up, obviously, a big number in that segment. I was wondering if you thought about that.

John Gibson

Well, we thought about it and I think that it’s difficult for us to give you a sensitivity because it’s a combination of supply and capacity. So if you think about it, we had opportunities to make these spreads, when was that, a year ago, but we had capacity in our fractionator tied up under, what I would call, under market fractionation agreements.

And so, we didn’t have the capacity to capture this. So the amount of – the ability to capture the differential depends upon obviously the demand but also the ability of the assets to have the capacity to transact. So there isn’t a good way to provide that to you and we’re never going to be able to. Anything you want to add there, Terry?

Terry Spencer

No, John, really I think the only thing I’d add is that we’ve, in the past, we’ve gotten that question and we’ve resisted disclosing how much capacity that we allocate. We have total capacity down the pipe of a number. And only a portion of that capacity we actually use for optimization. And so we’ve resisted in the past for competitive reasons disclosing that information and we still look, we’re still there. Maybe someday we’ll disclose it, yes maybe, but today, no.

Ted Durbin – Goldman Sachs & Co.

Maybe someday somebody will ask that question, so you’ll actually answer that. Okay.

John Gibson

We answered it.

Ted Durbin – Goldman Sachs & Co.

Yes, I appreciate it. And maybe just coming on the organic growth side, as you kind of look across and may be even diving into the different projects, you’ve given this range of five to seven times EBITDA. Are projects kind of looking like they’re going to come in at the low end or the high end of that range?

John Gibson

I think that we are – the ones that we have completed is the one that you’re talking about.

Terry Spencer

Yes.

John Gibson

The ones that we can look back on.

Terry Spencer

Yes, I think when we look back at it we’re probably in the middle.

Ted Durbin – Goldman Sachs & Co.

Okay.

Terry Spencer

Probably, if I think on some of the lookbacks that we’ve recently done, we’re going to be in the middle of that range. I don’t think it’s leaning toward one side or the other.

Ted Durbin – Goldman Sachs & Co.

And then just on, as you’re progressing with the existing ones, same answer? Or...

Terry Spencer

Say that again, Ted?

Ted Durbin – Goldman Sachs & Co.

As you’re progressing with, kind of as you’re going through some of the other projects as we look into ‘12 and whatnot, still feeling like you’re going to hit the middle of that range? Or...

Terry Spencer

Yes, we may get closer to low end of that range on some of these projects.

John Gibson

I think we’ll get closer to the lower end provided that we continue to learn from our past experience. We would have been at the lower end to that multiple range had we been more successful with some of our construction costs.

But we had and we don’t need to repeat all the past, but we learned a lot about weather and sage-grouse and dealing with the government and we’ve changed the way we approach our projects, and we believe that we’ll be towards the lower end because of that knowledge.

Ted Durbin – Goldman Sachs & Co.

Okay, that’s helpful. Thanks. And then the last one from me is the OKE level, the dividend raise here again a nice strong raise. It looks to me like you’re kind of at the top end of your payout ratio target if I just kind of annualize your current dividend. Are you raising the dividend a little bit in anticipation of where 2012 is going to come out? Just kind of a little guidance on what you’re doing there?

John Gibson

Well, we got a new CFO. No, I am sorry. Rob, you want to...

Robert Martinovich

Ted, that dividend had been anticipated subject to Board approval. So that’s, we were just executing in all that and I think you’re right with regards to your analysis as kind of being in the upper range there. So two parts, I mean one, everything was falling into place and some of the reason not to continue with the previous guidance.

Ted Durbin – Goldman Sachs & Co.

Got you. That’s it for me. Thanks.

Operator

Our next question comes from Yves Siegel with Credit Suisse.

Yves Siegel – Credit Suisse

Good morning, everybody.

John Gibson

Hello, Yves.

Terry Spencer

Good morning, Yves.

Robert Martinovich

Hi, Yves.

Yves Siegel – Credit Suisse

If I could, just to go back and then go forward. To go back, in terms of the guidance for the rest of the year, when we think about the optimization, so $0.15 is the assumed spread, are you assuming that you still have the same amount of capacity allocated for optimization in the second half of the year?

John Gibson

Yes.

Robert Martinovich

Yes.

Yves Siegel – Credit Suisse

Okay.

Robert Martinovich

All right.

Yves Siegel – Credit Suisse

The second question is as it relates to thinking about pricing fractionation services, can you give us the sense of on a per gallon basis where that market is moving to? And, well, I’ll just leave it at that.

Terry Spencer

Well, I mean I can give you a range but it depends too on the specific need of the producer, and the producer-specific situation and whether that producer is also securing pipeline transportation capacity as well as fractionations.

But I can give you a range. It’s somewhere in that $0.04 to $0.05 a gallon range for a frac. It’s pretty much the market and it’s inching higher but you got this new fracs that have been announced and I think that’s probably helping to keep it from going significantly higher.

Yves Siegel – Credit Suisse

Okay.

Terry Spencer

So, dependent upon where you are, it’s going to be $0.04 to $0.05 a gallon pretty consistently.

Yves Siegel – Credit Suisse

Okay. For you to allocate more of your capacity away from optimization, one would assume that you would need something substantially higher than $0.05 a gallon in order to do that.

Terry Spencer

Well, I mean when we think about optimization we think about transportation capacity between Conway and Belvieu. And so we look at that – we try not to get into any sort of cross subsidy between fractionation and pipeline capacity.

So when we look at pipeline capacity we look at the spreads, we look at the cost to build. It’s probably the bigger factor in setting a north-south rate. So what’ll happen is as we increase our contracting on Sterling III as we move forward, we’ll -as we increase our contracting, we will displace and squeeze down that optimization capacity.

Yves Siegel – Credit Suisse

Okay.

Terry Spencer

Did that help you?

Yves Siegel – Credit Suisse

No, it does. And then getting back to John’s commentary on the acquisition market, what characteristics do you think are required to see additional acquisitions? By that I mean, one could argue that may be Southern Union was management getting older and deciding to cash out. Others would be perhaps somebody gets into liquidity problems, so they’re forced to sell. What kind of conditions do you think are going to push us to see further acquisitions going forward?

John Gibson

Well, in addition to those that you mentioned, I think it continues to be looking at, if you’ll let me use this word, potential targets that fit, in our case, our business models. So companies that have distribution assets as well as MLP qualified assets and our bet is that in discussing with those managements we can deliver a greater shareholder value by having those assets a part of the ONEOK family as opposed to where they currently reside now.

That’s pretty subjective and it’s obviously not necessary to always welcome, but those are kind of the, some of the criteria that we’re looking for and of course, yeah, you talk about more opportunistic, keep an eye on the thermometer and see whether or not people are healthy or unhealthy which we do as well. But the key thing for us in the screening process is first deciding who fits our model.

Yves Siegel – Credit Suisse

Just to push it, John, I mean from my sense is, I understand from your perspective but you also have to have – you don’t necessarily have to have but willing seller, but it seems to me that it’s being more motivated from the buyer side of the equation than necessarily from the seller side in terms of future acquisitions above and beyond what we’re seeing with Southern Union.

John Gibson

I could tell you from personal experience over the last five years that is absolutely correct.

Yves Siegel – Credit Suisse

Okay. Thanks for that, John. And then the last question gets to just risk management and how do you think – and you’ve gone over this before so I apologize, but how do you think about potential overbuilding going forward and within that context how are you trying to structure your contracts so you don’t have everybody hitting the wall at the same time having to renegotiate the contracts?

John Gibson

Primarily through term and commitment towards our capital investment and we’re willing to give up, if you will, capacity that we might use for optimization to get that assurance. So, as Terry mentioned and I think part one of your question or somebody’s question, we’re willing to trade optimization capacity for fixed fee-based earnings relative to our investment.

Yves Siegel – Credit Suisse

Thank you.

John Gibson

Yes.

Terry Spencer

Thanks, Yves.

Operator

Our next question comes from Ross Payne, Wells Fargo.

Ross Payne – Wells Fargo Advisors LLC

How are you doing guys?

John Gibson

Hello, Ross.

Terry Spencer

Good morning, Ross.

Ross Payne – Wells Fargo Advisors LLC

I guess the biggest question I’ve got was factoring in DCP’s new pipeline, NGL pipeline is first and foremost, how much of DCP’s volumes are currently moving on your pipelines NGL-wise and how do you see the transition if and when that happens to their new pipeline that they proposed if that’s in your cash presence?

Terry Spencer

Yves – Ross, I’m sorry. We’re not going to, we won’t get into talking specifically about customers that we may have in their volumes. But what I can say about that pipeline is they will over a period of time gradually move some of their – increase their movement of equity volumes they own on that pipeline, okay.

So, there will be primarily – and that would be, from what we can tell, their primary driver, okay. We’ll be focused on moving third-party barrels providing our full integrated enhanced connectivity. We’ll be in a position to provide a full range of services for our customers.

So, when I look at that project, it’s very – and I look at DCP’s pipeline, it’s very equity volume focused. We’ll be very focus on third parties. And we believe we’ll be advantaged primarily because our long history, long reliable operating history.

Ross Payne – Wells Fargo Advisors LLC

Okay. And just so you expect to obviously more than make up for that over time as well as those volumes roll-off and fill into your pipelines?

John Gibson

Ross, I think what Terry is telling you is that in our plans for Sterling III we do not anticipate DCP barrels.

Ross Payne – Wells Fargo Advisors LLC

Okay. Perfect.

John Gibson

And so DCP is kind of on their own.

Ross Payne – Wells Fargo Advisors LLC

Got you. Okay, that’s great. Thanks guys.

Operator

Our next question comes from Craig Shere with Tuohy Brothers.

Dan Harrison

Yes, Craig, if we can limit and the rest of the people in the queue to one question so we can get to everyone that would be terrific.

Craig Shere – Tuohy Brothers Investment Research, Inc.

I have a bad reputation. Actually, Ross had the question I wanted to discuss, so you can move on. I appreciate it.

Operator

Our next question comes from John Tysseland with Citigroup.

John Tysseland – Citigroup Global Markets

Hi, guys. Just one quick fundamental kind of broader question. How does increasing propane exports out of the Gulf Coast impact the Conway market relative to Mont Belvieu market? Have you seen any changes in the market since that’s been happening and does that put kind of maybe offset your thought that the basis between the two basins comes back down?

Terry Spencer

Well, I mean certainly it does have an impact but not a major impact. And what the big driver when you look at the Conway to Belvieu basis is not so much imports or exports out of Belvieu.

It’s more seasonal as it relates to Conway, how hard a pull are you going to get in the Conway marketplace and how that impacts the spread. The spread is going to be primarily driven by ethane, okay, that’s the product that’s taking up the most capacity moving south. Propane, not as significant. So it will have – the import-export will have some impact but not like seasonal impact will have on the propane spread.

John Tysseland – Citigroup Global Markets

Thanks, Terry.

Operator

Our next question comes from Michael Blum with Wells Fargo.

Michael Blum – Wells Fargo Advisors LLC

Thanks. My question was answered. Thank you.

John Gibson

Thank you, Michael.

Operator

Our next question comes from Andrew Gundlach with First Eagle Investments.

Andrew Gundlach – First Eagle Investment Management LLC

Good morning, John. Let me flip the question around, one of the things that’s obviously driving SUG’s sale is that they may be disadvantaged with respect to maintaining market share in a more shale-oriented environment and you could say the same things about your pipelines in some ways and you’re seeing it in the results.

So while you might be interested in buying assets for sale, might you also be interested in selling assets if these are the prices being paid for pipelines that may or may not be competitively advantaged?

John Gibson

Well, I think that’s true for any asset that you own that you have to always be aware of that position, of the position of those assets in the market place and the best example I can think of are Powder River, gathering systems as an example. But you got to have somebody’s interest in buying them at a decent price. But yes, absolutely, Andrew.

Andrew Gundlach – First Eagle Investment Management LLC

And is the MLP structure, is it, make it – from a tax perspective mostly but others may be I’m not thinking of, is it making – is it easy to sell things that were – if the price were there, are these assets easily sold?

John Gibson

Well, we’ve been able to buy, I mean, we bought assets into the MLP from the other MLPs and so our counterparties worked through that issue. I think it makes it more complex but I think it’s doable, it’s achievable.

Andrew Gundlach – First Eagle Investment Management LLC

Thanks for taking the question.

John Gibson

You bet.

Operator

Our next question comes from Carl Kirst with BMO Capital.

Carl Kirst – BMO Capital Markets

Thanks. Good morning, everybody, and very much appreciate the time here. Just the last question I have with everything is maybe just to the OKE level on the energy services, and understanding that you guys don’t want to comment on 2012, is there anything hedged at this point for 2012 on either the transportation or the storage front?

John Gibson

Pierce?

Pierce Norton

Yes, we do have some storage hedged in 2012, not quite as much as we do in – it’s around 43% in storage and around 20% in transport.

Carl Kirst – BMO Capital Markets

And would those have been like recent hedges or perhaps maybe its spreads from late 2010 for instance?

Pierce Norton

They’ve been more back in time.

Carl Kirst – BMO Capital Markets

Okay.

Pierce Norton

And they were put on over a period of time.

Carl Kirst – BMO Capital Markets

Great. Thanks guys.

John Gibson

You bet, Carl.

Operator

Our last question comes from Jack Moore with Harpswell Capital.

Jack Moore – Harpswell Capital Management LLC

Good morning, and I think most of my questions are answered. But while I have you, I was wondering if you could comment on the legislation in Oklahoma regarding Directors and just how that came about? I think on Chesapeake’s call, they indicated that they were consulted and played a role to some degree. And I was wondering, were you guys cognizant of the bill being developed and what your thoughts are on it a going forward?

John Gibson

Well, I made some comments earlier about that legislation. So to answer your question directly, we were not consulted. And the legislation was put together in the last few hours of the legislation, and we were not consulted.

Jack Moore – Harpswell Capital Management LLC

Okay. Thanks, guys. Good quarter.

John Gibson

Yes. Thank you very much.

Dan Harrison

Well, thank you, everyone. This concludes the ONEOK and ONEOK Partners call. As a reminder our quiet period for the third quarter will start when we close our books in early October, and will extend until earnings are released after the market closes on November 1.

Our third quarter conference call is scheduled for November 2. We will provide additional third quarter conference call information at a later date. The annual ONEOK, ONEOK Partners Investor Day is scheduled for Tuesday, September 27 in New York.

Several save-the-date notices have already been mailed to you and we’ll be following up with additional information, times and meeting room locations in the next few weeks. Andrew Ziola and I will be available throughout the day to handle your follow-up questions. Thanks for joining us.

Operator

Ladies and gentlemen, that does conclude today’s participation. You may now disconnect.

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