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Executives

Dan Harrison - Senior Vice President, Administrative Services and Corporate Relations

John Gibson - Chairman and Chief Executive Officer

Robert Martinovich - Executive Vice President, Chief Financial Officer and Treasurer

Pierce Norton - Executive Vice President and Chief Operating Officer

Terry Spencer - President

Analysts

Steve Maresca – Morgan Stanley

Carl Kirst – BMO Capital

Ted Durbin – Goldman Sachs

John Edwards – Credit Suisse

Michael Blum – Wells Fargo

Elvira Scotto – RBC Capital Markets

Craig Shere – Tuohy Brothers

Helen Ryoo – Barclays

Ross Payne – Wells Fargo

ONEOK, Inc. (OKE) Q2 2012 Earnings Conference Call August 1, 2012 11:00 AM ET

Operator

Good day and welcome to the ONEOK and ONEOK Partners 2012 Second Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Dan Harrison. Please go ahead, sir.

Dan Harrison

Thank you very much. Good morning and thanks to everyone for joining us. 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 provision of the Securities Acts of 1933 and 1934. 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.

Now, John Gibson, Chairman and CEO of ONEOK and ONEOK Partners. John?

John Gibson

Thanks, Dan. Good morning and many thanks for joining us today. As always, we appreciate your continued interest and investment in ONEOK and ONEOK Partners. Joining me today are Rob Martinovich, our Chief Financial Officer who will review our quarterly financial performance and discuss our updated earnings guidance. Pierce Norton, our Chief Operating Officer who will review the operating performance of ONEOK and ONEOK Partners and update you on the partnership’s growth projects which I am pleased to say are on-time, on-budget and growing. And Terry Spencer, our President, who will update our NGL supply and demand outlook.

On this morning’s call, we will review our second quarter results and discuss our rationale for our updates to 2012 earnings guidance, reaffirm our ability to continue to grow ONEOK’s dividend and ONEOK Partners distribution over the next several years even in a lower commodity price environment, and update our progress with our growth projects, including our contracting status for the Bakken Crude Express pipeline and the $1 billion of additional projects we announced just last week.

Let’s start with our second quarter performance. ONEOK Partners turned in an exceptionally strong performance, driven by strong volume growth in the Natural Gas Liquids and Natural Gas Gathering and Processing businesses. Our Natural Gas Distribution segment turned in slightly higher results performing as expected and our energy services segment reported a loss because of the continuing challenges it faces in a low natural gas price environment with low price volatility.

Pierce will provide more detail on each segment’s operating performance in just a few minutes.

We updated our 2012 earnings guidance ranges increasing the range for ONEOK Partners to reflect our expectation of a continued strength of the natural gas liquids business. We decreased slightly the ONEOK guidance range to reflect lower than expected earnings at energy services and to a lesser extent the Natural Gas Distribution segment, partially offset by the strong contribution from the ONEOK Partners segment.

As Rob will discuss in a few minutes, we remain confident in our ability to grow ONEOK’s dividends and ONEOK Partners distributions over the next several years even with lower prices. The main driver of these increases will be the volume growth from ONEOK Partners capital investments. Since our last conference call, we have made a lot of progress contracting for our Bakken Crude Express pipeline, which Pierce will discuss in a few minutes. Demand for the capacity is strong and we may have opportunities to increase the pipeline’s capacity.

Rob will now review ONEOK’s financial highlights and then Pierce will review ONEOK’s operating performance. Rob?

Robert Martinovich

Thanks John, and good morning everyone. ONEOK’s second quarter net income was $61 million compared with $55.1 million for the same period last year, driven primarily by the solid performance of ONEOK Partners offset partially by continued challenges in the Energy Services segment. We completed a 2:1 split of the company’s common stock on June 1, making our shares more accessible to a broader base of potential investors. Also in June, ONEOK executed $150 million accelerated share repurchase agreement funded by cash-on-hand and short-term borrowings, part of a Board approved $750 million share repurchase program through 2013, of which $300 million remain. Based on the repurchase of shares, we expect the average amount of diluted shares outstanding for 2012 to be approximately 211 million.

ONEOK’s year-to-date 2012 standalone cash flow report changes in working capital exceeded capital expenditures and dividend payments by $82 million. In July, we declared a dividend of $0.33 per share on a split adjusted basis, an increase of 8% from the previous quarter.

With the partnership’s equity offering and private placement in March 2012, ONEOK as a general partner and significant limited partner owner is now expecting to receive $437 million in distributions from ONEOK Partners this year, a 31% increase over 2011.

We also updated 2012 guidance for ONEOK. Net income is expected to be in the range of $345 million to $375 million compared with its previous range of $360 million to $410 million. The updated guidance reflects lower expected earnings in the Energy Services and Natural Gas Distribution segments, offset partially by higher expected earnings in the ONEOK Partners segment. Pierce will discuss the specific guidance updates in a moment.

Our updated standalone cash flow, before changes in working capital, is expected to exceed capital expenditures and dividends by a range of $115 million to $145 million versus our previous guidance range of $155 million to $195 million. This change reflects our revised ONEOK earnings guidance. Today we are also affirming our expectation to increase the dividend by approximately 40% between 2012 and 2014 as incremental cash from the growth of ONEOK Partners flows to ONEOK. At our Investor Day in September, we will present our updated 3-year 2013 to 2015 projections that will include specific ranges for net income and dividend growth. We also expect to release 2013 financial guidance at that time.

ONEOK’s liquidity position remains good. At the end of the second quarter, on a standalone basis, we had $571.9 million of commercial paper outstanding, $22.8 million of cash and cash equivalents, with $626.4 million available under our $1.2 billion credit facility and our standalone total debt to capitalization ratio was 52%. ONEOK’s cash flow and liquidity position continue to give us excellent financial flexibility. ONEOK remains committed to providing sustainable value to our shareholders and solidifying our position as an attractive investment, whether it is by increasing our dividend, repurchasing ONEOK stock, and/or purchasing additional units of ONEOK Partners. We have used all of these options and don’t view them as mutually exclusive, and are fortunate to have the financial capability to do one or more under favourable conditions.

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

Pierce Norton

Thanks Rob, and good morning. Starting with our Natural Gas Distribution segment, second quarter 2012 earnings was up slightly due to higher rates and surcharge recoveries driven by regulatory activity in Texas and Kansas. The distribution segment’s operating income guidance for 2012 has been slightly decreased to $215 million, reflecting lower margins due to warmer than normal weather.

Now a brief regulatory update. Kansas Gas Service filed a requested with the Kansas Corporation Commission to increase its overall annual revenues by $32.7 million. The request includes a $50.7 million increase in base rates and an $18 million reduction in amounts currently recovered through surcharges. If approved, we expect to implement new rates in January 2013.

In July 2012, Oklahoma Natural Gas received approval to increased base rates by $9.5 million annually. Our tariff was also modified, narrowing the range of allowed return on equity to between 10% and 11% compared with the previously approved range of 9.75% to 11.25%. So far in 2012, we have received approval for increasing totals of $10.1 million annually in various Texas jurisdictions under rate cases and capital recovery and cost of service mechanisms.

Now a brief overview of Energy Services. Second quarter 2012 earnings were reduced as a result of lower transportation margins impaired with 2011 and lower premium services’ margins due to lower natural gas prices. As we have said on previous earnings calls, we are aligning, or right-sizing the transportation and storage capacity to serve our premium services customers, which means we are turning back or renegotiating transportation in storage leases. We now expect our year-end 2012 natural gas storage position to be approximately 72 Bcf compared with our previous estimate of 65 Bcf.

We decreased guidance for the Energy Services segment to an operating loss of $60 million. This was primarily from the required $30 million non-cash reclassification of deferred losses to earnings on certain financial contracts related to our storage business, of which we have gains that will be recognized in earnings during 2012 and 2013 heating season, and the non-cash $10 million goodwill impairment charge. Both of these charges occurred in the first quarter 2012. This segment continues to be challenged by lower natural gas prices and volatility and narrow seasonal and location natural gas price differentials.

John that concludes my remarks for ONEOK.

John Gibson

Thanks Pierce. Now, Rob will review ONEOK Partners financial performance and then Pierce will come back and review the partnership’s operating performance, as well as our growth projects.

Robert Martinovich

Thanks, John. In the second quarter, ONEOK Partners net income increased 21% compared with the second quarter of 2011, driven by higher natural gas liquids operating results. ONEOK Partners reported net income of $206.5 million, or $0.69 per unit compared with last year’s second quarter net income of $171.1 million, or $0.67 per unit. There were 219.8 million units outstanding for the second quarter this year compared with 203.8 million units outstanding for the same period in 2011. The equity offering and private placement in March 2012 included the issuance of 16 million additional units. Quarterly distributable cash flow increased 16% compared with the second quarter last year, resulting in a coverage ratio of 1.29 times. At the same time, we are increasing distributions to our unit holders. We increased the distribution $0.025 per unit for the second quarter and subject to Board approval, expect to increase another $0.025 per unit per quarter for the remainder of 2012.

The most common question we are asked relates to the potential impact of sustained low commodity prices, specifically NGL prices on our distribution growth rate. Based on a current forward-looking price tag developed by averaging Pyro and Wood MacKenzie prices for crude oil and natural gas and applying NGL price relationships to crude oil from CMAI, our average annual distribution growth rate would be at the low end of the 15% to 20% range for 2013 and 2014 with a coverage ratio of 1. Our long-term coverage ratio target remains at 1.05 to 1.15 times. However, if low commodity prices are sustained our coverage ratios could be slightly below that. We will provide more specific price assumption with you at our Investor Day in September.

We have increased the partnership’s 2012 earnings guidance to a range of $860 million to $910 million compared with the previous range of $810 million to $870 million, reflecting higher earnings in the Natural Gas Liquids segment offset partially by lower expected earnings in the Natural Gas Gathering and Processing segment. We now estimate the partnership’s 2012 distributable cash flow to be in the range of $975 million to $1.025 billion, compared with its previous range of $925 million to $985 million.

We will also present ONEOK Partners’ updated three-year projections for 2013 to 2015 in September that will include specific ranges for EBITDA and distribution growth. We also expect to release 2013 financial guidance at that time.

We hedge the commodities received for our services to lock-in margins on our expected equity volumes in the Natural Gas Gathering and Processing segment. For the rest of 2012, 76% of our natural gas volumes are hedged, while 70% of our NGLs are hedged. Hedging information for 2013 is included in the news release.

At the end of the second quarter, the partnership had $92.9 million in cash, $24 million of commercial paper outstanding, a debt to capitalization ratio of 44%, and a debt to EBITDA ratio of 2.3 times. We extended the maturity date of our $1.2 billion revolving credit agreement by one year to August 2017.

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

Pierce Norton

Thank you, Rob. As John said, the partnership had a strong second quarter. Operating income increased 13% driven primarily by higher margins in natural gas liquids segment from favourable NGL price differentials between Con-way and Mont Belvieu. Increased transportation capacity available for optimization activities and higher NGL volumes gathered.

Earnings also increased as a result of higher volumes in the Natural Gas Gathering and Processing segments, specifically in the Williston Basin, from the startup of the new Garden Creek I plant that went into service in late December. The Natural Gas Gathering and Processing segment’s second quarter financial results were relatively unchanged. Our natural gas volumes gathered and processed in the Williston Basin were offset by lower natural gas and NGL product prices on the unhedged equity portion of these commodities. The new Garden Creek I plant continues to operate near its capacity of 100 million cubic feet per day. Operationally, the plant is exceeding our expectations and we continue on a record setting pace for new well connects in 2012. However, we have reduced the segment’s operating income guidance for 2012 primarily reflecting our expectation of lower net realized and expected commodity prices. We have provided those specific price assumptions in our earnings release. We still expect process volumes to be up 24% over last year and gathered volumes to be up 12% compared with last year. Low NGL prices did result in periods of ethane rejection in the midcontinent but did not have a material impact of this segment’s results.

The natural gas pipeline segment’s second quarter results were higher due primarily to increased natural gas storage and transportation margins. 2012 guidance for this segment remains unchanged. Equity earnings from Northern Border pipeline are relatively flat. Northern Border is substantially contracted through March 2013 and has been successful in capturing 3 year or longer extensions as current contracts expire. It is also has two-thirds contracted on its long-haul capacity through 2014.

Our natural gas liquids segment continued to benefit from favourable NGL price differentials and more transportation capacity available for optimization activities and higher NGL volumes gathered.

Our MB-1 fractionator was down for scheduled maintenance for 30 days in May and experienced some temporary mechanical issues preventing it from returning immediately to its 160,000 barrel per day capacity. As a result, our fractionation volumes were down 2% during the second quarter with the Mid-Continent fractionators making up some of the volumes that would have been fractionated in the Gulf Coast and increased volumes in the Mid-Continent. The partnership will realize margins from raw feed stored in the Gulf Coast as a result of the turnaround later in the year as we have forward sales in place.

NGLs transported on our gathered lines were up 21%, averaging 523,000 barrels per day during the quarter. As a result of the increased NGL volumes gathered from the expansions Arbuckle pipeline and the Mid-Continent NGL gathering system in Texas and Western Oklahoma.

We expect NGL gathering volumes to be up 22% over last year and fractionation volumes to be up 11% compared with the same period. We increased our operating income guidance for this segment to reflect higher than expected NGL optimization margins from increased NGL transportation capacity available for optimization activities and higher isomerisation margins. For the last six months of 2012, we have assumed $0.28 per gallon Con-way to Mont Belvieu average ethane in the ethane propane mix price differential.

Now, an update on our projects. First, all of our previously announced internal growth projects are within the forecasted project cost and timeline ranges. Second, last week we announced more internal growth projects totalling approximately $1 billion that now bring our 2011 to 2015 internal growth program from $5.7 billion to $6.6 billion. Our contractual dedications in the Williston Basin have grown to 2.7 million acres which is supporting the building of a new 100 million cubic feet per day natural gas processing facility, the Garden Creek II plant and related infrastructure. Upon completion, our processing capability in the Williston Basin will be approximately 500 million cubic feet per day.

We will also be installing additional pump stations on the Bakken NGL pipeline to increase its capacity to 135,000 barrels per day from an initial 60,000 barrels per day to take away liquids generated by our plants. We will be expanding our Gulf Coast fractionation capacity by constructing a new 75,000 barrel per day natural gas liquids fractionators MB-3 and related infrastructure at Mont Belvieu, Texas, plus the installation of a 40,000 barrel per day ethane, propane splitter at our Mont Belvieu storage facility. These projects are backed by firm supply commitments and area dedications.

Third, an update of our plan to build the 1300 mile Bakken Crude Express Pipeline. Discussions with crude oil producers indicate they project crude oil production to increase to well over 1 million barrels per day within the next five years requiring additional crude oil takeaway capacity. At the moment, we are in advanced stages of negotiations with two large anchor shippers who represent a majority of the 200,000 barrel per day initial pipeline capacity. We are also negotiating with multiple other producers for additional capacity. We expect to have committed in the near-term well before construction all the pipeline’s capacity that’s available for commitments. Final negotiations with the anchor tenants, as well as the open season results could increase the current pipeline capacity beyond 200,000 barrels. For obvious competitive reasons we are not disclosing the proposed rates at this time. However, it will be advantageous to rail with producers able to lock in rates for longer term compared with a contract for typical rail capacity.

We continue to develop and evaluate a lengthy backlog of natural gas and NGL related infrastructure projects, including investments in processing plants, natural gas pipelines, NGL fractionation and storage facilities. Even with the recently announced projects totalling $1 billion, this backlog still totals more than $2 billion.

As we have done in the past, we will announce the projects when we are sufficient producer and/or customer commitments to make them economically viable.

John, that concludes my remarks.

John Gibson

Thank you, Pierce. Terry will now give you an update on our view of the current and the long-term NGL market dynamics.

Terry Spencer

Thanks, John, and good morning, everyone. Today I will provide a brief outlook of the NGL markets. Over the past several months there certainly has been some downward pressure on NGL prices, primarily as a result of the following: an overall softening in the crude oil markets, many of the petrochemical facilities were down for major scheduled and unscheduled maintenance, increased production growth in NGL rich sale areas and higher propane inventory levels due to a warmer than normal winter.

With the major plant outages behind them the petchems have begun to consume the excess ethane inventory that has built-up and accordingly ethane inventories are expected to decline throughout the remainder of the year. The petchems expect to be operating at high utilization rates, well in excess of 90% with ethane as their primary feedstock. Ethane continues to be the preferred petrochemical feedstock versus oil-based feeds due to ethane’s continued price advantage driven by the continued low ethane to crude oil price ratio which is now well below 20%.

With new record, ethane consumption of well over 1 million barrels per day, we expect US ethane inventories in terms of days of supply to be back to within normal ranges as early as year end. We expect the price of ethane, particularly at Mont Belvieu to continue to strengthen in the near and longer term as it has recently.

In particular, US Gulf coast petchem demand for purity ethane feed continues to grow and supplies of the traditional ethane propane mix continued to grow as well. This in our view is creating across our system an imbalance of excess ethane propane mix and not enough purity ethane to serve the petchems’ needs, accordingly the price relationship of ethane propane mix versus the premium price purity ethane has periodically widened to historical levels.

To meet the growing petrochemical demand for purity ethane, we have planned to construct a new facility in Mont Belvieu to slip purity ethane out of the traditional ethane propane mix. The new facility which is simply a specialized fractionator designed to fractionate an 80-20 ethane propane mix into purity will allow us to better serve our petrochemical customers, as well as compete more effectively for new markets and supplies.

A quick comment on propane. Due to the higher propane inventories, resulting primarily from the past mild winter and its reduced price relative to crude oil-based feeds, we have seen some petchems crack more propane compared with previous years. However with the petchems resuming normal operations following the major turnarounds, we are seeing some petrochemical facilities reduce their propane feed in favour of ethane.

We do expect the propane surplus to decline as additional export capacity is developed over the next 12 months, with propane exports being maximized due to the continued pricing incentive for international propane buyers to purchase US Gulf Coast propane.

We also expect NGL fractionation capacity to remain in short supply but gradually increase as new fractionators including our own come online over the next few years. Fractionation capacity especially in the Gulf Coast is at a premium as growing unfractionated NGL supplies from the prolific shell developments, we continue to see the premium price to Gulf Coast NGL markets.

Accordingly, new pipeline capacity between Con-way and Mont Belvieu is being built to accommodate NGL growth from the shales. We continue to believe the NGL price differential between the market hubs will narrow to cost to build range of $0.08 to $0.10 per gallon over the next couple of years.

In spite of the volatile and challenging commodity markets, we continue to focus on helping our supply and market connected customers get the products to where they need to be.

Our recently announced growth projects, the new MB-3 fractionator and EP splitter in Mont Belvieu and the expansion of the Bakken NGL pipeline are being built, so we can continue to provide reliable services to our customers through our integrated NGL asset base.

On the supply side, many rigs have moved away from dry gas regions and producers are focusing specifically on crude oil and liquids rich plays such as the Bakken, Cana-Woodford, Woodford, Granite Wash, Niobrara, Mississippian Lime and the Eagle Ford Shales. Fortunately, for us, our assets are well-positioned in all but one of these areas. While overall rig counts have decreased, rig counts in the Bakken and the Cana-Woodford especially in the core areas, where we operate are increasing.

As NGL growth continues at a rapid pace, we believe that over the next couple of years there will be some periodic oversupplies of ethane as new NGL production and infrastructure brings additional NGLs to market.

As we approach and move through the 2015 through to 2017 timeframe, we do believe there will be sufficient demand for NGLs as new petrochemical expansions come on line and from growing Gulf Coast export activity.

John that concludes my remarks.

John Gibson

Thank you, Terry. Before we take your questions I would like to add to what Rob said about our confidence in our dividend and distribution growth projections.

Prices, especially lower ones, will affect ONEOK Partners earnings through our Percent of Proceeds contracts, particularly in our Natural Gas Gathering and Processing business. This commodity price risk will always be present in the gathering and processing business, which is why we have historically pursued hedging opportunities. However, as we continue to grow ONEOK Partners, the volume growth in our natural gas liquids and crude oil pipeline business will generate additional income that is fee-based and contracted on a shipper pay or fracker pay basis, significantly reducing future earnings risk.

I would also at this time like to thank our more than 4800 employees whose dedication and commitment allow us to operate our assets safely, reliably, and environmentally responsibly every day and create exceptional value for our investors and customers. Our entire management team appreciates their efforts to make our company successful.

Finally, I would like to take this opportunity to recognize David Roth, our Senior Vice President of Administrative Services who will retire September 30. In his role he is responsible for IT, HR and corporate services. During his 33 years he has made countless contributions and many positive changes to our employee benefits, enhanced our IT capability dramatically, and advanced our employee development efforts. Through his leadership he has made ONEOK a much better place to work. During my 12 years at ONEOK, David has been a trusted and faithful colleague, but more importantly to me, over those years, one of my closest friends. With Dan assuming David’s responsibilities, I’m confident the Company will stay the course, but we will miss David Roth.

So, on behalf of all ONEOK employees, we thank David for his contributions and wish him the best in his retirement years.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

John Gibson

All right, and we are on.

Operator

We will go first to Steve Maresca with Morgan Stanley.

Steve Maresca – Morgan Stanley

You don’t get off that easy. Good morning and thanks as always for all the details. My first question is on the NGL movements out of Kansas and Oklahoma, can you talk a little bit about, first, what is Arbuckle running at right now in terms of flows? And then Sterling III comes online late next year. How long do you think that will take to get up to the initial capacity that you talk about 193,000?

John Gibson

I will ask Pierce to provide you as much detail, as he is comfortable doing. But as you will recall in our many, many conversations where you asked very similar questions, we don't disclose a whole lot of information about that, but whatever you feel comfortable saying, Pierce.

Pierce Norton

As far as Arbuckle goes, Steve, I guess the way I would say that it's near capacity.

Steve Maresca – Morgan Stanley

Okay.

John Gibson

That’s all you got say.

Steve Maresca – Morgan Stanley

Okay. And then, how long does something typically with a new line like Sterling, like take, would you say to ramp to what a capacity that name plate that you are talking?

John Gibson

You know, one of the points of reference, I would give to you is that when we built Arbuckle, we anticipated that it would have a slow increase. I can't remember what we – Terry, do you remember what we anticipate maybe as much as a year to get --?

Terry Spencer

Right, John. I think we were expecting – it would take roughly a year to get to about 160,000 barrels per day, and of course, we have moved through that pretty quickly. So, sort of, it depends upon the ability of the producer or the customer shipper to either complete the plans or have the supply available. Once the pipeline is built, it's just a matter of the supply being accessible.

Steve Maresca – Morgan Stanley

Okay. And then with our July announcements on the Garden Creek gas processing and the MB-3, can you discuss any agreements that you have surrounding those projects?

Pierce Norton

Steve, this is Pierce. The way I would answer that one is that if you remember in my script notes, we have 2.7 million acres under dedication there, and when you look at the projected volumes, it will more than fill up that plant. So, we actually have all of that contracted for under existing area dedications.

And as far as MB-3 goes, there is a very high level, way more barrels available there than even the capacity. So, we believe that, that will fill up really quickly and be committed as well.

Steve Maresca – Morgan Stanley

Okay. Final one on the Bakken Crude line, what are the permits or regulatory hurdles that are needed?

John Gibson

It really is not – it's the same one it's pretty much that you go through in the NGL side. You will get core permits, if you cross any kind of state lands. You get the state land permits. You go through the standard negotiation process in the beginning, and then, you have an open season, and then basically you are ready to go and construct and build once you get the necessary regulatory permits. So, nothing out of the ordinary when you compare it to the NGL side.

Steve Maresca – Morgan Stanley

Okay, thanks everybody.

John Gibson

Thank you, Steve.

Operator

We will go next to Carl Kirst with BMO Capital.

Carl Kirst – BMO Capital

Thanks, good morning everybody. Actually Pierce, just following up on that, and I am not sure if given this stage of negotiations it is possible to say, but you had made the reference of near-term, I believe. And so, is a binding open season something that you still expect to happen this year or was that something that could potentially be a 2013 event?

Pierce Norton

We still expect that to happen this year, Carl.

Carl Kirst – BMO Capital

Okay. And then if I could and Rob, I know you are going to lay all this out at the Analyst Day, but just, you mentioned sort of the forward deck that you are using being an average of (inaudible) Wood Mack, etcetera. Do you actually happen to have those absolute numbers even if it's kind of a 30,000 high level oil and even composite NGL relationship just to dead reckon?

Robert Martinovich

I mean, Carl, we do, and I guess one of the other reason that we want to cite that was that's been past practice, so you can get a feel as far as how those things are moving around, but really where those kind of end up from at least from a crude standpoint, you are kind of mid-90s, gas around 4, and then, on the composite barrels, kind of in that $0.80 to $0.90 range.

Carl Kirst – BMO Capital

Okay. Fair enough. And then last question if I could. I just wanted to make sure I understood on energy marketing at OKE. This reclassification, was that basically something that was previously a low comp and is now sort of a mark-to-market loss, and maybe we will get some of that money back, whether it’s the end of this year or 2013, or is that just more sort of an outright loss?

Robert Martinovich

Yes, Carl, when we talk about that first quarter, we said similar to an LCM that you may be familiar with on inventory, however, this related to losses on purchase head contracts. And as we indicated in the first quarter and as Pierce said, now, we expect to get some deferred gains back in this heating season. And so, we do expect to claw back a little bit of that this year and that’s included in the guidance.

Carl Kirst – BMO Capital

I see. Okay, all right. Thank you very much.

Operator

We will go next to Ted Durbin with Goldman Sachs.

Ted Durbin – Goldman Sachs

Thanks. Just following up on the question on the new Garden Creek plant. So, you have got the acreage dedications, but the volumes have actually moved through, will those be percentage of proceeds type contracts?

John Gibson

Yes, they will.

Ted Durbin – Goldman Sachs

Okay. And then, talking about just sort of the Conway, Belvieu spread assumptions, when you talk about $0.08 to $0.10 long term, you are now in the high 20s for this year. I guess I am trying to bridge for 2013 kind of how you are thinking about ‘13. You are going to be ringing 60,000 barrels a day of Bakken NGLs into Conway. So, that will probably make that spread a little wider. I am just wondering if you can talk a little bit more about that.

Terry Spencer

Ted, this is Terry. We provided you the $0.28 for ethane for the second half of 2012. As we look to 2013, if you recall, we have actually brought some capacity on between the Mid-Continent and the Gulf Coast, and then in particular our Sterling I 15,000 barrel a day expansion and our Arbuckle expansion of about 60,000 barrels per day here in 2012.

So, we have bought some capacity on, and so, as a result, our view is that the spreads will tighten somewhat as we move into 2013. So, you are going to see spreads, in our view, somewhere in that $0.15 to $0.20 range for 2013. And then, you will move into the 2014 timeframe and get into that $0.08 to $0.10 realm, which is primarily the cost to build.

Ted Durbin – Goldman Sachs

Sure. That’s very helpful. Thanks Terry. And then, last one is for me, just coming back to the Bakken Crude Pipeline. And you talked about the two anchor shippers. I guess if you got just those two contracts signed at where you are thinking, would you be hitting your sort of five to seven times EBITDA target, or do you need to get a few more people signed up to hit your target?

Terry Spencer

No. If we could get those two anchor shippers, then we will be within that range, but we do expect there to be even more interest than just those two anchor shippers.

Ted Durbin – Goldman Sachs

Got it. And that would cause you then to potentially upside of the pipe.

Terry Spencer

That’s correct.

Ted Durbin – Goldman Sachs

Got it. Okay, that’s it from me. Thanks guys.

John Gibson

Thanks Ted.

Operator

We will go next to John Edwards with Credit Suisse.

John Edwards – Credit Suisse

Yes, good morning everybody.

John Gibson

Good morning, John.

John Edwards – Credit Suisse

Just curious, you are making some comments about your distribution growth outlook in relation to coverage. And so, I am just curious, would you be more inclined to slow that growth just a bit to keep your coverage within your 1.05 to 1.15 target, or would you be more inclined to maintain sort of the low end of the 15% to 20% range and take your coverage down a bit?

John Gibson

Well, there’s no answer to give to you at this point in time. That's a board issue, but we have had that discussion with the board, and it’s management's view that we probably would focus more on the coverage ratio than we would the accelerating the distribution.

But again, it all depends on where the market is at that particular point in time. I think the more important thing is that we don't necessarily see ourselves in that position. Rob, is there anything you want to add to that?

Robert Martinovich

Yes, I think just to imply John, much like when we had periods of time, John, where we knew we had unsustainable optimization levels and we had coverage ratios well exceeding that target rate. There are going to be periods of times we are down below. So, I think you have to look at there from a sustainability standpoint before you make the final decision.

John Edwards – Credit Suisse

Okay. Great. And then, with regards to the ethane supply demand balance outlook, there were some comments made indicating there would be some periods of oversupply although 2015 to '17, the expectation was it would be in relative balance. And I was just wondering if you had any more thoughts regarding the 2013 to '15 timeframe with respect to what kind of or where you think the supply demand balance might be at that point in that timeframe?

John Gibson

John, really, I think probably the only thing I could add to the previous comments I made in my remarks is that the curve is going to be kind of lumpy. It is not going to be perfectly smooth and certainly, we will have these periods of time where we will have excess ethane. When many of the analysts analyze this ethane supply and demand balance, they would make the assumption that everyone of these fractionators that are coming on are going to be full day one, or at least get full at some point in time.

That may not happen in every case. And as a result, it is going to make it kind of difficult to predict those supply and demand balances during that timeframe. And so, it really is going to look kind of lumpy, and we will have periods where the crackers will need everything we can give them, and they will consume everything we can give them, and other times, where they don't. So, we will have to weather that. It will be volatile. And we are well-positioned through that volatile timeframe and by the time, we make it to 2015, 2017, we will be in really good shape.

John Edwards – Credit Suisse

Okay. Great. Thank you very much.

John Gibson

Thanks, John.

Operator

We will go next to Michael Blum with Wells Fargo.

Michael Blum – Wells Fargo

Hi, thanks. Couple of questions for me. One, on the E/P splitter, will that produce international grade propane, and if so, would that potentially find an export market?

John Gibson

No, it will be primarily consumed domestically.

Michael Blum – Wells Fargo

Okay. Then kind of a dumb question for me and I apologize, but why is MB-3, the cost to build this so much greater than MB-2?

John Gibson

I mean basically you have got some escalation of cost that occurs in the labor market and with the materials, so that's driving it more than anything, and frankly, when you start to build that many fractionators down in that area, you get a lot of demand for construction services, both construction management services and the materials and labor and this just drives the cost up.

Michael Blum – Wells Fargo

Okay. So, how does that impact the return you will get on MB-3 versus MB-2?

John Gibson

We still expect our returns to be solid and within those guidelines of multiples that we provided earlier.

Michael Blum – Wells Fargo

Okay, all right. Thank you.

Operator

We will go next to Elvira Scotto with RBC Capital Markets.

Elvira Scotto – RBC Capital Markets

Hi good morning. Just a point of clarification for me. For the increase in the guidance in the NGL segment where the press release states that part of that increase is due to higher optimization margin resulting from additional transportation capacity for optimization. Is that or can you elaborate a little bit more on that and how that trends the rest of the year? Is that just because you had some pipeline come on a little sooner and you are just waiting for some laterals to connect before third parties contract or has there been a change in how you are thinking about contracting?

Pierce Norton

Elvira, this is – it's really all of the construction and the expansions that we have done so far, and then it's a matter of how volumes match up with new plants that are coming online. If for some reason they are a little bit slower, then that provides us the ability to take those that spare capacity and use it for optimization volume. So it's really, it's opportunistic, but there's really no change in the way that we are contracting. We are still moving toward more of the fee-based, and as Terry has indicated more of the cost to build in the outer years 2014.

Elvira Scotto – RBC Capital Markets

Okay. And then, just a follow-up on a previous question. On the Bakken NGL pipeline, the expansion; do you expect that to be full on day one?

Pierce Norton

Actually, the way that you add the capacity to that pipe, which is through pumps, the way the engineering works is that the capacity actually elevates up to 135,000 per day. We do expect it to be substantially full, but we also run into a limitation when we get to Overland Pass pipeline. So, we won't be able to immediately go to the 135,000 without doing some things on the Overland Pass pipeline, but it will be substantially full early.

John Gibson

I am sorry, but was Elvira asking about the NGL pipeline or the crude oil pipeline?

Elvira Scotto – RBC Capital Markets

The NGL pipeline.

John Gibson

Sorry.

Elvira Scotto – RBC Capital Markets

Okay. And then, if you wanted to expand that pipeline further, could you or I guess as you said you would have to make some modifications to Overland Pass?

John Gibson

Right, that's probably going to be more of the driving factor than the NGL Bakken line. I mean, you can always expand them by looping lines and adding pumps. So, the simple answer is yes, you can expand it, but there's other things you have to expand as well.

Elvira Scotto – RBC Capital Markets

And then, just my final question. So, if you have these additional NGLs coming into Conway, I am just trying to understand looking out into 2014, why we are thinking the Conway to Belvieu spread is going to be at $0.08 to $0.10 as opposed to higher, if you have more NGLs?

John Gibson

Certainly, Elvira. I could see where you might think that. I think the reality though is that there's quite a bit of capacity that's going to be built not just by ONEOK, but by others. DCP has their project and Enterprise has their Texas Express projects. So, those will be coming online in 2013 and then 2014. So, those are going pressure the spreads.

We are pretty confident they will come in because when you just do the math and you look at the increment capacity that's going to be added, you just add it up, it's significant. So, our view was that the floor, so to speak, on that margin will – on that margin between Conway and Belvieu will naturally gravitate towards this cost to build. So, it may be conservative, but we feel pretty confident that's where it's going to wind up.

Elvira Scotto – RBC Capital Markets

Okay. Great. Thanks, that’s all I have.

Operator

We will go next to Craig Shere with Tuohy Brothers.

Craig Shere – Tuohy Brothers

Hi guys, thanks for the call and also for the mid-June Mid-Continent field trip. I thought those were very helpful.

John Gibson

Good. I am glad you enjoyed it Craig. It’s a little hot, wasn’t it?

Craig Shere – Tuohy Brothers

Yes. Especially in those overalls.

John Gibson

Yes, I am sure that’s true. We got to keep safe.

Craig Shere – Tuohy Brothers

That must be why you only sent us home with the hard hats?

John Gibson

Those dang things are expensive. Hard hats little peak.

Craig Shere – Tuohy Brothers

So a couple of follow-ups here. Terry, do you have a firm idea of just how much exactly petrochem capacity has increased to handle lighter feedstock coming out of the most recent maintenance cycle? And do you have a better feel for whether the proportional amount of fuel switching capacity between propane and ethane has increased or decreased coming out of that cycle?

Terry Spencer

What I can tell you is, is that the increased demand coming out of the petrochemical space is about 80,000 to 100,000 barrels a day just based upon the information we have been able to pick up, not just from the exports, but from those within the industry themselves.

As it relates to propane, we have seen a significant amount of switching. Our marketing people are talking to the petchems everyday and we are seeing some switching as much as 100,000 barrels a day away from propane back to ethane. So, pretty significant and we expect that to continue throughout the year, and in particular, as propane prices strengthen with the pressure from the increased demand on the export side.

But you want to attribute that to a decreased flexibility in the system depending on how they tweak things when they are in the maintenance down cycle?

Craig Shere – Tuohy Brothers

Okay. But you want to attribute that to a decreased flexibility in the system depending on how they tweak things when they are in the maintenance down cycle?

Terry Spencer

No.

Craig Shere – Tuohy Brothers

Okay. And there has been some questions about distribution coverage given the prepared comments. One thing I would note and the comment was made well, we are going to – it’s seasonal, right. Sometimes, we are going to be significantly over the target range for coverage and sometimes a little under, and it will be because of market events that were not.

They are transitory that we are not reacting to, but it was nice before when you had a whole slew of growth CapEx projects that were highly accretive and you happen to have a lot of extra cash flow. Now, that you are thinking about maybe a one-times coverage, and you just announced a week ago another $1 billion of CapEx, could you kind of speak to thoughts about how that might be financed?

Terry Spencer

I'm not suggesting that your question is insinuating. We have changed our practice, because we haven't. I think what we were trying to do in our comments was to say that with sustained low pricing and keeping our distribution growth, we could see a one-times coverage.

We are not saying that we are shifting from 1.05 to 1.15 and we are now going to set it at 1. So, I just want to be clear that, that was not the intention of our comments. Our comments were there is a lot of concern in low price environment, as to whether or not people are going to maintain their coverage ratio and grow their distribution.

We believe in worst case that we may face if prices continue to remain low that we might be near that one. We might fall below that 1.05, but we are not rebasing the company to a one-times coverage ratio.

So, I just want to be clear that we have not changed and we remain focused, and then there was a question earlier about which (inaudible) and our management team believes that what you would do is probably slow down your distribution growth in periods of extremely low price environment and maintain your coverage ratio. And then, of course, is your follow-on question about equity offering or additional financing. Even if we had those dates, we wouldn’t share them with you.

So, I think you look at the balance sheet, although there is a lot of great things to be said about it clearly, at OKS, we need to raise some additional capital, some debt and we have got a great general partner and a company that likes to invest in ONEOK Partners. So, we see the capital markets being receptive to any demands we might put out there.

Craig Shere – Tuohy Brothers

Understood. Last question, and it may just be coincidence, I know you have had a lot of nice transitions with the management team, various people taking on new responsibilities lately, and some people taking a well-deserved rest. Does the changing of the guard at energy services, amid the very tough operational environment indicate any kind of reconsideration of the business plan over time there?

Terry Spencer

Not one bit.

Craig Shere – Tuohy Brothers

Okay, great. Thank you very much.

Operator

We will go next to Helen Ryoo with Barclays.

Helen Ryoo – Barclays

Good morning. First question on the optimization capacity. It seems like you will be using much less optimization capacity in second half versus first half, and just wondering if that capacity has already been contracted out to third-party, and if so, what is the term of the contract?

John Gibson

Helen, you are correct in the amount of optimization capacity available to us is going to go directionally downward toward the end of the year. That is a contractual basis, but as I mentioned before, part of that is dependent on whether or not they actually – what volume is under those contracts actually shows up. So, we have assumed that most of that volume will show up. It may or may not, and if it doesn't, then we will have a little more for capacity. We actually don't disclose what that amount is.

Helen Ryoo – Barclays

Okay. Yes. I understand you don't disclose the amount, but just wondering the length of these contracts that you are signing with third-party, is it more of 5-year or 10-year, what?

John Gibson

They are long-term contracts.

Helen Ryoo – Barclays

Okay. And then, is it your expectation to bring down your optimization capacity down even more in 2013 versus the second half of the year, or are you, will you be comfortable with maintaining the sort of the second half optimization capacity level going forward?

John Gibson

I think if I said that and then the volumes, whatever those volumes materialize, kind of sending a message as to what that is. So, we are going to have, we will always have a certain amount of volume available for optimization, I guess is the best way I can answer that.

Helen Ryoo – Barclays

Okay. And then just out of curiosity on your E/P splitter project, I know it's a small project, but would that be a spread business for you or is that a fee-based business?

John Gibson

It actually is a little bit of both. We have enough E/P mix to put in that splitter and capture that upside purity ethane to the E/P price. It also factors into competitive advantage point of view that we have of being able to offer our customers a purity ethane price, which rolls into long-term fee-based contracts out of the Mid-Continent.

Helen Ryoo – Barclays

Okay. And then just lastly I think regarding the MB-3 project, I think the MB-2 fractionator was expandable from, like 75 to 125, if I am not mistaken. Just wondering your decision to build MB-3 instead of expanding the existing MB-2, what are sort of the factors that affected that?

Terry Spencer

Helen, this is Terry. I do recall that's what we indicated. I think it's quite simply in terms of we will have built the 75,000 barrel a day fractionator, then we will have done that. It will be easier and more efficient, and we will get more bang for our buck building a twin basically to MB-2. So, it's simply that.

Helen Ryoo – Barclays

Okay. And even if you expanded the MB-2 rather than MB-3, I mean sort of the cost side, it would not really have changed too much on the cost side?

Terry Spencer

I didn’t follow that.

Helen Ryoo – Barclays

So, just I mean there was an earlier discussion about MB-3 costs getting a bit much higher than MB-2 because of all those inflationary factors you mentioned, but just wondering if you expanded the existing frac rather than build a new one, would those factors still have contributed to higher cost?

Terry Spencer

Helen, there is one other piece I think that I need to mention here is that there are also infrastructure costs that are in the MB-3 costs. So, there is some line loopings, some pumps and some other stuff out in the field that's actually also going to be attributing to that, not only the escalation in costs. So, I think that's probably one of the big points I want to make.

Helen Ryoo – Barclays

Okay. Thank you so much.

Operator

We will go next to Ross Payne with Wells Fargo.

Ross Payne – Wells Fargo

Thank you. My questions have been answered, thank you.

John Gibson

Thank you, Ross.

Operator

We will go next to Carl Kirst with BMO Capital.

Carl Kirst – BMO Capital

Thanks, my question, my follow-up was hit, too. Thank you.

John Gibson

Okay. Well, thank you all. This concludes our call. A couple of announcements. The Annual ONEOK Partners Investor Day is scheduled for Tuesday, September 25th, in New York. A ‘save the day’ notice was sent out to you earlier this week and we will be following up with additional information, including times, meeting room locations in the next several weeks.

At that meeting, you will have the opportunity to meet TD Eureste, who is joining our Investor Relations team from Treasury and will be part of Andrew’s team. Our quiet period for the third quarter starts when we close our books in early October and extends until earnings are released after the market closes on October 30th, followed by our conference call of 11 Eastern, 10 Central on October 31st.

We will provide details on the conference call at a later date. Andrew and I will be available throughout the day to answer your follow-up questions. So, we will see you in September, if not before. Thanks for joining us.

Operator

And that does conclude today’s conference. We thank you for your participation.

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