oneok 2006 Wachovia Pipeline Conference

36
Wachovia Securities Wachovia Securities 5 5 th th Annual Pipeline & MLP Symposium Annual Pipeline & MLP Symposium New York City New York City December 5, 2006 December 5, 2006

Transcript of oneok 2006 Wachovia Pipeline Conference

Page 1: oneok 2006 Wachovia Pipeline Conference

Wachovia SecuritiesWachovia Securities55thth Annual Pipeline & MLP SymposiumAnnual Pipeline & MLP Symposium

New York CityNew York CityDecember 5, 2006December 5, 2006

Page 2: oneok 2006 Wachovia Pipeline Conference

John W. GibsonChief Executive Officer-elect

ONEOK. Inc.ONEOK Partners, L.P.

Page 3: oneok 2006 Wachovia Pipeline Conference

Forward Looking StatementStatements contained in this presentation that include company expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. It is important to note that the actual results of company earnings could differ materially from those projected in any forward-looking statements. For additional information refer to ONEOK’s and ONEOK Partners’ Securities and Exchange Commission filings.

Page 4: oneok 2006 Wachovia Pipeline Conference

4

Agenda

• Strategy Gibson• ONEOK Partners Gibson• Distribution Kneale• Energy Services Kneale• Financial Review Kneale• Questions and Answers Gibson/Kneale

Page 5: oneok 2006 Wachovia Pipeline Conference

5

• Consistent growth and sustainable earnings, manage our balance sheets • Strategic acquisitions that provide long-term value• ONEOK Partners anticipated to be ONEOK’s primary growth vehicle• Improve profitability at ONEOK Distribution Companies• Continue focus on physical activities in ONEOK Energy Services • Operate in a safe and environmentally responsible manner• Attract, develop and retain employees to support strategy execution

Key Strategies

Page 6: oneok 2006 Wachovia Pipeline Conference

6

ONEOK Partners Today

•• Gathering & ProcessingGathering & Processing

Page 7: oneok 2006 Wachovia Pipeline Conference

7

ONEOK Partners Today

•• Gathering & ProcessingGathering & Processing

•• Natural Gas LiquidsNatural Gas Liquids

Page 8: oneok 2006 Wachovia Pipeline Conference

8

ONEOK Partners Today

•• Gathering & ProcessingGathering & Processing

•• Natural Gas LiquidsNatural Gas Liquids

•• Pipelines & StoragePipelines & Storage

Page 9: oneok 2006 Wachovia Pipeline Conference

9

ONEOK Partners Today

•• Gathering & ProcessingGathering & Processing

•• Natural Gas LiquidsNatural Gas Liquids

•• Pipelines & StoragePipelines & Storage

•• Interstate PipelinesInterstate Pipelines

Page 10: oneok 2006 Wachovia Pipeline Conference

10

ONEOK Partners Key Points

• Integrated operations contribute to value creation– Commercial and operating synergies through a

common footprint– In compliance with FERC and other regulatory

rules– Shared corporate services

• Stable cash flow generated from diverse asset mix

– Supported by commercial and risk-management strategies

• The partnership is well positioned to grow• Operating philosophy reduces asset reliability

risks

Page 11: oneok 2006 Wachovia Pipeline Conference

11

Cash Flow Diversity

Spread0%

Commodity20% Fee Based

80%

Spread7%

Fee Based65%

Commodity28%

Pre-Asset Dropdown Post-Asset Dropdown

• Predominantly fee based– 65 percent of margin comes from fee-based business

• Commodity and spread risk is measured and managed• Cash flow stability managed within each segment

Total gross margin: $511 million Total gross margin: $834 million2005 Actual 2006 Guidance

Page 12: oneok 2006 Wachovia Pipeline Conference

12

Internal Growth

• Significant growth opportunities• Efficient use of capital• Projects underway in excess of $1.1 billion

– Overland Pass Pipeline ($433 million)– Related NGL projects ($173 million)– Guardian II ($260 million)– Midwestern extension ($37 million)– Other projects ($240 million)

• More than 25 active projects announced, under evaluation or negotiation

• Capital guidance for 2006– $178 million for Growth – $63 million for Maintenance

Page 13: oneok 2006 Wachovia Pipeline Conference

13

Growth Projects – Capital and EBITDA Timing• Over $1.1 billion of internally generated growth projects• EBITDA contributions begin in 2006• Attractive returns – CAPEX as a multiple of EBITDA in the 3-6 times range• 2008 EBITDA contribution greater than $150 million; increasing in 2009 and beyond

CAPITAL EXPENDITURES 2006 2007 2008 2009 + TOTALMAJOR PROJECTS

Overland Pass 38 251 144 433Related NGL projects 22 113 38 173Guardian II extension 8 90 162 260Midwestern extension 18 19 37

Sub-total 903

OTHER PROJECTSGathering & Processing 65 65 58 188Natural Gas Liquids 17 11 6 34Pipelines & Storage 7 1 1 9Interstate Pipelines 3 3 3 9

Sub-total 240TOTAL GROWTH CAPITAL 178 553 412 1143

Investment

EBITDA Contribution

Page 14: oneok 2006 Wachovia Pipeline Conference

14

Internal Growth – Overland Pass Pipeline

• A 99/1 percent joint venture with Williams for $433 million with 50/50 option

• 110,000 bpd capacity – easily expandable to 150,000 bpd

• Efficient alternative due to low fuel costs• Supply growth expected primarily from new drilling

– Current pipeline infrastructure expected to be at capacity• Long-term supply agreement with Williams (~ 60,000 bpd)• In negotiations for additional supplies• 750 miles, 14-16 inch line• Construction: Summer 2007• Completion: Early 2008

Page 15: oneok 2006 Wachovia Pipeline Conference

15

Internal Growth – Overland Pass-related NGL Projects

• Associated with Overland Pass Pipeline project, an additional $173 million in other downstream infrastructure upgrades and expansions are underway:

– Upgrade and expand the Bushton facilities from 80,000 bpd to 160,000 bpd– Upgrade the Bushton storage facility to accommodate ethane/propane mix and raw NGLs– Install 135 miles of 14-inch pipe from Bushton to Medford with a capacity of 120,000 bpd of

ethane/propane mix– Expand the Sterling pipeline capacity south to Mont Belvieu by 60,000 bpd – Add additional pump capacity to increase deliveries on ONEOK Partners Bushton-to-Conway

pipeline

Page 16: oneok 2006 Wachovia Pipeline Conference

16

Internal Growth – Guardian Pipeline

• 106-mile extension from Ixonia to Green Bay, Wisconsin

• Incremental capacity of 537,000 Dth/day to eastern Wisconsin

• Capital expenditures estimated to be $260 million• Project anchored by two 15-year agreements with:

– Wisconsin Energy– WPS Resources

• Construction to begin after FERC approval, expected early 2008

• Target completion November 2008

Page 17: oneok 2006 Wachovia Pipeline Conference

17

Acquisition – Natural Gas Liquids Storage

• $40 million to purchase and invest in related infrastructure improvements in Mont Belvieu, Texas

• Adds 14.6 million barrels of capacity

• Currently connected to existing NGL infrastructure

• Enhances value of our existing assets and allows us to provide our customers with additional services

Page 18: oneok 2006 Wachovia Pipeline Conference

Jim KnealePresident and Chief Operating Officer-elect

ONEOK, Inc.

Page 19: oneok 2006 Wachovia Pipeline Conference

19

Distribution

Improve profitability through:• Rate filings• Cost Control• Business Process Improvement• Customer programs

Distribution Strategies

647,000 647,000 customerscustomers

820,000 820,000 customerscustomers

576,000 576,000 customerscustomers

Page 20: oneok 2006 Wachovia Pipeline Conference

20

Distribution

Rate Strategies• More frequent and synchronized rate filings• Maintain positive relationships with regulators

Issue Solution Oklahoma Kansas TexasBad Debt Commodity recovery in PGA 2/17

Decoupling 1/17Margin Fluctuation Weather Normalization 7/17

Fixed-price PlanAverage Payment PlanFinancial Hedging 6/17Physical Hedging 17/17

Earnings Lag More frequent filingsLag in Capital Recovery Accelerated capital recovery 5/17Capital Recovery Return on gas in storageVolumetric sensitivity Two-tier rate plan

Optimize capacity Revenue sharing 2/17

Page 21: oneok 2006 Wachovia Pipeline Conference

21

Distribution

Kansas Gas Service – Rate Case

• $52.0 million settlement approved November 16th

– Adds $44-47 million in 2007 operating income

• Implementation January 1, 2007• As a result, the Distribution segment

will now earn 8.5 percent return on equity

Page 22: oneok 2006 Wachovia Pipeline Conference

22

Energy Services

Energy Services Key Points• Deliver bundled, reliable products and

services in exchange for premium value, primarily to LDCs

• Lease transportation and storage capacity, connecting the industry’s major supply and demand centers

• Optimize our storage and transportation capacity through the daily application of market knowledge and effective risk management techniques

• Grow earnings in our retail business by increasing market share, while maintaining current per-unit margins

• Execute trading arbitrage opportunities around our knowledge and positions

Page 23: oneok 2006 Wachovia Pipeline Conference

23

Energy Services

Energy Services: Sources of Margin

Trading8%

Retail7%

Optimization12% Storage

41%Transportation

32%

• Storage: Winter/summer spread, demand revenues, storage financial arbitrage• Transportation: basis hedging, optionality, marketing services• Optimization: daily/monthly from storage, transportation, split connect supplies• Retail: customer choice programs, LDC unbundling, small commercial and industrial• Trading: based on knowledge and opportunities to extract trading margins

Operating Income2006 Guidance

Retail7%Optimization

8%Storage

50%Transportation35%

Operating Income 2007 Guidance

Page 24: oneok 2006 Wachovia Pipeline Conference

24

2007 Guidance:

• Increased 2006 guidance– Includes gain on sale

• Announced preliminary guidance for 2007

2006 2006 2007Previous Revised Preliminary

ONEOK, Inc. $2.50 - $2.60 $2.60 - $2.70 $2.35 - $2.75Gain on sale $0.28 $0.28 -

Adjusted $2.22 - $2.32 $2.32 - $2.42 $2.35 - $2.75

ONEOK Partners, L.P. $4.77 - $4.90 $4.92 - $5.02 $3.06 - $3.46Gain on sale $1.51 $1.51 -

Adjusted $3.26 - $3.39 $3.41 - $3.51 $3.06 - $3.46

Page 25: oneok 2006 Wachovia Pipeline Conference

25

ONEOK Partners Distribution Growth to Unit Holders

$0.70

$0.7625

$0.7625

$0.7625

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.80

$0.88

$0.95

$0.97

$0.00

$1.00

$2.00

$3.00

$4.00

2001 2002 2003 2004 2005 2006

Q1 Q2 Q3 Q4

• Three increases in 2006; first increase since 2002• 21 percent growth in 2006

Page 26: oneok 2006 Wachovia Pipeline Conference

26

EBITDA Growth• Assumptions

– $1 million incremental EBITDA– Partnership is in the “high splits”– All incremental cash flow is distributed– Annual depreciation of $125,000

• Impact on ONEOK income is $664,000 (pretax)

– Approximately $500,000 from Incentive Distribution Rights

– Approximately $164,000 equity earnings related to limited partner units owned by ONEOK

ONEOK Partners Growth Benefits ONEOK

Distribution Growth• Limited Partner Units

– ONEOK owns 37 million limited partner units– Every one cent increase results in an additional

$1.5 in ONEOK’s annual cash flow• Incentive Distribution Rights

– Assumes “high splits”– Every one cent increase results in a $3.3 million

increase in ONEOK’s annual cash flow and income before taxes

Page 27: oneok 2006 Wachovia Pipeline Conference

27

ONEOK Is Undervalued• Enterprise value of $7.1 billion; equity value of $6.1 billion• Equity value per share: $55.08• Implied P/E of 21.6

EBITDA Enterprise(Millions of Dollars and Shares) EBIT * Depreciation EBITDA Multiple ValueDistribution 161$ 110$ 271$ 9.0 2,439$ Energy Services - Physical 205 2 207 6.5 1,346 Trading - - - - Total 205 2 207 1,346 ONEOK Partners ** Limited Partner Units - - 2,223 General Partner Interest 46 - 46 23 1,058

46 - 46 3,281

Total 412$ 112$ 524$ 7,065$ Long-term Debt, net of cash & gas in storage 1,007Equity value 6,058$ Outstanding shares 110Equity value per share 55.08$ Implied P/E 21.6Current P/E-based on closing stock price at 11/27/06 16.3

* 2007 Guidance ** Based on price of $60.08 and annual distributions of $3.88.

Page 28: oneok 2006 Wachovia Pipeline Conference

28

Appendix

Page 29: oneok 2006 Wachovia Pipeline Conference

29

Gathering & Processing

Gathering & Processing Key Points

• Asset diversity with balance between basins, producers and contracts

• Growth opportunities in Mid-Continent and Rocky Mountains

– Well connects– Internal projects– Strategic acquisitions

• Basin diversity effective in offsetting natural production declines

• Contract restructuring program has helped mitigate commodity price risk

Page 30: oneok 2006 Wachovia Pipeline Conference

30Contract Mix with Texas

Contract Mix – Volume Weighted

Gathering & Processing

41%

9%

24%

3%

19%

3%

40%

9%

30%

3%14%4%

40%

8%

33%

4%10%4%

47%

10%

23%

5%9%6%

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006G

Keep Whole w/ ConditioningKeep Whole w/out ConditioningPOP - Rocky MountainPOP - Mid-ContinentFee Based - Rocky MountainFee Based - Mid-Continent

Page 31: oneok 2006 Wachovia Pipeline Conference

31

Gathering & Processing

Gathering & Processing Risk Mitigation• Year to date, reduced keep-whole volumes to:

– 11 percent of total contract mix (47 percent of these volumes have conditioning language)– 16 percent of net margin for 9 months 2006

• Hedging:– 2006: 75 percent of margin associated with POP and keep-whole contracts– 2007: 25 percent of keep-whole spread– Ceiling: up to 75 percent of POP and keep-whole exposure

• Sensitivities:2006 2005 2004 2003

COMMODITY SENSITIVITYNatural Gas 10 cent/MMbtu increase -$0.1 -$1.6 -$2.7

$4.5$1.3

-$3.5Natural Gas Liquids 1 cent/gallon increase +$2.3 $3.8 $4.8Crude Oil $1/barrel increase +$0.3 $1.0 $1.1

Margin Impact ($ millions)

Page 32: oneok 2006 Wachovia Pipeline Conference

32

Natural Gas Liquids

Natural Gas Liquids Key Points

• Growing NGL supply through an aggressive plant connection program

– Connected to 90% of pipeline-connected gas plants in Oklahoma, Kansas and Texas Panhandle

• Increasing value in the services provided• Is primarily a fee-based business

– More than 80% of gross margin

Page 33: oneok 2006 Wachovia Pipeline Conference

33

Natural Gas Liquids

Mid-Continent Activities• Exchange and Storage Services

– Gather, fractionate and transport NGLs from processing plants to storage and market hubs

– Fee-based contracts• Optimization

– Obtain highest product price by directing product movement between Conway and Mont Belvieu

• Isomerization– Converts normal butane to iso-butane– Fee-based contracts

• Marketing– We purchase approximately one-half of fee-

exchange volumes in our Mid-Continent for resale on an index-related basis

Exchange & Storage

77%

Optimization9%

Marketing9%

Isomerization5%

Gross Margin ContributionGross Margin Contribution

9 Months 2006 YTD

Page 34: oneok 2006 Wachovia Pipeline Conference

34

Pipelines & Storage

Pipelines & Storage Key Points

• Pipelines and Storage produces a steady earnings stream

– 48% fixed rate (demand based)– 52% variable rate (commodity rate)

• Overland Pass is a significant growth opportunity• Abundance of internal growth projects

– Natural gas storage expansion and acquisition– Pipeline expansions– New projects

Page 35: oneok 2006 Wachovia Pipeline Conference

35

Interstate Pipelines

Interstate Pipelines Key Points

• Provide fee-based income (demand-charge revenues)

• Access to diverse supply sources with connections to growing markets

• High utilization ratesNorthern Border Northern Border

PipelinePipelineGuardian Guardian PipelinePipeline

Viking Gas Viking Gas TransmissionTransmission

Midwestern Gas Midwestern Gas TransmissionTransmission

Page 36: oneok 2006 Wachovia Pipeline Conference

36