OKE Are We There Yet? ONEOK 2007 ANNUAL REPORT • ONEOK is the sole general partner and 45.7 percent owner of ONEOK Partners, a master limited partnership engaged in natural gas gathering and processing, natural gas pipelines, natural gas liquids gathering and fractionation, and natural gas liquids pipelines. • ONEOK is three natural gas distribution companies serving more than two million customers in Oklahoma, Kansas and Texas. • ONEOK is an energy services company marketing natural gas and related services to local distribution companies, industrial customers and power generators. Financial Highlights Year Ended December 31 2007 2006 2005 Thousands of dollars except per share amounts Consolidated Financial Information Net margin $ 1,810,108 $ 1,721,984 $ 1,338,154 Operating income $ 822,543 $ 862,202 $ 803,805 Income from continuing operations $ 304,921 $ 306,677 $ 403,148 Net income $ 304,921 $ 306,312 $ 546,545 Capital expenditures $ 883,703 $ 376,306 $ 250,493 Number of employees at year-end 4,555 4,545 4,559 Common stock data Shares outstanding at year-end 103,987,476 110,678,499 97,654,697 Data per common share Earnings from continuing operations - diluted $ 2.79 $ 2.68 $ 3.73 Net earnings - diluted $ 2.79 $ 2.68 $ 5.06 Dividends paid $ 1.40 $ 1.22 $ 1.09 Book value at year-end $ 18.94 $ 20.02 $ 18.38 Market price range High $ 54.86 $ 44.26 $ 35.72 Low $ 40.12 $ 26.56 $ 26.63 Market price at year-end $ 44.77 $ 43.12 $ 26.63 Return on average total shareholder's equity from continuing operations 14.6% 15.3% 23.7% ONEOK continued to create exceptional value for shareholders by delivering both consistent growth and stable earnings. Letter to Shareholders Remember how as children we would ask our parents from the backseat of the family car, Are we there yet? And our parents would say, We’re well on our way. Those thoughts occurred to us as we reflected on where we’ve been, where we are and where we are going. It’s been a remarkable journey – and continues forward at rapid speed. In the first year of our second century of operation, ONEOK turned in another excellent performance and, in doing so, continued to create exceptional value for shareholders by delivering both consistent growth and stable earnings. The last 10 years or so have been marked by significant change as we began piecing back together parts of the natural gas value chain. Our vision was to provide more comprehensive services and better value for our customers and superior returns for our shareholders. The pursuit of our vision has resulted in many changes at ONEOK. • Just 10 years ago, our natural gas distribution business represented approximately 80 percent of our earnings and today it represents 21 percent. Even more impressive, over that same period we almost doubled the asset base of our distribution business, which serves customers in Oklahoma – where it all began in 1906 – and Kansas and Texas. • We developed one of the nation’s premier natural gas marketing businesses, with primary emphasis on physical marketing. Energy Services provided 25 percent of our operating income in 2007. • We acquired and developed a wide array of assets along the natural gas and natural gas liquids value chain. In 2006, we sold these assets to ONEOK Partners, a master limited partnership, and became the sole general partner and a 45.7 percent owner of the partnership. As the sole general partner, we manage and operate the partnership. In 2007, ONEOK Partners provided 54 percent of ONEOK’s operating income. Its contributions to ONEOK have been exceptional, surpassing even our original expectations, and this is the reason we continue to designate ONEOK Partners as our primary growth engine. Over this time period, our assets, capabilities and footprint have increased dramatically – now stretching from Canada to the Texas Gulf Coast and from the Rockies to markets in the Northeast. 1 ONEOK’s 2007 financial performance exceeded expectations. Performance Matters Overall, ONEOK’s 2007 financial performance exceeded expectations. Net income was $304.9 million, compared with $306.3 million in 2006, which included our $32.3 million share of the gain from the partnership’s sale of a 20 percent interest in Northern Border Pipeline. Here is a look at how our three major businesses performed: • ONEOK Partners’ financial performance was exceptional during a year when we were executing on a myriad of growth projects, announcing new ones and completing a strategic acquisition. Operating income was $446.8 million, compared with $511.2 million in 2006, which included a $113.9 million gain from that Northern Border Pipeline transaction. Excluding the effect of that sale, operating income increased 12 percent in 2007. • Our natural gas distribution business performed at a new level of profitability in 2007, with operating income of $174.2 million, compared with $117.5 million in 2006. The improvement included the impact of new rates in Kansas that went into effect on January 1, 2007. Over the last three years, our distribution business has significantly improved its return on equity and continues to narrow the gap between actual and allowed returns. • Energy Services turned in a solid performance, in spite of lower natural gas price volatility, which limited our optimization opportunities when compared with the record-setting previous year. Operating income was $205.3 million, compared with $229.2 million in 2006, when we generated higher margins resulting from the carryover effects of massive supply disruptions caused by hurricanes in the third quarter of 2005. The majority of Energy Services’ income is derived from the physical delivery of bundled products and services to local distribution companies and industrial customers. ‘Growing’ the Partnership A year ago we wrote that ONEOK Partners was “flexing its muscles and building its future” with more than $1 billion in internally generated projects. While delivering on that promise and safely and efficiently operating its businesses, the partnership announced another $500 million in growth projects and completed a major acquisition during 2007. We will begin to see the fruits of our labor when the partnership’s largest project, Overland Pass Pipeline, comes on line this year. This new pipeline will bring natural gas liquids (NGL) from Wyoming to the partnership’s expanding fractionation and storage facilities in central Kansas. In October, ONEOK Partners also acquired an NGL and refined petroleum products pipeline system extending from that Kansas fractionator to Chicago. This $300 million acquisition was immediately accretive to earnings and serves as another example of assets that fit and work together. As a result of this purchase, the partnership’s growing NGL business now serves major market centers in Kansas, the Texas Gulf Coast and Chicago. This acquisition opens the door to new customers in the upper Midwest and allows the partnership to enter a new link in the energy value chain – refined petroleum products such as unleaded gasoline and diesel fuel. Eighty employees joined the partnership as part of this transaction. 2 Are We There Yet? Because approximately 60 percent of ONEOK Tribute to David Partners’ overall business is fee based, its earnings When our leader, colleague and friend David Kyle are relatively stable. The partnership’s fee-based stepped down as president and chief executive business will increase as the big slate of growth officer of ONEOK on January 1, 2007, we entered projects comes on line. This aligns with our a year of transition that went smoothly, thanks to strategy of providing consistent growth and stable continued help from David and the efforts of our new earnings. Following this letter, we describe the management team. larger projects and explain how this growth benefits Jim Kneale, our former chief financial officer and ONEOK. treasurer, stepped into the role of president and We are very pleased with ONEOK Partners’ chief operating officer. Curtis Dinan, our former chief growth and performance since we became the sole accounting officer, filled Jim’s former roles as chief general partner two years ago. financial officer and treasurer. And I began serving as chief executive officer, in addition to my role as Increasing the Dividend president and CEO of ONEOK Partners – and more We increased the ONEOK dividend twice in recently, chairman. Our jobs changed, but ONEOK’s 2007 and yet again in January of 2008 for a total vision and strategies did not. increase over that period of 19 percent. Since David retired as a full-time employee on January of 2003, we have increased it 12 times – January 1, 2008, when he began serving as a 145 percent increase overall. non-executive chairman of the ONEOK board of Our goal is to pay out between 50 to 55 percent directors. His ONEOK career, spanning more than of our recurring earnings to you, our shareholders, 33 years, is remarkable for a number of reasons. He in the form of dividends. was instrumental in formulating ONEOK’s vision and As of January 2008, ONEOK Partners had strategy in the late 1990s, which led the way for so increased its cash distribution to unitholders in much of our profitable growth. eight consecutive quarters, representing a 28 As our chairman, president and CEO from percent increase since we became the sole general the summer of 2000 forward, he led us through partner. This adds value to the ONEOK shareholder unprecedented change, growth and value creation. via ONEOK’s ownership of units in the partnership He is an outstanding leader, a remarkable person and from the additional incentive distributions and an even better friend. received as the sole general partner. As we have We all owe him sincere thanks for a job well done.