歐尼克 (OKE) 2002 Q2 法說會逐字稿

Good morning. My name is Vanessa, and I will be with your conference facilitator today. I would like to welcome everyone to the ONEOK second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Weldon Watson. Please go ahead, sir.

Good morning and welcome as we begin this morning's conference call. I will remind you that any statements that might include company expectations or predictions should be considered forward-looking statements and as such are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. It's important to note that the actual results could differ materially from those that are projected in such forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to the MBNA sections of ONEOK's filings with the Securities and Exchange Commission. Now Dave Kyle, ONEOK's Chairman, President and CEO will moderate this morning's conference call. David?

Thank you, Weldon, and good morning. I want to thank you for joining us today to discuss our second quarters earnings. After my opening comments, Jim Kneale, our Chief Financial Officer, will review the financial highlights for the quarter, also with us on the call is Chris Hughes, President of ONEOK Energy Marketing and Trading, John Gibson, President of our Energy Group, which includes gathering and processing and transportation store segments and Lamar Miller, or Vice President of Earth control. Together, we will be happy to respond to your questions following discussion of our financial end segment results. We are pleased with our second quarter performance, particularly in light of the difficult environment we faced. While lower energy prices had a negative impact on several of our business segments, our strategy of focusing on the fiscal side of the business and trading around our asset base continues to yield positive results. As many of you know, the joint stipulation are agreement we reached with the Oklahoma Corporation Commission in May also enabled us to recover $14.2 million in gas costs that we had written off in the fourth quarter of 2001. As we announced in a separate press release yesterday, we launched a debt tender offering consent to solicitation for as $64 million in aggregate principal remaining for two issues of senior notes. We are also soliciting consent to propose amendments to the agreements for those notes that effectively eliminate most of their restrictive covenants. The tender and consent solicitation are scheduled to expire at the close of business on August 20, unless extended or earlier terminated. I'm pleased also to report that our internal process for complying with the SEC's June 27th CEO and CFO certification order is nearly complete. Jim and I will be meeting with members of our accounting team, as well as members of our management team to complete this process by the August 14th deadline. We're also complying with the congressional certification requirements in the Southend Oxy Act with respect to each periodical report we file with the SEC that contains financial statements. While this new requirement has been the topic of much discussion since the President signed the act on July 30th, we will be complying as required with our second quarter 10-Q. I know that many of you are wondering what action ONEOK intends to take with respect to the purchase of Weststar energies ONEOK's shares. I can only tell you that we are continuing to evaluate our options with the goal of arriving at a decision that we believe will create the greatest value for ONEOK's shareholders. As we said in the release, the tenders should not be interpreted as a decision to purchase or not purchase Weststar shares. I would now like to turn the call over to Jim Kneale to review our second quarter results. Jim?

Thank you, David. Yesterday, we reported earnings per share of 32 cents for the second quarter of fiscal 2002 as compared to 20 cents last year. Net income was $38.8 million, compared to $23.6 million the year before. Cash provided by operations increased $115.6 million to $220.7 million. For the six-month period, cash provided by operations was $585.8 million, an increase of $331.5 million. Also for the six months, capital expenditures and acquisitions are $137.6 million, $52 million less than last year. The increased cash flow and reduced capital spending have allowed us to reduce total debt $467 million since December 31st and $297 million from one year ago. As a result of the lower debt and interest rates and the impact of the fixed loading floating interest rate swaps put into place last year, interest expense for the quarter is $8.4 million under last year and $19.8 million under last year for the six months. Operating income was $86.8 million for the second quarter as compared with $71.9 million one year ago. The production segments operating income decreased from $19.7 million last year to $7.1 million. Although gas production volumes declined only slightly, the realized price for natural gas decreased to $3.28 per MCF from $4.93. Depreciation and depletion increased 1.3 million due to higher drilling costs over the last twelve months. Approximately 61% of the remainder of the year's natural gas production is hedged at a wellhead price of $3.51. The gathering of processing segment reported operating income of $28,000 as compared to 6.9 million last year. Although net revenues increased slightly on higher volumes of gas processed and liquid sales, lower commodity prices offset much of the impact. Operating costs increased 6.7 million due to increased allowance for doubtful accounts and customer billing adjustments, additional lease compression and higher employee costs. Operating income for the distribution segment was 17.1 million, as compared to a loss of six and-a-half million last year. Included in operating income is 14.2 million related to the settlement with the OCC that David mentioned earlier. Operating expenses declined 6.9 million or 11% primarily due to reduced bad debt expenses. Transportation and storage operating income decreased 7.7 million from 15.6 million last year. Our volume transported increased slightly. Transportation revenues decreased due to the impact of lower natural gas prices on retained fuel. Storage revenues declined due to idle storage capacity that represents about 14% of our total capacity. Revenues were also negatively impacted by the resolution of a third party contractual storage and pipeline imbalance. Operating expenses increased 1.7 million due primarily to increased after-allowance taxes and employee costs. ONEOK Energy marketing and trading reporting operating income of $54.6 million as compared to $36.8 million last year. Natural gas sales volume increased 7% and we are also trading natural gas liquids and crude oil. disclosure in our 10-Q, which provides an analysis of our mark to market income as of the end of the quarter the source of the fair value and when it turns to cash. As of the end of this quarter, approximately 60% of our mark to market earnings turned to cash by March, 2003 and 81% turned to cash by March, 2004. Other income of $8.1 million for the quarter includes a gain of $7.6 million from the sale of our remainder in investment in Magnum Hunter resources. David mentioned the tender offer we launched yesterday. If all the bonds are tendered, we will record a pre-tax charge of about $5 million in the third quarter. Looking forward to the balance of 2002, we still expect earnings to be in the $1.33 to $1.44 range. If we are closer to the $1.33, there is a potential for us to experience the superdilution in earnings per share for the third quarter when the distribution businesses are typically in a loss position. As a result, we may have to report basic earnings per share that would be lower than the current D95 method in the third quarter. This creates a situation where the fourth quarterly earnings per share numbers add up to a lower total than what would be reported for the year. Excluding the superdilution calculation, we estimate the third quarter will be in a range of 10 to 15 cents and the fourth quarter will be in a range of 31 to 37 cents. David, that concludes my remarks.

Thanks, Jim. It is now time for questions, but before we start, let me remind you that we are continuing to evaluate our options on the ONEOK shares held by Weststar and as such, we will not be taking any questions on that subject 00:10:41 this morning. We are ready for your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. Please hold for your first question. Your first question comes from William Mays with Bank of America.

Yes, good morning, guys. I just wanted to ask you on the Weststar - no, I'm only joking. I did want to ask actually on the restrictive covenants that you mentioned on the notes. Could you just give a little color on those and then also, you know, as you noted, it was a very difficult environment. I was just wondering what you're seeing out there now as far as marketing on the liquid side and on the gas and the power side as well. What's the ability to hedge right now and if you could just give a little bit more color on what you're seeing out in the environment.

Thanks, Will. Let me turn the first part of that question over to Jim to address the tender, and then I'll talk toss the second part to Chris in terms of his view of the marketing side.

Will, good morning. The notes that we've tendered for were issued under an indenture that was created in 1991. The notes were issued in 1992. It's the only two series outstanding under that indenture. There are a couple provisions in there that are somewhat restrictive on what we may or may not do going forward. One of the restrictions is a dividend payment restriction. It's a formula where you take net income forward for a period of time, add an amount and then deduct dividends paid. We have a lot of room, I think about $440 million of room under that provision, but it is the only indenture we have that has that provision. It has then another part under that dividend restriction that restricts the amount of ONEOK stock we can buy back to that same number in the range of $440 million. So we looked at that and for a couple of reasons. One, if we proceeded with the western buyback, we would need to eliminate that provision, and probably as important with the 8.32% and 8.44% debt, economically, we can buy those back at a discount to cash flow streams that almost are break-even and we'll turn around and invest 8.32, 8.44% debt and probably just then use commercial paper at some point in time in the future to offset that.

Bill, on the gas marketing side, we have seen liquidity diminish with regard to the counterparties that we can play with due to this credit crunch by the large merchant power group, but for us in our focus and strategy, which have been physical and unidirect, we have not experienced any decrease in our business at all. In fact, you know, as Jim said, our volume went up 7%, you know, direct and we're ahead of our storage injection curve, so the producers are continuing to sell to us due to our credit standing and our end users that have always been there with us and will continue to be our focus are there for the day-to-day volatility and when they're not buying, we're using our storage facilities, instead of having to make distressed sales in a volatile marketplace, we can pull it from storage as we see fit and take advantage of the market. On the long date side of this marketplace, this winter, we are seeing a lot more local distribution companies come out and talking to us about winter peaking business. So whether we difficulty that across two or three merchant player, they're coming to us saying hey would you like to double or triple your volume with us. From that point of view, it's been very good for us. In the real long date, we're wanting to hedge debt, 2003, 2004, 2005, 2006, we're having to deal with the banks, and the liquidity with the major merchants, we are conscientious of our peer group even who we can and cannot trade with, and we have a credit report that comes out and lets us know our exposure from a mark to market, receivable, physical, payable. We net everything out and all of our big counterparties we do have master net outs with, so we watch that very closely.

Was that the focus of the question or do you want us to talk about NGL?

NGL as well, but that was helpful. Are you maybe perhaps adding staff? It sounds like you've got a good opportunity to grab some market share, and I'm wondering, you know, how aggressively are you going after that?

We are evaluating through this whole process of what we're doing with the western resources, we are going to grow this business but we are going to grow it smartly and within the cash flow operations of what this corporation can provide and that's always been our strategy for the last seven years. We could have become an instant power merchant player, but the cash and wherewithal of this corporation has been always at the forefront of what we've said set our marketing and trade operation to be. If we weren't generating the cash, we weren't going to grow, and the margins and cash flow has allowed us to do that. At this point in time we are strongly evaluating. There are a lot of skilled traders out on the street we are waiting to capture and bring in the increased market share we see available.

Before John addresses the NGL, let me address and follow on to what Chris is saying. Our general philosophy is to lag demand in terms of the talent pool. So in other words, you know, as the big comes to, we will staff up. We won't staff up to go get the business, if that makes some sense.

It does. Sounds prudent in this environment.

John, why don't you talk about NGL.

Will, on the number of traders partners in the NGL has diminished with the turmoil that's taken place over the last several months; however, there still remains some very substantive trading partners, two of which are market to begin with.

That's correct. I would say the liquidity has not dried up, but it's in the hands of fewer people.

Thanks, guys.

Thanks, Will.

Your next question comes from John Olson from Sanders, Morris and Harris.

Good morning, everybody 6789.

Good morning, John.

I think I've been traveling the last 24 hours, so I'm a little brain dead more than usual. Having said that, I wondered if we could get an update from the Southern Union Southwest situation. Is this thing dead and done with now or is there any more, you know, death rattles to come?

Basically, what I can say to that, John, is that the trial date is still October 15th, in that range. We are, I'm sure as the other sides are, preparing for trial. The damages, there are still some remaining summary judgment issues before the judge, and that's really about all I can say as to what's going on with respect to that litigation.

And that trial will still be in Arizona State Court or Federal Court?

It's Federal Court in Arizona.

And that is against Southern Union as opposed to Southwest?

The claims that are remaining are a claim that we have against Southwest, a claim that Southwest has against us, both surrounding the agreement, the merger agreement that we entered into, and then there are two claims that Southern has against each of us, Southwest and ONEOK. The Southern claim focuses on the fan sale agreement and the claim that Southern has against us focuses on what they claim is a torturous interference claim. So those are the only claims remaining in the trial.

Okay, do they have any money attached to that? I mean, these numbers were not big, as I recall, were they?

Yeah, in some rulings that the judge entered, the claims that are remaining are essentially out-of-pocket claims as against ONEOK, both in terms of the Southwest claims and the Southern claims. The Southern claim does have the potential for punitive damages, but the claim is limited to a little less than $1 million from Southern and in the $5.5 million range from Southwest.

Okay, thank you on that. I wanted to ask about capital spending for the rest of the year. Are you guys going to be pulling in your horns at all now or are you still on track?

We're in the process of reviewing our capital forecast for the balance of the year. I suspect that we will be pretty much in line with our previously reported numbers, which are in the 200 plus million dollar range. I will say that, you know, a big part of our capital expenditures are focused on distribution businesses, and that business that we must continue to invest, to replace pipe and install service to customers. In addition to that, we've got transmission facilities and those require ongoing maintenance and support. We will be looking, as John and I talked here recently, as to our CAPEX with respect to G and P, and we'll be taking a hard look at that, but I suspect we'll be in that same range.

Okay. John, I wanted to ask you, if I may, about any changes in the complexion up there with sale of the Williams natural gas or William central base pipeline gathering systems for that financial group which had Amoco contracts dedicated to it or Amoco was operating that system.

Right.

Was that doing anything for you? I can't think of a better deal for Williams to get away with Amoco.

I'd agree with you, and we have not seen any impact in our business up in the Bushton area. We have a separate gathering system that we operate that brings a lot of gash to Bushton and of course northern natural as a transporter brings gas as well to Bushton.

Thank you very much.

Thanks, John.

Again, in order to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Lany Tindale with Edward Jones.

Good morning. I was wondering if you could go over the figures again for the mark to market gain for the current quarter and then what amount of that turns to cash in 2003.

Jim, why don't you grab that.

Lany, the mark to market earnings for this quarter were $52.4 million, and if you look at our total mark to market earnings which again we'll have the chart, it's really called the fair value of the contracts which are mark to market earnings, 60% of those turn to cash by March, 2003.

Okay.

81% turned to cash by March, 2004.

Fantastic. Have you guys given a guidance for '03 yet?

We have not.

Okay, all right, thank you.

Thank you.

Your next question comes from Bob Sullivan with UBS Warburg.

Hi, just wanted to see if I could get an update on the hedge. You indicated that your contracts for the gas side in '02, I'm wondering if you could give the same figures for '03 as well as for oil if you have any.

Bob, for 2003, about 37% of our production volume is hedged at a wellhead price of 3.74. Only about 10% hedge for 2004, and it's at 3.87.

Could you give the assumed volumes for those?

I didn't bring them. I believe it's about 70,000 a day.

And oil is unhedged?

It's unhedged.

Okay, and could I just get the after-tax contribution from both Magnum Hunter as well as the 14.2 million, the settlement?

You're looking for the -

After tax gain. Either one, the UPS or the after-tax earnings impact.

The O and G settlement before any related costs recorded that go with that is about 7 cents, and the Magnum Hunter would be about three and-a-half, three and-a-half to four.

Okay, and just one last question on the marketing business. You indicated in the press release that some of the other commodities besides gas were positive contributors there. Can you break out the operating income at all or just provide some flavor there on how much they contributed?

Go ahead, Chris.

Your next question comes from Kathleen Uched with WH Freeze.

Good morning.

Hi, Kathleen.

I was wondering how you're doing on converting the liquids contracts from keephold to other types of contracts.

John?

Kathleen, we continue to make progress. So far year-to-date we've restructured about 90,000 in the BTU per day per contracts, on profitable contracts. We now have about 30% of our contracts exposed to keephold spread, about 43, 44% fee base and 27% percent of proceeds.

Okay, I was also wondering if I could ask what he's seeing as far as a term of contracts for storage, particularly by power generators, whether those contracts are, it sounds from your book like they're one and two-year contracts, but could you give a little light as to what kind of things people are looking for on some of the high deliverability trading and marketing contracts?

I'm not real clear on what you're asking but let me take a stab on what I think I heard. Right now, availability or the people wanting to do 2 and 3 and 4 and 5 year deals is greatly diminished in this credit crunch, so there's not a lot of people out looking to do the long date any type of business, whether it be storage, whether it be tolling arrangements, whether it be long-term purchases. For our business, which is fine, we've never looked at that business in the long-term basis, but if you look at our storage book, we have three agreements. We have two agreements that go out for five years, and we have three other storage agreements that are two years in length, and that's when Jim described the amount of income that turns to cash between March of '03 and March of '04, the big jump of 60% to 80% in March of '04 is because of that second year storage contracts of majority of those positionS. We've got a few electric starting to talk to us about looking the using to tolling arrangements with their plants for no fees, where we just set up and do strictly a sharing arrangement with benefits. We wouldn't pay them any demand dollars. We'd kind of set a, we think we can make X amount of dollars with this plant, and until we get to that threshold, then we start increasing our percentage of share but there would be no risk, no capital risk within ONEOK to take advantage of that if that opportunity arises and we haven't found one that we're comfortable with but we are looking at them.

I think, I guess it's clear to us that this environment is generating opportunities. I think the take-away message is that we're going to be judicious as we evaluate those opportunities. We're not going to jump out there and do some things that are going to get us in trouble. So but clearly, as this overall market in terms of market and trading contract, it's going to generate opportunities for us.

Great. Okay, thank you.

Thank you.

Your next question comes from Richard Hayden with Omega Advisors.

Good morning. Could you once again clarify what the earnings would be without this convoluted Thasby relative to the preferred?

Richard, I didn't quite catch all of that. Could you give me that again?

Relative to the delusion created by the Thasby ruling concerned the preferred held by western, could you clarify what the earnings would be if that weren't the case?

Well, you know, looking forward - for instance for the quarter, where we've reported 32 cents, they would be 39 cents and for the year estimate, 133 to 134. That would translate to about $1.58, and the full year, it's about 25 cents, 28 cents depending on the level of earnings.

Thank you.

Your next question comes from John Olson with Sanders Morrison Harris.

We charge for a second question. I'm sorry, I was just teasing. I said we charge for the second question.

Okay, no, I couldn't hear you. Again, I'm so beat up right now, but I may come back for a third and fourth for all of my being so tired right now.

We need to give a volume discount.

Net income way, very simple question, and that is I'm delighted that Rich asked about the lack or the numbers before, the dilution there. What is I meant to ask you what the total debt was for the quarter, short term debt maturities, Jim, and what is common equity?

As of the end of the quarter, it is, our current maturities of long-term debt of $10 million. We have current maturities are $351 million, but at quarter end, we had $44 million invested. So if you net those, about 300 million in short term, and then long-term debt is with 1.5 billion. That includes about $28 million of other comprehensive income from the fixed floating swaps we did.

Okay, thank you very much.

You're welcome.

Thanks, John.

Again, in order to ask a question, please press star and then the number one on your telephone keypad. There are no further questions. Mr. Watson, do you have any closing remarks?

Thank you, Samantha. This concludes ONEOK's second quarter 2002 conference call. As a reminder, our quiet period for the third quarter will start when we close our books, which will be sometime in early October, and extend until the release of our third quarter earnings. A tentative date for that earnings release and conference call are set for November 4th and 5th respectively. Confirmation of those dates will be made later. This is Weldon Watson and I will be available for follow-up questions concerning today's conference call. You may call me at 918-588-7158. On behalf of ONEOK, thank you for joining us and good morning.