歐尼克 (OKE) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the ONEOK 2003 year-end conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce your host for today's conference Mr. Weldon Watson. Sir you may begin your conference.

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 is important to note that actual results could differ materially from those projected in such forward-looking statements. For 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 and now, David Kyle, ONEOK's Chairman, President and CEO will moderate this morning's conference call. David.

Thank you Weldon and good morning everyone. First, let me express my appreciation to you for joining our review of the 2003 financial results. I'm pleased to report another strong performance for ONEOK with earnings from continuing operations up about 37% over last year's. 2003 was a very good year in financial terms and Jim Kneale will get into detail on the numbers. But, 2003 was a significant year for ONEOK in other ways. We ended a six-year relationship with Westar Energy, a company which had held a large equity position in ONEOK since our acquisition of the Kansas distribution property in 1997. We started the year with about a 44% equity holding by Westar energy and we ended 2003 with no Westar ownership bringing to close what had become a difficult relationship and one that brought confusion to the investment community. We're glad it's over.

At the beginning of the year we sold approximately 70% of our natural gas and oil reserves for $300 million. We said then that we were not exiting the production business. Keeping most of our staff in place we began looking for opportunities to grow that business back and true to our word by the end of the year we had acquired $240 million in reserves and systems. We sold our reserves in January for $1.53 per Mcf equivalent and acquired the new reserves in December for $1.27 for Mcf equivalent. The new properties will gives us added development potential consistent with our acquiring and develop strategy and I'd like to compliment JD Holbird and his team at ONEOK energy resources for their remarkable year.

As you know, the capital raise in the sale of our reserves at beginning of 2003 helped fund a $420 million acquisition of our Texas Distribution properties bringing our average customer count to almost 2 million. Roger Mitchell leads that organization and I am glad that they are now part of our growing organization and congratulate them on their efforts this last year of transition.

During 2003 we received a $45 million rate increase for our Kansas distribution company and my congratulations to Phyllis Worly (ph) and her employees in Kansas for their year. Later in the year we received a $17.7 million increase in rates for Oklahoma distribution property. San Comes and his fellow ONG employees are also to be congratulated for their efforts this year.

Our marketing company led by Chris Skoog not only had a very good financial year, I am proud that they were ranked first in 2003 among the major natural gas marketers in North America by the Masio survey. We're pleased to be recognized by our customers in the area of this service, value and effectiveness. The major needs of our customers are reliability of gas supply, dependability in meeting commitments and integrity. Chris is here today and will be available to answer questions later. Congratulations to you, Chris and your team.

Another very important attribute recognized by customers is financial strength. Maintaining a strong balance sheet is important to us. And that is why we recently sold 6.9 million shares in our most recent equity transaction. When we announced our reserve acquisition we told you we would consider issuing more common stock. In fact, this issuance was factored into our 2004 guidance. For gathering and processing business we continued during 2003 renegotiating contracts to mitigate risks and make us less sensitive to adverse moves and commodity prices and the resulting back spread. I believe we're seeing the culmination in 2003 of several years of hard work in this area. John Gibson is also here today to help answer your questions. But let me say that I'm proud of his and his team's efforts over the last several years to improve their financial performance.

Understanding the importance of dividend to our shareholders we increased them twice in 2003 or 16% for the year. In January of 2004 the dividend was increased another 5.5% putting our annual dividend at 76 cents per share. As I said, we understand the importance of dividends and will continue to increase the dividend when appropriate. We believe that having the issue of the Westar ownership behind us and with two acquisitions under our belt we are starting 2004 in excellent position to repeat our success again this year. In fact we have a couple of smaller deals in the works, hopefully to be announced soon. Before I turn it over to Jim Kneale to address the financial highlights I would like to recognize his efforts over this last year in helping navigate through the Westar exit. And finally I'd like to thank the entire ONEOK employee group for their hard work and positive efforts this year. I'm proud of our results and I'm excited about our future. Let me now turn this over to Jim Kneale our CFO. Jim.

Thank you, David and Good morning. Yesterday we reported 2003 earnings per share from continuing operations of $2.13, one cent above our guidance and compared to $1.30 for 2002 net income from continuing operations with $214 million, or $58 million over last year. Operating income also increased almost $75 million to $446 million. These increases were the result of four primary factors. Higher prices for natural gas, natural gas liquid and crude oil, the impact of our ongoing contract restructuring effort in the gathering and processing segment; the addition of the Texas Gas distribution properties and the rate increase in Kansas.

For the fourth quarter earnings per share from continuing operations were 65 cents compared to 30 cents last year. Net income was $62 million, which compares to $35 million in 2002. The same factors that impacted our year-end also impacted the quarter, but there are two other items I need to mention. First, the fourth quarter includes the $3 million charge for our settlement with the CFTC that we announced several weeks ago. Second, as we previously discussed all year in early 2003 we implemented an accounting change that eliminated mark-to-market accounting on certain energy contracts and put them back on the accrual basis. As a result, the fourth quarter for the marketing and trading segment reflects accounting for those contracts on the accrual basis. In 2002 they were under mark-to-market accounting. Capital expenditures for 2003 were $215 million, which compares to $211 million last year. Our cash flow from operations before changes in working capital remain strong exceeding capital expenditures and dividends by almost $220 million. At December 31, we had $600 million of commercial paper outstanding which includes $240 million related to our acquisition of the Wagner & Brown properties.

At the same time, we had natural gas, natural gas liquids and natural gas liquids in storage or in the process of collection for December sales of $652 million. David mentioned that we issued 6.9 million shares of common stock with proceeds of $151 million in February. As of today, we have about 102 million shares of common stock outstanding, which is comparable to the 101 million and 100 million total shares outstanding at the end of 2002 and 2001. Our debt to equity ratio after the offering and using Moody's treatment for our equity units is 48% debt, 52% equity. Finally, in the earnings release yesterday we reconfirmed our 2004 guidance that was originally contained in our December 19th, 2003 press release, David that concludes my remarks.

Thanks, Jim. And as I mentioned both John and Chris are here to help answer questions. And we are now ready to open the lines to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Cathleen of W H Reeves your question please.

Good morning. I was wondering first of all where Chris stands at the storage level?

Cathleen. This is Chris. As of December 31, we still had 65 billion cubic feet of gas in the ground or 86% full.

That has to have changed. Can you give us a current view where that is, Chris?

Yes, as of the end of January we're at 45 billion cubic feet in the ground and projecting here at the end of February to be somewhere in the neighborhood of 22 to 25 Bcf in the ground.

Excellent. Thank you. And Chris, are you changing the focus of all of your market territory? I know when we talked last you were looking at parts of the mid west, is that - are you continuing to look at expanding those potential market?

Yes, we continue to penetrate the upper midwest, the Michigan, the Ohio Valley area as part of our Canadian strategy and we are looking at some opportunities to come across over to get to closer to the northeast. Finally we've gotten some opportunities that are coming to us from Canada that look like it could be a good possibility for us, and as well as we've now got deep penetration into Florida and Florida Power and Light is in the top five customers now.

Well. Thank you. Also I was wondering when you all are thinking of filing a rate case in Oklahoma?

Cathleen, I'm sure you saw the announcement on the rate adjustment we received that was you know in January.

Right.

As part of that settlement there is some sunset to that rate relief, if you will. And it's basically an 18-month time period. So you can expect that certainly between now and then we will be looking at filing a rate case in Oklahoma.

OK. Thanks.

Yes. Second line there.

Thank you. Our next question comes from Mike Heim of A.G. Edwards. Your question please

Thanks. Chris, as you talk about expanding into new areas. Can you give us a sense of what that means? Do you lead out what kind of assets or is it hiring people or just buying up capacity? Tell us exactly how that works

Mike, it's a little bit of combination of everything. You know, we had for our fiscal strategy of what we set this company around and the legacy that this company has been built on since 1907 is physically delivering the gas. So, in order to get to these new areas and offer new services in these areas we will get the transport and storage capacity to back our position so we can offer the right services to our customers.

OK. Chris, are you willing to comment on just little bit on the first quarter here, the upcoming March quarter? Certainly we don't have the volatility we had last year, but any general comments?

Just generically the - I have a little different opinion on volatility than you do, I think. When we were trading $7 in January and February and we are trading $5 today that is a pretty good move in the market. So, we feel like we are capturing that in the first quarter. But on a go-forward basis yes you are kind of flat looking forward here in second and third quarter, but I surely believe that won't be reflective of the market as it settles.

OK. And question for either Chris or Jim, I guess. As you talk about accounting change and the effect on writing down the derivative contract backed by gas and storage, is there any way to kind of quantify how much of that -- what that was in the December quarter?

I have that, Mike. As comparison from 2003, the fourth quarter we reflected about $11.2 million in storage gains, whereas in fourth quarter of 2002 we didn't have any.

OK.

In 2002 we had reflected the income in second and third quarter. So about $11.2 million so that should give you an apples to apples comparison

OK. Thank you. That's all my questions.

Thanks Mike.

Thanks. Thank you. Our next question comes from Anatol Feygin of J.P. Morgan. Your question please

Hi, good afternoon everyone. Chris, can you just comment on the fourth quarter? I guess the results were a little bit lighter than we had expected. Do you guys had an August set out of $230 million number for marketing and trading and that came in little bit below. Do you see any structural issues there or is just a timing issue relative to '04?

Anatol, I think two things. We reflected 230 as of August and took it down to 217 I believe sometime in the third quarter conference call, if I'm not mistaken, in the middle of October and that was reflective of the basis from the Rockies and Mid-continent and then we took it down to 202 right toward the end of the year and it was better reflective of having 86% of our gas still in the ground at year-end as opposed to you know when there is 40% over you think you have more gas out of the ground. It moved us to take gas out of the ground and but then in December when the NYMEX settled at 440 and 480 when January and February were trading in the 5 and 6 and $7 range. So, we just kept more of our gas in the ground during the fourth quarter than we originally thought.

Sure. Can you comment on your views on the basis going forward? And perhaps how you are positioning yourself relative to that?

Yes, our biggest exposure as you know is the Rockies to the mid-continent. And we are approximately 70% hedged for '04 and we're 80% hedged in '05. And we see the basis which had tightened up very severely here late in third quarter earlier fourth quarter like it always does a widen back out and Rockies just trading in low 80s. Is 80 behind the screen. So, It is back out. It's not up to the $2 level first quarter of a year ago, but its coming back out to more normal areas. And on the going forward from calendar '05 through '08, we're seeing it in the 80s, behind the screen. So back out to more normal levels.

Is the hedging in that range or is it something that is more reflective of where those swaps were trading kind of late third or early fourth quarter when obviously the projections for that basis started to come down a little bit?

It's more reflective of the 80 range. We more than cover transport costs.

Great. One other sort of avenue of questions Can you guys give us sense for CAPEX breakdown of the 280 -- 270 to 280 guidance, where the perhaps the large incremental delta is relative to '02 and '03 levels?

Anatol this is Jim, good morning

How are you Jim?

Good.

The two, about a rounded $60 million increase over '03. About $25 million is in gathering and processing and that breaks down into really two parts our buckets, I guess. There's $14 million in that $25 million that is for undisclosed project that we're working on. The 11 million is related to pipeline integrity and new NGL storage regulations, money we will have to spend this year. The production segment is up about $24 million, 20 of that is kind of Wagner & Brown and the other 4 million is drilling on our legacy properties. And probably the other big increase is about $11 million; we're in the process of putting in a new customer system for our three distribution entities. If you recall, each one is on a different system than the acquisitions we made. And so there's about $11 million increase in capital spending related to installing that system. That's the big pieces.

Great. In terms of the pipeline integrity is that a number we will see that higher level for next five or 10 years kind of timeframe?

Anatol, this is John Gibson. The number will be higher on the front end and then flatten out over the probably 3-10, year 3-10. But I would expect that you will see this level of increase for the next couple of years.

Great. Thanks very much.

Thank you.

Thank you. Our next question comes from John Edwards of Deutsche Bank your question please

Yes. Good morning. Just one of the things, can you talk a little bit on the production side? It looks like you came in about the same as last year even though you only had those properties in place from December. I was wondering if you could talk about that and then I will have a question on the trading segment?

John, this is Jim. Let me make sure I understand your question. Was the production volumes are flat '03 or look fairly flat '03 to '02 is that the correct -

Actually, I was not asking about the volume just the results. May I know the prices were higher, but as I understood it you had almost it imbibed the assets until December and nonetheless you still came in pretty close to a year ago. I thought that struck me as somewhat impressive. So unless I'm missing something I thought you could talk about that.

No, it is. We had a very successful year on drilling on our legacy property and hit some very good wells that kept those volumes up comparable to the year before because the acquisition was -- I believe it closed on late December the 19th or 16th. I don't remember the exact date. So this, very little volume from the acquisition in '03. So your read of that is accurate. They had a very good year drilling on the Legacy properties.

OK. I mean, what was -- I mean what was behind that? I mean, in terms of that very good year?

Well, you know, David might add to this. I would go back to when we sold our properties beginning of the year we were pretty adamant that we were number one staying in the business because we felt like we had a very high caliber staff of people down there and we also kept several fields that one was a long wide legacy production field and the other two were newer fields that were in the development stage but we had done a significant amount of work on and felt like there was a lot of upside potential. And so as the year progressed we actually drilled some of those wells and proved that our view that they had some large upside potential.

OK. And then on the trading side just a question for Chris. It looks like you're having a bigger percentage of the mix coming from this category trading crude tower and NGL and gas options. Maybe you could provide a little color on that or fill in a little detail on that.

John, if you have the press release in front of you. In 2003, the trading was a 116 million. And in 2004, we are taking that down to 78 million.

OK.

We're lowering that number. The biggest reason for lowering the number is we had exceptional year last year trading options. We made over $60 plus million in options and didn't budget at that level, we budgeted over $30 million level, which was the two prior years. More reflected. That was the big decrease there.

OK.

And the increase in marketing and storage from a $100 million to $124 million is primarily due to the new market penetration in upper Midwest for full year of southeast. Then the change in mix of storage from more market zone storage and less field zone storage where volatility is greater the further you get from the production level. Does that help you?

Yeah that is great. Thanks a lot.

[OPERATOR INSTRUCTIONS]. Our next question comes from Yves Siegel of Wachovia Securities your question, please.

Good morning just to follow-up. One is Jim, when you look at the cash flow for 2004 it seems like significant amount of free cash flow again. Can you discuss where you'd like to see the balance sheet? It sounds like it is in pretty good shape right now. And also maybe put into context the fact that in Chris' group as storage unwinds you're probably going to end first quarter with significant amount of cash flow, as well. So, I know you are looking at dividends, but despite buybacks at this venture make sense also?

Yes Yves, let me try to address all of those points. Yes, we expect to again generate a significant amount of free cash flow after CAPEX and dividends in '04. And I think that in the $150 million plus range based on our forecast. Looking ahead to the Spring, depending on when Chris pulls the rest of the -- primarily depending I guess on when Chris pulls the rest of his gas out of storage and presuming that he doesn't roll any until the next season depending on pricing, we'll probably end late spring, probably not by end of the first quarter, be $300 million of cash invested and again generate surplus cash this year. Looking forward again we have several things on the horizon. David mentioned looking at couple possible small acquisitions. If you look to '05 we have $335 million worth of I think it is seven and three quarter percent debt maturing another $300 million in '06. But, all of that together I think we will also continue looking hard at our dividend rate. I believe our pay out ratio based on our budget still only about 35% or 36% and we've raised dividends three times in 13 months. That is also on our model. We aren't looking at this point during the stock buyback. As you are aware and I think most everybody that follows us, our credit rating is very important, especially to the marketing and trading function and how we deal with our counter-parties. And having cash and strong balance sheet is a good thing.

Yves, this is David Kyle. Let me add to that and say the history of this company has been one of inquisitive nature and we continue on that track. So, you know the potential does exist for some of the use of that excess cash flow to fund acquisitions and acquisition strategy. I think I would also like to emphasize while we look at the impact of an acquisition on our earnings we have internally increased our focus on returns and in fact our -- one of our key performance measures is our return on invested capital, which includes for this calculation, includes both short-term debt and takes into account invested capital. So we're looking to grow this business going forward. But will do it in a rational way.

Can you discuss the nature of the acquisitions that you're looking at? And the type of the size, could you see another $400 million type of acquisition?

I can tell you that the ones we've talked about here are smaller acquisitions and I'm really not prepared not to get into specifics. But just say they are consistent with the business approach that we've developed and demonstrated over the last several years. They will add to our footprint and provide us more stable type earnings stream going forward.

OK, if I could, just three real quick follow-up questions.

Sure.

One if John can just discuss where he stands now on gathering and processing in terms of on the contract mix and how much sensitivity is there to earnings? That will be number one. Number two, could you just mention if you have any significant hedges for gas production going out into 2005? And then thirdly, David, you mentioned the emphasis on return on capital. I can't help but look at the additions to the Board of Directors and sort of put that into context of where you are now on the Board of Directors and what was the thinking behind the additions? Thank you.

This is John. Let me talk first about the contract mix. We ended the year about 44% by volume in the fee-based contracts and 29% of gross proceeds and 27% key pull. Having said that I think one of the important things to note is that our profitability has increased significantly in light of decreasing processing spreads, but rising commodity prices. So although as you compare our position in key pull contracts say to 2002, it's a very - it is almost flat. I think we were about 1%, may be 2% lower. But what I would emphasize is it's what is in the contracts that make a difference more so than each of the three categories.

As far as sensitivity is concerned, just again we've had this discussion before. I think when you take into account sensitivity, you have to also take into consideration our ability to change our operating mode to maximize production of relative components whether that be propane or whether that be ethane natural gas. So, these don't work day-to-day, month-to-month. And there is somewhat of close correlation say year to year and for a 10 cent move in natural gas prices it impacts our gathering and processing business right now about $3.6 million. So gas prices go up 10 cents for every 10-cent its goes up it effects our operating income by $3.6 million to the negative. However, with the penny increase per gallon in natural gas liquids it has about $4.5 million advantage. So as NGL prices rise we benefit by that $4.6 million. We do also produce a lot of common state in the field and that is why we also look at the sensitivity of crude oil. Condensate is tied to crude oil so when we see crude oil prices go up $1 net as positive impact to the G&P segment of $1.3 million.

Now having said all that what you also need to keep in mind we are also constantly working on our contract portfolio so as everyday we show up we're changing that contract mix inside each of those three categories which of course impacts sensitivities.

Steve, with regard to the hedges in '05 in our production segment, we are not hedged into '05 at this point. And with respect to the drag we added two quality individuals to our Board in the last couple of months. And you will recall part of our arrangement with West Star at one point allowed them to have two board seats and then with the new agreement was reduced to one. You know practically speaking with them no longer being a shareholder we don't have to hold a seat available for them. So it's sort of turned us loose to start adding to our Board and adding to our bench strength and I think both of these new directors do that. You've read the information on each. Obviously Julie Edwards brings strong financial and investment banking history and Jim Day has - brings a long-term chief executive officer view. You should note that at one point in Jim's career and in fact early in my career Jim was an employee here. He also has knowledge base of this company that will prove beneficial.

Thank you.

Thanks Yves.

Thank you. Our next question comes from Morris Shanesey of Massachusetts Financial Services your question, please.

Sorry, I've got a little bit of a cold. Thanks for your time. Couple questions on the production side. Can you talk about what your production goals are in '04 over '03? Not sure if I heard right 89% hedge position in natural gas in '04 to 0? '05? Maybe you want to tell me what your hedging strategy is all about then?

Yeah, this is Jim. We -- first the hedging strategy is you know it again it's somewhat opportunistic, but looking at our view of pricing and really with the focus of creating stability in the earnings from that segment traded off with somewhat of variability you can have because of production rates and drilling success and things like that. But if you look back over the last three or four years we've been fairly highly hedged in each one of those years as the opportunity in the market presents itself to lock in those prices.

I'm just wondering why you wouldn't given the price you locked in for '04 why you wouldn't have locked in the '05 production, as well?

Because when we were looking at '04 prices if you had gone out and looked into '05 they were what we sometimes in Crude oils were backward dated. You saw the rally in the market for '04, but the '05 market didn't rally. So we believe there will be opportunities looking forward to capture the prices as it does it again. And if you go back historically, you see that same phenomenon happening every year.

In terms of production, I didn't bring that data with me. Primarily I can't remember the production from our Wagner & Brown acquisition. I think it's about 26 Bcf a year. I'm getting some help here. How much? 26 million a day and that will add to our legacy production of what we had this year. So, in that perspective that's the primary increase in '04.

What kind of growth or decline are we getting out of the legacy piece?

This is David Kyle. Let me give you flavor of what we are seeing with the properties we capped a year ago. We basically as Jim said, kept three fields. Two were more highly developed fields and we still continue to see infield drilling but the decline rates are very low in those fields. The other field that we capped was a very prolific field where if you -- what we saw this last year. If you have success, you have very dramatic success and the decline rates there are obviously steeper than a more mature field. I should note that the early indicators and as I said, we haven't had the Wagner & Brown properties very long. But the early indicators are that we are seeing some success from drilling efforts infield and those acquired properties.

OK, so no one is going to give me production goal for '04 overall?

I don't know that we've put that out in terms of our guidance.

Yes it's the guidance was 18 DCF for the year.

OK. Sorry that included the acquisition?

Yes.

OK, great. Is there any strategy on the rate case at Texas Cast?

Texas rates, obviously because it's a municipally driven type race rate strategy, we can expect to be before those, some of those regulatory bodies almost on a continual basis and to date we've not indicated what our -- which of those we plan to be before over the course of the year and what any of those outcomes might be but because of its nature, that sort of how it turns out.

Can you give me just the trailing 12-month returns out of the Texas Gas Service Company, kind of returns you have been able to generate there?

This is Jim. Are you talking about the rate returns?

Yes, just like the trailing ROE, just trying to understand what kind of returns you are getting out of these?

This is somewhat of a guess. I have got some information from Texas and looking at their data, I believe what they gave me their ROE is around 11%.

OK. Great. Just wondering if we talk a little bit of more about the acquisition strategy? You know, obviously your stock, this TE is relevant metrics which may or may not be, is probably the cheapest of anyone in your -- of any company in your sector and perhaps this because marketing and trading is such a large proportion of your profitability. When you think about the acquisition strategy and you think about adding or not adding to that piece of the business given where your stock is trading, how do you think about all of that?

Let me approach it this way. Chris talked earlier about a move in the upper midwest and the potential to maybe move further east with taking some position in storage and pipe capacity. And that's really indicative of how the growth occurs in the marketing segment. When you look at the balance of the organization, the growth there is driven largely by you've got some intrinsic growth that you will see from natural occurring customer adds and so forth. But primarily the growth is going to be driven by acquisition and its hard asset type acquisition and it's in those areas we are focused in terms of our acquisition strategy.

We believe that while Chris is marketing effort represents a large percentage on an operating income base of Wagner's operations, it is not because of that percentage necessarily that we think we're trading at a discount. But it is some of the predictability and the questions of sustainability of that earnings stream over year after year. And that's why over the last year plus we've been trying to get more information out about how we approach the business and how we believe, in fact if this model does yield itself to replicate a pretty solid earnings capable stream year after year. Having said that, we're looking to grow hard asset that is provide stable cash flow and stable earnings going forward, mindful of the accretion, dilution impact and also mindful of this as I said earlier the return on invested capital aspect. So that's kind of in a nutshell the business approach.

Can you talk to me about in sense of compensation, how return on invested capital fits into that or is that all just about revenue and earnings growth?

It is about three parts invested capital and one-part earnings in terms of incentive measure.

What was return on invested capital in trailing 12 months?

This is Jim. It was little over 16%. But, to make it comparable, if you look at '03 we had the gain on the sale of our production property as you factor that out, it's about 13.5%.

OK. Thanks very much.

You're welcome.

Thank you. Our next question comes from Sven Del Pozzo of John S. Herold your question please.

Hello, just in reference to the initial comments about having sold properties for buck 50 or so from MCFE and acquiring them again for 120 something 127 for MCFE. I was wondering if the properties acquired had higher operating cost than the properties that you sold?

I don't believe they did. I think they are pretty equivalent. You should know that the properties that we sold were pretty well spread out across Oklahoma primarily. And this acquisition is pretty focused acquisition in a few fields in East Texas. In terms of development potential, anecdotally I would say that the East Texas properties have more development potential for us than the ones that we sold.

OK and what about in terms of differentials to benchmarks, I guess given that are driven by location of the reserves and the intrinsic quality of the reserves? Is there any difference between the property that you sold and the ones you acquired for those characteristics?

Obviously the ones we sold were in Oklahoma and carried a different price deck and basis differential to NYMEX. East Texas is going to trade more closely to ship channel and so you'll see a potential uplift there. Intrinsically, as I said, developmental potential I think is higher on the East Texas property. If you follow Wagner & Brown and their strategy, they are a company that's involved in exploration. That's not something we do. We are not involved in exploration at all. It makes great sense for us to buy properties that have been generated internally generated and put together by an exploration company whereby we can take those properties over and exploit them and develop them. So it's very key to our strategy and that's why these properties fit so nicely with this strategy.

OK one last question for Chris. In reference to the decrease in forecast operating income from in 2004 versus 2003 in the trading gas options. I was wondering how much variability might there be around that 78 million in operating income? I'm trying to find out in general what kind of assumptions might have been driving that 78 million in operating income from that element of marketing and trading in 2004? If basis differentials do swing your way or relative to the assumptions made for this 78 million, could you see it go higher or going lower?

What we typically do is in the trading segment is look at kind of rolling three-year average. If you go back to 2002 we made $77 million in that specific area. So we're back to 2002 levels just where we think volatility where be based on the underlying price of the commodity of natural gas and looking at winter and summer spreads. So there is some variability in that number. You tell me what NYMEX is going to do and I will be able to help you. 77, 78 million is kind of what we think is a conservative three-year average number.

OK.

What we have done in the past 116 we made last year was exceptional year. We are trying to be honest, we had a good year last year and we reflected a lower number in 2004. We have typically been pretty conservative on numbers and estimates and we don't see that changing going forward. We will not change our risk portfolio. We will stay within what we do well, our physical business.

OK. Are you seeing encroachment in your area from competitors or your customer bases pretty solid with you guys?

We have a pretty good customer base that's been with us over the eight years and grown and continue to grow with them and taking a bigger piece of their portfolio over time. The liquidity in the marketplace and the credit-worthy counter-parties out there helps us to continue to grow our presence with our balance sheet and the type of services we're providing. There is not a lot of company $500 million in free cash flow to play this storage game the way we play it. That's unique. So we are seeing increased competition on the base load of business producers are going direct to the markets, but this if everybody had base load gas to buy like producer his to produce there wouldn't need to be companies like me. Supply demand doesn't work that way. Supply is driven by cash flow.

OK. Thank you.

Thank you.

Thank you. Our next question comes from Devin Geoghegan of Zimmer Lucas your question, please.

Thanks for the time. Just wanted to go back, Chris, to the hedging numbers you gave for Rockies and MidCon. Using 70 cents, I think what you hedged in sometime back when you gave guidance. Is it now 80 cents or do you have closer than round numbers for us?

On average probably closer to the 70 number, low 70s.

OK

The portfolios around were around - so that is -.

OK so closer to 70s?

Yes.

OK. In terms of other pipelines have you had a opportunity to hedge those in, as well?

Yes, we're about 40% hedged off through the winter '04 and '05 on our Chicago piece, the transport up to Chicago. Then the stuff in MidCon to the Gulf Coast is being probably in the 50% to 70% hedged range also. It gets looked at daily. When we feel like there is structural trends and deliverability and production and just supply and demand and weather forecast. We try to look at that as April as piece and break winter down.

Clarify when you in your presentations have given pipeline capacity before, I usually think about Rockies to MidCon about $200 per day? The 70% or the 80% at 70 cents that's on your MidCon, the 320,000 per day?

No that is on that 200million a day, 300 million a day on the Chicago, that's about 30% hedged.

I'm confused now. The 200,000 on Rockies from MidCon with which Chicago is 30% hedged?

Rockies to the mid continent that is one - that is 70 to 80% hedged. The mid continent to Chicago is about 30% hedged.

How much capacity on that one?

Roughly about 300 million that you said, 200 million a day out of Rockies, 300 in mid continent to the Chicago way.

OK that helps. Do you have hedging number that is go with those, as well?

I don't have those off the top of my head here. But typically we get our cost of the transport covered. We can cover that basis spread. We lock that position off. As we get 100% of cost returned. We take advantage of the opportunity and upside by using storage in winter summer capacity. When we step out and take new transport position we delay that risk off right away. So inherently basis collapsing won't typically hurt us.

OK. Then on the lesser to Chicago leg in the last quarter of '03?

That is a 100% hedged?

100% hedged in? Do you have levels on that?

- It is a 100% cost of transport. I believe it is 60% spread and it is all covered.

Is that adding to earnings or recovering cost?

We are recovering our cost to transport. The opportunity becomes in buying gas better than index and selling gas higher than index. So it is not a big revenue generator for us. We are penetrating into Canada and trying to get our feet very conservatively. We laid that risk off on buying and selling at this point, not on the relationship widening or tightening.

OK. That's helpful. Thank you very much.

Thank you. At this time I'd like to turn the program back to Weldon Watson for concluding remarks. Sir.

This concludes ONEOK's 2003 earnings conference call. As reminder our quiet period for first quarter of 2004 will start when we close our books in early April and extend until earnings are released. We will provide date of the conference call information later. This is Weldon Watson and I'll be available throughout the day to follow-up questions concerning today's conference call. Call me at 588-7158. On behalf of ONEOK thank you for joining us and good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect.