歐尼克 (OKE) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ONEOK earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a brief question-and-answer session and instructions will follow at that time. If anyone should require assistance during today's program, please press star then zero on your touchtone telephone. I would now like to introduce your host for today's conference call, Mr. Weldon Watson. You may proceed, 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 provisions of the Securities Acts 1933 and 1934. It's important to note that the actual results could differ materially from those projected in such forward-looking statements. For a discussion of factors that could cause actual results to differ please refer to the MD&A 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. Good morning, everyone, and thank you for joining us to discuss our second quarter results. I'm pleased to report that we have met our expectations through the first half of 2004. It has become apparent, however, that we will do better in our gathering and processing business this year than had been earlier anticipated. The primary reasons for the increase in this segment are the higher commodity prices we are experiencing and the positive results from the contract restructuring efforts over the last several years. John Gibson and his team have done a great job in this area and I compliment them on their results. John will join us later to answer any questions you may have. As a result of this improvement in earnings, we have increased our 2004 guidance to a range from $2.18 per share to $2.24 per diluted common share. Marketing and trading results were off slightly, primarily due to reduced volatility. Even so, we continue to believe this segment will contribute $155 million in operating income this year. We have spent the last several months examining our marketing business and have re-focused our efforts to emphasize the physical marketing of natural gas. This side of the business has always been our bread and butter and this effort has brought it back into sharp focus. We've made several organizational changes and expect to begin reporting this nontrading part of our business on a gross basis rather than net beginning in the third quarter. Obviously this will not impact operating income numbers. In the second quarter our production segment continued to do well as a result of last year's acquisition of natural gas and oil reserves in east Texas. Other segments' results were reviewed in our release and need no other comments at this time. I'm also pleased to remind you that we raised the quarterly dividend during the quarter by 2 cents to 23 cents per share or 92 cents per share annually. We will continue to evaluate our payout and increase the dividend appropriately. At this time we'd like I'd like to call upon Jim Kneale, our Chief Financial Officer, to review the financial highlights for the second quarter. Jim.

Thank you, David, and good morning. As most of you probably saw, yesterday we reported earnings for the second quarter of 17 cents per share. This exceeded First Call estimate by one cent and our guidance by 2 cents. Earnings per share were down 6 cents compared to last year's 23 cents for the second quarter. In the gathering processing segment operating income was up $11.5 million to 27.3 million. As David mentioned this resulted from higher commodity prices and the impacts of our ongoing contract restructuring efforts. The production segment's operating income was up 275% to $12 million, again as David mentioned, due to the earnings from the Texas production properties acquired in December of '03 and higher commodity prices. Marketing and trading operating income was 4.9 million compared to 30.5 million last year. The decrease was a result of lower interregional basis spreads and reduced natural gas volatility. For the six months ended June 30th, our cash flow from operations before changes in working capital was $274 million. This exceeded capital expenditures of $114 million and dividends of $40 million by about $120 million. Also at June 30th we had $460 million of natural gas and NGL inventory and related margins on the balance sheet and a net short term borrowing position of only $21 million. Our debt to equity ratio was 47% debt and 53% equity treating 75% of the equity units as equity. David mentioned that we increased our fiscal year guidance by 6 cents a share to a range of $2.18 to $2.24 as a result of stronger gathering and processing segment earnings. We also provided revised estimates of 18 cents for the third quarter and 82 cents for the fourth quarter. There is an attachment to the earnings release which provides forecast segment information, capital expenditures and cash flow information for fiscal 2004. David, that concludes my remarks.

Thanks, Jim. As I mentioned, John Gibson is here joining us to help take questions. Also joining us here today is Chris Skoog, President of our marketing business. So at this point we'll open the floor up for questions.

(Caller instructions) Our first question comes from John Olson from Sanders Morris Harris.

Gentlemen, good morning.

Good morning, John.

That was a very concise and good summary. Just kind of a structural question if I may, David, and that is the spending is $275 million a year now and you're generating such nice surplus cash flow. Is there any thought to expanding this E&P budget for JD or anybody else now?

Candidly, John, we have, you know, obviously included JD's budget in that plan and it is not reflecting a curtailment in any sort of drilling opportunities. As a result of the acquisition we made we do have some PUD opportunities that can be drilled and those are on plan. The current forecast does not include accelerating any drilling program at this time. Obviously that's something we'll take a look at as we do our budgeting for next year but at this time there's no forecast for increased drilling.

Okay. One more question if I may for John Gibson. And that is the G&P numbers have come through so nicely here, what -- is there any specific event that triggered the contract restructurings? Did things get better in -- on the old Dynegy assets or the old KN Energy assets? Is there any specific reason, John, that this has happened or is it just across-the-board?

John, it's a combination of things. First thing that happened was a number of the contracts came up for renewal. Whereas previously we were trying to restructure contracts prior to their termination or expiration date. So certainly that's helped us over the last couple of years. The other thing is that there has been a substantial shift in the commodity price of natural gas and natural gas liquids in crude and that has enabled our producers to be a little more open in their negotiations with us for new contracts. So I'd say it's a combination of those two things.

Okay. Thank you very much.

Thanks, John.

Our next question comes from Kathleen Muchetti(ph) from WH Reese.

Good morning, gentlemen.

Good morning, Kathleen.

I was wondering if Chris would talk a little bit about where you all stand with storage, how full you are, how much is contracted, kind of what kind of margins you're looking at going into the winter season on the storage deliveries that you all make.

Good morning, Kathleen.

Hi, Chris.

Currently at the end of June 30th, the end of the quarter, we were at 58.7 BCF of gas in the ground, I won't give you exact price but it's below $5.20 WACOG in the ground. We're very happy with our spreads to the winters. I'm not going to give you an exact number where that is due to competitive reasons, but we're extremely pleased with where we're at in settings up for the fourth quarter and our guidance for the rest of the year reflects what we think will be happening. And the remaining 25 BCF we still have to inject into the ground to get to the 83.5 -- roughly 83.5 BCF of gas that we have contracted for this winter. We're seeing current value August, September and October on the next two months versus January and February pushing one dollar spread. Wow! So historically, you know, historically we look at 50 cents winter/summer spread, you know the upper 40s to low 50s so the dollar spread on the remaining 25 BCF looks very favorable. The key thing we're looking at right now is how much gas do you pull out in the fourth quarter versus how much gas do you pull out in the first quarter.

Okay.

So that'll be subject to weather and conditions in that range but under normal conditions right now we're keeping with the guidance at a $155 million for our segment.

Great. Chris, I didn't hear the number of how much you have contracted?

83.5 BCF.

You have the full amount contracted?

Yes.

Thank you so much. Also what's the status of filing -- looking at filing a rate case in Oklahoma?

Kathleen, as you, I'm sure, will recall, we as a result of the last rate order we received in Oklahoma, we're required to file no later than the end of January of '05.

Okay.

And obviously we're making plans to do that filing.

Great, thanks so much.

Thank you.

Our next question comes from Mike Heim from AG Edwards.

Thanks and --.

Hi, Mike.

Hi, how you guys doing? Under the distribution there's some comments about decreased margin in Kansas because of the weather-proof bill. Can you explain that a little bit more? I guess I'm forgetting exactly what that's referring to.

Mike, this is Jim. Through 2003, Kansas had a what's called the weather-proof bill program which allowed a customer to set their gas price for the entire year and then they just paid a flat amount every month, and at the end of the year the customers settled up, well, the customer didn't, their gas usage was settled up with a insurance company and so the insurance company took the risk of if they used more or less than that flat payment. So what you saw was flat revenues being reported in the distribution segment in '03 when that program went away in '04, you started seeing those customers, you know, have gas bills consistent with their usage so you had higher billings in the first quarter, lower billings in the second and probably third. And then they would be higher again in the fourth but on an annual basis it comes out to the same amount of margin for those customers.

Okay. Are you seeing the same type of utility problems we're hearing a lot of people talk about, the bad debt really starting to come up. I guess there's a little reference to employee and contractor costs rising. So, what about some of the other ones, bad debt, pension, medical, those type of things.

Let me address the bad debt portion of that, Mike and then I'll ask Jim to address the other portions. Yes, in fact, when you have higher gas prices it affects folks' ability to pay and that has a direct impact on bad debt. Obviously we're taking all the steps that we can to -- during this period where we can collect, as you know most jurisdictions have cold weather rules which prevents you collecting during periods of cold weather. So while we have the opportunity now, we are obviously focusing our efforts on collecting those dollars and reducing as much as we can of that exposure to bad debt expense. The other thing I would say is that consistent with other LDC's around the U.S., we are visiting with our regulators and looking at opportunities to mitigate the effects of bad debt expense, particularly the gas cost portion of that. You know, the intent behind regulatory oversight is to allow the Company to earn on the investment that we've put in the ground and that the gas costs really is a pass-through. Inasmuch as gas costs for uncollectibles is a portion of that pass -- you know, should be a portion of that pass-through, we've begun discussions both with legislators and with those that regulate us to look at ways to mitigate some of that exposure.

Okay. And so don't be surprised if we see a bad debt tracker in the Oklahoma application or something like that?

Don't be surprised at all if you see that.

All right. And even if you don't get that type of thing, year on, you'll use the 2004 test year I assume.

That's right.

So it'll reflect some of those higher costs.

That's exactly right.

The final topic just to touch on briefly is the People's arrangement. First of all, when you talk about revenues from that, will that fall into the retail marketing sub-buckets of the marketing and trading?

No, Mike, that'll be in the marketing -- up in the marketing segment of the wholesale level, not the retail level.

Okay. And how should we kind of think of this? Is this a pretty major deal, does this have the potential to really add to the earnings and cash flow? What are the risks associated with this?

I will -- it should help our cash flow. It should help our growth and the underlying segment of marketing and storage. The contract, without getting into all the details of of it, hit some high levels here. It's 30 months agreement starting out of the four quarter of this year, so the vast majority of the income will come in '05-'06 and it's a minimum take contract of 51 BCF, it could flex up to as much as 80 BCF and it's a price delivered at the city gate. So it's a base load component and a peaking component which fits into both our strength that we want to do in our physical side of the business.

And are you set to take on these responsibilities or do you need to go through hiring employees, adding storage, et cetera?

No storage and no additional employees going to be required to cover this.

Okay. Okay. Thanks a lot.

Thanks, Mike.

Our next question comes from Rebecca Followill from Howard Weil.

Good morning. Several questions for you.

Hi, Becca.

Hey. In June you guys put a clause in your earnings guidance that said we are evaluating our overall trading strategies in light of these reductions for you to reduce to your marketing and trading guidance. Do you have any more color on that or is that in line with what you said earlier today where you said you've re-focused your efforts on physical -- the physical business?

I think I'll start and I'll let Chris amplify. As I said, over the last several months we have really taken apart our marketing effort and re-evaluated in essence every component and how we approach that business. And as Chris and I talked over the last several months, you know, our bread and butter business has always been the physical side of the business, and it still is. We have re-focused our efforts to concentrate in that area. Obviously that means we'll be less focused on the trading side of the business. Clearly we still, you know, put financial positions on to support our physical business and we'll take what the market will give us. But we're not going to have that be a primary focus of what we do. And I will say candidly that we're also evaluating what we do with the power side of the business. We're currently still operating in that part of the Energy sector, but that's something we're taking a look at going forward. Chris?

Hey, I'll just follow up. I mean -- and David's -- what everything he said there is exactly on point. What we're trying to do is get in front of the analysts a certain degree of predictability versus risk. There's a predictability versus risk/reward that you guys evaluate marketing and trading companies on and the more predictable we can get our earnings the better you like us. So in the physical business we can count on the growth, we can count on the physical customers and we can get very predictable with our earnings there and try and sustain a level of earnings that will get you comfortable with what we do. We'renot de-emphasizing trading, trading has always been something that's been there for us, but it's -- we're trying as we've isolated it down into these three revenue sources, we're truly trying to be transparent for you guys to understand our retail business is what I would call like a utility business, 95% confidence level that we're going to hit the year-end number. Our marking business, I've got an 80+% confidence level that we're going to get that number depending on what weather may happen during what time of the year and our trading business, last year it was outstanding. This year it's, you know, we're in the game. We haven't changed our philosophy there. We do not sell things that we can't deliver. We're a buyer of option but with volatility being as low as it's been and liquidity of counter party risks making markets we've just de-emphasized that portion of the trading book. Does that help?

That does help. So just to clarify, with the exception of evaluating what you're going to do with the power side of the business, are you done with your evaluation of the business and what we see today with the exception of the power business is pretty much what we're going to see going forward?

I think so, as we sit here today, Becca, but obviously that's something that we'll continue to evaluate as we go forward.

Okay.

Clearly, and again I want to re-emphasize, back when we got in this business, it was a natural gas physical business for us. It was a higher margin physical peaking business that we focused on and that is still our bread and butter. You know, with all the attention over the last several years that a number of the marketers, and you know the names as well as I, have received and the blow ups that have occurred, you know, it's obvious that the business that we do is still a solid business and what we're trying to do, as Chris said, is focus our efforts on that part of the business.

All right, Thank you, and one more question on marketing and trading. Back to the People's arrangement. Since you're using the existing storage capacity that you have is -- are there incremental - is there incremental EBIT coming from this that is significant or is it more in rounding over '05 and '06.

It should be significant. I won't get into the margin permaby(ph) 2 that's in the contract but, like I said, the impact should you see more, you know, it will start late in the fourth quarter here.

Okay.

And it will be more '05, '06 impact than it will be in '04.

Great and then a couple of other questions. One for JD on E&P. Production was down sequentially. Are guys still on target for the same guidance that you put out production earlier in the year.

Becca, this is Jim. The answer is yes. It was down a little bit. In that segments they've drilled a number of really good wells. It's just a matter of getting them connected and getting them on. They had some of that delay forecast in their overall projections but we still feel good about that guidance we're giving on that segment.

Great. And then, John, one for you also. On the gathering and processing business can you address, again, the sensitivities to changes in NGL prices and gas prices understanding that your business you can move around things a great deal and then also just as kind of an overall one, at what point are you guys going to put out '05 guidance and with just John on the gathering of processing business. I don't really see much changing as far as fundamentals right now, I would assume its trends would continue into '05 or do you have any commence on that? Thanks.

Becca, this is John. First of all, sensitivities, as they stands right now for us based on our current operating mode as well as our contract mix, are $4.6 million per year change in gross margin positive per penny positive change in natural gas liquid prices. That is a penny per gallon. Gas prices have a -- a increase in gas prices of a dime have a negative impact to our gross margin of $3.3 million. And then on the crude side, for every $1 increase in crude price, we see a $1.3 million increase in our gross margins and that's attributable to our condensate sales. So those are the sensitivities as we go forward for the balance of this year and they will continue over time to adjust where we see lower impact by increasing gas prices and we will see increasing benefit from NGL prices as we continue to restructure contracts. As far as '05, I mean, that is a question for David but I will say the comment that this year we're seeing some excellent, I'll say good, processing spread but the important thing for us is we're a business or a segment that's no longer solely dependent upon good processing spreads. By restructuring our contracts from and mitigating keephole spread risk and focusing more on commodity price movement through our percent of proceeds contracts, as well as increasing the fees that we charge producers for the services we provide, we're becoming a business that is much more -- much less, let me say, much less volatile from an operating income standpoint. And as you pointed out in 05, if you look at the screen today, for gas and crude, they look very similar, those prices look very similar to those that we -- we see today.

Becca, as to our guidance for '05, we began that process sometime during the third quarter in terms of our budgeting process. And we carry that -- that budget and that plan to the board for approval. I expect that as soon as we have a good sense of where we are in each of the segments, we'll look at putting out some guidance, probably sometime earlier than what we have in the past, just provide some clarity. Obviously as we go through the year, as numbers become more clear to us, we will revise that guidance accordingly.

Thank you very much. That's all my questions.

Thank you.

Our next question comes from Anatol Feygin from Banc of America Securities.

Good morning, everyone, how are you?

Good, how you doing?

I'm doing well, thanks. I guess a couple followup questions. John, you in the past have given us a sense for the percentage of the keephole contracts that have -- that you've been successful in putting in conditioning language. Can you give us an update on where that stands sort of beyond just the migration straight out of keephole into pop, how much of the keephole you have that flexibility in today?

We currently have about 18% of the volume that we have under keephole contracts with conditioning language. And we continue to move in the right direction in our strategy of having 75% of our keephole contracts with conditioning language over the next four years.

Great. Thanks, John. Chris, if I could follow up on a couple of the questions. First on the People's arrangement you mentioned that existing storage would be used to satisfy that -- that agreement. It's -- it's my understanding that you actually get to use some of People's assets as well, both storage and sort of in-city assets, is that correct?

I have People's storage lease behind their facilities that I have in my name, and I have transport to Chicago in my name. There is People's transport, I'm not sure I get to use theirs or not.

So there's no -- I guess, there's no incremental storage that accrues to you, control of incremental storage that accrues to you as part of this arrangement, it's what you had already in --?.

Right, no incremental expense to us as far as storage.

Great. And in terms of -- you mentioned there's a margin peram in btu kind of an arrangement, is there also a performance based incentive that's driven by pricing versus Chicago city gate, that kind of -- ?

No. It's a -- it's based on a Chicago city gate price plus a fee, but there's no -- there's no performance issued between the two companies. It's kind of a partnership. We're guaranteeing them X amounts -- it's a variable load contract, base load per month over the 30 months, during the wintertime it's much higher, during the summertime it's much lower but in each one of those months they have the right to call on additional gas which we will use our storage that we have leased up in Chicago and the stuff we have leased on Kinder Morgan to, you know, flex up and cover their peaks as they see needed. So it will be part of my 1.3 BCF of peak day service that I sell.

Got it. So it will be the fluctuations in the gross profit that you guys will recognize will come more from the volumes that PGL calls on as opposed to -- as opposed to the Delta and your success in procuring that gas?

No, you can't -- you can't declare it that way. I won't -- I'm not going to get into the details on that portion of it but there's a set fee in the incremental gas gets called on a daily price level so I'm -- that's as much competitive as I'm going to go into it, Anatol.

Okay. Thanks, Chris. If I could get your thoughts on differentials out of the Rockies, do you see them kind of hovering at current levels, what are guys thoughts there and if you could also update us on your level of hedges on those capacities?

Sure, as you looked at our June 25 release that we changed our guidance down from the 182 to the 155 that was reflective of -- a lot of that shift was due to the fact that we took basis which were used to be in the trading component and put it up in the marketing component and we trued up those two components for you and the reason we did that is remember on the last conference call we're 90% hedged on the Rockies, the mid continent for the balance of '04. We're 80% hedged on our mid continents to Chicago business, we're a hundred percent hedged on our northern border business, we're a hundred percent hedged on our El Paso business and we're a hundred percent hedged on our Reliant business. So when you take all that basis inter-region risk which in 2003 we had left open that was very profitable for us, this year we've laid off all that risk and that's why we put it in the marketing and storage components to say we're not trading that like we traded it a year ago. It's more of a core predictable earning base stream. So whether it comes in any more now or widens out from here, being 90% hedged from the Rockies mid continents we're indifferent on. Going into calendar '05 the Rockies mid continent piece were 90+% hedged there too, and we're 89% hedged in '06. So we've taken the Rockies and mid continent risk out. We feel that with the incremental capacity coming on with Cheyenne Plains here starting in the fourth quarter of this year, we're no worse than January of '05 that we're comfortable that with the existing levels are we're happy with those spreads and we've locked in our margins.

Great. Thanks. And one I guess sort of related question, I have a feeling, is as we look at the balance sheet, we see the -- the net position of price risk management becoming more negative over the first half of the year. Is -- can you just speak to that for a second? Is that a function of these financial hedges offsetting physical positions. What gives rise to this 127 million kind of negative book position on the balance sheet?

Anatol, this is Jim. I think a portion of that is coming from just exactly what you said. As we mark certain things to market and the physical side doesn't get marked you're seeing what you -- if you just look at one side of the transaction as losses being put on the balance sheet, but the physical side isn't being marked so when the transactions actually settle there's going to be a margin there and it's just a timing of how they flow those assets and liabilities.

Sure. And -- and is the -- is basically the full 127 attributable to that mismatch between the still FAS 133 mark to market components and the no longer marked physical component?

No, Anatol. Part of that, I believe about 90 million of that is the -- what you would call the mark on our interest rate swaps that we have on where, you know, if you just -- and that is, you know, as we took some off, put them back on and if we were to try to terminate those versus carrying those to term, it's just the way you record that, the accounting for those swaps.

Got you. Okay. Super, thanks very much for your time, everyone.

Thank you.

Our next question comes from Yves Siegel with Wachovia.

Thanks. Good morning, Yves.

Good morning, everybody.

Just -- just to come back to a couple of questions if I could, on gathering and processing. John, what is your thought in terms of using hedges going forward? I see that you've locked in for the, looks like for a good part of the balance of this year. What about looking out to '05?

What we did in '04 was, from a hedge perspective, was put some hedges on to lock in a price on our condensate sales and I would -- we will continue to look at those opportunities for '05. What we did on -- with some of our NGL product is sold -- sold that forward into the market during the last six months of this year and where we see opportunities in the market to make a forward sale we'll continue to do that. We have not tried to hedge or put on a dirty hedge for our processing spread. Primary reason there is that we have, at least it's my experience as well as in the business as well as our experience here at Oneok, we've never found that perfect dirty hedge that works so we choose to mitigate our exposure to keephole spreads by reducing our People contracts and increasing fee-based business and percent of gross fee contracts.

I'm not sure I understand. Why wouldn't you lock in more of the percentage of proceeds?

I'm sorry, say that again.

Why wouldn't you try to hedge, if you could, more of the percentage of proceeds, or is that just -- can you do that or you just can't do it that.

The market's not deep enough the only contract that's traded is propane so, you know, the products that we produce through our percent of proceeds contracts are ethane, propane, isonormal and natural gasolines and, you know, the market -- there's just not a market out there to do that. There is a, you know, you can find a counter party that will agree to buy those products over time but not from the pure financial derivative contract.

Okay. And just circle back with Chris on the People's contract, two questions related to that. Number one, how competitive was the negotiations, I mean, were there other players that you were competing with to win that contract, number one? And then number two, what's the potential to enter into similar type of contracts going forward?

Yves, People's put out a request for bid and I'm not sure how many people responded to it overall. But during the course of business and the magnitude of the contract I'm assuming it was people with strong credit ratings and the strong issue and understanding the physical side of the business that can handle a 50 BCF contract so I'm assuming the majors and those type but I don't -- I don't have an exact count of how many people, but it was a competitive bid, request for bid process so I don't know how many would be there for sure. And, yes, this is right in the avenue of what we've been trying to do with the other peaking customers we've done in the past, you know, with the other major utilities that we have signed up to serve St. Louis, that serve Minnesota, the other ones in Chicago, Houston, Shreveport, Little rock, Arkansas, those type customers are the ones that this -- this is a mirror of those type agreements and this is where we're further focusing our efforts on to expand our physical presence so we can continue to provide predictable earnings.

To do a similar size as this, would you need to have more financial resources to do that, would you have to start thinking about expanding how much storage you have under lease and pipeline capacity and as such?

Yes, under this deal we're comfortable. We haven't -- you know, like I've said we've never sold beyond two thirds our deliverability from storage which currently stands at, you know, almost 2.4 BCF a day. So we could go to 1.6 BCF a day. We've never been past 1.3 BCF a day so we have 2 or 300 million a day of incremental growth that we could, if we wanted to be really aggressive, and go out and get without adding any additional expense at this point. But with the 8 BCF that we picked up this year, as you see in my earnings are in the second quarter, we're experiencing the incremental expense here in the second quarter without cleaning up any revenue due to volatility being down. So we're trying to mitigate this year picking up any more storage expense, so we're comfortable with what we've done with People's that we've got that well within our realm of assets that we have under control.

Yves, let me add to what Chris is saying. This People's contract is representative of the type of business that he has focused on for the last several years and is part of our core marketing effort. We have internally determined that we need to provide more information and more transparency to that part of the business and so I expect that you will see over time that as customers, new customers come along or as existing customers renew, that we will, you know, continue to issue information in the public arena as to what those deals are. All of this is in an effort to provide more clarity and more transparency to what we're doing which is primarily our physical business.

That's great. David, I just have two other questions related to the last thing that you said. On the surface it would appear to me that this appears to be a fairly profitable contract for you. So it begs the question on my part, are you competing on margin or are you competing on service or a combination of both?

Let me give you my view of that, and then I will -- I'll let Chris add to it if need be. I think we compete on both areas that you articulated and I think the thing that you should, and the rest of the investment community should understand, is that as an LDC views potential suppliers, they look at the ability to serve, they look at the historical performance of the counter party, but they also look at credit because they want to do business with people who will be there, that they know are going to be there when the gas demand is the highest. And not only have we consistently performed, we've got a great track record in performing with LDC and large industrial customers, but we also maintain, you know, good credit worthiness and I think that's been part of our success.

I'll just follow up David's point with we go back to the Mastio Survey, we were ranked number one in the peer group, of the top seven volume marketers in the country we were ranked number one on reliability of gas, ease of doing business with, dependability of service, price, it's got all those components in there, and we were 2 or 3 percentage points above our nearest competitor in that arena and that's something we're really focusing on and that didn't hurt us in this negotiation with People's. I'll just leave it at that.

Okay. Last -- last one and this sort of just wraps up on the financial side. Jim, I think you have over $300 million of debt coming due in the next 12 months. And you also have a significant amount of free cash flow. Could you sort of describe what you're thinking in terms of paying down the debt, and the use of the free cash flow in the context of -- David, as well, in the context of how you look at the dividend and how you are looking at acquisitions? Thanks a lot for all -- for all the answers.

Yeah, Yves, let me try to address that and David may want to add to that. I think if I just fast forwarded to February ignoring our acquisition efforts at the moment, I will have sufficient cash to pay that $335 million issue in February, it's a 7.75 issue, and what I'll do if -- my comments earlier with $460 million worth of gas in the ground today and only $21 million worth of borrowings, right now I'm just using my excess cash to fund working capital. Again, fast forwarding to February, I can pay off that $335 million, I would still have about $100 million of excess cash that I'm sure will be tied up in working capital but the net result is I'm paying off 7.75 debt with excess cash and I might borrow under my current facility or commercial paper at about 1.4%. Now, if -- obviously if we were to make an acquisition and depending on its size, we would reevaluate that and how we were going to finance it but even in today's world I can pay off that 7.75 issue and reissue 10 year debt at about, probably, 6.2%. So I think that 7.75 series will be gone come February and it's just a matter of A, do I use my free cash or have we made some acquisition that might somehow change that mix a little bit.

Yes, I would add that, as I mentioned in the prepared remarks, we obviously look at our payout against peer and we'll increase dividends appropriately on a going-forward basis. Clearly our, you know, return to investors of a fair return is very important. But also important is, you know, how we're going to grow this business and where we're going to grow the business, and -- and so we look at our free cash flow as an opportunity to expand our footprint and grow our business on a going forward business.

Thank you.

Thank you.

Our next question comes from Craig Shere with Standard & Poor's.

Hi, good quarter.

Good morning,.

Followup Becca's question and the comment you call, in regards to the trading, that you all were looking for a sustained level of earnings to show the street. If you'll look at, you know, the First Call estimates out the next couple of years, at least prior to today, the street hasn't been looking for much in terms of earnings growth but now you're at risk more speculative trading as a percentage of everything seems to be getting lower and lower. And you're commenting on the other efforts you're doing including the PGL contract. What -- using this year as a base, 2004 as a base, not looking for any real tight guidance for '05, I understand you're working on that, but what is your goal for the sustain level of EPS growth from the '04 base, say out several years? And if you want to give a broad range that's fine but what is it you're trying to get the street to believe?

You know, Craig, in the past we had talked about a 10% compound annual growth rate and when we talked about that we were always looking back in terms of our performance. And we had, in fact, delivered in excess of that 10% compound growth rate in earnings. What that translated into was a perception that we were going to grow our earnings perspectively on a 10% growth rate and in that flawed view, clearly we believe that over time, whenever you look back in time, that you will see either high single-digit or low double digit growth rate in terms of our overall earnings per share growth. And that's largely driven by the organic growth that we see in terms of our existing businesses. But also the opportunistic way that we have grown through acquisitions and we have a very disciplined approach. We're not going to over pay. We're not going to get into difficulty by paying too much in a -- in a , you know, a bidding frenzy, but we will over time grow our business and that growth, in fact, when you look back, will have, we believe, delivered a high single digit or low double-digit growth rate. We have not, in fact, as I responded to earlier question, given guidance for '05 or beyond. We currently are evaluating our five-year forecast and the assumptions that go into that forecast, we will begin our planning process for the '05 budget. And as soon as we have more clarity as to where those numbers are, we will be issuing some guidance. But I think that hopefully addresses the core of your question.

Well, I remember the analysts meeting sometime back you had in New York where you all were talking about that 10% growth and it was off a much lower EPS number some years back. And, you know, because you've done so well, that -- that that's somewhat less meaningful today.

That's right.

So I guess the question, you know, since wall street analysts going out to '06 are looking to flat to down earnings for you all, at least before today, and your P/E multiples, your price to book multiple and a price to cash flow multiple, exports and capital changes are such a discouple to all your peers, do you -- can you say at this time that you believe that at least some long-term growth in the mid-single digits off '04 levels is a reasonable expectation?

Yes, I can, yes, I can. And part of the reason that I have comfort in doing that is, you know, some of the factors we've already talked about in terms of the core business that Chris focuses on, the -- what we're seeing in terms of pricing going forward and in terms of the G&P, the stable cash flows that we see from our transportation storing business. Obviously higher prices have an impact on our production segment, and finally, if you look going forward we've got the rate case that we know will be filed before the end of January of '05, with that hitting sometime during, obviously, during '05, and having a full year in '06, so all of those factors combine give me comfort that, in fact, we will be able to achieve that kind of -- that kind of growth.

Great, thank you.

Thank you.

Our next question comes from Mike Warner from Kennedy Capital.

Hi, good morning.

Good morning.

Good morning. What -- real quick, what is your, maybe you have one, longer term target for a payout ratio?

We have not articulated that. One of the -- I'll just go into the evaluation that we do. We do a buildup of the type of businesses and the percentage of payouts that we see against peer and it is an ongoing analysis. Clearly, you know, the yield is a component of that and payout percentage is a component, but we do not have a stated target.

But your -- but, again, restating your intentions, you think that the -- you think your earnings to your dividend level should be -- should rise?

Clearly.

Consistently.

Yeah. Clearly as we have demonstrated consistent earnings, delivered earnings and growth in earnings, you'll see obviously an increase in the dividend.

Okay. Thanks.

Thank you.

There are no further questions at this time.

This concludes Oneok's second quarter conference call. As a reminder our quiet period for the third quarter of 2004 will start when we close our books in early October and will extend until earnings are released, and we'll provide a reporting date and conference call information later. This is Weldon Watson, and I'll be available throughout the day for followup questions. You may contact me at 918-588-7158 or through 3-mail at wwatson@oneok.com. On behalf of the Company, thank you for joining us And good day.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect.