歐尼克 (OKE) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the ONEOK Third Quarter Conference Call. (Caller Instructions.) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today's conference, Mr. Weldon Watson.

Good morning and welcome. As we begin this morning's conference all, 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 projected in such forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to the MB&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, and thank you for joining us to discuss our third quarter results. I'm pleased to report that ONEOK has continued to meet and even exceed earnings expectations for 2004. Once again, our gathering and processing segments included strong results with operating income increasing by 136 percent over the same period last year. This improvement is attributable to increased commodity prices, wider processing spreads, and our continued efforts to restructure contracts.

We have also nearly completed construction on a 33-mile NGL pipeline that connects our Bushton processing facility to Conway. This will provide us with price transparency between the two and have the effect of increasing the value of our natural gas liquid storage at Bushton. Another benefit is that it will give us more NGL marketing flexibility. The new pipeline's cost is $9.2m and is expected to be in service by the end of this year.

Our production segment also did very well during the quarter thanks to both higher volumes from last year's acquisition of producing properties in East Texas, and higher prices. Because of these strong results, we have increased our 2004 guidance to a range of $2.25 to $2.31 per diluted share of stock.

As was previously announced, we have changed the name from ONEOK Energy Marketing Trading to ONEOK Energy Services. This change was not just cosmetic. After fairly intensive reevaluation of our efforts, we have reorganized and de-emphasized our trading effort. The fiscal marketing of natural gas has always been our bread and butter. And this has brought it back into sharp focus.

Because of these changes, beginning this quarter, we have begun reporting the non-trading revenue of our business on a gross rather than net basis. Obviously, this will only impact the revenue and expense lines and will not impact the operating income numbers.

We continue to move forward with our acquisition of the 82.5 percent general partnership interest of Northern Borders Partners. We have been working through transition issues and expect to close very soon. While we've had discussions with the management team, our primary focus has been on closing the transaction.

We anticipate that after closing we will begin working with Bill Quarters and his team on developing and executing a growth strategy for this partnership. One final comment relative to Northern Border Partners. The employees there have had a couple of rough years with a lot of uncertainty as the bankruptcy proceedings have progressed. And, for our part, we are both pleased and proud to have them become a part of ONEOK.

I am also pleased to remind you that we raised the dividend during the quarter by $0.02 to $0.25 per share or $1.00 per share annually. Each quarter we evaluate our payout and yield against our peer group. Currently, we are in the middle of the pack in terms of the yield, and on the lower end in terms of payout.

I believe the improvement in our operating results has impacted the payout analysis. Obviously, dividend policy is of high interest to investors and to us as well. And we will continue to increase the dividends as appropriate to remain competitive.

At this time, I'd like to call upon Jim Kneale, Executive Vice President and Chief Financial Officer, to review of the financial highlights for the quarter. Jim?

Thank you, David, and good morning. I'm gonna make a few brief remarks about the quarter and then turn it back to David so we can open it up for questions. We reported earnings for the third quarter of $0.19 per share as compared to $0.01 last year. The $0.19 slightly exceeded our guidance and the First Call estimate of $0.18.

David already mentioned the improved results in both gathering and processing and production segments. Operating income for the energy services segment also improved to $11m compared to $6.3m last year, primarily due to the increased volatility in natural gas prices.

Offsetting some of these increased earnings was the lower operating income in the distribution segment, due to higher labor and employee benefit costs. For the nine months ended September 30, cash flow exceeded capital expenditures and dividends by $113m.

As a result, our cash position remains very strong. At September 30, we had $697m cash invested in natural gas and NGL inventory and related margins. And our net short-term borrowings were only $280m, which would equate to a net cash position of about $417m. Also at September 30, our debt to equity ratio was 48 percent debt, treating 75 percent of the equity units as equity.

In September, we replaced our $850m 364-day credit facility with a $1b 5-year credit agreement, which can be upsized to $1.2b. Also, I am pleased to report that in October, Moody's Investor Services revised our ratings outlook from negative to stable. Moody's pointed to our improved financial leverage and financial flexibility, and our demonstrated commitment to improving our credit profile, as reasons for this change.

David mentioned that we increased our 2004 guidance. We included an attachment to the earnings release that provides the revised forecast information. We did not change our 2005 guidance, however, if the current price environment holds, our current projected results for gathering and processing and production could prove to be conservative. As 2005 progresses, we will review and update those projections as appropriate.

Finally, I want to mention that yesterday we closed the sale of a very small propane distribution system in Texas that we initially acquired when we purchased the Texas distribution properties in January 2003.

David, that concludes my remarks.

Thank you, Jim. Also joining us this morning are John Gibson, who is over gathering and processing and transmission and storage, and Chris Skoog, President of our energy services segment. At this point, we're ready for questions.

Thank you. (Caller Instructions.) Our first question comes from Yves Siegel from Wachovia.

Good morning, everybody. A couple of questions. One is, can you talk about the hedges that you put in place and what's the thought of hedging a little bit more for '05 and going out to '06 and beyond? That's the first question. Thanks.

Yves, this is Jim. I think we indicated that we had done some additional hedging in the production business for 2005. And I think right now we're about 63 percent hedged, if I remember correctly, on our natural gas. And I think it'd be fair to say we continue to look at these prices and watch them and try to balance, you know, getting some assurance that we'll make our targets for 2005, yet also leave a little room on the upside. So it's sort of this balancing act and watching what prices are doing. But we're, you know, with 63 percent of our volumes hedged in production that's probably getting close to the highest amount we might hedge.

In the gathering and processing segment, again, you'll notice that we've got about--I think it was 50 percent of our condensate and 34 percent of the [unintelligible-speaker interference] hedged, and about--a little over 50 percent over natural gas hedged at some pretty high prices. You know, again, the same thing.

We've taking a view of--obviously we are aware of what the historical levels of those prices are compared to 2005 and what our view of the market is. I think it just wrapped that up. And David might want to add to that. We continually look at those opportunities. And I might turn over to John Gibson to comment a little more on the gathering and processing business.

Okay. In 2004, what we saw was an opportunity to lock in some keephold spreads that were significantly above historical averages. And so we locked those in. But looking to '05 and the guidance we gave for '05, we had an opportunity to lock a certain portion of our equity production, at or above guidance prices, and leave quite a bit of room for up side as it relates to condensate natural gas and natural gas liquids.

So far in '05 we have not locked up any keephold spreads, primarily because the curves don't provide any opportunity. But we watch that several times a day. As it relates to your question as to '06 and further, obviously, if you look at the crude spread and the gas--excuse me, the crude to gas spread, there's opportunities there, particularly, relative to history. And we've had discussions internally. But we have as of yet not done anything further out than '05.

Okay. This may or may not be a fair question. You may or may not want to answer it. But given the multiples that are being paid for assets--and Jim, you did note that you did sell some of your propane distribution assets, what is the thought process of further rationalization? And what is the thought process of potential assets that could be pushed into Northern Border?

Yves, let me kind of address that from a couple different areas. First, in general, we continue to look at our footprint, n terms of our gathering and process assets. And that evaluation is ongoing in terms of would it strategically what we want. Ostensibly, there may be parts of what we own, certain plants, certain systems, that are not strategic for us over the long-term. And if others value those more than we, then that's something that we will look to selling.

Generally, I would say that it's premature for us to talk about directionally where we might go with [unintelligible-speaker interference]. But let me say that I think that our assets have fit very nicely in that partnership. And, from my perspective, I'm not sure out gathering and processing assets fit as well as maybe some other assets as we might own. But again, all of that's very premature. We've not had the opportunity to sit down and talk to Bill and his team about the direction that they might go, but that's something we'll look at going forward.

Okay. Well, thanks for that answer, David. And then, finally, a two-part question is Jim, can you just discuss the long-term debt that's coming due in '05, and what financing plans you may do in '05? And then, lastly, can someone also comment on the earnings from the distribution assets, and from the context of it looked a little bit light for the third quarter relative to a year ago, and what kind of expectations are there to grow earnings from that segment? Looking out into '05, has that changed at all?

Yves, this is Jim. First, on the debt and financing for 2005, you know, we anticipate closing the Northern Border transaction before the end of the year. And, as you're aware, that's a $175m transaction. We'll use our commercial paper to fund that. And then, in February of '05, I have a $335m, 7.75 percent debt issuance coming due. With my cash position, you know, I'll be able to retire that and fund a part of the Northern Border acquisition and maybe be short, you know, $100m to $150m, depending on how my cash works out. I could--right now, I view that I'll probably carry that in commercial paper because I'm hanging at about 1.9 percent. But, you know, then you have to factor that with any other transaction we may do. And it's just sort of a moving target. For now, that would be my plan on that debt maturity.

On the distribution results for the quarter, I think the one thing that you have to sort through, and you have to go back to the first quarter of this year, at the end of '03, Kansas Gas Service terminated a program called Weather Proof Bill, which was a program that allowed customers to sign up for a flat monthly bill for their natural gas service. And the delta between what they paid and the actual gas used was covered really by an insurance company who took that risk.

That went away. That program went away in January. And so we began recording those revenues this year as the natural gas was sold. So you'll have--we had higher margins in Kansas in January, lower margins in the second and third quarter, and probably have higher margins again in the fourth quarter. For the year it will net out to zero. And then going forward to '05, it won't--there won't be any impact for that. Other than that, the only thing is just their employee costs and benefit costs are up a little higher than planned. Part of that has to do with our increasing earnings.

The other thing I would add to that, Yves, is as you will recall, we are required to file the days in Oklahoma before the end of January. And as far as the way, in terms of preparing for that case, we've not announced nor have we sent notice to the Commission yet as to our intent. Obviously, part of '05 will be affected by some, hopefully substantial rate relief that may occur in Oklahoma.

Thank you.

Thank you.

Thank you. Our next question comes from [Kathleen Upton] from [W.H. Reeves].

Hi guys. How are you doing?

Good. How are you?

Very well, thank you. Talking about Yves' question a little bit more on the labor and benefit expense. This kind of increase that we saw in the quarter--should we extrapolate that for all quarters or was it more of a one-time type catch up charge for the quarter? Is this a new higher cost level that the utilities will be incurring on an ongoing basis every quarter?

Kathleen, I would put it more in a catch-up mode, not the Heinz variety, but catching up. First, and there's another item in there. We had a catch-up adjustment from our actuary on our pension costs that drove some of the increase, because the utilities have the majority of the employees.

That is buried in there and then as our earnings improved, and we've talked about our incentive compensation here-as our earnings are exceeding targets, we are accruing that incentive compensation and there was somewhat of a catch-up adjustment in the third quarter. And again, because they have the majority of all our employees, that's where you see most of the cost.

How much of those costs, Jim, are you going to--are recoverable in rates?

Well, Kathleen, it--I think, you know, because ONG is going to be filing a rate case, they'll include those costs in their filing, you know. And in Texas, where we are able to file on a city-by-city basis, as they file, they'll include those costs. I believe in Kansas we agreed to a two and one-half year moratorium, which is up in about another year and one-half, if I remember correctly.

Okay. Great. And Jim, could you talk a little bit about the interest rate expense level? Where do you see that in next year? Flat with last year? Your cash flow is running very, very strong. And what you're kind of expecting interest rate--interest expense to look like going forward?

Yes. Kathleen, I think right now if you look at our 2005 guidance, interest expense is up a little bit. If I remember correctly, it's about $3m. I don't recall what was '05. The two things that are--well, there's three things probably driving that. We, obviously are going to assume this $175m on Northern Border.

We've had a little bit of increase in the short-term rates. Our commercial paper rates are not up a lot, from about 1.5 percent to about 1.9 percent today. We anticipate those to go up slightly in '05. And then if you recall, we have about $770m of our interest of our long-term debt swap to floating. And although the long-term curve has come down, we see about another--I think we put about another 1.5 percent increase in those rates. And then, we'll generate excess cash flow.

So when you blend all those together, I believe we reflected for '05 a slight increase in interest rate expense. But not that dramatic, because again, we're paying off that other issue.

Right. Okay. Thanks so much, guys. Take care.

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

Thanks. Two questions. I'll ask them individual if I could. The first one is to just start off by saying I would imagine that the commodity price volatility we've seen in what was a wide summer/winter spread for a lot of the quarter should set you up pretty nice for earnings in the March quarter. Is there a way to kind of quantify how much of a negative mark to market of the futures contract there was that should reverse?

Mike, most of the gas in storage is not marked anymore in mark to market.

No, I was referring about any short positions that are covered by the gas in storage.

No. There'll be no effect. So what you should see is a rather significant fourth quarter earnings wise and significant first quarter earnings wise. There should be no negative affect on the mark. We could a small little bit come through, what we call OCI, other comprehensive income. Gas - but I've got hedge to come up here in the fourth quarter that I may not take out of the ground here in the fourth quarter. It may get pushed into the first quarter of next year, when the gas physically comes out. As got gas hedges in November. To the extent that we don't get the gas in November, and we will roll that position forward to March, those earnings could roll forward. And it's too early to tell, two days into the month, whether it's going to play into how much gas we get out in November.

I guess what I was trying to get at, in the September quarter, if there was a way to quantify how much the impact of writing down some of the short position.

Hey, Mike, this is Jim. I'm not following you exactly. I'm wondering if--one of the disclosure that I think you'll see in our 10Q is that we had a pretty large charge to OCI for this quarter. But that's because the financial instruments that hedge our gas in storage are mark to market. But we aren't allowed to mark the gap in storage to market.

And that's exactly what I'm getting at.

And they moved in opposite directions. So, although as we pull that gas out of the ground, that loss will come out of OCI, the mark--the extra profit, if you will, on the gas in the ground will be recognized at the same time. And it will just bring us back to Chris' hedged position, you know, as we call, along that summer/winter spread strategy.

That's exactly what I'm getting at. Is there a way to quantify the OCI charge for this quarter?

It's too early to tell. It depends on how much gas get out of the ground here in November and December or what--how that OCI moves across.

Okay. Why don't we take this up offline? Let me go to the second question. If I do the math correct on the hedge position it implies an estimated '05 gas production number of around 16.7, and an oil of around 400 barrels for the year. That seems like it's a drop from the numbers you were using in the guidance. Is that correct? And is there a reason why production levels are coming in lower than when you gave guidance for '05?

Mike, this is Jim. I didn't bring those volumes in there, but what I remember for '05 is they're pretty flat--the production volumes. I think as we lay into these hedges, we haven't gone back and you know, done a calculation of putting the hedge price in and then made a projection from what we think the remainder of the unhedged volume prices will be.

I think that probably is getting back to my comment about our '05 guidance may be a little conservative because I would--if these prices hold, the production segment's earnings are low. That said, our strategy generally is we're not as focused in increasing production year-over-year as we are in the quality of what we're drilling. So without having the numbers here, I believe they're flat to maybe down a little bit for next year, but I don't think that far off.

But in your mind, there's nothing to change in your expectations for production levels versus what you used when you gave initial '05 guidance?

No, I don't--Mike, I think that's right. To build on what Jim's saying, you know, both in production and in G&P, given the higher prices, we've not gone back and rehashed our 2005 guidance, given that higher price stack. And so, what we're looking at going into 2005 is ongoing revisions, if you will, to our expectations. As we start the year we're pretty comfortable with where they are.

Okay. Thank you.

Thank you. Our next question comes from Rebecca Followill from Howard Weil.

Hi. A few questions for you. One for Chris on marketing and trading and your storage, the (nearly March) (ph) spread has been huge over the past few months. Does the guidance that you guys had built in for '04 include anything from pulling that gas out of storage in the fourth quarter? Or like, I know that for going into '05 you excluded anything from trading. But the storage benefits, are those included in the numbers?

Rebecca, let me answer it in two parts here. The guidance that we revised down from the 155 down to 148 reflects a level of gas in the ground at year-end of approximately 75 percent still in inventory as of 12/31. So we have lightened our expectations of getting gas out of the ground. That's why the revision from 155 on June 25 down to the 148 number today. So, does that answer that question?

Yes.

And then, going forward, the revenues associated with that deferral of gas this quarter to first quarter of next year, I think we're comfortable with where we're at with our guidance for next year, knowing that at this point in time, as we fine tune through the spreads, the vast majority of the gas in the first quarter was already hedged before this blowout occurred.

I will tell you we have hedged approximately 25 BCF to a winter from a year from now at over $0.70 in value. You remember historically we've budgeted in the $0.45 to $0.50 range. In New York, with the presentation we gave up there, we talked about a $0.60 range. We've locked in to about a $0.72 average on the first 25 BCF for the next winter.

So winter '05/'06?

Yes.

And then to the guidance, you're still sticking with the guidance of 131 for energy services for '05, despite pushing more gas withdrawals into the first quarter?

That is correct. And part of the reason for that Rebecca, is what Chris alluded to. We had already hedged some of the winter of '05 before the spread blew out.

Okay. Does this tell us anything about your weather forecast? The other question is for John. The guidance for '05 on gathering and processing, just looking at your old guidance that you put out, I think it's in September, a big jump from '04 to '05. Yet the commodity prices are not that substantially--my record of 575 accrued at 35 in NGL at $0.65. Can you give us some more color on what is driving that differential besides commodity prices?

Well, it's being driven by several things, one of which is as we move more of our contracts from keephold to percent of proceeds, we obviously are benefitting from the strengthening in the commodity price and reducing our exposure to the spread, although the spread's been pretty nice this last quarter--all time high.

The other thing that's happening, as we renegotiate those contracts, the existing contracts that are currently POP and the new ones, we're retaining more of the natural gas. And we're retaining more of the liquids as compensation for our services. So we're positioning the Company to benefit primarily from the increase in commodity prices and reduce our exposure to the spread risk.

Is that the only factor behind it?

Another factor in the increase in earnings is we continue to see growth in our NGL marketing segment. As David alluded to, one of the things we will be starting up is a new pipeline which connects our Bushton storage to our Conway storage. There are two NGL centers in the United States. One is in Mount Bellevue, Texas in the Gulf coast, and the other one is in Conway, Kansas.

We own and control storage in both Conway--NGL storage, in both Conway and Bushton. And by building this pipeline, as David alluded to, we benefit. And we created opportunity to increase earnings in our NGL marketing area. And that has also been a significant contributor to our growth, and we look for further opportunities there.

All right. Thank you.

Thank you. Our next question comes from Phillip Salles from Credit Suisse.

Hi. As far as your production for the--for the quarter, I believe--I'm not sure if you gave production guidance for the year, but I think on a daily basis production was down in the quarter. And I'm just trying to figure out was there a reason for that. Was it completing wells? Or was it--was there something else involved? And if you could just also give me the number of wells drilled and the wells completed?

Do you have that data, Jim?

In general, I think I can answer that. We, you know, I mean, because you have to try to compare. If you remember, we had those discontinued operations last year, but our production is up over last year from continuing production last year. It was down a little bit this quarter.

I know because we had a--there was an issue with one of the major pipelines moving gas, I think, out of the East Texas assets. That slowed the production down for I think about four or five days, if I remember. That's been resolved now. So we still feel comfortable about our original guidance--I think was in the neighborhood of about 19 BCF for the year. And that--so I think that's still gonna be on target or pretty close.

And in terms of the number of wells that you drilled and completed for the quarter?

I think I've got it for the--I'm looking. I've got it for the third--I think it was about 19 wells were--we participated in 19. I'm trying to remember. I don't remember--I know we've got about 33 that are in process, so I believe that number is 19. But if you want to follow-up with me and you can get that for sure.

Sure. Okay. The next question I have is on--if I understood the press release right and some of your comments today, was that you were hedging your liquids production and--or trying to take advantage of the processing spreads. I just remember one--at some point of time in the past, one company had tried to hedge their liquids prices out of the future. And because of, I guess, varied commodity prices, those hedges had come back and hurt them. Is that something that you're doing or are you just selling the commodity forward to another customer? What's going on there?

Let me ask John to elaborate on our strategy with respect to processing. It's a little bit more elaborate than what it appears on the surface. So, John, could you kind of give some color to how you approached the forward sales and then your hedging?

Sure. Be glad to. As it relates to our residue, we hedged that using an NYMEX contract. As it relates to the forward sales of our NGLs, we actually go out into the marketplace and physically contract or commit to sell barrels that we are going to produce in the future to a specific customer.

On keephold contracts where we try to--well, not try to--where we lock in a percent of our keephold spread or our shrink, we there, since we're in a long position on NGLs we sell a crude swap, a calendar swap. And then we buy a natural gas contract against it to lock in a margin.

Okay. Is there any possibility that if as crude and gas prices move in opposite direction, that those keephold hedges you've put in place or swapped could come back and hurt you? Or is that--the way you've got it right, it's not possible?

The way we have it right now, it's not possible. That's why we did it that particular way.

Okay. Fair enough. On the processing side, what's the overall utilization rate of the processing plants and the gathering systems to date?

Well it varies from plant to plant. But overall, I'm gonna guess that we're probably at 85 percent capacity. Most of our excess capacity is at our Bushton facility in Kansas. But in Oklahoma and in Texas we're pretty close to full.

And how does that capacity compare to last year? Is it up or is it pretty much flat?

It's pretty much flat. We've seen growth in supply in Oklahoma. Oklahoma's been a great state for us. And in Texas it's slightly down. And it's slightly down in Kansas.

Okay. Fair enough. Thank you. And I just have a question on the gas in storage. What's the kind of weight average cost of gas in storage right now at the trading company or the marketing trading company?

Chris?

Phillip, I don't give that out. And the specific reason is for competitive reasons. But if you go back to last quarter it was below 540. And with where prices have been this last quarter, you can imagine it's probably a little lower.

Got it. Thank you very much. Appreciate the time.

Thank you. Our question comes from Sven Del Pozzo from John S. Herald.

Hi. The last caller asked a couple of my questions. I was kind of surprised to hear that the capacity utilization for your gathering processing facilities has remained relatively flat compared with the prior year. I'm wondering, because in the upstream, and I've heard a lot about the ramped up drilling programs in the mid-continent area. So are your facilities not located in areas where there is a lot of incremental drilling going on this year versus the prior year?

Let me try to answer the question this way. The plant inlet volumes are relatively flat, relative to last year. Now, what has happened is we have chosen to bypass a certain amount of gas around our facilities. And we have chosen not to re-contract with producers for a certain amount of gas. And we've replaced that gas with higher margin gas, or gas that is under different contractual terms.

Net/net, we remain fairly consistent with the previously year. We've just got different molecules going through the plant. From a decline perspective, I, again, don't recall the numbers off the top of my head, but for all practical purposes, in Kansas and in Texas, it's probably, I'm gonna say a 4 to 6 percent decline net/net. But in Oklahoma it's probably an 8 to 10 percent growth.

And what I'm referring to there is the--when you look at the--I'm looking at the decline areas, decline in those particular areas of the currently flowing wells. Okay? So you've got a decline in two areas, an increase n another area. And what we're doing is remaining fairly flat by changing out less profitable volumes and inserting more profitable volumes.

Okay. And then in reference to the up side in 2005 earnings per share, now, am I to understand this is coming from E&T? Because I was wondering, with gas prices, if they stay as they are, it wouldn't be coming from your keephold spreads in the gathering and processing segment, would it?

Actually it would come from both. Absolute higher prices in the producing segment are gonna improve, given our existing forecast. And as John has already talked about, because a portion of our volume is under percentage of proceeds, absolute higher prices are also a benefit there.

To the extent that we've got things hedged into '05, we brought some of those spreads in. And some of those spreads are above what we had anticipated. Net-net, higher prices are gonna benefit both segments into '05. And I'd ask John to elaborate if he would.

I agree with what you said, Dave, with one exception. We have not been successful so far in locking in any keephold spreads for '05. The market just hasn't been there yet. But the dynamic of those particular curves are usually the curves will widen and the opportunity to lock in margin occurs in the month previous to gas volume. For example, we're looking--we'll wait until December to look for opportunities to wait to move into January.

Okay. Thank you very much fellows.

Thank you. Our next question comes from [Wade Suki] from Banc of America Securities.

Good morning, everyone, it's Anatol Feygin. I've just got a couple of quick follow-ups. David, if you can comment on your kind of strategic view of the production business and maybe give us a sense for how--for your evaluation of last year's acquisition, whether that's meeting your targets, or if more work needs to be done there.

I think the short answer, Anatol, is that I think it's a very timely acquisition for us. The production has been a benefit to us, obviously. In this year, they've drilled and added to the reserve base and I think it was a very timely acquisition for us.

You know, we--the producing segment is one of our smaller segments. And you know, as we--as we go forward, obviously, we evaluate how to grow, if we can, in that segment, where we might like to grow, or if there are opportunities for us to maybe wind that segment down. But that's--an evaluation that is ongoing. And, obviously, no conclusion has been made as to a direction. I would say though, that it's an area where we either need to grow or either just produce it out.

And is that--in triangulating the guidance and what you guys have given us, it seems like volume growth isn't what you guys had talked about when that deal was consummated through the in-fill drilling, and the pipe conversions that you were looking at. Is that because a decision has been made sort of to--you guys have always been acquire and exploit. Is this decision to produce out these particular properties what's reflected in the volumes?

No, I wouldn't say that. Our strategy is still the same. It's still an acquire and exploit strategy. Obviously, with these prices we're seeing, you know, it's a pretty expensive buy-in. And so, given where we are, that's something we've got to evaluate.

Is that an area where we want to commit the capital dollars and in essence speed the treadmill up? Because the producing segment is a treadmill business. You're producing out your asset every day. And so you've got to replace that asset if you're going to maintain the size. So that's really the evaluation I'm talking about that will be ongoing.

Thanks, David. A quick question for Jim. Is the interest expense guidance for '05 and beyond, does that include the amortization of the swap?

Anatol, yes it does. We have--what you are referring to is when we terminated our swaps, and brought in about, I think, $90m. And we include a table in our Q and K that that $90m is amortized over the remaining life of those swaps. So that is a part of our guidance for '05 and this year, and also what our view of interest rates are on the current swaps that we have in place. So that's all built into those numbers.

Great. Thanks for your time everyone.

Thank you. Our next question comes from Paul Patterson from Glen Rock Associates.

Good morning guys. How are you? Just wanted to get a little bit of clarity on the mark to market derivative. What was the size of that, that you guys saw in the third quarter?

This is Jim. Are you referring to the-?

In the energy services, you guys said that the increase in operating income for the third quarter was due to a combination of the following - an increase in mark to market value of derivative contracts subject to fair value accounting due to increase natural gas volatility.

Yeah. That number was right at $17.9m.

So it's $17.9m?

Yes.

And was that in the trading business? Was that all realized or recognized in the trading business? Or is that across different businesses?

This is Chris, Paul. In the trading business, the vast majority of that came through from the options book that we've always had, that we're a buyer of options, with the increase in the commodity price.

Okay. I just wanted the clarification on that. Thanks a lot for your help.

Thank you. Our next question comes from Devon Diogen from Zimmer Lucas Partners.

Hi. Thanks for the time today. I appreciate it. How it's going? I just wanted--you mentioned the G&P contracts are, you know, moving away from keephold. I just wanted to get an update on what the percentage are as you stand today? It seems like you're making a lot of progress on that front.

This is John. The current position is 24 percent by volume is keephold; 43 percent is fee; and 33 percent is percent of proceeds, all of those by volume.

Okay. Great. Any estimate of how much you can do in '05 and then kind of what you think the long--what--where you can get in the next couple of years?

Yeah. I don't have that information with me, but it's part of our plan. And in years forward we have set, obviously, some hurdles. I would say this, that I don't expect the percentages in these buckets to change significantly. What I expect to change is what's inside of them. And by that, what I mean is, we still have in our fee bucket, for example, some unprofitable contracts, some gathering rates and services that we're receiving that are below market that need to be increased.

Obviously, in the keephold bucket, it's good to have some keephold exposure, as we experienced in the third quarter, but we continue to negotiate more conditioning language into our contracts, which establishes a floor and protects us in the event that the margin turns upside down.

And then on our percent of proceeds, as I was answering Becca's question, what we're doing there is trying to restructure what's inside those contracts. And retain more of the proceeds from the liquids and more of the proceed from residue. So I think the relative numbers are getting close to, you know, a final resting point. But what will continue to change is what's inside of them.

Just one last question on those--on those keepholds with treating fees. The last I heard I had you guys at 6 percent--or roughly 18 of the 24 points of keephold were treating fee. Is that still roughly correct?

I believe the number is about 18 to 20 percent of the volume that is under a keephold contract has conditioning language.

Okay. Great. Thank you very much.

Thank you. Our next question comes from Yogeesh Wagle from Standard & Poor's. Mr. Wagle, your line is open. Gentlemen, I'm showing no further questions at this time. I'll turn the conference back over to you.

This concludes ONEOK's third quarter conference call. As a reminder, our quiet period for the fourth quarter of 2004 will start when we close our books in early January of 2005 and will extend until earnings are released. We will provide a reporting date and a conference--conference call information for year-end results at a later date.

This is Weldon Watson and I will be available through the day for follow-up questions. You may contact me at 918-588-7158 or through email at wwatson@ONEOK.com. On behalf of the Company, 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. Everyone have a great day.