歐尼克 (OKE) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ONEOK 2004 earnings conference call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference please press star, then zero, on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Weldon Watson. Mr. Watson, you may begin your conference.

Good morning and welcome. As we begin this morning’s conference call I remind you that any statements that might include Company expectations or predictions should be considered forward-look 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 everyone and thank you for joining us to discuss ONEOK’s results for 2004. I’m pleased to report earnings of $2.30 per diluted share of common stock, which I believe is a record earnings year for us. That’s an increase of over 88 percent as compared to 2003. If you look back over the last four years the cumulative annual growth rate in operating income since 2000 is almost 11 percent. This reflects the success of our strategy and does not happen without the combined efforts of all ONEOK employees and for that I’m grateful.

Jim Kneale will present more detail about each segment in a moment, but I want to acknowledge an increase of more than 100 percent in operating income for Gathering and Processing. Clearly, higher commodity prices and a wider Processing spread throughout the year contributed to this success. Importantly though, our contract restructuring continues and provides us with a more stable earning stream when spreads aren’t as strong.

Our Production segment’s results were almost 200 percent better than a year ago, thanks to the impact of favorable prices and the December 2003 acquisition of Texas natural gas and oil reserves. In January, our Oklahoma distribution company, Oklahoma Natural Gas, filed an application for a $99.4 million rate increase. That number includes $10.7 million of interim rate relief granted in January of 2004. The Oklahoma Commission has 180 days, or until the end of July, to make a decision on that request.

During the fourth quarter, we completed the acquisition of the 82.5 percent general partner interest in Northern Border Partners. While the acquisition only contributed $1.3 million in equity income for the year, we believe this $175 million acquisition was a key strategic decision for us during 2004. We firmly believe that Northern Border Partners will have better opportunities to compete for acquisitions and grow in certain asset classes, such as interstate and intrastate pipelines and other similar fee-based assets.

We found that as the competition for assets increased we were often at a competitive disadvantage to the MLPs because of their lower cost of capital. The choice for us was either to buy or build, and when this opportunity presented itself the decision was an easy one. We needed to add this arrow to our quiver. Clearly, as the partnership grows so will the unit distributions and the income distributed to the general partners.

We received a number of questions about contributing assets into the partnership. All that I will say at this time is that we have assets that we believe in the MLP business mix, primarily our Transportation and Storage assets. These throw off a fairly stable cash flow, primarily from fee-based business. We believe that potentially other assets may fit. However, if there’s too much volatility in cash flow as a result of commodity price moves, we do not believe that those to be likely candidates for Northern Border Partners. If, however, volatility can be reduced through restructuring then they would likely fit.

Also during the quarter, we had a restructuring of the ONEOK Management team and I want to mention three of those changes.

Chris Skoog has left the Energy Services segment to join Northern Border Partners as Executive Vice President with direct management responsibility over their interstate pipelines and mid-stream activities. Obviously, Chris’s background in Marketing in the Mid-Continent, Rockies and the upper Midwest on some of the very pipelines in the partnership will be helpful in his new role.

John Gibson became President of ONEOK Energy Company, which now includes Energy Services, in addition to the two segments John was already managing -- Gathering and Processing and Transportation/Storage. John’s broad experience in the industry, coupled with his prior experience at Phillips in marketing their natural gas throughout the Midwest, gives me confidence that we will see continued success in the Energy Services segment with a renewed focus on the fiscal aspects of the business. After Jim’s comments I’ve asked John to comment on each of his segments’ results.

Sam Combs became President of ONEOK Distribution Company and will have the responsibility for all three of our natural gas utility companies. Sam’s job is to ensure we use Best Practices across all the utilities with a sharpened focus on controlling costs and improving Customer Service. Sam has joined us today and can help answer any questions you may have concerning any of the LDCs.

These personnel changes and others will provide new challenges and opportunities, but importantly, they enhance our experience base and I believe contribute to our strength and our success.

In January we announced a stock repurchase program, authorizing us to repurchase up to 7.5 million shares of ONEOK common stock. As you know, next year our equity units convert, and while this will bring us additional cash, if nothing changes between now and then, it will have a dilutive impact on earnings. Obviously, we prefer to grow our earnings through acquisitions and that is our intention. But we do not intend to wait to see if we are successful. This action gives us the flexibility we need to maintain and grow shareholder value.

I’m also proud that during 2004 we increased the dividends to shareholders each quarter. We’re over 38 percent during 2004. At their present level we believe we are competitive with our peers on both payout and yield, but we continue to monitor and will increase when appropriate.

We’ve given guidance for 2005 earnings, and despite some of the changes in the underlying assumptions, we are reaffirming our 2005 guidance in a range of $2.22 to $2.28 per diluted share.

In closing, let me say again how proud I am of my fellow ONEOK employees and the strong results we delivered in 2004. I believe we demonstrated that our strategy is sound, our earnings are sustainable, and we focused on performance to deliver shareholder value.

And at this time I’d like to call upon Jim Kneale, Executive Vice President and Chief Financial Officer, to review the financial highlights of 2004.

Thank you David, and good morning everyone. As David already mentioned, we reported earnings per share for 2004 of $2.30 on net income of $242 million. Last year’s net earnings per share were $1.22 and earnings per share from continuing operations were $2.13 last year. In 2004, earnings before interest and taxes increased to $495.6 million, or about 10% over last year.

Next, I want to briefly review our business segments, highlighting some of David’s points and adding some additional perspective. The first three will be Gathering and Processing, Transportation and Storage, and Energy Services, which, as David mentioned, John Gibson will provide more detail in his comments.

In the Gathering and Processing segment, operating income increased to $131 million, up from $62.7 million last year. We were positively impacted by higher commodity prices for natural gas and natural gas liquids, and in turn, favorable keep-whole processing spreads. We also continued to see improved margins related to the renegotiation of some NGL Storage agreements and the addition of NGL Storage and Pipeline assets.

The Transportation and Storage segment saw its operating income increase by $9 million, which was primarily the result of our selling some excess cushion gas in the fourth quarter.

In the Energy Services segment, operating income was $137.8 million in 2004 compared to $197 million last year. There are several factors that affected this segment. Our Marketing and Storage margins were down in the early part of 2004 because of lower interregional basis spreads. A portion of this decrease was offset by higher reservation fees for peaking services.

Also helping was the increase in intra-month price volatility during the fourth quarter of 2004, which allowed us to increase gas sales by cycling our Storage. Trading margins were down due to decreased natural gas price volatility.

In the press release, we provided a table in the Energy Services section showing the sources of net margins for the last six months of 2004. We also mentioned the reorganization of this segment that occurred at the beginning of the third quarter and the fact that we began reporting revenues of our non-trading activities on a gross basis at that time.

Another result of all this analysis is that transactions are better reflected in their appropriate margin source. Since the change is perspective, numbers from prior periods have not been revised.

The Production segment’s operating income was $47.8 million, up $31.7 million over last year. Driving this improvement were the increase in natural gas production to 16.6 bcf, which is primarily due to the addition of the Texas Production properties acquired in December of 2003 and the increase in the realized price for natural gas after the impacts of our hedging from $4.78 per mcf to $5.28.

Operating income in the Distribution segment decreased to $110.2 million compared to $117.8 million last year. While this segment experienced an increase of $30.8 million in operating income due to rate relief in Kansas and Oklahoma, they also experienced slightly warmer weather and significant increases in employee benefit costs. Information Technology costs related to customer systems also increased.

For the fourth quarter of 2004, earnings per share were $0.90 compared to $0.66 last year. The increase is mostly attributable to the same factors I discussed for our yearend results.

Switching back to 2004 year, cash flow from operations before changes in working capital was $537 million and exceeded capital expenditures and dividends by $184 million. At December 31, 2004, our debt-to-equity ratio on a GAAP basis was 53% long-term debt and 47% equity. Using Moody’s methodology of treating 75% of the equity units as equity, we were 44% debt and 56% equity. And if you give full equity credit to the equity units, we would be 42% debt and 58% equity.

Our 2004 return on invested capital, which includes short-term borrowing, was 14.4%. Our return on equity was 17% on a GAAP basis and 14% using 75% of the equity units as equity.

David mentioned our 2005 guidance and the fact that some of the assumptions have changed since we issued that guidance, but because it is very early in the year we maintain our guidance. However, if you took a snapshot today there are three areas that bear mention.

First, Production volumes have not increased as we anticipated primarily because of our inability to get access to more drilling and workover rigs. Offsetting some of that impact of the lower volumes are higher prices for both oil and natural gas and our efforts to increased wellhead-gathering capacity in East Texas.

Next, in the Gathering and Processing segment, NGL and natural gas prices and keep-whole spreads are higher today than we forecast in our guidance.

And last, employee benefit costs, primarily Pension and Post Retirement Medical, are going to exceed last year’s costs.

Now, I want to turn the call over to John Gibson, President of ONEOK Energy Company.

Thanks Jim and good morning. Our Gathering and Processing segment experienced another good year, primarily as a result of our continued contract restructuring effort. The lion’s share of our increase in operating income, some $67 million, came from widening Processing spreads and higher commodity prices. Clearly, the contract restructuring effort has benefited the Company by positioning us to benefit from these rising prices in spreads.

Another of our strategies to grow margin through our NGL marketing effort contributed to our growth as we increased margins $10 million, primarily through the renegotiation of some NGL Storage agreements and the addition of NGL Storage and Pipeline assets located in Conway, Kansas.

In the past, many of you have expressed difficulty trying to model the earnings from this segment. Let me try to help.

In the most recent press release there are two tables -- Margin Information and Information At a Glance, which, when you combine with some calculation, should help you better model this segment. You will find on our website at oneok.com under ‘Events’ with the webcast information, a slide in support of today’s discussion, which will show you how to use the data from the two tables mentioned to estimate the margin for our keep-whole percent of proceeds and fee-based contracts. We hope this helps.

Keep in mind that these are estimates and the actual margins can be affected by operating mode, producer elections on contracts, or hedging activities.

Now, moving to the Transportation and Storage segment, again, another good year. Our earnings this year increased over last due to the sale of operational or cushion gas from our Storage fields, which amounted to an additional $9 million of margin. Notwithstanding that item, this segment continues to produce operating income year in and year out in the $50 to $55 million range.

And finally, to our Energy Services segment, which is where I’ve been spending a lot of my time since February 1st. I’ve had the opportunity to review our marketing strategies and business opportunities with many of our Marketing people. I have been really impressed with our people’s knowledge, ideas, energy, and excitement. As stated before, we are refocusing our efforts in this segment on our physical Marketing capabilities. Those capabilities are represented by our ability to combine physical gas supply with leased Transportation and Storage to meet the needs of our customers, which in turn produces significant margin opportunity for this segment.

We buy gas at the wellhead, the plant tailgate, or at a central delivery point on a pipeline, and then, by using leased Transportation and Storage capacity, we sell that gas to customers, mainly local distribution companies. The combination of these services in turn allows us to provide customers with premium services, which is collected through a demand charge.

This type of service carries the highest level of reliability, requiring us to meet the customers’ needs, sometimes at a moment’s notice. The more extensive our web of gas supply, transport and storage the more varied and responsive our services can be. This web-like effect also allows us to maximize our margin by optimizing today’s gas, transport, and/or storage values to deliver gas to the customer.

As we continue to execute this well-tested strategy, we look to add more customers to our portfolio. Compared to 2003, we generated an additional $9.5 million of margin through the demand charges paid by a mix of six new customers added in 2004 and other margin increases implemented across the balance of our existing customer base.

Also in 2004, we were also able to add approximately $20 million of margin by taking advantage of our physical storage flexibility. Primarily, in the fourth quarter, there were repeated days of cold weather followed by days of warm weather, which allowed us to cycle our storage, or put in other words, inject gas into storage during the warm days when prices were lower and sell gas on the cold days when prices were higher. That’s allowing us to capture this intra-month pricing volatility.

As we have pointed out before, trading margins are difficult to predict. We note in our press release that we experienced a decrease in trading margins of almost $36 million due to the lower natural gas price volatility. While lower than the year before, trading contributed to our 2004 results. You will recall that our 2005 guidance does not include margin from trading.

At the end of 2004, we had 70.6 billion cubic feet of storage in the ground, or about 76 percent of the 92 bcf we have under lease. Our weighted average cost of inventory is south of $5.80. We have experienced some draw-down on our storage throughout the winter, but not to the levels that we had predicted. Currently we have 42.6 bcf of our inventory hedged with locked-in spreads, ranging from 70 to 80 cents per mmbtu. Storage spreads, however, have recently widened with the current May-to-January spread at $1.20.

In conclusion, we believe -- we continue to believe in the business model developed for our Energy Services segment. We believe premium value can be created by rebundling services for the customer. Again, I want to emphasize we do not include margin from our trading effort in our 2005 guidance and see them only as additive.

We will continue to fine-tune our existing strategies and develop new ones, which will serve to grow the operating income from our core marketing business and reduce the levels of earnings at risk.

Thank you all for your continued interest in ONEOK, and David, that concludes my remarks.

Thanks John. At this point we are ready to open the lines up for questions and we’ll take the first question.

(OPERATOR INSTRUCTIONS) Kathleen Vuchetich, WH Reaves.

I was wondering if John could repeat how much profitability was related to the trading activity that was excluded from the forecast for ’05.

There was -- Kathleen, this is John -- there’s nothing in our guidance for ’05.

Right. How much income was there in ’04 relating to trading?

Kathleen, this is Jim.

Hi, Jim, I’m sorry I’m not being more clear on this.

No, I think you are. Let me see if I can answer your question. To give you some background because the numbers aren’t quite comparable. In the press release there is a table that has information for the six months that is subsequent to our reorganization and it has trading margins listed as $24.6 million.

Yes, I see that.

If you go back to the second-quarter 10-Q, that same table reflected for the first six months about $14 million. Now, although the numbers are somewhat comparable as we made this change and I mentioned in my remarks, one of the benefits coming out of all this analysis was we found some items that we used to call ‘trading’ just because a trader put on a financial position, but it really was a physical trade. So, we redid some of the classifications, but all in all, if you just take those two numbers, it was $24.6 and $14 and that’s somewhat comparable, but not exactly.

And that’s margin. What would it look like net income-wise? I’m trying to get a comparable to the $2.30 that you reported this year. If you would say do similar-type numbers on trading --

Yes, you would just take -- our tax rate is about 38 percent, so just take 62 percent of the total of those two and that would be a ballpark number.

Okay. And then we could add that to the $2.20 to $2.28 forecast to get a comparable to the $2.30 if trading were to be equivalent in ’05 as ’04?

That’s accurate.

Okay good.

That has to be your assumption, Kathleen, that trading is equivalent to ’04.

Right, I understand that. We have to make some judgments on volatility and stuff to look forward, but I just wanted to make sure I was getting a number that compared with the $2.30.

The second question I have, and I don’t mean to be a nuisance about all of this, but the second question I have is, when you take a look at the new rate case, the $99 million rate case, how much of that is related to increases in rate base versus increase in costs? And is the new CIS system included in the rate-base number that you’re applying for in Oklahoma?

Let me let Sam answer those questions.

In terms of rate base, we’ve seen our rate base grow about 44 percent since our last general increase 10 years ago. That number is about $194.4 million. And to your question about the Customer Service System, yes, it’s included in that increase in rate base.

Okay. And how much -- Sam, how much of the rate application is related to cost increases, of the $99 million?

About $50 million in expenses.

Yves Siegel, Wachovia Securities.

I have several questions, so please indulge me. If I take too much time just go to the next person.

The first question is an easy one for Jim. What is your target now in terms of capital structure? I mean, it seems like you’re going to be under-leveraged, if you will, going forward.

Yes, Yves, I think I would answer that we don’t have a specific 50/50 or 55/45. I’d say generally -- but generally it’s probably 55% to 50% debt, but it really then comes back to the various ratios that we and rating agencies look at to maintain our current rating. But, you’re right in your analysis. As David said, if we do nothing between now and March of ’06, we’re going to be under-leveraged.

Okay. So that sort of begs the question, in terms of acquisitions for ONEOK, not for Northern Border, what type of assets are you looking at and how would you sort of prioritize them? Specifically, I’m curious where Distribution versus E&P assets sort of fit on that spectrum, if you will.

Let me address that, Yves. Given a choice between a stable cash flow distribution-type acquisition versus an E&P or Producing asset, I think at this point we would -- we would be more inclined to do the distribution asset. We are currently evaluating which direction to proceed in with respect to our Producing assets. Clearly, they are contributing to our earnings stream, but they are not a significant portion of our complete asset mix and it’s something we have currently under evaluation.

The other thing I wanted to comment on is that this question with respect to under-leveraged, clearly, as we look at acquisitions and this whole framework of how you pay for those acquisitions, depending upon the size of any acquisition we might make over the next couple of years, clearly, we’ve got some dry powder. And so I guess the conclusion one could draw is that the need to go to the equity markets to raise capital to fund an acquisition is not likely.

Right. Okay. Then, I just have two more. One is, how should -- I’m not sure I understand how to think about the trading activities in Energy Services. I know you’re de-emphasizing it, but I’m not sure what exactly that means.

Let me see if I can help. The way I have talked internally is that we ought to view trading as very similar to an asset sale. If we make an asset sale that is -- that creates a gain it’s treated as a one-time gain. And in terms of modeling, it obviously accretive to earnings and it’s a benefit to the earnings stream, but it’s a one-time event. The thought process that we would like to have is that you all view any trading margins as sort of one-time events. It happened during 2004. We’ve made some money during 2004. It is not necessarily repeatable. We might make that much; we might make less; we might make more. But in terms of sustainable earnings, that’s why we’re focusing on margins without trading. And that’s the way we’re approaching the business.

But you guys -- but you have traders, right, whose job is trying to extract some value?

As we’ve said before, if the market gives us an opportunity to extract value through volatility in gas prices or in volatility in bases, then we’re going to take that opportunity. John, do you want to add?

Well, I just would add one thing. In the last month or so I’ve been trying to get my mind around -- think of it this -- the way I think of it is we’ve built the model based on physical marketing, so we’re in the physical market putting pieces together -- supply, transport and storage -- and we have most of our effort focused on risk management activities relative to our physical marketing.

The same people that are executing that risk management are also the same people that have the potential to develop a point of view, see some inconsistency in the marketplace, and execute against that. So, what we’re saying is that the primary focus of our people is to our physical marketing business, of which risk management is a part. But the knowledge gain in that activity, if it could be translated into a trading gain, then we’re going to try to capture it. We’re going to capture that value. But that comes to you from a market that is very volatile and one that is not predictable.

Okay. And one last question and one comment. The question is, John, can you just go over the sensitivity in Gathering and Processing right now of the commodity prices? And in terms of have you been able to hedge any more going out into ’06?

And sort of the observation, unsolicited, is that if you were to sell Transportation and Storage into the MLP, Jim’s going to have another problem because my sense is that you could potentially have over $0.5 billion worth of cash coming in the door, so I sort of assume that you probably would fairly easily be able, if you so desired, the ability to increase your stock buyback. So, that was just my unsolicited comment.

Then, John, I’m sorry, if you could just answer the sensitivity question.

That’s okay. Let me take a stab at that. And I’ve jotted down here two questions. One is the sensitivities. Let me give you the sensitivities for yearend 2004 for NGLs, which is for every penny move in natural gas liquids prices per gallon equates to $4.2 million of margin. For every $0.10 increase in gas price is a $3 million hit negative to our margin. And on the crude side, for every $1 move in crude equates to -- that’s $1 per barrel -- equates to $1.3 million.

So, those are our sensitivities going -- at the end of ’04, and of course, as we continue to restructure contracts, that sensitivity changes. It also changes based on our hedging position, and as you have noted and as is reflected in our press release, we’ve been taking advantage of these prices that currently exist and we have been attempting to -– well, we have been locking in more of our POP equity barrels and mmbtus, as well as the Processing spread.

Now, your comment or your question specifically to that was are we doing anything in ’06. And the answer is no, we’re not. Our strategy has been on keep-wholes is we don’t do dirty hedges. We sell physical NGLs forward and every time we do we then immediately lock in the fuel and shrink against that by -- through non-mix-based futures contracts.

To continue to lock in that spread into ’06 means that we need to go out and find a physical buyer and the NGL market is not deep enough to go out and make those forward sales. We have because of the recent run-up in pricing had some success in locking in keep-whole margins throughout the balance of 2005. Likewise, on our percent of proceeds contracts, we have increased since the beginning of the year -- it’s not obviously reflected in these tables -- but we have continued through this time period to lock in more and more of our condensate natural gas liquids and natural gas for the balance of ’05, but we have not looked again into ’06 primarily for the same reason.

Mike Heim, AG Edwards.

John kind of alluded to one of my answers quickly, but I’ll ask it again. You’ve done a great job reducing your exposure to keep-whole down to 18 percent of total margin. Is that still an ongoing effort or is that kind of where you want to be?

We’re close to where we want to be. And that’s somewhat exhibited by the fact that we had a great 2004 and if margins hold out we’ll have -- obviously the keep-whole spread will be healthy again for 2005. But, I think we’re close to where we want to be. There are a couple of key contracts that we’re working on that will affect the volume under keep-whole. Those will be resolved this summer.

And I think the other thing to remember, Mike, is that a big of focus of this contract restructuring is not only to move from keep-whole to fee-based or percent of proceeds, but it’s also to come back in and provide that floor when Processing spreads turn negative.

You lead me right into the second question on that and that is, you’ve talked about kind of having these almost side arrangements with some of the keep-whole that change when things turn negative. How are those treated as you kind of split up these numbers in the table? Are those still called keep-whole contracts, so (indiscernible) is actually additional protection?

Well, let me update everyone on where we are at this point in time. Of the volume we have under keep-whole contracts, 22 percent contain conditioning language. Conditioning language is that which converts a keep-whole contract to basically a fee-based contract when the margin turns upside down.

When you look at actual numbers, if a producer contract has let’s say kicked in and is utilizing conditioning language, our accounting system accounts for those under a fee-based contract. So, they will flip back and forth, depending upon what we call producer elections. Now, having said that, in 2004 there was -- I’m just off the top of my head now -- I don’t believe anybody exercised, or we had exercised any conditioning language in 2004. So it would not be relevant I don’t believe in ’04.

Okay. Alright. Let me shift gears with one last question for Jim, I guess, and that is to see I can get a comment on some of the negative working capital needs we’ve had the last couple of years, what’s the explanation behind that?

Mike, if you -– you have to go way back behind some of those numbers, if you recall at the beginning of 2003 we had an accounting change where we went off of 98.10, which mark-to-market all of our activity in the Energy Services, and so a key component of that was inventory. The gas in storage is now broken out in working capital as a current asset. And so, just because of that switch and breaking that out it does appear that -– and it’s factual -- that our working capital needs have increased.

And what you see, like at December to December, your periods of time when there’s a lot of gas in the ground. I’ll even roll fast forward though to today, we still have about $650 million of commercial paper outstanding, but we have $320 million of cash invested just in anticipation of paying off this long-term 7.75 note March 1st, so we’re already back down to only -- technically $300 million of working capital. And you could say $175 million of that is the Northern Border purchase, so it’s just the way the numbers come in and out. The business in and of itself is requiring a little more working capital with these higher gas prices through the storage season, but through the summer months that all comes back.

Okay. So, just, I guess the next question is looking forward, can we assume that those negative won’t continue unless we see gas prices go higher, et cetera, et cetera?

Well, with that assumption, yes. I don’t see anything that would cause us to use more working capital than we currently are unless, again, we purchase something or you see increased gas prices.

It also has an impact on the utility business. When you think about the amount of gas they buy and sell and the two-month lag or in collecting that. And they also, the utilities now, I believe, versus two years ago, I think they have combined about 14 bcf of storage that they now -- maybe a little higher -- that they utilize through the winter also.

Sven Del Pozzo, John S. Herold, Inc.

I’m wondering about, in the Production segment I see you have difficulty getting rigs, but if there were no difficulty how much do you think you could increase production anyway?

Sven, this is Jim. I don’t have the technical answer to that. I can give you my understanding from talking to the President of that unit. There were two issues that are impacting that. One is, just the overall lack of capacity in the Service sector, which includes drilling rigs, workover rigs, and even the ability to lay lines to new wells. And in our particular case, in East Texas, we have a lot of plans on the drawing board to up the capacity of that Gathering system for the gas we’ve been drilling, but we’re not able to get all that work done. So, it’s a combination of those two, and that’s about all I can tell you.

Okay. You guys have been attracted to the Chicago market when Energy Services was marketing and trading. I remember at the time you had been building your leased storage position for access to the Chicago market. I’m wondering with the purchase of the interest in Northern Border Partners, I mean, is there a strategic fit? I mean, you like Chicago and I’m wondering, down the road, will there be an attempt to integrate your physical assets, integrate physically into the Chicago market? That way you can use your management expertise at profitably supplying gas using your physical assets.

Let me say -- let me start with saying that for some time Energy Services has been a shipper on Northern Border, and in fact, moves gas across TransCanada, coming back down through the Great Lakes area. And so, that has been a key area for Energy Services in terms of marketing their physical gas. Clearly, there is a distinction between what we do here at ONEOK in terms of our Energy Services functions and our Distribution functions and such, and between that and what Northern Border does, we’re always -- I’ll let Bill Cordes at Northern Border talk more about where their focus has been, but just say generally that assets that fit that MLP model, and particularly fit Northern Border, do make sense. And if there are opportunities to add to the asset base for Northern Border in that general market area, they will make sense.

Integrating between Energy Services and Northern Border, beyond what we’re currently doing, is not in the mix.

Anatol Feygin, Banc of America Securities.

If I could ask a couple of questions. First, John, if you would be so kind as to repeat some of the Storage numbers. I know you guys had just under 71 b’s in storage as of yearend and then, I think you mentioned just under 580 as sort of the WACOG number there and where I lost track is when you mentioned the hedging levels going forward. I think it was something in the 40 bcf range.

Yes, that’s correct. Right now 42.6.

So, 42.6 b’s of the gas in the ground is -- has sort of a fixed margin over the next year or so, right?

Correct.

Okay, great! And did you provide a number for where gas is today, sort of at the end of February storage-wise?

No, I did not.

Would you?

It’s -- let me look at this number. It’s a little -- it’s around 43 to 44 bcf.

Great! And John, you also mentioned some cheat sheet on the website that we can use to help us with midstream. Can you just repeat where we could find that?

I’d be happy to. This is like an advertisement. Go to oneok.com and under ‘Events’ and there will be a further reference with this webcast information. You should be able to find this slide, which basically has three mathematical formulas which you can use as an estimate to calculate the margin generated by each of those three keep-whole, POP and fee.

Terrific.

Anatol, we promise there won’t be a test. You don’t have to consider it a cheat sheet.

To shift gears for a second, Jim, maybe can you comment on what you guys see as the deferred tax run rate now with the bonus depreciation behind us?

Yes, the last estimate I saw, Anatol, and I haven’t updated it since we’ve got through all this yearend, was that deferred taxes would be, I think it’s $50 to $60 million this year.

Great! And then, the last thing to just follow up a little bit on Mike’s question on working capital. Yes, obviously, there’s the gas and storage component; marketing, and risk management is up a little bit, just given the activity in prices, but why such a large and almost $0.5 billion swing in the receivables? I guess nothing much has changed from a WACOG standpoint and the distribution composition is roughly the same, so I’m struggling to figure out why that was such a big uptick.

Anatol, on the surface I don’t have the detail of that, but I’m pretty sure it’s just related to -- if you look at the WACOG and not the -- what the prices, the utilities are paying compared to a year ago, that’s up a bit. And so that would drive -- with 2 million customers, that would drive those receivables up. Of course, G&P even, you take that with the higher spreads they are going to have just some incremental increase and the cycling of our storage where we -- John mentioned that we were able to buy gas on the warm days, sell it on the colder days, that money takes 25, 30 days to come around. So it will build up your receivables higher than just the month where you were just turning gas one time out of the storage.

Got it. So that actually has two impacts. It’s captured in gas and storage when you prepare to kind of sell it and then once you do deliver it, it then feeds the accounts receivable line.

Correct.

Got it.

Jeff Gildersleeve, Millennium Partners.

I just wondered, it’s been a while since we heard about the assumptions and you were good enough to put all the hedging numbers in there. But I was wondering, the un-hedged part of your commodity business, both Production and Gathering and Processing, what are your assumptions for ’05?

Jeff, on our original guidance for the Production segment we used $5.75 for natural gas as of the NYMEX base price, and a crude oil price of $35.

Okay. So that’s NYMEX and that’s for ’05?

Yes.

And how about G&P?

I think -- yes, it was the same. I believe they were the same, $5.75 natural gas and $35 crude.

Okay. What was the NGL price per gallon though?

$0.65.

Okay. This past quarter you realized $0.83, or that was the Conway price?

I mean, what we are experiencing relative to those prices that Jim gave you is prices higher, $6 plus for gas.

I guess I’m just looking at the gas (indiscernible) around $6, $6.80 now, so that’s $1 higher than this gas price, and then oil is above $50 again.

Correct.

So, I’m wondering just, when you look out into ’05 and you look at these prices if they were sustainable, I’d assume you’d have a pretty big upside to your businesses.

Let me say, Jeff, that we talked earlier about where our guidance was and Jim talked about how some of the underlying assumptions are moving around a bit. Obviously, if those prices held throughout the balance of the year the numbers would be higher because those are higher than we used in setting those estimates.

So there -- I mean, you said there’s some employee benefit expenses have gone up, but they wouldn’t seem to go up as much as the sensitivity on the commodity side. Is that fair?

I think that’s a fair statement.

John Olson, Sanders Morris Harris.

A couple of quick questions if I may. 2005 capital spending, the profile, any numbers there?

John, this is Jim. I think our guidance initially for capital spending for this year was $265 million -- I’m trying to remember -- for ’05. I think if you look in terms of the buckets – no, let me correct that -- it’s $235 million. I think where you’ll see the changes from this year, the G&P spending will be down a little bit because if you recall they built a pipeline this year. I think the Production unit will be about flat with ’04. The Utilities will be up a little bit. And the other bigger change was our Other, which was where we were completing most of the capital spending on our new customer system for the Utilities, will be down quite a bit.

Okay, that’s fine. Jim, I guess this question applies to you as well. What would your annualized earnings contribution from Northern Border be now?

Based on the guidance that Northern Border put out for ’05 and with our current ownership structure it would be in the range of $10 to $11 million.

Okay. And then on the [no notice peak] service contracts you have into Chicago and Missouri and the like, how much -- what are the monthly demand charges that you’re getting from all those customers?

John, this is John Gibson. They range across the spectrum -- I mean, they’re pretty wide. I’m not sure that I actually have that information with me. The other side of that, John, is I’m not sure we’d want to share that competitive information with those going up for bid.

Very good point.

There are no further questions at this time.

This concludes ONEOK’s 2004 conference call. And as a reminder, our quiet period for the first quarter of 2005 will start when we close our books in April of 2005 and will extend until earnings are released. We will provide a reporting date and conference call information for first-quarter results at a later date.

This is Weldon Watson and I will be available throughout 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 concludes the program. You may now disconnect.