歐尼克 (OKE) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ONEOK fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Harrison. Sir, you may begin your conference.

Thank you. Good morning and welcome, everyone. As we begin this morning's conference call, I remind you that any statements that might include ONEOK expectations or predictions should be considered forward-looking statements and as such are covered by the Safe Harbor provision of the securities acts of 1933 and 1934. It is important to note that actual results could differ materially from those projected in such forward-looking statements. For 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.

Thanks, Dan and good morning, everyone. As we announced yesterday, our year-end and fourth-quarter net income increased significantly because of strong performances in each of our operating segments combined with onetime effects from the sale of assets. More specifically our results included gains from the sale of our oil and gas production business in September, the Texas gathering of processing assets in December, partially offset by an impairment related to the pending sale of our Spring Creek Power Plant in Oklahoma. But if you back out these onetime items, we still had an exceptional year by any measure. Jim Kneale will discuss the details of the financial performance in a few minutes.

Our acquisition of the Koch assets in July was a significant accomplishment that contributed to our outstanding performance. These primarily pipelines and storage natural gas liquid assets are performing well and are positively affecting results in both natural gas liquids and our pipelines and storage segments.

Our 2005 results also reflect the approval and implementation of new rates in Oklahoma. In our gathering and processing segment, higher commodity prices had a positive impact on the Company's 2005 results as did favorable gross processing margins. Increased basis differentials and increased natural gas price volatility contributed to stronger performance in our energy services segment. Because we see this continuing into 2006, we have increased our 2006 earnings guidance for this segment.

I would now like to turn the call over to Jim Kneale, our Chief Financial Officer, who can provide you more details on our 2005 financial performance. Jim.

Thank you, David and good morning. As David mentioned, our year-end and fourth-quarter 2005 results increased significantly over last year. Net income was $555 million or $5.14 per share compared with $242 million or $2.30 per share last year. The $5.14 number includes three items that David mentioned that we do not expect to occur in the future. There is the after-tax gain of $150 million or $1.39 per share from the sale of our oil and gas production business in September. There is also a pre-tax gain of $264 million on the sale of the Texas gathering and processing assets in December, which is reflected in operating income. It represents an after-tax gain of $1.50 per share. Partially offsetting those gains is a $32 million or $0.30 per share impairment related to the pending sale of the Spring Creek Power Plant. Removing those onetime items, our 2005 net earnings per share were $2.55 as compared to $2.30 last year.

Our 2005 income from continuing operations was $411 million or $3.81 per share, which also includes the gain on the sale of the Texas assets. We had a strong fourth quarter. Net income was $238 million or $2.30 per share compared with $98 million or $0.90 per share in the fourth quarter of last year. The 2005 fourth-quarter results also include the $1.50 gain on the sale of the Texas gathering and processing asset. Additionally, it includes an impairment charge of $8.5 million on some gathering and processing assets and a $10 million contribution to the ONEOK Foundation. Those two items reduced earnings in the quarter by about $0.10 per share.

Our cash flow also remains strong. For the year, cash flow from operations before changes in working capital and excluding the impacts of the asset sales exceeded capital expenditures and dividends by about $173 million. We also continue to rebalance our balance sheet after the acquisition of Koch last July. In late December, we retired early $300 million of 7.75% note due in August 2006. At December 31, our long-term debt was 48% of our capitalization treating the equity units that settled several days ago on February 16 as equity.

Also at December 31, we had $1.5 billion of short-term debt outstanding, which included $900 million of related to the Koch acquisition. At the same time, we had $911 million of natural gas and natural gas liquids in storage. As of today, primarily as a result of our withdrawals from storage and settlement of the equity units, our short-term debt has dropped to about $660 million. David, that concludes my remarks.

Thanks, Jim. And now let me turn the call over to John Gibson who will discuss the energy company's performance.

Thanks, David and good morning. The energy services segment had another good quarter as well as year. As in recent quarters, these results are primarily due to margins generated through the optimization of our supply, transportation and storage contracts, which are so vital to our core business of providing physical wholesale marketing services to our customers. Primarily in the fourth quarter, basis differentials continued to widen improving our transportation margins. Also during the fourth quarter, extreme price volatility and rising natural gas prices allowed us to sell monthly index priced gas into the rising daily market capturing the difference between the daily price and the first of the month index.

Given the higher than normal storage levels experienced across the nation, we believe gas prices will be lower than the fourth quarter of 2005. Considering the effects of weather and regional supply and demand fundamentals, we do however anticipate both daily and monthly price volatility, which will provide us with additional opportunities throughout the year in storage, transportation and marketing.

Seasonal storage spreads widened significantly during the last half of 2005. Basis differentials continue to remain attractive for our transport portfolio. For 2006 to date, we have approximately 53% of our contracted storage capacity and 83% of our transport position hedged at attractive margins. The combination of higher seasonal spreads and wider basis differentials were the primary reasons we raised our guidance to $170 million. Consistent with our past practice, our guidance does not include any trading earnings, which although lower than 2004, were $13 million last year.

The new natural gas liquid segment, which consists primarily of the assets acquired from Koch, also had a good quarter and year. Operating income increased compared with last year primarily due to the addition of the Koch assets. While our marketing and our isomerization activities were better than expected, our base transportation and fractionation business was slightly lower due mainly to the impact of ethane rejection and freeze-offs.

The natural gas liquid segment also benefited from increased storage fees paid by our storage customers primarily for storage leased from our ONEOK legacy assets. The natural gas liquid segment ended the year in line with our expectation of $43 million of operating income. We continue to experience success connecting new NGL supplies along our system. Increased drilling activity has resulted in the need for new gas processing plants, as well as increased NGL production from existing plants.

As previously reported, the 15,000 barrels a day of incremental barrels anticipated prior to the acquisition are now flowing on a daily basis. And our negotiations with several plant operators have resulted in commitments, which when connected to our system may add as much as another 24,500 barrels per day to our system during 2006. These new volumes are not included in our 2006 guidance as we are uncertain as to the exact volume, as well as the timing.

With the current outlook for volume growth, improved margins and continued cost control, we remain confident in our 2006 operating income guidance for this segment of $93 million. Our pipelines and storage segment continues its steady performance, which also was enhanced by the new natural gas liquid assets acquired from Koch. For 2005, operating income for this segment exceeded expectations due mainly to higher throughput experienced on our natural gas pipelines. Warmer weather this past summer and to some extent even during the fourth quarter increased demand from power plants for cooling, which led to higher throughput. Throughput was also aided by some short spurts of cold weather during this past December. The cumulative effect of the higher throughput and prices led to the increased margins of $20 million when compared to 2004.

We realized another $5.8 million of increased margins over 2004 due to the renegotiation of certain gas storage contracts and wider seasonal spreads that benefited our short-term storage business. Obviously, earnings growth for the quarter and the year was also due to the addition of the liquids pipelines acquired from Koch. Throughput on our liquids pipelines was slightly lower again primarily due to the freeze-offs and ethane rejection and fewer barrels being delivered to Mont Belvieu.

We expect 2006 to be another good year for the pipelines and storage segment and remain very confident in our guidance of $85 million.

And finally, shifting to our gathering and processing segment, where we had another solid quarter and year. For the year, continued higher prices for natural gas, condensate and natural gas liquids worked favorably to increase gross margins on our POP contracts, or percent-of-proceeds. And we also saw wider processing spreads on our keep-whole contracts. The increases in gross margin would have been even greater if not for the effects of hedging, as well as somewhat lower volumes.

We successfully closed the sale of our Texas assets, which when compared with our remaining gathering and processing assets, had the least amount of synergies with our other ONEOK entities, historically represented our smallest region in terms of throughput, NGL production and margin and represented our highest exposure to keep-whole contracts without conditioning language.

Currently we are very comfortable with our contract mix of 36% percent-of-proceeds, 48% fee-based and 16% keep-whole. With our current contract mix, projected volumes and forward prices and spreads, we remain confident in our 2006 guidance of $88 million for this segment. We thank you for your continued interest in ONEOK. David, that concludes my remarks.

Thanks, John. At this point, I will ask Sam Combs to discuss the distribution segment.

Thank you, David. The distribution segment finished the fourth quarter on a strong note and ended the year with solid results. We are successfully transitioning from operating our three divisions as independent units to a group structure with a single focus. Our 2005 performance was highlighted by a rate increase in Oklahoma that was implemented on July 28 and contributed $28.2 million to margins for the year. While we were disappointed in the return on equity allowed, we were pleased with certain aspects given the fact that it was the first filing in ten years.

To summarize, it included three highlights. A front-end loaded rate structure designed to recover a larger percentage of our fixed costs through the demand charts. Thus reducing volumetric sensitivity and smoothing cash flow. It also features a new two-tier rate plan that offers greater customer choice. The unique and positive treatment of our gas and storage investment that removed it from rate base but allows full return on the actual monthly gases inventory versus a static test year level. And three, an increased level of bad debt expense in base rates.

Also in 2005, we sought and were pleased to receive approval from the Kansas Corporation Commission to recover the fuel-related portion of bad debts in a monthly rider. This is noteworthy because Kansas Gas Service operates in our coldest region, serving more than 650,000 customers with the most restrictive service shut-off rules and was responsible for 54% of our total bad debt write offs in 2005.

For comparison purposes, Oklahoma is our second coldest state with more than 800,000 customers, 31% of our total bad debt write offs, but has consistently outpaced the industry in controlling bad debt. Additionally, we are well into our preparations for the general rate case we plan to file in Kansas later this year following the expiration of a moratorium on May 15, 2006. The rate moratorium was a provision that accompanied the black box settlement of the previous 2003 rate case. We expect this case to be primarily focused on the recovery of expenses.

In the absence of the settlement, the Kansas rate proceeding is a 240 day process. Therefore we have not factored any additional margin into our 2006 guidance.

Finally, we have joined with other gas utilities in Kansas to file in the legislature for a new gas safety and reliability surcharge or GSRS. That, if successful, would provide a capital recovery mechanism in Kansas similar to the gas reliability infrastructure program or GRIP we have available in Texas.

During 2005 in Texas where we have home rule ratemaking, we initiated three major rate filings along with annual cost of service filings in six communities. We were also pleased with the outcome of the GRIP or capital recovery mechanism in the El Paso, Texas region that will add some $900,000 to annual margins.

Additionally in November 2005, we filed for general rate increases in the South Jefferson County and North Texas jurisdictions in the amounts of $2.5 and $1.4 million respectively. Both cases are well underway and in the discovery phases. We anticipate one additional rate case and a capital recovery filing in 2006. Please note that we have already projected the collective impact of all these cases and factored it into our 2006 guidance. These rate cases are part of our strategy to become more current in our filings so that we can recover our investments on a more timely basis.

Our focus is to improve shareholder returns by executing on our four key productivity and growth strategies, which include one, well-timed rate cases, as I mentioned earlier, utilizing consistent and appropriate ratemaking tools; two, growth through investments in rate base, increasing customer count, volumes and offering complementary customer programs; and three, improving our service delivery and four, reducing exposure to bad debt by adopting best practices, unique customer choice programs and accelerated rate recovery mechanisms. David, that concludes my remarks.

Thanks, Sam. The last year was full of activity and without the hard work and commitment of our employees, this performance would not have been possible. From the successful integration of the assets we acquired to the diligent efforts to get fair value for the assets we sold and the daily quest to safely and efficiently operate our business and provide service to our customers, this performance was the result of their efforts. So to our employees, I say thanks so much.

Before we open up the lines for your questions, I would like to provide some additional comment on our announcement last week involving Northern Border Partners and TransCanada. We firmly believe this is a very positive series of transactions and look forward to getting them closed. We're still on target for an April 1 closing and have begun our focus on transition issues. We continue to evaluate and work on internally generated opportunities, as well as those external. All to say we remain focused on growth in the partnership. As you already know, we will benefit from that growth.

At this point, let's open up the phone lines for questions.

(OPERATOR INSTRUCTIONS). Faisel Khan, Citigroup.

A question on the working capital. I know you walked through a little bit of that earlier in the call when you said you thought short-term debt now of $650 million roughly. But if you can -- if I did a calculation, I'd get about a $700 million drain on working capital for 2005 according to your page 15 of your reconciliation. Can you walk us through what portion of that is related to utility and what portion is related to the trading and how that comes back to you over this year?

Faisel, I don't have that with me. I can give you some general guidance on that. Typically in the winter, the utilities account for say 100 or $150 million of the working capital. Of course that is all depending on weather and gas prices and the remainder of it has to do with gathering and processing and energy services. That is why, when I said at December 31 we had over $900 million of just gas in storage and liquids in storage, we are catching that at the peak time and that turns pretty quickly as we come through the winter even though January was a little warm. February here was quite cold for a period of time and we have got a lot of that coming back and as gas prices are coming down. So I am just guessing -- I'd say an educated guess, but probably 100 to $150 million of the ramp up in working capital is utility rated and the rest is the energy company.

Okay. And you said that cash comes back to you pretty quickly over the course of the year?

Yes. The natural gas liquids in storage are a pretty flat number and not much of that total. I think in the press release and I can't remember, John, we had 62 -- how much gas in storage?

I think it was right around 62.

Prices -- you can just say if that was even at $8, you can get close to $500 million and then with the hedging we do and things, you can add another $100 million of margins. So that -- again, we inject that in the summer; begin withdrawing it in November; withdraw a lot in December, January and February and of course hopefully get close to empty by April, but then we will start reinjecting in the spring.

Okay. On the energy services side, I missed this a little bit. You talked about how you had locked in some of your margin or transportation storage. Can you go over those numbers one more time, the percentages you locked in?

Sure. This is John. I'd be glad to. Let me just -- we're about 53% of the contracted storage capacity is locked into date for 2006 and 83% of the transport position.

And then is your target still 75% overall hedging of your transportation storage differentials for the year? Is that what you are still targeting? I think previously in your analyst presentations you talked about targeting that percentage of hedging for those differentials?

I apologize; I don't recall that. I think we have also benefited from having a portion of our storage unhedged. So I think we're fairly comfortable with this level at this particular point in time in the cycle.

Given the -- I think, John, you'll agree with this -- I think given how wide some of the basis spreads are, we have been pretty aggressive in locking down a fair amount of the transport side of the equation.

David, I agree. That is why you are at 83% and a lower number for the spreads and we have seen spreads continue to widen.

And were there any mark to market gains in the quarter that kind of either reverse or come back to you over time?

No, nothing of real significance, fairly nominal.

On the gas utility side, you talked about how some of the rate filings were in your guidance for this year. Are we assuming some of these rate increases come into earnings during the course of the year?

Yes, that would be correct.

Mike Heim, AG Edwards.

Just looking at the share count drop from the third quarter to the fourth quarter and the cash flow statements being maybe $40 million to repurchase shares. Can you remind us what is authorized in terms of a share repurchase and where you sit on that?

Mike, good morning. We had an authorized stock buyback plan of $7.5 million, which we completed -- shares I mean, which we completed and then it was either in January or December, I don't remember which, December, the Board authorized another plan of 7.5 million shares.

As you look at the share repurchase and in light of the Northern Borders, etc. and just your general cash position, I guess the question -- I don't expect you to get specific on thoughts on repurchasing, but do you tend to look more at it from a balance sheet point of view or more at watching the stock price and being opportunistic?

Mike, let me see if I can give you some sort of general guidance on this issue. It gets back to the transaction with Northern Border and TransCanada. As you know from that transaction, we get cash back to the ONEOK level and we have modeled it in our guidance to you all as a debt avoidance. We indicated on the call I believe that we have obviously alternatives and one of those alternatives is to repurchase shares. Importantly, none of that has been factored into our guidance. Clearly we have had a desire to grow the business also and we felt like the easiest and best way to model it for you all was to show it as debt avoidance.

Generally speaking we have not concluded directionally what we're going to do with that cash at this point. You know you have alternatives. Obviously you can leg into a repurchase. There are alternatives out there where you can go and repurchase shares in a single occurrence. But the direct answer to your question is we have not determined what we're going to do with that cash at this point in time.

That's helpful. That's my only question.

Sam Brothwell, Wachovia.

Just touching on Mike's question a little bit, you also alluded to the possibility that you might look at broadening your utility footprint a little bit and I just wondered first of all if you had discussed those alternatives with the rating agencies and secondly, if you were to consider building out the utility footprint, would you want to stay within the regulatory jurisdictions that you're operating in now or would you look at stepping out beyond that a little bit?

Let me answer the last part of that first. I think generally we are pretty comfortable. Obviously there is not much opportunity to grow within Oklahoma. We are the largest utility in Oklahoma. We are the largest in Kansas. We do have some opportunities I suspect maybe in Texas but generally speaking I would share with you that I think the opportunities are going to be external to our current operating areas as they present themselves.

And on the other issue -- I mean it seems to me that the idea of share repurchases would not sit very well with the rating agencies. Is that --?

I think that, as a general statement, is true. Obviously they are focused on the debt side of the equation. We have shared with them directionally the things we have going on and some of the things we are looking at and I think that is has been taken into account. I will ask Jim to elaborate.

Sam, I would just to that that we visited with the rating agencies before we announced the Northern Border transaction and if you take our cash flow surplus -- this year, it was $170 plus million. We projected it to be 180 next year and the past several years, it has been between $150 and $200 million. But if you take that and just project that through our debt to equity calculation, we get under 40% debt in a short period of time.

Now that said, important are coverage ratios and those get very strong also. So there is room in the current rating structure to reacquire stock if we so chose to do that. But at the same time, we will be mindful of our balance sheet.

If I could just shift gears to one other question. You know we're going to hear from Williams next week and one of the things I'm expecting them to talk about is this Overland Pass liquids pipeline that they've proposed. Is that a threat or an opportunity or an in between for you guys?

Let me make some general comments and then I may ask John if he has anything to add. As I understand directionally what they intend to do or what they have talked about doing is to officially bring NGL into the midcontinent, primarily at Conway and just thinking about this from a 10,000 foot level to the extent that there are NGLs that come into the midcontinent that would prefer to be at Mont Belvieu, we are strategically located as the connection between Conway and Mont Belvieu.

So generally speaking, to the extent that those NGLs hit the midcontinent and desire to move south, I think that is beneficial for us. John, do you have anything to add?

David, that is right on. The only other thing I would add to that is we are excited about it for the reasons you described. Plus when you look at our footprint where considerable growth in natural gas liquids might come from, it is going to come externally and this being able to participate in the Rockies would be a great thing for us.

(OPERATOR INSTRUCTIONS). Kathleen Vuchetich, WH Reaves.

I was wondering if Jim could tell me what the share count was at the end of the quarter and what you are assuming is the share count for the full year in your guidance.

Kathleen, at the end of the quarter -- I'm flipping the page to find --.

I can hear that.

The outstanding shares at the end of the quarter were 97.7 million. But again though the way we calculate earnings per share, you have to include the dilutive effect of those equity units. So I can just tell you the average for the fourth quarter, I don't have it, was 103.4 million shares. And that was what was in '05. And '06, I believe the number is 116 million shares is the average.

Okay. And that includes that net sale of 7.5 million that you bought out recently -- that you bought up recently. That is netted in the 116, right, Jim?

That's correct.

Okay. And one other question. You guys had a fairly warm --everybody had a fairly warm January and I wondered how the new rate design in Oklahoma worked out because you were expecting less weather impact with the new rate design. Did that occur? Were you satisfied with the rate design that you got?

Yes, we were pleased with the results and you also have to remember that we have weather normalization in Kansas and Oklahoma and because of our rate designs in Texas, we are insensitive to weather in something like 83% of our jurisdictions. So yes, we were pleased. The weather did have an impact but it was not significant to the point that we thought it affected us negatively.

Sam, correct me if I get off here but one of the benefits, Kathleen, of this two-tier structure wasn't the focus on dealing with the weather side of it so much, but it was to move more of the recovery return into the first rate block for a number of customers and to the extent you're able to do that, then you are less dependent upon the weather normalization impact.

I see.

And really gives the customers a choice as to how they want to set their payment. So it had two aspects for us. Irrespective of which way they chose, there was an increase to the first rate block.

I see. Will this flatten out the LDC earnings for the year as far as quarterly?

It depends upon how many customers move into which rate, but to the extent more move toward that higher first rate block, yes it would flatten out.

Thank you so much.

(OPERATOR INSTRUCTIONS). Alex [Meier], Zimmer Lucas Capital.

Good afternoon, gentleman. Congratulations on the quarter. I guess I am having a little trouble reconciling I guess shares. You talk about how you have about 97 million shares outstanding at the end of the fourth quarter and then you are adding about I think is it 16 million shares related to the equity units converting in February? Is that correct?

It's 19.5 million.

Oh, it's 19.5? Okay. So you are probably not including any stock buyback in that 116 number. That's correct, right?

That's correct.

And how much of the stock buyback program that you just announced -- I guess the $7.5 million that was authorized, how much of that have you used so far, any at all?

We haven't used any of those shares.

There are no further questions.

Thank you, all. This concludes are conference call. As a reminder, our quite period for the first quarter will start when we close our books in early 2006 and will extend until earnings are released. We will provide a reporting date and conference call information for the first quarter at a later date. I of course will be available throughout the day for follow-up questions and you can contact me at 918-588-7950. 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.