Exhibit 99.a
CONFERENCE CALL
NOVEMBER 2, 2001
CONFERENCE #1834711
Date of Transcription: November 2, 2001
OPERATOR: Good morning. My name is Luanne, and I will be your conference
facilitator today. At this time, I would like to welcome everyone to the ONEOK,
Incorporated third quarter 2001 earnings conference call. All lines have been
placed on mute to prevent any background noise. After the speaker's remarks,
there will be a question and answer period. If you would like to ask a question
during this time, simply press the number "1" on your telephone keypad, and
questions will be taken in the order they are received. If you would like to
withdraw your question, press the pound (#) key.
Thank you, Mr. Watson. You may begin your conference.
MR. WATSON: Good morning. I will remind you that any statements in this
conference call, which might include company expectations or predictions, should
be considered forward-looking statements, and, as such, are covered by the Safe
Harbor provision of the Securities Acts of 1933 and 1934. It is important to
note that actual results could differ materially from those projected in such
forward-looking statements. For 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 Exchange Commission.
And now David Kyle, ONEOK's Chairman and President and CEO, will moderate this
morning's conference call. David?
MR. KYLE: Thank you, Weldon, and good morning. Thanks for joining us today
for our third quarter conference call. We will start as usual this morning with
Jim Kneale reviewing our financial results and, once again, I've asked John
Gibson and Chris Skoog to join us this morning. John will review gathering,
processing, and transmission storage segments, and Chris will review the
marketing and trading segment. These segments most clearly represent the
diversified energy company that ONEOK has become.
Before I call on Jim, let me bring you up to date on actions taken this week
at the Oklahoma Corporation Commission. As most of you know, last winter, we,
like other LDCs across the nation, saw unprecedented and unanticipated spikes in
gas prices. We have recovered some of those gas costs, but still have about $40
million unrecovered. On Wednesday, the commission voted two to one to not allow
us to recover unrecovered costs as of December 1, 2001. A final order has not
been entered, but our attorneys tell us that we have a good case and should have
excellent ground for appeal to the Oklahoma Supreme Court.
At this point, I would like to call upon Jim Kneale to review the quarterly
numbers. Jim?
MR. KNEALE: Thank you, David. Yesterday we announced third quarter earnings
of $0.16 per share on net income of $18.8 million. For the same period last
year, earnings per share were reported at $0.01 on net income of $10.1 million.
I want to clarify the $0.01 number because it's difficult to compare that to
this year's $0.16 due to the additional dilution from the preferred shares in
last year's calculation. Without that dilution, last year's earnings per share
would calculate to $0.09, as compared to the $0.16 this quarter, which is how
those earnings impacted the fiscal year to date and annual calculations. For
the nine months, earnings per share were $0.90, compared to $0.85 last year.
Our results for the quarter were positively impacted by our ability to capture
higher margins and arbitrage volatility in our marketing and trading segment and
the increase in earnings in our production operation. Offsetting these
increases were a reduction in processing margins, a decline in storage revenues,
and increased interest costs.
For the quarter, EBITDA was $93.1 million, a $9.6 million increase over last
year. For the nine months, EBITDA was $386.8 million, compared to 351.5 last
year. Cash flow from operations, excluding changes in working capital,
increased $71 million to $277.6 million for the nine-month period. Cash flow,
including working capital changes, increased $214 million over the same period
last year.
Interest costs were $2.3 million and $25.9 million over last year for the
quarter and the nine months. The increase is attributable to barring for the
acquisitions last year and higher working capital. This higher working capital
resulted from larger receivable balances due to the high gas cost last winter,
the earlier
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injection of gas into storage this year, and unrecovered gas purchase costs.
Before John and Chris talk about their operations, I'm going to talk briefly
about distribution and production. Distribution had a $3 million smaller loss
in the third quarter, as compared to last year; and for the nine months, their
operating income is $6.4 million less than a year ago. Customer charge-offs
increased $6 million for this quarter and $18 million for the nine months over
last year. However, increased margins and a reduction in operating costs helped
us offset a portion of those increased bad debts.
In the production segment, although we had declines in volumes, operating
income increased $6.3 million and $31.7 million for the quarter and for the nine
months. Higher realized prices for natural gas, primarily as a result of hedges
in place, were responsible for those increases. For the last quarter of this
year, about 60% of our gas production is hedged with collars between $4.32 and
$4.82. For fiscal 2002, we have about 38% of our gas production hedged at an
average price of $3.26; and for 2003, about 21% is hedged at $3.61.
David, that completes my remarks.
MR. KYLE: Thanks, Jim. Now I would like to call on John Gibson. John?
MR. GIBSON: Thanks, David, and good morning. As stated in the press release,
in our gathering and processing segment operating income is lower relative to
last year for both the quarter and year to date, primarily due to a combination
of lower prices and processing spread. In our transportation and storage
segment, our third quarter operating income is down relative to last year, due
to lower throughput.
Reporting first on gathering and processing, operating income relative to the
third quarter of last year is down due to lower natural gas and natural gas
liquids prices. These lower prices affect us in two ways: First, since we sell
both natural gas and natural gas liquids into the market, lower prices reduce
our revenues. Secondly, these gas and NGL prices resulted in a smaller
processing spread over the same period last year. Our year-to-date earnings are
also less than last year due primarily to low processing spreads, especially in
the first two quarters of this year. Also, our operating cost and DD&A were
greater than 2000, primarily because we owned the assets a quarter longer during
the comparable time period.
In the first quarter, our processing spreads were negative but widened back in
the second quarter to a little over $1 (MMMbtu), and in the third quarter
averaged about $1.70 (MMMbtu), primarily as a result of falling natural gas
prices. Exposure to processing spread volatility is limited to the volume of
gas purchased under our keep/whole contracts. We currently have 21% of our
purchased gas under keep/whole contracts, down from 35% a year ago. Our fee-
based contracts represent 33%, and percent-of-proceeds contracts account for the
balance of 46%. These fee-based and percent-of-proceeds contracts are not
exposed to the NGL spread risk, but rather to the flat price risk of the two
commodities, natural gas and natural gas liquids. The advantage of fee-based
and percent-of-proceeds contracts is a reduction in volatility of gross margins.
We continue in our efforts to mitigate the spread risk by amending our
keep/whole contracts to include fee-based gatherings and/or conditioning fees,
while adding more volume under fee-based and percent-of-proceeds type contracts.
However, we do feel that, with proper conditioning language, some exposure to
keep/whole contracts is attractive, given the wide margins that they sometimes
can produce.
We still believe that these are extremely well-positioned gathering and
processing assets with substantial potential earnings uplift through both
continued asset consolidation, as well as growth through acquisitions. The
continued volatility of earnings in the gathering and processing segment may
cause others to seek opportunities to reduce their ownership in these type of
assets, and we view this as an opportunity to selectively grow our asset base.
Switching to our transportation and storage segment, we are slightly behind
last year's quarter because of lowered throughout, but ahead on a year-to-date
comparison due to the acquisition of the West Texas Pipeline asset. Our storage
levels are considerably higher relative to last year, consistent with the trend
experienced across the U.S. We have our 300-megawatt peaker that is
operational, but has not seen much service due to the lower spark spreads.
That concludes my remarks.
MR. KYLE: Thanks, John. Now let me call on Chris Skoog.
MR. SKOOG: Thank you, David, and good morning. During the third quarter,
OEMT continued to show growth over the comparable quarter in 2000. This
expansion came from our continued growth outside our core presence in both our
wholesale and retail businesses. We demonstrated again that we are able to
expand our focused area and lease both transport and storage capacity to capture
and capitalize on price volatility in the marketplace.
Our wholesale business strategy has not changed since we entered this business
six years ago,
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providing both physical and financial options to producers and end user that add
value to their programs, while creating the most value for ONEOK. We have always
focused on services that provide larger margins rather than the more typical
base load business. Our coverage in this business continues to expand our
presence in the 28 states we are currently in. We developed this business from
our core asset area, and now it extends from California to Ohio and from Texas
to Minnesota.
During the third quarter, OEMT continues to hold over one billion cubic feet
of firm transportation capacity, and we have expanded our storage presence by
3.5 billion cubic feet, pushing our firm storage capacity to over 73.5 in both
the field and behind city gates, plus additional managed storage capacity for
some of our customers. This leased capacity allowed us to exploit natural gas
volatility and resulting basis differentials in two ways: Our firm
transportation capacity allows us to exploit inter-region price differentials,
while our 73.5 billion cubic feet of market and supply zone storage allowed us
to capture the continuing price volatility around the country in the natural gas
markets. Our earnings reflect our ability to leverage the ever-changing weather
patterns and turn them into margins.
During the third quarter, as Jim mentioned, we expanded our overall operating
income for the quarter to $21.5 million, up from 11.1 million a year ago, a 94%
increase for the quarter. Our sales volume declined 2.5 billion cubic feet for
the quarter, as the focus shifted to injecting into storage, since we have grown
our storage capacity over 33% compared to last year. This focus was due to the
winter/summer spreads opening up to levels we have not seen for several years.
For the rest of 2001 and into the future, we expect several major
opportunities to impact us positively as we continue our aggressive growth
pattern that has developed. First, our long-term firm transportation capacity
will afford us the opportunity to capture the expanding inter and intra-region
pricing differentials that occur due to the delicate balance of supply and
demand in almost every region of our service area. When new gas production is
being developed, there is little localized demand or transportation capacity to
move it. But as traditional production is located, there is ample capacity, but
deliverability is declining, giving OEMT the opportunity to utilize our
specialized services. Our second opportunity, a storage strategy, had been
aligned with OEMT service area with the addition of the 3.5 billion cubic feet
of storage capacity instead of limiting our focus to the producing area. In
addition to this realignment, we negotiated several long-term storage agreements
through the year 2005. This capacity will benefit OEMT because the
winter/summer spreads have more than doubled on a go-forward basis.
As I talked about in the last conference call, our 40 to $0.50 storage spreads
have gone up past $0.60, well above our historical 15 to $0.20 margin. We have
been active in hedging these spreads into the out years to preserve our margins.
Our retail business is focused on small commercial industrial end users by
marketing energy behind our core corporate assets in our historical mid
continent Texas, Oklahoma, and Kansas territory. We are also expanding in this
area to Colorado, Missouri, Wyoming, and Nebraska as the bundling continues to
mature in those states.
Our power marketing results for the third quarter were slightly lower than
expectations, but we're extremely happy considering the cooler than normal
temperatures experienced in this part of the country. Our power plant is
targeted for satisfying peaking requirements rather than trade in the electric
market. We are expecting to continue to expand our power presence beyond the
Southwest power pool as we go forward. Do not expect a lot from this segment in
the fourth and first quarters as we continue to grow this electric area by
leveraging around our 300-megawatt peaker.
We already have the system infrastructures and the risk control measures in
place to manage our power business as we continue to expand and grow it with the
same success we experienced on the gas side. I want to thank you for your
interest in ONEOK, and I will now turn the call back over to David.
MR. KYLE: Thanks, Chris. And at this time, we will open the phone lines and
would be most pleased to take your questions.
OPERATOR: At this time I would like to remind everyone in order to ask a
question, please press the number "1" on your telephone keypad now.
Please hold for your first question.
MR. KYLE: I guess we answered all the questions.
OPERATOR: Your first question comes from Sven Del Pozzo of John S. Herold,
Inc.
MR. DEL POZZO: Hello. Good morning. This is Sven Del Pozzo with John S.
Herold, I'm looking at your historical margins in the marketing and trading
segment, and, looking at the large difference between 2000 and the first nine
months of this year, I was wondering if any of the EBITDA stream operating
income - actually operating income stream -- that has been generated, how much
of that might be related to the
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marking to market of gas contracts?
MR. KYLE: Chris, why don't you address that?
MR. SKOOG: Spen, for the quarter, the mark generated all the income, but
let me clarify how that occurs in our business.
MR. DEL POZZO: Okay.
MR. SKOOG: Because we use the storage very extensively, we had some hedges
out in July, August, and September spread through the winter. And we had, in
theory, we locked in $0.50 spreads. But the pricing on those contracts were,
let's just say, in the $5 range where we put them on last March. So we bought
NYMEX futures in the $5 range, and we sold January in the 5.50 range, locking in
a $0.50 spread. But for the quarter, when we roll off the positions in August
and September, when the NYMEX settle in the $2 range, we experienced a $3 loss
on those volumes. So physically we lost for the quarter, but we're still
sitting there on the January 5.50 sales, so the mark generates all that money.
So we have to experience the operating income now under mark to marketing
accounting or we won't experience the cash until January.
MR. DEL POZZO: Okay. Is there any sort of indication you might be able to
give me of the mark to market effect in the fourth quarter - or actually in the
first quarter, in January, first quarter 2002?
MR. SKOOG: Let me try it this way with you, too. Our big quarters for the
mark should be the second and third quarters because that's when we go out and
sign all these storage agreements, and you have to put those into the mark. Our
first quarter and fourth quarter results should be largely reduced to cash. So
second and third quarters are large mark quarters; first quarter and fourth
quarter are large cash quarters. Does that help you?
MR. DEL POZZO: Yes. And then in reference to the gathering and processing
segment, I was wondering about - I see a pretty big increase, mostly the
difference in your operating income between the first nine months of this year
and then the nine months of last year. It looks to be related to increase in
operating costs in the most recent nine-month period. I was wondering, is that
a correct assessment, and, if so, I was wondering why operating costs have been
on an increasing trend.
MR. KNEALE: Spen, the issue there is we did not own those assets for the
first four months of the year 2000. So on a comparable time period, you are
absent any particular - you know, that large amount of operating costs. So
that's really not a good comparison. But if you look on a quarter-to-quarter
basis, you'll see there actually are operating costs in 2001 versus 2000 are
down, and we've continued to remain focused on managing our operating costs.
MR. DEL POZZO: Okay. So most of the decrease in operating income then can be
tied back to the lower natural gas prices and NGL prices?
MR. KNEALE: That's correct.
MR. DEL POZZO: Okay. And, please, one more question. In the marketing and
trading segment - sorry to go back and forth, but it just came to mind. I saw
that through your asset acquisitions, your asset base increased quite
significantly. I was wondering what are those hard assets or are they hard
assets or does some of that asset base represent derivative contracts?
MR. KNEALE: Sven, I think if you look at that, you can say it's related to
those acquisitions, but it is the price risk management assets that are created
when we do mark to market accounting. It's not pipe in the ground or steel;
again, it's the mark to market assets that get recorded.
MR. DEL POZZO: So the bulk of those assets is what you call mark to market
assets then?
MR. KNEALE: Yes.
MR. DEL POZZO: Okay. But you do have storage assets in the marketing and
trading segment?
MR. KNEALE: Well, Spen, in the marketing and trading segment, they lease
storage from third parties. Our storage segment that John talked about does own
storage assets, and those assets are reflected in those numbers.
MR. DEL POZZO: All right. So for the marketing segment, the storage assets
are entirely leased? You don't own any of it?
MR. KNEALE: That's correct.
MR. DEL POZZO: All right. Thank you very much for your help.
OPERATOR: Again, I would like to remind everyone if you would like to ask a
question, please press the number "1" on your telephone keypad now.
Please hold for your next question.
Your next question comes from Michael Garvey of Angelo Gordon.
MR. GARVEY: Good morning. How are you? A couple of things. One, if you
could just go back
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through the hedging figures again, the volumes and prices going out.
MR. KNEALE: Mike, this is Jim. Good morning. Those numbers were really for
the fourth quarter of this year. 60% of our gas production is hedged with
collars - now, these are NYMEX prices - with collars between 4.32 and 4.82. For
2002, it's 38% of our estimated gas production that is hedged. It's a flat
price of $3.26. It's an average price. It's not collared. And then for 2003,
21% of our production is hedged at $3.61. Those are all NYMEX prices.
MR. GARVEY: And on the trading side, in your trading business could you give
us any idea of your exposure to Enron and how you're handling credit issues with
what's going on right now on that front?
MR. SKOOG: Mike, this is Chris. We monitor the credit exposure daily. We
have more corporate guarantees in place than we have exposure to them. At the
same point in time, we're more naturally a buyer from them than we are a seller
to them. So, in theory, we're holding their money as opposed to them holding
our money. But we are very comfortable with where they are positioned, and I
don't think I can give exact dollar amounts on the call here. I have those, but
- -
MR. GARVEY: You're trading with a lot of counter parties? I mean, they're
not disproportionately a large piece of it, are they?
MR. SKOOG: Right. If you want to look at our book overall, probably close to
80% of our sales are direct to end use customers. Local distribution companies
are actual end users. We do very little trading with other marketing and
trading organizations.
MR. GARVEY: Okay. Very good. Do you have any comment at this point on your
'02 outlook?
MR. KNEALE: Mike, we've given guidance before that we expect our current year
to be more in line with what we think our longer term outlook is for earnings
growth. And, on the average, we're expecting long-term earnings growth to
average 10% compound. So we see nothing at this point to change our view as to
that long-term average.
MR. GARVEY: Okay. Thank you very much.
MR. KNEALE: Thank you, Mike.
OPERATOR: Your next question comes from Tom Moore of Hallmark Capital
Management.
MR. HALLMARK: Good morning. Could you spend a second going through the
income tax line, what's going on there and what to expect in the future?
MR. KNEALE: Tom, if you look at the quarter income taxes, the effective rate
is fairly low, and I'll run through that with you. We filed our 2000 tax
returns on September 15th. That was the first year that we had the assets from
the Dynegy and Kinder Morgan acquisitions that impacted our effective tax rate.
A lot of those assets have accelerated depreciation and, because of all the
multi-state implications, when we filed our September 15th return we had a lot
of ups to our effective tax rate, which lowered it for this quarter because it
was a catch up. So, looking forward, the long-term implication is - and we're
trying to assess that for 2001 - our effective tax rate has decreased a little
bit, and that follows through. If you look at the cash flow statement where we
have such a significant amount of deferred taxes spent, these asset facts, we've
created an NOL for Oklahoma and federal tax purposes this year. So, again, it's
a lot of accelerated depreciation, a lot of multi-state implications; but the
bottom line was less current tax and a somewhat lower effective tax rate.
MR. HALLMARK: Okay. Thank you.
OPERATOR: There are no further questions at this time. I will now turn the
call back over to Mr. Watson for closing remarks.
MR. WATSON: This concludes ONEOK's third quarter conference call for 2001.
As a reminder, our quiet period for the year end will start when we close our
books, which will be sometime in early January and will extend until we release
our 2001 annual earnings. The date for that earnings release in our year-end
conference call will be announced later.
This is Weldon Watson, and I will be available for follow-up questions on
today's conference call. You can call me at 918-588-7158. On behalf of ONEOK,
thank you for joining us and good morning.
OPERATOR: Thank you for participating in today's conference call. This call
will be available for replay beginning at 12:30 p.m. Eastern/Standard time today
through 11:59 p.m. Eastern/Standard time on November 7th. The conference ID
number for the replay is 1834711. Again, that number is 1834711. The number to
dial for the replay is 1-800-642-1687 or 706-645-9291.
[TELECONFERENCE CONCLUDED]
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