EQT Corp (EQT) 2001 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Equitable Resources (Company: Equitable Resources Inc.; Ticker: EQT; URL: http://www.eqt.com/) year-end 2001 earnings conference call.

At this time, all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host for today's conference, Phil Conti.

Sir, you may begin.

Thanks,

.

Good morning, everyone, and thank you for participating in Equitable's year-end 2001 earnings conference call.

With me today, as always, are Murry Gerber, Chairman, President and Chief Executive Office, and Dave Porges, Executive Vice President and Chief Financial Officer.

In just a moment, Murry will make some brief comments regarding Equitable's progress to date. Dave will then review the 2001 financial results that were released this morning as well as address some topics of current interest. Following Dave's remarks, we'll open the phone lines up for questions.

But first, I'd like again to remind you that today's call may contain forward-looking statements related to such matters as anticipated diluted earnings per share, earnings sensitivity to gas prices and weather, goodwill amortization,

the effect of company actions on earnings volatility, including the effect of hedge positions and monetizations and other financial and operational matters.

It should be noted that a variety of factors could cause the company's actual results to differ materially from the anticipated results or other expectations expressed in these forward-looking statements.

These factors are listed in today's earnings release, the MB&A section of the company's Form 10-K and third quarter 10-Q, as well as on our Web site.

I'd now like to turn the call over to Murry Gerber.

Phil, thank you, and welcome, everyone.

We are pleased with the financial performance of the company during 2001.

Earnings per share set a new record, growth and EPS was competitively superior and return on capital, our key measure of management effectiveness, comfortably exceeded our benchmark of 10 percent.

In our press release of January 3, we guided you to an earnings per share range for 2002 of $2.35 to $2.40 per share. This range is consistent with an average NYMEX gas price for the year of $2.65 and accounts for the natural gas price hedges we have previously put in place.

Recall our earnings sensitivity to natural gas price for 2002 is one cent per share change in earnings for every dime change in the NYMEX gas price.

In the past and in the context of a normal range in temperature, we have not needed to highlight the issue of weather sensitivity. However, with the heating season of 2001-2002, we have experienced an extraordinary departure from the norm.

Therefore, we included in our press release a sensitivity formula to illustrate how Equitable's earnings per share change in relation to weather during the winter months.

Looking beyond 2002, we have no reason to change our fundamental view of the financial prospects for the company. Equitable will continue to focus on obtaining both a competitively superior return on total capital and a totally superior long-term growth rate targeting low double digits.

I'd like to draw your attention to a couple of other matters, the first one in respect to price cycles. The very tumultuous environment of 2001 has reinforced for us the strategic imperative for companies like ours to be prepared to effectively manage the cycles in our business.

I have my own opinions about why the cycles are occurring. Incidentally, they are occurring more frequently and the amplitude of the changes in price is spikier, but that doesn't really matter, lamenting the presence of cycles or ignoring them is not a proactive response and not what we intend to do.

Our actions in the past have demonstrated our attention to the issue of managing through cycles. We purchased Appalachian

in 1999 during a low point in the last price cycle.

We took the opportunity to monetize a portion of that supply and hedged a great deal more when gas prices were above $4 per

.

These actions have dramatically moderated our earnings sensitivity to price and we believe lowered our cost of capital by reducing the overall business risk of the company. In this sense, I think we have positioned Equitable uniquely among our peers.

Conversely, we did not purchase any assets in the heady priced environment of 2001. Instead, we focused on internal improvement of core businesses, deployment of new technology and management development.

We wish our businesses to be run such that we can be reasonably assured of their returning at least the cost of capital during industry downturns. You will recall, for example, that we stress test our capital project profitability to a low line price expectation of $2.20 per

in natural gas price.

We have also decided this is not the time to become more aggressive with monetizations of our Appalachian supply business. Market conditions are just not appropriate at this time to execute such transactions. If the market conditions change, we will reconsider that decision.

We will continue to act as if relatively little is stable about the environment for our business. This background paranoia, we hope, will keep us on our toes. We'll discuss more about the issue of cyclicity at our analyst conference later this month in New York.

The last matter I'd like to talk about is earnings quality. And in the context of the events surrounding Enron (Company: Enron Corporation; Ticker: ENE; URL: http://.www.enron.com/), I did want to make a plug for the quality of the earnings reported at Equitable.

Among other things, there is considerable discussion these days concerning the rather widespread use of the exclusion ladened pro forma earnings.

Equitable has resisted the temptation to report earnings this way. We have adhered to the general philosophy that when necessary we wish to take our medicine along the way rather than storing the pain up to be dumped into the marketplace all at one time.

Our approach seems to be coming into fashion at this point. And while we tend to be contrariness in any number of other ways, we will not be changing our approach to reporting earnings going forward.

And with that, I'd like to turn the discussion over to Dave Porges, Executive VP and Chief Financial Officer.

Thank you, Murry.

Equitable Resources today announced record core earnings per diluted share or EPS, excluding earnings from Westport Resources (Company: Westport Resources Corporation; Ticker: WRC; URL: N/A), of $2.12 for 2001 versus prior guidance for core 2001 earnings.

This reflects a recent decision to record a seven cent per share charge related to a reassessment of doubtful accounts that the company undertook at the end of 2001 pertaining to collection of equitable gas company receivables dating to last winter. I will discuss that issue in more depth in a moment.

The 2001 results represents a 45 percent improvement compared to 2000 EPS of $1.46 with that figure excluding two fourth quarter 2000 special items and Westport and Gulf of Mexico earnings.

Reported fourth quarter 2000 earnings included a one-time expense associated with a Kentucky

labor settlement and a gain from the sale of Westport stock that together had a net negative effect of 12 cents on full-year 2000 EPS.

Earnings from the Gulf of Mexico unit and from Westport totaled 22 cents per share in 2000. Earnings from Westport totaled 18 cents per share in 2001. Please recall that Equitable merged its Gulf of Mexico oil and

unit with Westport in April 2000

so this is the last time you should be hearing about a comparison that involves that Gulf of Mexico unit.

In the fourth quarter of 2001, the company reported core EPS of 39 cents, compared to fourth quarter 2000 EPS of 45 cents, excluding the special items and Westport earnings in 2000 as previously mentioned.

The decrease in earnings in the fourth quarter compared to the 2000 fourth quarter was due to lower gas prices, unusually warm weather and the seven cent per share charge at Equitable Utilities that I mentioned a moment ago.

Rather than sticking with our typical practice of discussing business unit by business unit results, I'm going to devote the rest of this portion of the call to a variety of topical subjects, concentrating first on those items that impacted 2001 results and then on items of broader interest given the current business environment.

First: weather. We'll start off with an old reliable in weather. Heating degree days in the fourth quarter 2001 totaled 1,602, that's 1 6 0 2, which was 31 percent fewer or warmer than in the prior year and 24 percent warmer than the 30-year normal.

Heating degree days for the year totaled 5,059 -- 5 0 5 0 -- or 10 percent warmer than 2000 and 15 percent warmer than normal. Roughly, this means that weather reduced net income in the fourth quarter by $6.1 million versus the prior year, and by $4.4 million versus normal.

For the full year, weather reduced net income by about $4.7 million versus 2000; and by about $7.5 million versus normal.

Next topic, natural gas prices. Net of hedges, our average well-head price for equity sales volumes during 2001, was $3.67 per MCFE, versus the prior year average of 306 per MCFE.

For monetized sales volumes, meaning prepaid forwards, average wellhead prices was $3.81 per MCFE, versus the prior year average $2.04 per MCFE.

The weighted average of those sales categories yielded a total wellhead price average of $3.72 percent MCFE in 2001, and $2.91 per MCFE in 2000. This 81 cent per MCFE improvement compares to a 38 cents per MMBTU (PH) improvement in NYMEX, from 2000 to 2001.

So, with a sharp degradation in natural gas prices in the latter part of the year, the beneficial effects of the hedging program became more apparent.

I'll speak more about 2002 hedging in a moment.

Doubtful accounts: Largely as a result of the high natural gas prices and cold wither that existed during the winter of 2000-2001, Equitable Utilities experienced worse-than-normal payment problems. As a means of dealing with this issue,

while be sensitive to the economic realities of the affected customers, we have been discussing a mutually satisfactory resolution to this issue with the relevant regulatory authorities.

Based on those discussions, we made a recent decision to reassess the expected amount and timing of payments related to those receivables. The effect of this reassessment creates enough uncertainty in a full recovery, that we decided that a reserve of approximately $7 million, or seven cents per share, is prudent.

This is amount is recorded as an additional expense at Equitable Utilities in the fourth quarter of 2001.

Share repurchases: During the fourth quarter of 2001, Equitable repurchased 250,000 shares of common stock. This brought our total stock repurchases for 2001 to just fewer than 1.8 million shares.

In addition, for the first five weeks of 2002 -- that would really be from January first of this year, through yesterday, we have repurchased an additional 490,000 shares.

Since we began repurchasing stock in late 1998, we have now bought back 12.8 million shares, leaving a little less than six million shares remaining under our most recent stock repurchase authorization.

As has been discussed previously, if we were to approach that number, we would expect to again ask our board of directors for additional authority.

Hedging: For 2002, Equitable has hedged 33 BCF, at an average of $4.15 per MCF. That amount includes primarily swaps. In addition, Equitable's prepaid forward transactions involve about 14 BCF of sales, at an average price of about $4.00 per MCF that will appear on the 2002 income statement.

For 2003, the equivalent numbers 24 BTF of swaps and fixed-price sales, at an average price of $4.45 per MCF, and 14 BCF of forward sales, at an average of about $4 per MCF.

For each of the next two years, 2004 and 2005, the equivalent numbers are about 26 BCF of swaps and fixed price sales at an average price of about $4.50 per MCF, and five BCF of forward sales at a price of about $4.00 per MCF.

Again, each of those figures apply to both of those two years, individually. For the forward sales drops to zero from 2006 onward, though the volume swaps again rises to about 30 BCF in each of 2006 through 2008, all at an average of just over $4 per MCF.

We will provide these numbers in tabular form in the 10-K.

Other comprehensive income: On a related topic, these hedges are deeply in the money, due to the sharp decline in natural gas prices.

The extent of this position is reflected on the balance sheet as other comprehensive income, or OCI. For 12/31/2001 this amount will be roughly $102 million.

This amount represents the difference between the actual prices of executed hedges, and the current market value for the relevant time periods, from 2002 through 2008.

The OCI figure is tax-affected, so it represents an in-the-money position, and therefore, potential counterparty exposure of over $150 million. These hedges are all with double A minus, or better banks, but we are still investigating various alternatives, to mitigate some or all of this credit exposure.

Monetizations: As discussed at the time of the transactions and periodically since then, we have two types of monetizations, and two transactions of each variety.

At the end of 2000, we entered into two prepaid-forwards, each with proceeds of just over $100 million. One of these transaction has a three-year term, and the other is a five-year term, in each case, commencing on January one of 2001.

Remaining volumes were discussed a moment ago. The proceeds were recorded on the balance sheet, and amortized with deliveries, while the income statement reflects these as it was current sales, as the volumes are actually delivered.

Unlike hedges, there is no counterparty credit exposure, because payment has already been received, and, as an aside, the OCI figure mentioned earlier does not reflect that the fact that current market prices are much lower than the prices that existed when we entered into those transactions.

The other type of monetization entered into during 2000 was the sale of oil and gas property interests in two separate transactions. We still operate those properties., pursuant to an arms-length operating agreement with the investors.

These investors are typically insurance companies and banks. While Equitable operates the properties, we do not bear technical -- that is to say, volume risk -- and we do not bear operating expense risk beyond that which is typical for an operating agreement.

These transactions do -- these transaction do contain a right, under certain circumstances, for Equitable to increase its very small equity ownership in these properties. These circumstances could only occur once the equity owners achieve their return, and any debt they have taken on is retired by them.

The debt the investors incurred to acquire the property interests has no recourse to Equitable, or to other Equitable assets, and separately, no Equitable employees have any role whatsoever with investors, nor are any equitable employees in the investor groups.

The larger of these two transactions was reviewed fully with the two largest credit rating agencies in December, 2000 and they both issued press releases at that time regarding their ratings.

Now, I'd like to review our thinking in approaching both hedging and monetizations. First, there's a significant quantity of natural gas price exposure associated with our assets, and the risk of this price exposure dwarfs all other risks in our production segments.

However, historically and over long periods of time, commodity price exposures do not generate a return commensurate with the risks they involve. Thus, the decision to hedge this risk. And, as you have hear, we have significant volumes of hedges in place.

Still, straight hedges result in an increased counterparty risk, as we have discussed, and this credit risk becomes, in turn, the largest risk in our production business.

As one means of mitigating that risk, we enter into transactions in which we are prepaid for these revenues. Even these transactions, however, present creditors with some risk that we will restructure or otherwise unwind those transactions, as we could with straight swaps, as well.

The sales of profit interests remove that right, and therefore, protect creditors from such

risk.

Our shareholders benefit from the improved borrowing capacity that this risk mitigation facilitates. In the current environment of low gas prices and enhanced awareness of counter-party risks, we continue to review the proper mix of straight hedges,

prepayments, and sales of property interests, to provide our shareholders the most appropriate risk/return tradeoffs.

Goodwill: Equitable will adopt FAS 142, a new accounting standard for treatment of goodwill and other intangible assets.

As a result, the company will assess the relevant assets,

, in our case, early this year, in order to determine whether a write-down is required under this new accounting standard.

If such a write-down were to be required, the result would be to record a one-time non-cash charge in the first or second quarter of 2002.

Consistent with the mandated approach for the adoption of FAS 142, such an amount would be depicted on the income statement as cumulative effects of a change in accounting principle.

So, there would be an earnings-per-share number of before cumulative effect, and an earnings-per-share number after cumulative effect.

Another result of FAS 142, is Equitable's ongoing annual amortization expense will be cut by approximately $3.7 million. Again, though all public companies must adopt the new standard, for Equitable, FAS 142 is currently relevant only for our

unit.

Auditors: The topic of auditors has been much in the news lately, and we have seldom spelled out how we approach this topic, so we shall now. Our Auditor is Ernst and Young, and they have been our auditor since 1950.

In 1999, we decided to outsource our internal audit function, and the company's audit committee determined that it was inappropriate to invite our auditor, Ernst and Young, to be considered for that role.

After a competitive process, we selected KPMG to perform internal audit functions, and that has worked well. The next year, we decided to outsource our tax compliance function -- that is, the mechanical filing of the several hundred state and federal income tax returns that we must file.

In that instance, we determined that there was no conflict for the auditor, and did select Ernst and Young, again, after a competitive process was run.

E&Y has also provided Equitable with audit services for various benefit plans and pension plans and subsidiaries. In many companies, that service is part of the standard audit fee, and we intend to follow that norm in the future

However, in last year's proxy, those amounts were reflected in other fees, with no reference to audit.

Numerically, in 2000, we paid E&Y $550,000 for the external audit, $220,000 for other entity audits, $270,000 for tax compliance, $450,000 for a tax audit defense, $270,000 for tax planning ideas, $710,000 for assistance in implementing FAS 133, and $240,000 for assorted other accounting matters.

The total paid to E&Y in 2000, as reflected in last year's proxy, was about $2.7 million.

In 2001, as will be reflected in our upcoming proxy, we paid E&Y a total of just under $2 million, with the category breakouts being very similar to the 2000 numbers, but without the FAS 133 assistance.

We do not believe we have any of the conflict issues that have been discussed in the public, and would not be affected by the recent decisions by certain large accounting firms, including E&Y, to alter their service offerings to audit clients, as we do not avail ourselves of the affected services from E&Y anyway.

Specifically, we are not using E&Y for IT consulting, or, as mentioned before, for internal audit work. As you know, E&Y sold its consulting business a couple years ago. Also, we do not have any former E&Y partners in our company.

Approximately six of our employees worked for E&Y at some point in their lives, and two of those -- with two of those having spent time on the Equitable account.

No current members of our headquarters accounting function have every worked for E&Y. We will obviously continue to monitor the current deliberations regarding changes in companies' relationships with their audit firms.

Now, my final topic is taxes. Another issue that has arisen recently has been whether corporations are actually paying taxes. Sadly, we are.

Cash taxes for 2001 will total just over $24 million. This is much higher than cash taxes paid for 2000 of just under $3 million, with that 2000 figure being assisted by NOLs acquired as part of our acquisition of natural gas assets from standard

.

For reference, in 1999 we paid cash taxes of also over $24 million. As a reminder, we are an alternative minimum tax payer, and expect to remain in AMT status until at least 2003, absent any transactions that generate a material taxable gain.

We recognize that we have run through many issues, only a couple of which were related to 2001 earnings, but we did not want to wait until next month's filing of our 10-K and proxy, to address topics that we thought may be -- may have been of interest, given the current environment.

We will, of course, welcome any questions, and requests for specific types of disclosures for upcoming filings.

Phil, back to you

And that concludes the comments portion of the call.

, we'd now like to open the call up for questions.

Thank you, Mr. Conti. At this time, the floor is now open for questions. If you have a question or a comment, please press the number one, followed by four, on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they are received. Once again, if you do have a question or a comment, please press the number one, followed by four, on your touchtone phone. Please hold for our first question.

Our first question is coming from Mike Heim, of AG Edwards (Company: A.G. Edwards Inc.; Ticker: AGE; URL: http://www.agedwards.com/)

Thanks, a couple things. Looking for an update on giving a PBR; looking for an update on your strategy with Westport; and finally, any guidance you can give on production numbers for Equity Gas for next year?

Mike, this is Murry. The issue on PBR is this, we have had a positive ruling from the Public Utility Commission in Pennsylvania, to allow us to manage transportation costs of natural gas, and that's a very, very positive development.

Earlier in the year, I had mentioned that I'd hoped that we would make some progress on PBR in '01, and I was very, very pleased to get actually a ruling. And, this is the first phase of what we view to be a multiple-phase PBR process, going forward.

And, I think we'll talk more about that at the analysts' conference, but we've really had a good run on that.

Secondly, with respect to Westport, as you all know, Westport is not a core asset of the company. Our interest in the company has been going down over time.

It was reduced dramatically, recently, with Westport's merger with Belco Oil & Gas (Company: Belco Oil & Gas Corporation; Ticker: BOG; URL: http://www.belcooil-gas.com/), and suffice to say, Mike, that we are looking for more opportunities with them to further reduce our interest, to the point where we can achieve some liquidity.

And, as we've said in previous calls, we're not really -- we're in a position where we really need to have -- have a bigger company with more liquidity, so that we can, as we choose, exit that investment without impacting the shareholders there, including ourselves.

The last matter, on production, the capital budget for production this year, includes about the same amount of money for drilling as we had last year.

We are increasing, though, the capital expenditures for infrastructure. And, what I mean by that, is pipeline replacement, measurement, and management, and automation. So, we're trying to work more on the gathering system.

And, we're really, you know, we had hoped -- well, earlier, we had thought that we would be substantially increasing drilling this year, but we just don't think the environment is right to be plowing a lot more capital into the business.

We do need to continue to fix our gathering system, and fix our -- you know, and continue to work on technology and measurement, there, but we don't think it's right to put the pedal to the metal on drilling. Our drilling is expected, however, to at least maintain, and probably grow production, over the next couple of years.

The way that you talk about Westport, then, do you see them as being a very interested acquirer of property, as a lot of this stuff comes on the market?

There seems to be a lot more, Mike, a lot more properties, at this point. I will tell that -- this is just my opinion; you can take it or leave it. I think that we -- whereas, we have seen a reduction in expectation on the part of sellers, an little bit.

I don't think the full magnitude of this price reduction has -- is playing out, yet, in the expectations of sellers.

And so, I'm thinking that it's going to -- you know, that we're going to need to see these prices for a little longer, before those expectations go down. The general answer is, yes, they are interested in acquiring properties, or merging,

but, you know, or creating big -- doing big deals, little deals and big deals. But, the price -- the timing may not be just yet right.

OK, thanks, Murry.

Sure. Thanks, Mike.

Thank you. Our next question is coming from Carol Coale of Prudential (Company: Prudential PLC; Ticker: PUK; URL: http://www.prudential.co.uk/).

Hi. Good morning, gentlemen. I have several questions. I'll list them in order and then let you answer them, because they're for different people.

First of all, I'm not sure that I caught it, but, Dave, did you quantify what your goodwill charge was estimated to be in the first quarter of '02? That was question one.

Second, also for Dave, I'm not sure that I completely caught the logic of selling properties as a way of mitigating prepaid risk? I was wondering if you could elaborate on that a little bit more.

And then, third, must a macro question for Murry, we're seeing preliminary evidence that gas production overall in the lower 48 was down, we've seen, as much as four percent.

I realize you all are up in the Appalachia, but through your ownership of Westport equity interests, I was wondering if you could comment just on the macro environment, if you can confirm that supplies to look like they were down, and what you're internally thinking the trend is going to be in '02?

So, those three questions, please.

I'm sorry, Dave. Carol, let me handle that one first, and then you can get to Dave on the other two. I -- I don't see, in this area, very much indication of production decline.

The drilling seems to still be very heavy, up here, so, if there -- and I -- frankly, I just don't really know much about the other areas, and I'm just not an expert on Rockies, and all that.

But, in this area here, in Appalachia, just for information, there doesn't seem to be any particular downward production. And, incidentally, the drilling seems to be pretty right. At this point in time, all the plans are for a lot of drilling in 02.

OK.

OK. David.

The first question you asked was about goodwill. We haven't -- we have not completed the assessment of values that are necessary under the new standard to determine whether there is a writedown for

, and what the extent of that writedown is.

And, we will certainly advice investors of what that is, as it -- as we complete the assessment. So, that still should be early this year, but it has not been completed yet. So, we'll -- we'll have to wait on that one for another time.

And, the other question that you asked was about the logic behind the sale of oil and gas interests, vis-a-vis risk mitigation. And, one thing I didn't mention in the comments, and maybe this closes the loop some, is that we tend to see that business in Applachia, economically,

as being as much an operating and gathering business as a production business. And, there fore, we don't really like being weighed down by too much of the risks that are associated only with crude developed producing reserves.

So, of course, selling -- any time you sell properties, you shed the price risk, but what we retain is an operating agreement, and separately, just because of our extensive gathering operations, we retain gathering fees.

So, we continue to handle those volumes and get paid fees for those volumes, and retain those volumes, but we shed the -- we shed the price exposure associated with it.

And, the way I was distinguishing those versus prepaid forwards -- and this has been brought up to our attention by rating agencies, is the -- a concern with hedges and prepaid forwards, is it is relatively easy to restructure those types of agreements, and in essence remove the -- the hedges.

We've even gotten folks asking us questions about whether we want to do that, and I can assure you there's plenty of banks that also ask us the same question. That occasionally can be interesting economically, but it doesn't provide a lot of comfort to rating agencies about our permanent shedding of those risks.

When we sell -- when we sold the oil and gas properties, even -- the oil and gas interests -- even though we've retained operating agreements, and gathering agreements -- and, gathering fees, we don't have control, or even influence, over those entities, and cannot cause them to be unwound.

So, that price mitigation is locked in.

OK.

I'm hoping that answers the -- I'm happy to go further down that line at the analysts' conference, so we're -- and in other venues.

Yes, let's do that. It's still a little complex. I appreciate your explanation. Thank you.

Thank you. Our next question is coming from Dave Maccarrone of Goldman Sachs (Company: The Goldman Sachs Group Inc.; Ticker: GS; URL: http://www.gs.com/).

Thank you. I was hoping you could discuss for us -- you talk about maximizing turns on capital, and lowering cost of capital. I was wondering if you could talk about optimizing the cost of capital, with respect to your balance sheet being underlevered.

And, maybe this is contrarian -- and you guys are contrarians in many ways, but, you know, what is the right credit rating for Equitable, given it's mix of assets?

Is it A-minus, optimal? Is it trible-B-plus optimal? And, can you put this all in the context of a buy-back, your buy-back program, and also, how much of it is price sensitive?

You clearly picked up the pace of the buy-backs as the stock got a little bit weaker. And, previously, you talked about it more as a program -- as not a program, but as a way of life. And, I was wondering if you can amplify on that a little bit?

David, those are a lot of good questions. I'll have Dave just speak about the buy-back program in just a second, but as a general matter, we have continued to look at what the optimum capital structure is, and what the optimum credit rating is.

And we continue to look at that. And, I think it's fair to say that we're looking at it more and more, now. I just don't have any conclusions from that work to share with you guys at this point in time. So -- and, I just don't think it's right for me to do it.

You are right to -- to observe that the stock buy-back program has picked up a little bit, and maybe Dave can talk just a little bit about the stock buy-back program.

Sure, though again, its really just a philosophical issue that ties back to Murry's comments on simplicity in our sector. It does appear that for whatever reason, when the environment looks dour in the energy sector,

there is what historically one would tend to look back on, and think was an overreaction on the downside in commodity prices, and in equity prices.

When that happens on the equity side, we think that we owe it to our shareholders to, let's say, utilize a longer-term view. And, that can result in increased stock repurchases.

We think that's just consistent with our general view of the cycles in the sector. And, actually, we'd like the investor community to be comfortable that we are sufficiently aware of the simplicity of our industry,

that they can feel comfortable sticking with us through the ups and down cycles, because we will adjust our spending. We will adjust our hedging we will adjust our stock repurchases, depending on where we are in those cycles.

I think it's fair to say, David, that this is a topic that we would like to highlight at our New York analysts' meeting at the end of the month, the discussion cycles and our responses, because I think it's an absolutely critical issue.

I know, from my experience, I find far too many people in our industry -- and, without prejudice to them, that lament the cycles, and, you know, wish they would go away.

I think, from Dave and my standpoint, we're trying to say that -- that although it may be difficult, we're embracing the cycles, and are trying to do things that are positive for the shareholders, in the context of managing through them.

And so, but look, that's a complex topic, and I'd like to spend some time in New York on that. I know you'll be there.

OK, thank you.

Thank you. Our next question is coming from Jason

-- I'm sorry, Jason Selch, of Wanger Asset Management.

Oh, yes, first of all, I'd like to say that I found the additional disclosures about counterparty risk, and account relationships, to be really very interesting, and value-added.

I was wondering, on this negotiation that you had with the regulator, regarding the seven cent provision. Are you going to get anything for that?

It seems a little bit strange that your earnings were reduced in a warm fall by eight cents, by weather, and you made extra money last year, because of cold weather, but now you have to give it back -- so, it doesn't sound like there's equitable risk sharing, as far as, you don't benefit if it's cold, and you lose when it's warm.

Well, we'd be happy, Jason, to have you call the

on our behalf. So, actually, to give a little bit more information on the -- on that charge, the total amount involved, from -- and it's not entirely that winter.

Frankly, balances had been built up with some of those customers, and it kind of brought it to a head in 2000-2001 winter, was $23 million, was the total amount of dollars involved.

Part of the judgement that we made -- and, really, frankly, was just after the close of -- just after the end of 2001, so in early January, was that we should -- we should reach a resolution on how we're going to go about collecting that money from those customers,

and to what extent -- as you're aware, there's sensitivities on -- in regulated businesses, about having collection efforts that are overly aggressive. So, we need to do that in conjunction with the regulatory authorities.

In conjunction with that, we made the determination that it would be prudent to assume that some of that money -- even in the presence of agreements to collect that money, that it would be prudent to assume that some of it won't get collected, anyway.

And, that's what the seven cent, or $7 million charge relates to, is our assumption that we won't get it.

It would not be fair to place that at the -- at the regulator's desk and say that they won't let us recover it. It's just -- because that's not really quite accurate. It's -- it's really more our assessment of our ability to recover it over time, even in the presence of agreements.

Jason, there's one other thing. The point you mentioned about, you know, sort of the lose-lose issue; it's fair to say, that whereas we benefit some -- although we've mitigated that risk -- we benefit some from prices going up. Clearly, we still have exposure to prices going up.

The fact of the matter is, is that utility doesn't benefit that much for prices going up. We have this negative that comes from people not paying. And, as David said, you know, in any other business, you just shut people off, you know, and that sort of thing -- stop it, you can't do it.

There's a social issue, here, and so, as David mentioned, there have to be other means to be able to recover it. But you're right -- it is a -- it is a little bit of downer, in a higher price environment. You know, net-net, we're happy when prices are a little higher.

OK, well I was just thinking you can use this as a means of negotiating something, where your utility earnings can be less weather-sensitive.

And, we have moved in that direction. And, we'll look to move more in that direction. But actually, in Pennsylvania, they've been reasonably receptive to allowing firms more in that direction.

And when you look at it, with -- these are pretty extreme -- these have been pretty extreme weather swings. And, in the overall scheme of things, I -- you know, if you look at the earnings moves overall, given that extremely high-priced cold first quarter,

and then versus what's going on in the 2001-2002 timeframe, these are -- this is almost like peak and trough.

Yes, it is amazing. OK. In the very beginning, you were talking about the cyclical timing of the industry, and I thought that that was going to be a preamble to your saying that since this isn't a good time for monetizations, it may be a good time for acquisitions.

And, I was wondering what your capacity is, given the amount of stock that you have bought back, and whether the opportunities are in the area of oil and gas reserves, LDCs, pipelines, power, or

.

Well, yes, what I said was, Jason. Yes, you picked that up. I said '01 seemed like a bad time, for the obvious reasons. '02 is starting out seeming -- it should be better, but we just haven't seen it get to the points where we're comfortable yet.

And, yes, you know, bolting on things to our Appalachian -- bolting on acquisitions to our Appalachian supply business is certainly in bounds; we'd like to do that. But, again, only at the right price.

And, as we've said many times, you know, the LDCs around this area are very fragmented, and should come together. But, again, only at the right price.

And, I think, in any event, we feel comfortable in our ability to raise money, if such an opportunity arises.

You are aware that we have prided ourselves in having earnings growth and maintaining a return. And -- and conversely, we don't want to see the capacity -- or, our capacity to borrow, or money that we have, burn a hole in our pocket. And, we're not -- we're not going to do that.

We are looking for deals that make good sense, and we understand the implications of doing deals that don't make sense, particularly for a company our size. So I hope that answers -- I -- the bottom line is timing -- it seems like it should be good, but it's just not that good yet. And, just stay tuned.

OK, well, I think Equitable seems to be one of the few companies that does have the capacity to make acquisitions, this year. So, if the market is good, I trust you'll take advantage of it.

We will definitely try.

Thanks a lot.

Thank you. We have a -- our next question is coming from Jay Yannello, of UBS Warburg.

This is Ron Barrone. I'm sitting in with Jay. And, just two quick questions, Murry. One's a micro, one's a macro. Could you bring us up to date on the automatic meter reading initiative, and also, could you give us an idea of the regulated acquisition environment, for regulated entities?

OK, I'll hit -- I'll hit the AMR issue, first. We have -- and I mentioned this to you -- to you guys, before, we are strategically moving in the direction of AMR, and so -- and I'm -- got the guys working on a lot of different options.

Suffice to say, that the ones that we have looked at so far, for various reasons haven't met all the needs that we have. They've been a little -- and they've been a little more expensive than we wanted them to.

And, we're looking now -- and we'll discuss this in -- in February, so we don't have to belabor it too much, here. We're looking at probably a phasing of AMR, and maybe not an immediate approach to get all houses, all our 280,000 customers hooked up.

We're looking at a phasing that will allow us, for example, understand the gas supply better.

So, maybe, you know, thousands of meters, but not hundreds of thousands of meters, to start out with, to test the technology, and then be able to manage our gas supply better, and manage our capital expenditures better, our pipe replacement programs better, and try to sort of work our way into this, this thing.

Because, you know, we don't want to -- we just don't want to overpay for the benefits that we're going to achieve.

There is now doubt that three -- five -- six years from now, that all -- that utilities will be automatically metered. It's just a matter of doing the most cost-effective thing. And, again, I'll talk more about that in February.

As far as the LDCs, I -- Ron, you probably know more than I do. I think, and my view is, that consolidation needs to occur in this LDC segment, and it particularly needs to occur up in this Northeast area.

I think everybody's leaving money on the table, here, including the customers. So, you know, I'm a proponent of that

I just haven't seen the right prices or the right will, frankly, in a lot of -- in a lot of circles, to pull that sort of thing off. And, you know, something's going to have to change, and it just -- it just doesn't seem like our industry is -- is hip to what they need to do, here.

I just don't know how to put it any other way. It just doesn't seem like there's a philosophy, that, forget, well banking had, when it started to consolidate.

It just doesn't seem to have that flavor here, and so it's going to have to -- something's going to have to change, and I'm not so sure I know what it is.

Prices are going to have to go down; people are going to have to have some bad years, that sort of thing, before they realize they need to do something. But that's just my opinion.

I agree, Murry, definitely. Well, thank you very much, and I look forward to seeing you in a few weeks.

OK, thanks, Ron.

Our next question is coming from William Farer, of WH Reaves.

Good morning, gentlemen, and I must echo the earlier sentiments, that I thought David's clarity, and actually, the speed with which he elaborated those insights, was very helpful.

Just a kind of technical issue, if you will. With regard to the sales of assets in the fourth quarter, for some 60-or-so million dollars. If no gain or loss was recorded, then presumably, the DD&A rate will go down next year. Do I understand that correctly?

And then, if so, do net equity volumes, and gathering volumes, or some other line item, increase? Thank you very much.

Well, first of all, Bill, on the speed, we can -- we'll take a look into whether we can get the replay to work at a slower speed.

It used to be the FedEx, so congratulations.

We noticed that you commented on the speed, but you didn't compliment the speed. We're were very careful in your choice of words, there, Bill.

So was I, thank you.

You are correct about the oil field sales, and the effect that that should have, the reduction of that should have, on DD&A.

And, as far as gathering volumes, it shouldn't really have much of an impact. One of the reasons we sold the oil fields is because there are not operating synergies between those oil fields and our normal gas expertise.

Oil tends to be picked up in barrels, and things like that. And, there -- though, as far as equity -- so, in the gathering, it's going to be really be kind of de minimus. You will see a reduction in equity volumes as a result of the sale in the -- of the oil fields. That's certainly a correct assumption as well.

Where you, though -- if I understood correctly, were you to continue operating these volumes, shouldn't that show up somewhere? Or, is that a reduction as well, in your "net" operating expenses?

In that case, with the oil sales, and that's -- of course, we view these things as part of a continuum. On that part of the continuum, we are not operating those volumes.

So, on that -- on those oilfields, the buyer -- which is a private company -- will assume the operations. And, again, the -- we didn't want to maintain operations of that, because it's a very different type of operations,

and the gathering -- I guess you could technically call it gathering when they stop by to pick up barrels of oil, but it's not -- it doesn't utilize our gathering system.

So, actually, those volumes will completely walk away from our -- from our numbers. You wont see those volumes, really, anywhere in our -- in our numbers.

There was a little bit of gas associated with it, and some of that will still roll through our gathering volumes -- but -- but -- but the oil stuff, the oil volumes, it will just disappear.

Thanks. And since I have then line, ex-sales or purchases -- obviously, there were no purchases -- but excluding sales or revisions, are your reserves in the Appalachia "preliminarily" up or down, as of the end of last year?

Well, of course, that's going to come out more in the full-year financials, but we did have -- we certainly had adjustments due to -- due to price. We wouldn't view them as being large adjustments, but we had adjustments due to what we consider to be economic reserves.

As you know, reserves are just volumes, and -- but, the way we record them in our financials is based on what volumes are economic to extract. And, that determination would have resulted in a -- in slight decrease in volumes, because of lower prices.

As you know, we're -- we're required, for those calculations -- those determinations, to use the 12/31 price, which was a little lower than the 12/31 2000 price. But, fundamentally, the volumes were flat or a little low. But, price, the price impact was negative.

Yes, Bill, just so you know, on that score, just so we're clear on it, we -- because we haven't -- we 're not focused as much on volumes as we are on profit, we

-- we have not jumped through hoops to try to, you know, make the reserve numbers anything other than what we -- you know, what they are. I mean, we're not -- we're not trying to be heroic, there.

But, and so -- as Dave said, you know, we had to apply last year's price for the whole -- the whole thing, and when we did this at the end of 2000, the price was so high that the tail volumes -- the volumes out 30 -- 40 years from now, on some of these wells, became "profitable."

And -- and so, those tails have sort of been cut off, this year, because the price we used was a lot lower, and so you -- effectively, the economic life in that calculation was reduced a little bit. So, some of those reserves fell off.

So, you will see positives from extensions to discoveries and other additions, and positive -- well, and -- in the net of the positives and negatives, excluding price and production, are positive. So, I should say, if you exclude the sale -- exclude sales price, and production, then the reserve quantities are increased.

But I understand I'm -- you know, kind of parsing, there, because the price was negative, and production obviously was negative, and we sold -- we sold some of those properties, as well.

Thank you. Our next question is coming form Philip Salles of Credit Suisse First Boston (Company: Credit Suisse Group; Ticker: CSGKY; URL: http://www.credit-suisse.com/).

Thank you. Most of my questions were actually asked -- but, and I do appreciate additional disclosure at the beginning of the -- of the call.

Murry, you talked -- you talked about the monetizations, at the beginning, about not being more aggressive. I would like to see -- have you just amplify that comment, relative to the monetizations.

I mean, that was something that that seemed to be part of the longer-term strategy and goal, as some of these hedges roll off, and a larger -- and some of the monetizations roll of, rather -- you know.

How do you -- how do you look at those, with being put into the equity production, and then a lower percentage of that equity production therefore be -- being hedged, and do we begin to look at equitable as being more exposed or levered to the commodity?

Phil, good questions. As a fundamental issue, we do wish to monetize more of these volumes. So, let's get that on the table first. I think the issue at this point, is when? Two issues: When? and that is predominantly a price issue, a cycle issue.

So, when? is one issue. And, then, How? is another issue. And, I'll take the when, and then maybe Dave can speak a little bit about the how.

I just think this is just a bad time, from a price standpoint, to lock it in. And, I think, if we have some patience, here, over the nest year, two years, three years, there will be some better opportunities to be able to monetize this, from a price standpoint.

Now, you know and I know that the storage numbers are looking very, very full right now, and that bodes poorly for this year, and probably for next year, as well.

Shored-up demand -- some demand increases, and -- and the point Carol made earlier, maybe some supply decreases. But, short of something dramatic on those two ends, you know, the next year to 18 months just doesn't seem like a good When? to monetize. And, I'll just maybe -- Dave can comment on the How? we do it.

You've seen that some of what we do shows up on balance sheets prepaid forwards. There's other ways of entering the transactions like this that are on balance sheets. Some wind up being deconsolidated, though we disclosed the numbers involved.

With all of the issues going on in the current environment about -- especially by deconsolidated transactions, we're not sure whether we want to do more of the sales of net profits interest, or more of the prepaid forwards, or something different.

Frankly, in the transactions that we have, that have been, the sale of low-end gas property interests, there are real equity owners, real arms-length equity owners, and they expect real private equity type returns, as I've -- as I'm sure, most of you who are involved in banking firms know, those are steep returns.

If at some point, those wind up getting viewed as being not terribly different, from a credit perspective, as the prepaid forwards, or something else that's more on balance sheet, then we tend to lean more in that direction,

because they are more costly to enter into, since you are selling to entities that are looking for equity returns.

So, we -- we juggle whether we're -- which types of those transactions. We

basic types, that we have entered into two of each of. And that's -- that's what we're weighing as far has how?

Now, it's just not as urgent that we figure out how we want to attack that, given Murry's comments on where we are in the price cycles.

OK, thank you. Just -- just kind of a followup question, if I may -- relative -- you talked about the credit mitigation, and creditworthiness. You had a figure -- I forget what that was, of $150 million, I think it was -- if I recall -- that just said, you're in the process of trying to mitigate that risk?

Could you -- could you also talk about that? And, timing of that? And, is that -- is that kind of a focal point for us, to -- or a data point that we should beginning to look at, on a quarter to quarter? Is that a number that you're going to continue to release to us, relative to your exposure?

Well, first let me -- let me comment on the -- on the first issue. As Dave reported in his comments, we don't -- we did all these with double-A-minus, and I -- again, I don't want to -- you know, we're not bragging about this,

but -- but we particularly excluded all of the energy merchants from consideration in doing any of these transactions. And, it's because of our concern that -- about the overall creditworthiness of those entities.

So, we excluded all merchants. The reason is, because, you know, we've entered into very long-term transactions, and so -- you know, to manage that risk, we tended to move more towards -- toward quality. David's point, though, is that having said all that, it's still a lot of dough.

There's still -- there's a lot of money there, and I think it's fair to say, at this point, we're trying to understand how much credit risk we really should be willing to -- to have. And, should we take any actions with respect to -- to credit risks.

And -- and it's fair to say, at this point, we do not have a conclusion on that, and when we do, we'll -- we'll let you guys -- you guys know.

Phil, you will continue to see that -- certainly you see the other comprehensive income line item in each one of the Qs. We -- I guess we've mentioned the number in each one of the last two conference calls, and presuming that we remember it,

I'm happy to make sure that we try to get an estimate of that when we have the conference call, so it will be out ahead of the -- ahead of the -- the public documents.

It's -- the only sensitivity is, as is the case with most companies like ours, the audit firm, of course, concentrates on the earnings numbers first, and typically isn't really concentrating on getting comfortable with the balance sheet numbers, until -- until we get a little bit closer to the release of the 10-Q or the 10-K.

So, we've been pressing them, lately, to make sure that we do get an agreement -- at least a rough agreement, on what that OCI number is.

And, of course that's subject to some change, because they still haven't, of course, signed off on the full year -- you know, audited financials, as they wouldn't have for any company that's got a calendar-year reporting cycle.

So, we will try to make a commitment to -- to give you a rough idea, at least, of what we think that OCI number is, every quarter.

Oh, thank you. I appreciate the insights in -- and your thoughts. Just a point of clarification and -- back to Murry -- is I understand the cycles and the pricing. Do we look for, therefore, Equitable to be more sensitive to

to the commodity in the nearer term.

As you, you know, kind of look out, you know, try to kind of pick the right timing to put on some of these additional

and hedges. But in the nearer term, do we look toward the larger percent of the equity production that is unhedged portion to be more levered?

I would hope that is not the case, generally speaking, because, as you know, I've -- as I said last year and I will continue to say throughout the year, I've wanted to try to manage our earnings sensitivity to price down to, you know, the penny or less as we're approaching the year.

I will say, however, though, Phil, that there, you know, and without telling you what that is, there are certain prices. I'm just not willing to do that. Because I don't think it's prudent. But let me just answer this way.

As I said at the beginning, I'm really hopeful that we will not see a lot more or hardly any more sensitivity to price. I mean, that's where we're headed. That would be where we're headed.

And, you know, the fact that we have these long live assets gives us tremendous flexibility. I mean, it's not like we have Gulf of Mexico production that's going to go away in three years. I mean, these are long, long live things. So, we're able to take long-term views to hedging.

And as the prices cycle, which I know they will, we'll try to lock up some more of it, going forward. I hope that's helpful. It's not as specific, but it's -- you know where we're headed philosophically, anyway.

Thank you. The floor is now open for questions. If you have a question or a comment, please feel free to press one, followed by four, on your touch-tone phones.

Once again, if you do have a question or comment, that's one, followed by four, on your touch-tone phones.

Is that right?

Yes. We have a final question coming from Gill Gabbay of J P Morgan.

Yes. Gill Gabbay, J P Morgan. I just want to spend a couple of seconds talking about NORESCO. I noticed that the company exceeded its year-end target for backlog of $105 million.

But it also seems like the business unit has some ways to go in terms of reaching its 50 cents EPS contribution. 2001 seemed like the perfect storm in terms of driving up interest in what this business does. Could you comment a little bit about the outlook for 2002?

Yeah. Let me take that question for just a second. It's a good question. I think the -- we're very encouraged, first of all, by the increase in backlog in that business.

And you are right that, at least the beginning of the year, the price -- the concern about energy delivery and the prices all contributed to some renewed interest in managing energy.

I -- the guys are on track to continue to grow that business. We still have a great deal of hope that they can reach that critical milestone that I set for them.

And I really don't have anything else to say right now. The trends are good. Let me put it that way, at this point in time. And beyond that, I don't know that I can say much more.

OK. Thanks a lot.

Thank you. Gentlemen, there appear to be no further questions. Do you have any closing comments?

I would just like to remind everybody that a replay of today's conference call will be available on our Web site at www.eqt.com. And also, to remind everybody, as I alluded to several times during the call today -- we do have our annual meeting for investment analysts on February 26 in New York City.

And that presentation will be Web cast again on our Web site. That concludes today's call and I'd like to thank everybody again for participating.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may disconnect your lines at this time. Have a safe day. Thank you for participating.