EQT Corp (EQT) 2002 Q2 法說會逐字稿

Good morning and welcome to the Equitable Resources Incorporated second quarter 2002 earnings release conference call.

At this time, all participants 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 Mr. Phil Conti.

Sir, the floor is yours.

Thanks Carlie and good morning everyone.

We would like to thank you for participating in Equitable second quarter earnings conference call.

Joining me today as always are Murry S. Gerber Chairman, President, and Chief Executive Officer and David L. Porges, Executive Vice President and Chief Financial Officer.

In just a moment, Murry will make some brief introductory comments and then Dave will review the second quarter financial results that were released this morning.

Following Dave's remarks, we will open up the phone lines up for questions.

But first, I would like to remind you that today's call may contain forward-looking statements related to such matters as expected growth, anticipated diluted earnings per share, the current consensus, year-on-year operating comparisons, the future impact of potential new New York Stock Exchange or SEC regulations, future share transactions, the effect of company's ongoing efforts to reduce its cost structure 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 MD&A section of the company's form 10K, first quarter 10Q, as well as on our website.

I would now like to turn the call over to Murry.

Thanks Phil, good morning everybody.

Despite some continued weakness in the energy markets, gas prices for example were down about 9% quarter-on-quarter.

I am again very pleased with the level and the quality of the earnings Equitable Resources has achieved in the second quarter.

Productivity improvements both on the revenue and the cost side continued to be apparent making year-on-year operating comparisons encouraging for the future.

We are making tremendous progress of the company in achieving the necessary competitive level of operational excellence that we need for growth.

I will highlight a few specific milestones achieved this quarter.

Volumes are up year-on-year from our Appalachian natural gas business after we eliminate the effects of our divestiture last year of smaller properties.

Unit cost structure in the production unit is down 17% quarter-on-quarter and 18% for the comparative six months.

Productivity improvements in the utility are apparent in both absolute cost reduction and in key unit measures.

Cost per customer is down 9% in the second quarter comparisons than a 11% in the 6-month period.

Cost as a percentage of net revenues is also down significantly.

And lastly, backlog in NORESCO was an all time high at the end of the second quarter at a $157m.

I would just like to make a note on 2002 and 2003 earnings.

We have consistently guided you to an earnings per share range for 2002 between $2.35 and $2.40 per share.

Today we would like to reiterate that earnings range.

In addition, we would also like to give you our first reading on prospects for earnings per share in 2003.

We are on track to low double-digit growth and are not uncomfortable with the first call consensus estimate.

We might remind you that our gas production is more that 90% hedged in 2003.

Our EPS loss is less than one cent change in EPS per dime change in the

.

Regarding performance based rates during this quarter, Equitable Gas was successful in receiving approval for phase II of our performance-based rate initiatives.

This new order allows Equitable Gas to offer a fixed price service to our residential and small commercial customers.

This is how it works: We offer a customer the ability to lock in the commodity portion of their rate for a period of up to one year.

This service can be offered up to four times per year.

At our option we review every offering with the Public Utility Commission before it goes out.

And we will offer this service on the risks to do so are in our judgment manageable.

Turning to the capital budget, in our release this morning we referenced the slight increase in our capital budget for 2002 and a shift of $10m of anticipated commitments away from NORESCO and two equitable productions.

Let me explain that a bit.

First, building on earlier successes and pilot programs in Equitable production, we have been encouraged to make additional investments in pipeline infrastructure and automation technology to increase production from our existing assets.

In particular, we are going to profit from a completely automating two of our producing districts for the intended benefits of completely reinventing the way we do well surveilance.

This involves about 1600 wells in one district in West Virginia and one district in Big Stone Gap and it is going to cost about $4m to do the project.

In NORESCO, we had earlier been hopeful that the energy crisis would lead to opportunities for substantial investment in onsite energy infrastructure projects particularly for industrial customers and more specifically for projects related to energy reliability.

Several factors have led us to slow down that effort.

For one thing, power markets have relaxed somewhat excluding California's cost-benefit analysis relating to high reliability power has changed.

Secondly, after reviewing a number of opportunities in the industrial segment, we have not yet been able to justify the economics of our own investment in these onsite power facilities, particularly when factoring in the credit quality of the industrial customers we would be serving.

And third, favorable rules historically concerning off balance sheet financing of these facilities by our customers are under review and are likely to change.

NORESCO is aggressively pursuing energy infrastructure projects in our core institutional and government markets.

For example, we have recently been awarded a large project in the city of

, California.

It is about $44m, a 48-megawatt plant there.

The institutional market segment though generally doesn't require large investments by NORESCO and in those projects we are engaged for design, construction, and operation of those facilities and not really required to own those upfront.

We are still hopeful that our energy management businesses, both energy infrastructure and performance contracting in NORESCO will show increasing profits and importantly increasing profitability over the next 2 to 3 years in accordance with the plans we have previously shared with you.

Briefly, returning to regulatory changes and disclosures, Equitable is committed to meeting all its obligations in support of emerging regulatory matters.

Dave and I will of course sign the SEC order for CEO, CFO certification without qualification.

In direct contrast to what you might think we are not all paralyzed by these regulations and we really believe that the new regulations will help companies like ours and may be a differentiating factor from our peers in the energy business.

At this point, let me turn it over to Dave for comments on the financial results of the quarter.

Thank you Murry.

Equitable Resources today announced second quarter 2002 core earnings per diluted share of 46 cents.

This core earnings number excludes the results of our minority ownership in Westport Resources as it always does and also excludes this quarter's 9-million dollar tax gain related to discontinued operations.

This core earnings represents a 4.5 percent increase over the 44 cents per share reported for the 2001 quarter including Westport in the gain from discontinued operations.

Equitable reported total earnings per diluted share of 59 cents for the second quarter.

As always, I would comment on the quarter's results generally amplifying topics discussed in this morning's release and I would also comment on some other items of possible interest.

First, Equitable Utilities.

Equitable Utilities had earnings before interest and taxes (EBIT) for the second quarter of 15.1 million dollars compared to 5.7 million dollars last year.

The improved results for 2002 are primarily attributable to the absence of a 4.3-million dollar charge related to a workforce reduction in June 2001 quarter, higher revenues from colder weather, and lower operating costs.

Adjusting for the 4.3-million dollar charge last year, EBIT was up 51%.

The largest contributor to this year-over-year improvement was the workforce reduction charge that inflated expenses in last year's quarter.

However, we believe the most noteworthy reason for the year-on-year improvement was continued progress in productivity initiatives of the Utilities.

These improvements reduced expenses by 3.5 million dollars versus last year.

Weather also had an unusually large affect on earnings in the second quarter.

Typically, second quarter results had been influenced by weather.

However, the 632 heating degree days we experienced in this year's quarter exceeded last year's total by 25 percent resulting in additional net revenue of about 1.9 million dollars.

This is still an 11 percent less than the third year average of 712 degree days.

There were a number of other smaller year-over-year differences but the three-year quantified explained fully the net EBIT improvement of 9.4 million dollars versus last year.

Now on to Equitable Production, this unit had EBIT for the quarter of 38.8 million dollars or 13 percent lower than the 44.4 million dollars earned in the same period last year.

The two primary reasons for this decrease was lower natural gas prices and last year's sale of most of our oil-dominated deals.

Effective

natural gas prices for this quarter averaged 3 dollars 46 cents per Mcfe or 9% lower than the prior year's average of 3.79 per Mcfe.

This led to a decline of EBIT of about 4.5 million dollars, which was the net of the decline in revenue and decline in price-related expenses such as severance tax.

Gas prices, which are measured in energy content declined from 4 dollars 67 cents per NMBTU in last year second quarter to 3 dollars 40 cents per NMBTU in this year's second quarter, a 27% decline.

These prices are provided for wealth comparison as we provide prices in volumetric units rather than energy units and therefore our net of expenses per

.

Separately, the oil fields that were sold late last year had contributed over 4 million dollars till last year second quarter.

These negatives more than explain the year-over-year decline in EBIT.

Two primary factors partially offset those negatives.

First, unit operating expenses declined from 76 cents per Mcfe to 63 cents per Mcfe.

This puts total expense index that include these operating expenses, gathering and compression expenses, and general and administrative expenses, each of which declined year-over-year.

By the way, this total expense metric excludes the afore-mentioned severance tax expense as well as depreciation, depletion and amortization or DD&A expenses.

In total, these other expenses were also down versus the second quarter of 2001, but that is entirely as a result of the effect of lower price we had on severance taxes.

And finally, NORESCO.

NORESCO posted a loss before interest in taxes of 0.6 million dollars in the second quarter compared to a positive EBIT of 4.6 million dollars in the same period last year.

The decrease in EBIT is primarily attributable to a write-off of 5.3 million dollars to Jamaica Power appliance.

Equitable invested 7.4 million dollars for a 91 percent ownership stake in a greenfield power appliance project in Jamaica that went

in 1998.

That plant is nonoperative to expected level and remediation efforts had been in effective.

As a result, in the quarter, the company determined that the appropriate action was to write-off its entire investment in that project.

At the time of the write-off, the total investment equalled 5.3 million dollars.

And on a more positive note, and the rest of this quarter, the impact log was 157 million dollars representing the highest backlog

ever recorded.

As we have mentioned on numerous occasions, backlog is very lumpy because of the size of some of the projects and we do not expect backlog to stay at this level through the end of the year as many of these projects will be built-in therefore converting to revenue.

Still, this increase in backlog is a positive indicator of the health of the performance contracting business at NORESCO.

Now, I will cover a variety of other topics that may be of interest to investors.

The first of these is Westport.

Equitable reported a 0.6-million dollar loss from its minority ownership in Westport Resources during the second quarter 2002.

Equitable typically released its earnings at least a couple of weeks prior to Westport's release and we therefore estimate their earnings to the best of our knowledge just prior to our own release.

Equitable's share of earnings from Westport are considered noncore.

The company continues to earn 13.9 million shares of 27 percent of Westport common stock.

The quarter-ended has taken the market value of 228 million dollars.

The company's investment in Westport for book purposes as of that date was about 143 million dollars.

Also as of that date, our tax basis in this investment was about 74 million dollars.

The next topic I will discuss is goodwill.

In 2002, Equitable adopted SFAS No. 142.

A new accounting standard for treatment of goodwill and other intangible assets.

As a result of ongoing annual amortization expense, we do reduced by approximately 3.7 million dollars.

During the second quarter, the company completed to acquire initial impairment adjusted goodwill.

As a result of impairment adjusted, the company was acquired through a court of charge to the cumulative effect of accounting change of 5.5 million dollars, net of tax active to the first quarter 2002.

The effect of this is a goodwill balance as of the end of the second quarter of about 51 million dollars.

You will call that this entire goodwill issue at Equitable pertains to NORESCO.

Another so called effect was reported in the second quarter, which was a 9-million tax related gain.

In April 1998, the management adopted a formal plan to sell the company's natural gas midstream operations, but capital loss from this sale was treated as nondeductible for tax reporting purposes under then regulations resulting in an additional tax recorded on the sale as a reduction to net income from discontinued operations.

In May 2002, the treasury regulations interpreting the loss

that are now expected to permit a significant portion of that capital loss to be treated as deductible.

Consequently, in the second quarter the company recorded a 9-million dollar increase in net income from discontinued operations.

We do not of course included this gain in our definition of core earnings but does represent cash taxes and will therefore increase cash balances with some of these being realized in this year and the rest in later years.

I would now like to give you an update on our stock buyback activities.

During the second quarter, Equitable repurchased approximately 760,000 shares of equity stock.

The total number of shares repurchased from October 1998 to June 30 of this year was approximately 13.7 million with a little over 5 million shares of authorization remaining.

We have also implemented plans for other companies

broker to continued repurchase shares during the backlog periods that proceed normal earnings announcements.

We will continue to update investors on our stock repurchase activities at quarter ends.

Though it is safe to assume that those activities are affected positively by the downward drift in equity prices that have occurred of late.

On a more sombre and personal note, I have recently been divorced.

Though the divorce is now final the financial settlement is not.

It is possible that the financial settlement would be finalized shortly, in which case I will have to sell some of my Equitable holdings to pay for the settlement.

In this event, I would only sell in order to pay for the settlement.

If this settlement drags on, it is more likely that I will eventually assign or transfer a certain amount of options in stock respectively as part of the settlement.

In either event I will make full disclosure to investors of my activities even though the Securities and Exchange Commission has reduced Form-4 disclosure for such events.

Now in a similar vein of providing early disclosure on issues of the day or issues of possible relevance who wanted to comment on a couple of corporate definite topics being discussed in the investor community at large.

First, loans to company directors and officers, in short, this is not an activity we favor.

The company currently has no outstanding loans to Equitable Resources' Officers or Directors, in the full year since any management team has been in place of Equitable that has been only a single occasion upon which a single officer received a one-time loan from the company.

This loan was less than 70,000 dollars and was expended only because of an interpretation that certain taxes were payable currently by that officer at an item of deferred compensation in which the officer received no current cash compensation.

Still, this small loan issued in 2000 was repaid in less than one year.

The second topic is the accounting treatment of stock options granted to employees as an incentive compensation.

We intend to be in the forefront of disclosures on this topic that are currently monitoring the best way to do this.

As you would be aware, our 10K disclosed the estimated cost of such options as of the end of last year.

We are currently examining whether to make this disclosure more frequent, include the estimated expense in our income statements or take some other approach to add transparency to our financial results.

Now switching back to a couple of topics referred to in today's press release.

As Murry alerted two Equitable's Board of Directors approved a 4-million dollar increase in the 2002 capital budget, with this increase being the net of a 14-million dollar increase in the production and gathering unit for certain automation and infrastructure projects and a 10-million dollar decrease at NORESCO

units current focus on the less capital intensive performance contracting aspect of their business.

Also at that same July 18, 2002, board meeting, the board of directors of Equitable Resources declared a regular quarterly cash dividend of 17 cents per share payable September 1, 2002 to shareholders of record on August 16, 2002.

I will now hand over the floor back to Phil Conti.

Phil.

Carlie, that concluded the comments portion of the call.

I mean, we would like to open the floor up for questions.

Thank you gentleman.

The floor is now open for questions.

If you have a question or a comment, you may press the number one followed by four on your touch-tone phone at this time.

If at any point your question has been answered you may leave yourself from the queue by pressing the pound key.

Questions will be taken in order they are received and we will do ask while posing your question, that you please pickup your handset to provide optimum sound quality.

Please hold while we pose for questions.

Thank you.

Your first question is coming from David Maccarrone from Goldman Sachs.

Good morning.

First, just David, I was wondering if you had any preliminary balance sheet information you might provide us on the debt and equity outstanding at the end of the quarter.

I don't have that with me right now David.

What I can promise to do is to get that information and will make a, we should, we will get something out on that as soon as we get our orders signed.

As you are aware that orders review the earnings numbers first, and they don't review the balance sheet items until later.

But we will get something out on the balance sheet much ahead of the 10-Q.

And about energy and utility sectors been in complete turmoil of late, I was wondering if in your stated strategies, if you could discuss a little bit whether you are more optimistic about your potential to make

acquisition and talk a little bit about its potential for E&P reserve acquisitions versus utility properties and may be pipeline or

gatherings?

David, I will comment on the general topic of acquisitions first.

I think it is fair to say as I stated on a number of occasions that there is a need particularly in the distribution segment for considerable consolidation in the industry.

We talked about that on a number of occasions.

It is based on our view at Equitable, the utility business is not too much similar in fundamentals from other businesses and that is that working on operating excellence platform, that is getting your costs down, getting your productivity up, meeting your customers need is something that hasn't been generally applied and its our view, David and my view that there is plenty of room for that.

Equitable of course is a key example of that.

David, the issue has not been one of strategy or the ability to make an acquisition potentially look good on paper, make it accretive and value enhancing as it shows.

The issues have mostly been

and so, and I think that continues to be the case and in this downturn now, we haven't yet seen people accept that the prices that they are receiving for the stock or the prices that market is giving them for the stock at this point are real.

And so I think at anything this downturn is causing people to freeze up a little bit on thinking about doing certain transactions.

As far as the E&P is concerned, the natural gas business, we still think and you can see from the results

and his team over there are doing a really good job using technology and chasing the processes to make that business more productive.

At the end of the day, though gas prices are still pretty high and in an absolute sense, when you compare to the historical forward curves, I mean if this prices is still pretty high and the owners of those assets are pretty proud of them and so, not to say an acquisition can't be done and can't be hedged and unappropriately mid risk managed but it takes a final pencil and you don't have as many people talking right now about selling.

So it has been a little hairy, the prices had been

.

This is the same message I gave at the last quarterly result not much has changed in the acquisition market in my view.

Okay and then just finally an another accounting question.

When do you expect to get conclusion on off-balance sheet accounting, whether you might have to consolidate some of the activities associated with reserve on

?

That really depends on giving new, the accounting profession, putting new standards out.

There really hasn't been, even though there has been a lot of discussion of all that and we have got rough ideas of what we think that issue might itself.

I don't even

a comment period on proposed regulations yet.

Our understanding is that we likely to have things in place possibly as early as full year financials for this year but there is nothing even close to being finalized yet.

Would you anticipate that this has to be directive versus an SEC issue?

You know, to be honest, I am not sure at this point with the way things are working with both SEC whether they might both participate.

I mean it is just tough to tell in this environment who is going to wind up and make a final call.

Thank you and I appreciate that, okay.

Thank you very much.

Thanks David.

Thank you.

Your next question is coming from Jason

Asset Management.

Hello, the breakdown in Jamaican plant, is that including core earnings or is that excluded?

That write-down is included in the core earnings.

So that damaged core earnings if you will, or it decreased core earnings.

Okay.

So without that write-down, core earnings has been substantially higher?

Well, it would have been higher by 5.3-million tax affected.

Okay.

But it wasn't, you know, it really

was a write-down so that is why we, our attitude is that the appropriate thing to do is to incorporate that negative in course.

Okay.

So the only two things excluded from core earnings were the Westport stake and that loss to

.

The goodwill impairment was a first quarter item.

We would have excluded that from core earnings because that is the so called below-the-line item, so if you look at the first six months that amount would been below though.

It would have been noncore also.

But those are the only items.

Okay.

Is there anything else that we need to know about rating reviews, debt maturities, triggers, things of that sort?

I am not aware of any negatives along those lines.

We have routine discussions with the major rating agencies but we do not appear to be of particularly high priority of theirs at this time.

Okay and you are currently rated, you are A-rated firm?

That's correct and we are A1P1 commercial rated.

Okay and you have any idea?

What?

That actually, at this point, given our normal tapping the capital markets, our commercial paper rating is actually a little bit more uncertain to ask in a long-term rating.

Okay and do you have any idea, how much additional debt you could put on in your company, say if you are to make an acquisition and still maintain that rating.

We have internal estimates of what we think makes sense.

You know, I think what I might just say is we think they are let us call them, lowish nine-figured numbers.

I just don't want to be presumptuous and speak for the rating agency.

I am sure their attitude would be that they want to see whatever it was and what the cash generating capability of an investment was, in that hypothetically

I recognize that is not a great answer but from your perspective we do think that we got a cushion on versus A on the coverages etc but obviously let us not really interupt to say, that is on issue, that would be stepping on S&P

.

Okay, well it looks like it has been a tremendously smart idea to keep your powder dry and let us see what you eventually use it for?

Okay Jason, thank you.

And actually, I would like to, I stated that we try to get some preliminary balance sheet information low ahead of the 10Q.

So I think now it might be a good time.

So now I recognize some improvement activity with Maccarrone's question, but again now this is preliminary.

I don't want to vouch for the fact that our order has been completely signed off but our estimate as the end of the second quarter, our long-term debt balance is 271 million dollars, total current debt which incidently includes the Jamaica, because it gets consolidated even though it is nonrecourse.

It is 163 million dollars giving total debt of 434 million, there is a trust preferred, I think

more like debt, which is 125 million dollars and the shareholders equity is about 794 million dollars.

So those again are preliminary figures as of June 2002 and I hope that answers David Maccarrone's question.

Thank you and once again if anyone has a question or comment you may press the number one followed by four on your touch-tone phone at this time.

Please hold while we pose for questions.

Thank you.

Your next question is coming from

from JP Morgan.

Hey good morning Guys.

Actually I want to congratulate you guys on getting phase 2 approval of your PBR, that is great.

Murry, you made the comment that you will offer a sixth gas price to your customers when the risks are manageable.

Given all the trouble that the energy merchants are having now, are you guys, you know, hold off until those companies get back on their feet or are there other parties out there that are willing to warehouse that risk for you?

Yeah, I think, in general, you know, we haven't used any of the energy merchants for any of our risk management at all and we have avoided those credits back a year, two years really as we were hedging a lot of our natural gas production.

So, yes we think the better bank credits are places where some of that risk can certainly be warehoused.

There are some basis risks that are a little more complicated but not impossible to be able risk manage and so the way our deal works is that we make the offer to our customers when we deem it appropriate to do so and talk to them about this offering and keep in mind it only relates just to the gas commodity.

It doesn't include the whole rate that is stated.

It is just the gas commodity.

And so if we review that with the Public Utility Commission, get approval from them that everything is okay, make the offer to the customers and then we do our risk management along the way.

So, I think it is a very, small step I think, in a integrated scheme of things, a very manageable risk for us to take and it is a good service for the customers too.

Yeah certainly.

Good luck with that.

Thank you gentlemen.

Your peers have no further questions at this time.

Okay.

Let us conclude today's call.

This call will be replayed for a 7-day period beginning at approximately 1:30 p.m.

Eastern time today.

The phone number for that replay is 973-341-3080.

The confirmation code of 3377366 is needed for the replay.

The call will be also be replayed for 30 days on our website.

And we again thank everybody for participating today.

Thank you ladies and gentlemen.

This thus concludes today's teleconference.

You may disconnect your lines at this time and have a wonderful day.