EQT Corp (EQT) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Equitable Resources Year-End 2002 Conference Call. (Caller Instructions.) It is now my pleasure to introduce Mr. Phil Conti. Sir, the floor is yours.

Thanks, Jackie. Good morning everyone and thank you for participating in Equitable's Year-End 2002 Earnings Conference Call. With me today are Murry Gerber, Chairman, President and Chief Executive Officer, and Dave Porges, Executive Vice President and Chief Financial Officer. In just a moment, Murry will make some brief comments regarding Equitable's progress. Dave will then review the 2002 financial results that were released this morning. Following Dave's remarks we'll open the phone lines up for questions.

But first I'd like to again remind you that today's call may contain forward-looking statements related to such matters as the percent of expected operated gas volumes that are affected by changes in NYMEX natural gas prices, the Company's earnings per share sensitivity to changes in gas prices, the intention to reduce the Company's ownership percentage in Westport, the total book equity as of the end of 2002, the possibly of replacing the $125m of trust preferred securities with debt, the deductibility for federal tax purposes of the capital loss on the Company's previous sale of its gas midstream operation, the time period when the Company will lose its status as an AMT tax payer, the anticipated diluted core earnings per share, capital spending, financial performance, future cost savings, growth 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 MDNA section of the Company's 2002 Form 10-K, the first, second and third quarter 10-Qs as well as on our Web site.

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

Thanks, Phil. Good morning, everybody. Before Dave shares the details of our 2002 results, I'd like to make several comments about the Company. We're aware there are several other companies reporting this morning and I will keep my comments relatively brief.

First and foremost, 2002 was a terrific year for Equitable Resources. We achieved record earnings, record earnings per share, and importantly, we are now without question, an industry leader in return on total capital. The achievement of this return milestone is particularly satisfying to me because when Dave and I arrived here in 1998 Equitable was the industry laggard on this metric. Another way to look at this achievement is that pound for pound, we believe Equitable is among the most profitable companies in our industry and a leading generator of value creation for shareholders. At Equitable our distinctive strategy of operational excellence and the intense focus by a talented growing management and staff on fundamental is paying off. For me, this whole issue of return is about credibility. Our ability to earn a superior return on the capital we have employed on the past is the most important determinant in the presumption of a superior return on capital we intend to employ in the future.

My second comment relates to the sale by NiSource of the C&R Properties. Obviously, we were not successful in this auction and apparently for the bulk of the asset, neither was anyone else. I think it important though to emphasis that on a strategic level, the C&R Properties are a good fit with Equitable's assets in the Appalachian Basin.

However, in the bidding process, we had to take a number of negative factors, specific to the C&R assets, into consideration. First, there was a complex financing transaction that had the effect of significantly depressing cash flow in the first few years and increasing risk of the financial benefits of the transaction over time. Secondly, C&R has a long-term union contract and has terms that we believe are industry non competitive and difficult to change in the short-term. This hurts value because execution of our operational excellent strategy would be delayed. Lastly, as I mentioned previously, we had some other operational concerns, including concerns about the amount of lost and unaccounted for gas. From a management perspective our response to the C&R offering demonstrates our discipline to remain focused on value creation. We did not overstretch to grow the Company even for a property that has significant strategic value to us.

While we remain relatively disciplined in our M&A philosophy, we continue to execute on internal opportunities for growth that we have previously discussed. Because of these efforts today we reiterate guidance to you for 2003 earnings per share of $2.70 to $2.80 per share. During our analyst meeting in March we will give a progress report on organic growth in support of our stated objective to maintain EPS growth for Equitable in the low double-digit range. At that meeting, we will also expand our discussion about the pipeline storage and gathering portions of our two main business units. To emphasize our focus on these businesses you will note, as regards gathering, we have changed the name of Equitable Production to Equitable Supply, a name that more accurately represents what we actually do in Appalachia. And we have also formally named a president of Equitrans, our pipeline of storage unit, and a president of Equitable Gas Company, our distribution arm, under the Equitable utilities umbrella.

Dave will note our natural gas price hedging in the fourth quarter. Philosophically, we continue to maintain the belief that prudent risk management adds significant value by reducing cost of capital through reduced cash flow and earnings volatility. We firmly believe the benefit of this approach far outweighs the occasional one-time cash flow spike from an exuberant price move in the market.

Lastly, I have reviewed Equitable's stock ownership guidelines in light of industry practice and have decided it is time to make a few changes. Specifically, I am first raising guidelines for stock ownership, defined as common stock held, stock held in employee plans and time-restricted shares, to levels that are either at or above the high-end of industry practice. And I'm secondly eliminating in the money value of stock options from any calculation of Equity ownership.

For Dave and me, I have set an ownership guideline of eight times salary. This compares to a range for industry of between four and six times for me and two to four times for Dave. I've also raised guidelines for my direct reports to four times salary -- market guideline is two to four times -- and broaden the list of executives, managers and key employees covered by stock ownership guidelines from about seven to about 70. Our new policy discourages officers from exercising options for cash or from selling stock if they do not meet ownership guidelines. Of course, this also means that if an officer has met or exceeded the guideline, they are unrestricted by policy from managing their money in the manner that they see fit.

With that, I'll now turn the discussion over to Dave for specific comments about the 2002 financials.

Thanks, Murry. Good morning. Equitable Resources today announced record full year 2002 financial results, which comprised core earnings per diluted share, or EPS, of $2.44 and earnings from continuing operations of $2.36. As is the norm, the single reconciling item between these two figures is our share of earnings in Westport Resources. For 2002 that represented an after-tax loss of $0.08 per share and I'll discuss Westport more in a few moments. The EPS of 244 was 15 percent higher than the core EPS of $2.12 earned in 2001.

As I have normally done in these end-year conference calls, I will generally confine my remarks to our full year results. Further information on the fourth quarter of 2002 can be found in the press release and its attached tables. After discussing 2002 results by business unit, I will discuss other items of potential interest, including share repurchases, capital structure, hedging activities and some information on both weather and natural gas prices for the recently completed year.

First we'll discuss Equitable Utilities. Equitable Utilities has earnings before interest and taxes, or EBIT, of $101.9m for 2002, compared with $79m for 2001, a 29 percent increase. Net revenues for 2002 were $233.4m, compared to $230.7m in 2001. Cooler weather than we experienced in 2001 played a small role in the improvement, but I'll provide some of the weather statistics in a moment. More importantly, total expenses declined by nearly $20m from 2001. Much of that was due to charges in 2001 for work force reductions -- $6m, and a 2001 bad debt expense -- $7m. The remaining expense reduction of just over $7m was due to the benefits of prior year initiatives as well as further process improvements during the course of 2002 that related primarily to automation efforts. Notably, this is net of increases in pension and post-retirement benefit expenses, which were about $3m higher in 2002 than in 2001.

As for revenues, our efforts to better understand and utilize our storage and other commercial assets increased net revenues for the year by about $8m versus the prior year. As an aside, you may notice that we are taking another step towards providing more detail on the pipeline business and we expect to provide investors with even more delineation between the pipeline and distribution aspects of Equitable Utilities now that we have more formally split the jobs of running those business between the two people, Art Cantrell and Randy Crawford, who were previously co-heads of Equitable Utilities.

I would now like to discuss the business unit formally known as Equitable Production. In an effort to better align the name of this unit with its activities, we are now referring to our largest business unit as Equitable Supply. More substantively, we have refined the data tables for this unit to more clearly delineate the two business activities that it comprises -- production of natural gas and gathering of natural gas. Equitable Supply recorded EBIT of $164.4m in 2002 or eight percent lower than the $178.7m earned in 2001.

We will discuss some of the operational factors that contributed to this result, but I do with to first remind you of a couple non-operational issues that affect the year-to-year comparison. First, the absence of the oil fields that were sold late in 2001 accounts for about $12m of the $14m decline in EBIT. Second, the increase that occurred in our ownership of the Appalachian Basin Partnership, or ABP, upon meeting certain financial targets resulted in more equity production for Equitable, but had the effect of reducing EBIT by nearly $7m and also decreasing taxes by a similar amount. I will discuss ABP a little more later. Another factor that always affects this unit is natural gas price. Realize natural gas price has declined by 6.7 percent year-on-year and I will comment on more price specifics in a moment.

However, switching to more operational factors affecting Equitable Supply, total operated volumes increased by three percent or 2.6 billion cubic feet, or Bcf, after adjusting for the four Bcf associated with the sale of the oil properties in 2001. Similarly, gathered volumes increased 16 percent over the prior, in part due to the transfer of gathering activities inside Equitable Utilities to Equitable Supply as part of our efforts to concentrate our gathering activities within the Equitable Supply unit.

Another positive sign operationally was that per MCF operating costs declined in both the production and gathering portions of this unit with lease operating expense down from $0.32 in 2001 to $0.27 in 2002. Gathering and compression expense down from $0.23 in 2001 to $0.19 in 2002. And SG&A per MCF expense held flat despite an increase in reserves of about $2m due in part to the now settled Kentucky litigation and in part for activities pertaining to some of the older wells that we operate.

Now onto NORESCO. The NORESCO segment posted EBIT of $14.5m, 11 percent higher than the $13.1m earned in 2001. EBIT was negatively impacted by a write-off of $5.3m for the Jamaican power plant in the second quarter. The write-off was partially offset by the absence of $3.8m in goodwill amortization that was recorded in 2001. Revenue for 2002 totaled $190m or 21 percent higher than 2001 revenue of $157m. Total expenses were up five percent at $30.5m in 2001, compared to $29.1m in 2001. The construction backlog was $118m at year-end, down from $128m at the end of 2001 as the large increase in construction ate into the backlog.

Now let's turn to other topics that are related to the earnings figures. Weather. Heating degree-days totaled 5,258 for 2002, which is four percent more or colder than the 5,059 degree days recorded in 2001, but 12 percent fewer were warmer than the 30-year normal of 5,968. Compared to recent years, this year on year impact is quite minor. We estimate that cooler weather improved EBIT in 2002 by a little over $2m when compared to 2001.

Natural gas prices. Our average well head price for Equity sales volumes during 2002 was $3.53 per Mcfe versus the prior year average of $3.67 per Mcfe. For monetized sales volumes, meaning pre-paid forwards, average well head price was $3.27 per Mcfe versus the prior year average of $3.81 per Mcfe. The weighted average of those sales categories yielded a total well head price of $3.47 per Mcfe in 2002 versus $3.72 per Mcfe in 2001. Though this represents an all in decline in well head natural gas prices of $0.25 per Mcfe, the 6.7 percent decrease I referred to a moment ago, this is in the context of a decrease in NYMEX price of about one dollar even from 2001 to 2001. NYMEX prices, which are measured in energy units, averaged roughly $4.25 per MMbtu in 2001 and roughly $3.25 for MMbtu in 2002, about a 23 percent decline.

Hedging. We provided specific volumes related to natural gas price hedging activities in the press release. Please note, though, that when we discuss our hedging activity internally, we typically speak in terms of percentage hedged or percentage exposed to natural gas prices. In this manner, we can take into account the hedging impact of our pre-paid forwards and the sales of net working interest and properties that we continue to operate. It also allows us to take into account severance taxes, gas used as fuel and other non-price impact to volumes. Viewed in this way, only about six percent of our 2003 expected operated volumes are affected by changes in NYMEX gas prices, leading to an EPS sensitivity of less than a half cent per dime move in NYMEX. Looking further out, volume forecasts become more critical to this analysis. However, though we do expect volume increases from our Capex increases, we often look at these same price sensitivity measures on a constant volume basis for simplicity. Viewed in that way, the equivalent figures for 2004 and 2005 are, for both years, about 25 percent of operated volumes are affected by changes in NYMEX and the EPS sensitivity is about $0.025 to $0.03 per dime change in NYMEX. Going out to 2008, we still have just over a third of our operated volumes, again, on a constant volume basis, exposed to changes in NYMEX prices, leading to an EPS sensitivity of nickel per dime change in NYMEX.

Westport. Earnings per share for 2002 include an after-tax loss of $5.6m or $0.08 per share from the Company's stake in Westport Resources. As you know Westport earnings are not considered core earnings and are excluded from the Company's earnings guidance. Equitable continues to own 13,911,000 shares, the same as we owned one year ago. However, as a result of Westport's recent equity offerings, following an announcement of an acquisition, this stake now represents approximately 20.8 percent of Westport Resources, which is down from 26.7 percent as recently as the end of the third quarter of 2002. We have not attached any particular time horizon to exiting this stake, but it is our intention to continue to reduce our percentage ownership, whether by dilution as Westport grows, sales of stock or other means. As you can probably appreciate, our near-term desire is to reduce our stake sufficiently so that we will no longer in Westport's earnings in our earnings at all as we have very little influence on the day-to-day activities of that company.

Stock repurchases. During the fourth quarter, Equitable repurchased approximately 500,000 shares of EQT stock, bringing the total number of shares repurchased for the year to just over 2.9 million. The number of shares repurchased since October 1998 is approximately 15.2 million out of 18.8 million currently authorized.

Capital structure. As you might imagine our auditors, Ernst and Young, have not reviewed with finality our 12/31 2002 balance sheet items so those figures are still preliminary. However, on a preliminary basis, our total book equity as of the end of 2002 was approximately $778m or about $12.00 per share. Also as of the end of 2002, long-term debt, including current maturities, totaled about $471m, up by about $200m from the prior year as a result of a long-term debt issuance in the fourth quarter of 2002. Similarly though, our short-term debt as of the end of the year was about $106m, which is about $169m lower than the prior year figure.

In all cases, these figures do not include the balances of the two pre-paid forward transactions entered into in late 2000 -- one that has one year remaining and the other that has three years remaining. The remaining book balances for those two transactions are $35m and $62m respectively, split between currently liabilities and non-current liabilities on the balance sheet. Also, these figures do not include the effects of the sales of net profits interest in natural gas properties that were also entered into during 2000, though these transactions are described in the notes with the financials as they have been since they were entered into.

Finally, another balance sheet item that remains constant from year to year is the $125m in trust preferred security. This security is callable as of April 2003 and we may call it as the rate is about 7.35 percent. As the security calls for fixed periodic payments and a fixed principal payment, we believe that is it economically the equivalent of debt and if we call it we would most likely replace it with straight debt.

Finally, I wish to remind you of some other items that we have previously mentioned, which do affect comparisons from 2001 to 2002. First, there was an accounting standards change in 2002. In 2002 Equitable adopted SFAS Number 142, a new accounting standard for treatment of goodwill and other intangible assets. As a result, Equitable's ongoing annual amortization expense was reduced by approximately $3.8m. During the second quarter, the Company completed the required initial impairment test of goodwill. As a result of the impairment test, the Company was required to record a charge for the cumulative effect of an accounting change of $5.5m, net of tax, retroactive to the first quarter 2002. The Company has elected to complete its annual impairment analysis in the fourth quarter and no additional impairment was required. As you will recall, this issue pertains to NORESCO only.

The second issue relates to a change in the IRS interpretation of a Previously Disallowed Loss. In April 1998 management adopted a formal plan to sell the Company's natural gas midstream operations. Our capital loss was treated as non-deductible for tax purposes under the then-current Treasury regulations embodying the loss disallowance rule resulting in an additional tax recorded on the sale as a reduction to net income from discontinued operations. In May 2002, the IRS issued new Treasury regulations interpreting this rule that are now expected to permit a significant portion of a capital loss to be treated as deductible. Consequently, in the second quarter, the Company recorded a $9.0m increase in net income from discontinue operations.

The third issue that I would like to remind you of is the treatment of our ABP transactions. Through the end of 2001, this transaction was treated basically as a pre-paid forward. That is, proceeds were treated as deferred revenue and produced volumes showed up as monetized volumes in both operational and financial statistics. When certain financial targets were met, our ownership increased to about two-thirds of ABP. At this point, all of the volumes moved into the equity portion of the operational and financial statistics and we had to record the minority interest on the income statement relating to the one-third of ABP we did not own. We now received cash equivalent to about two-thirds of ABP and we also received a Section 29 tax credit associated with our ownership, though the tax credits obviously do not show up in the Equitable Supply EBIT, but rather in the corporation's tax line.

The final issue that I would like to bring to your attention, though it has also been mention before, is that of our tax situation. This has two aspects. Though Section 29 tax credits that we have been receiving has ceased as of December 31, 2002. This is not particular news as we all know that no energy bill has come out of Washington yet to revive this credit so we must assume that it is gone. However, since it was referenced in my discussion of ABP, I wanted to remind you of this change in 2003 tax status versus 2002. As we have mentioned before, we expect the negative year-on-year impact of this will be about $0.10 per share.

The other tax status issue is to again remind you that Equitable is an alternative minimum tax, or AMT payer. But we continue to forecast that we will have completely utilize our AMT credits and be a normal taxpayer by roughly the end of 2003. For cash planning purposes, we assume that we are an AMT payer in 2003 and a normal taxpayer for 2004 and beyond.

I will now turn the call back to Phil. Phil.

Okay, Jackie, that concludes the comments portion of the call and we'd now like to open the phone lines for questions.

Thank you. (Caller Instructions.)

The first question is from David Maccarrone of Goldman Sachs. Please state your question. Mr. Maccarrone, your line is live. Please state your question.

Hi. Good morning. I wanted to ask about the capital expenditure budget. If you look at the actual expenditures in ’02, and the projection for ’03, and net it of depreciation, you are looking at adding a net 20% plus to your capital employed, or net PP&E. And I wanted to know what sort of returns you are going to get, over what time period, and talk a little bit about the development drilling you are doing, and what the slope of production growth will be related from these investments.

David, I will take that question. I think there are two facts. Well there is one basic fact that we could talk about with respect to the actual cap ex. And of course we treat the cap ex different than the budget. I mean the budget is obviously something the Board approves. And the capital that is spent from that budget can go over year-end.

And two things, I think, happened. One was we had a lot of carry-forward from ’01 into ’02. And secondly, we had much less carry-forward from ’02 to ’03. So it sort of stacked up the cap ex in ’02. As a result, our expected capital expenditure for ’03 is about the same as ’02. We just accelerated those expenditures a little bit.

So I wouldn’t – this isn’t a change in plan, as much as it is an acceleration of the spending of the money that we have already discussed with you. As to the returns, the majority of this capital is related to drilling expenditures. And as you recall, we have a hurdle relate for our capital expenditures in production of at least making our cost of capital – that is roughly 8% - at 220 natural gas.

You will recall that for the 2002 program we believe that we earned, on that same metric, 10% return at 2002, and significantly more than that at the current market price. And then of course I am looking out a little bit.

As for the production growth that we are expecting David, I would say that – of course we will update this at the March meeting. But I will say that at the present time that production growth is exactly what we previously talked about in our analyst conferences and in our analyst meeting. So I don’t see any particular change.

This whole issue is an acceleration of money spent rather than a change in plan. And incidentally, the comment I made earlier – I realize this concern about capital generally. But the comment I made earlier about return on total capital is really at the fundamental roots of why we think that is such an important measure for credibility.

I mean Equitable has demonstrated that for capital we have employed that we make a proper return on capital. And maybe there is another measure to prove credibility. But for me that is the metric I use to get myself comfortable that the capital that the business units are employing in the future will make that return. I mean we have demonstrated our ability to do so. And with industry-leading return on capital, I wouldn’t expect that is going to change, given the discipline of this management.

I hope that covered the issues that you are talking about.

Just a couple of thoughts. On the acceleration of the investment, why aren’t we seeing an acceleration in production outlook?

Yeah. We have not projected production for ’03 yet. And so I am not going to talk about that at this particular time. And just suffice to say that we got a lot more wells drilled than we thought in 2002. And we will discuss that later.

And then secondly, you said you are getting an 8% or so return at very conservative NIMEX prices. And at current market prices you are getting a 10% type return.

No. I am sorry. I probably didn’t state that appropriately. What I was saying was that the 2002 program, we believe, would have generated 10% at the conservative prices, and significantly more at the current prices, if you see what I am saying.

Okay. But the math would suggest that is well north of 25% returns on capital.

It is probably not that high. There are some deductions for gathering expenses and other things that we will try to explain more clearly in March.

Okay. Thank you.

Okay. But it is significantly higher than the 10%. But not at that level.

Okay. Thanks a lot.

Okay.

Thank you. The next question is from [Jay Yenello] of UBS Warburg. Please state your question.

Good morning. With the really cold weather we are having, I presume you are reserving a lot more for bad debt and other associated expenses. Is there any metric we can use for that?

[Jay], this is David Porges. We normally think in terms of the utility reserving about 4% of its receivables in the form of bad debt. But we actually have a little bit more involved approach that increases that percentage when they get to be over a certain number of days. I mean certainly it is fair to say that we you should be using a slightly higher number. And you can see this if you are trying to forecast for 2003.

Frankly, we don’t spend as much effort trying to forecast what the bad debt expense is going to be, as we do trying to make sure they don’t become bad debts. But if you do assume that these things are going to go more than 30 or 60 days overdue, then the 4% does get ratcheted up. But I am afraid I don’t have a simple number, because we don’t actually look at it in terms of just one percentage, other than the all-in 4% number.

Okay. So I guess you are not taking a proactive stance right now, ratcheting it up above and beyond kind of norms at this point.

Well we wouldn’t get any support for that from our auditors, because if we are only selling the gas now, it is not even a receivable yet.

Okay. That is fair.

But also when we provide guidance to you on earnings, we are also not doing anything that is forecasting a cold January or a warm February or anything like that. We use normal weather. And we forecast everything based on that.

Okay. So there are positives and negatives.

Right.

Murry, my usual question. I guess in many aspects and ways, [Nightsource] is off the table here. How does the potential M&A outlook look? Kind of any general comments, whether it is assets, companies – any kind of flavor on that would be useful. Thank you.

Well the first comment I will make on that is just a reiteration of the one I made in my comments. And that is that [C&R] fits strategically pretty well. But a strategic fit for us isn’t as important as a fit that makes financial sense, and value added for the shareholders. And so we weren’t successful in that auction.

Obviously the properties that Equitable Supply would be interested in are pretty richly valued at this moment in time. And you can argue that theoretically they shouldn’t be, because they are long-lived assets, and the prices out in the futures market, even a couple years out, are significantly lower than today’s prices. But that is just the way it is. People are pretty proud of their production properties.

As to the utility, I can say two things. One is that we continue to be hopeful with the downturn in our sector, and the number of companies that had experienced trouble. The distribution companies, and potentially pipeline and storage assets in our region will be available.

As I have mentioned before, we are strong proponents of performance-based rates. It is very consistent with our operating excellence strategy. However, the regulatory environment means that when we take an asset, it will take some time to realize the benefits that we know we can realize. Therefore, the value of a potential acquisition has to be discounted accordingly for the timing.

And I have mentioned previously that deals in this sector have to be “rational deals.” That means relatively low premiums, with gives on social issues. And I think that latter point is the point that is restricting what should be a real ripe area for consolidation in the distribution pipeline and storage arena.

As for prospects, I have not seen a lot of change in that utility area lately. Anything that – I couldn’t stand here right now and say that there are just a tremendous number of opportunities out there, because there are not, for the reasons that I have described. Financially you have to have a pretty sharp pencil on it. And you have got to solve some of the social issues.

I hope that helps you frame the landscape. I mean it is a little broader than you probably want. I wish I could give you more specifics. We are looking. We are looking. And nothing has hit us in the head yet.

No. That is fair. Thanks.

Thank you. The next question is from Carol Coale of Prudential Securities. Please state your question.

Hi. Good morning.

Hi Carol.

Hi. I just wanted to clarify a few things. You talked about your return on cost of capital at your E&P company specifically, or now called supply. But could you give us a feel for what your goal is for return on total capital deployed? I believe last year your goal was 12%. And I wondered if that was still your goal, if you were tapering it off with lower expectations for earnings growth going forward.

No. Carol, the way we look at the return on total capital is that we want to make sure that we earn an actual return on total capital in excess of our cost of capital. And that has been true since Dave and I got here. At first – and really through now – we believe that earning a 10% return on capital is clearly in excess of our cost of capital, and is value added, and parenthetically is superior to what we see out there in the universe of companies that we compete with. So we feel like we have met that.

This year it is going to be a little higher than that. Frankly, there is no particular reason that we should be targeting much, much higher return on capital. And the reason for that is that if we are making a sufficient gap between cost of capital and actual on any individual asset, that is value-added to the shareholders. And what we need to do is just keep making that return over and over again.

Conversely, if we raise the targets too high, we start to restrict our ability to buy anything or put any capital into employ. So suffice to say that I am pretty comfortable with the gap that we are at right now, plus or minus. The issue for us is to find ways to employ capital at those rates of return in the future. And of course, we are sticking to our organic growth plan. Over the next few years we can still see ourselves to low double-digit EPS growth.

As we have mentioned, we will update you on that in March. But beyond that, the question is are there sufficient opportunities for us to employ capital at the returns that we know we can make in this business. That is really the long-term question for us.

So our return on total capital for 2002 is going to be nearly 12% when all the numbers get finalized. It is going to be a little higher than it was in 2001. And our desire is - we are just as motivated to continue to earn that kind of return on more capital employed as we are to increase the return on total capital on the existing capital. If we do either of those two things, we will continue to drive up our earnings per share, and continue to increase shareholder value.

Okay. And then just as a follow-up to that, you mentioned that one of your goals is to lower the cost of capital through reduced price volatility. And one way you have done that is through your monetizations and your pre-pays. And I understand one of those is maturing this year. And some have already matured. So what happens to your cost of capital as these monetizations roll off? Are you going to just do traditional NIMEX hedges? Or are you going to pursue more prepaid and monetized type opportunities going forward?

Carol, our preference is to do more of the monetized transactions. And that is because the counter-party exposure gets to be pretty high if the hedging goes out long-term. I mean if we are only talking about two or three years of hedging, then maybe the counter-party exposure isn’t such a big deal.

And it certainly wouldn’t look like a big deal this instant, because prices are so high. But at some point we all know, even if prices go up higher as a result of say today’s announced large withdrawal from gas storage, at some point they will go back down again. And that creates more counter-party exposure for us. So we would prefer to have more monetized transactions of some form, whether they are prepaid forward or some other.

Our attitude, though, is that the accounting rules are still just settling down. The new rules on I think what they are now calling variable interest entities are dense, and subject to quite a bit of interpretation. And we think that eventually interpretation on those will allow us to have a better idea of whether the economic realities of a transaction will get reflected that way in our financial statements.

So we are still holding off a little bit on doing more of that, because we are not sure exactly how it is going to be treated. And we don’t want something that has got one economic impact, to be reflected in a manner that is inconsistent with that on the balance sheet.

I will say though, Carol, that regardless of whether we are able to execute on monetized transactions, I think it is fair to say that the kind of earnings sensitivity that you have been accustomed to seeing at Equitable with respect to NIMEX is a strategy that we are going to continue in the future. And that primarily is what is reducing earnings and cash flow volatility.

So regardless of whether we do it with hedges or, as Dave said, more preferably with monetized transactions, you should continue to see us manage our price risk. That is our strategy and philosophy.

Okay.

And several years into the future, the answer to it is still going to be – that statement applies to several years into the future, not just the two or three years that you would see an E&P company engage in.

Okay. And I don’t want to belabor the point. But are monetization opportunities enhanced in the high price environment, or disadvantaged?

They probably look more interesting, because of the worry. But frankly, from a counter-party perspective, it looks like there is more of a chance of price declines that cause that counter-party exposure to blow out.

Okay. All right. Well I look forward to seeing you in March. And can you remind me of the date of your conference?

It is March 6. I think it is March 6. And [Pat Cain] will let everyone know. I am sure he will come racing into this room.

Sorry about that. We will have that before we leave the conference. I am sorry.

All right. Thank you. Thank you.

Again, the floor is open for questions. (Caller instructions.) The next question is from [Mark Haswithbro] from US Bancorp.

Hi guys. This is kind of a follow-up I guess in terms of how you are putting capital to work, if in fact there are such limited opportunities. Maybe you can comment on your outlook on dividend policy, and on share repurchase, especially given that it looks like your authorization has maybe about one more year of life at the rate you have been running in the past on share repurchases. And I would also like to ask if there are any issues in regards to your complicated tax situation in terms of potential dividend tax relief.

I will take the former. And then David will take the latter on dividends. First of all, I think for the next few years we do have internal organic growth opportunities, as we have mentioned before. So I am not so concerned about the opportunities to employ capital over the next few years.

My comments really refer to what happens in the 2006, 2007, 2008 timeframe with Equitable. So I think that handles the first part. And those opportunities are for, as we mentioned, to drill more wells, to employ capital to get more out of our existing wells, and to employ technology in the utility, such that we can benefit the performance-based rates.

So those are the main buckets. And again, we will update that on March 6, is when the analyst conference is. And Dave, maybe you might want to take the dividend question.

Good answer. You also asked about the share repurchase. So I will hit that. I think you asked that one first. So on share repurchases, the numbers you quoted back to us are of course correct. But to remind everybody, since we got here in ’98, that total share repurchase authorization is the result of three separate actions by the Board of Directors. And frankly, we would expect that when we get close to that total we will go back to the Board of Directors again and ask for an increase in authorization.

As a controlled mechanism, and both Murry and I certainly agree with that, we don’t want to have a huge gap between what we have actually repurchased and what the authorization is. So we actually don’t think it is unusual at all that we haven’t increased the authorization yet. And we are probably not going to look to do it until we get closer, whether that is this year or next year, or whenever it happens.

We think though, just so you are aware of those facts of the authorization, that we don’t view that as being a long-term constraint, even though it clearly would be a short-term constraint, because the Board would have to act on it.

And you asked about the new dividend – the proposal on dividend relief from taxes, or from double taxation. Philosophically we are supportive of the notion of eliminating double taxation on anything. Anybody who gets involved in drilling though probably finds that it doesn’t really help them quite as much as it would if you don’t have any drilling, because we do have tax credits that are associated with that.

So we haven’t really tried to figure out yet if we get all our dividends, would all of our dividends be tax-free to shareholders, because it would depend on the drilling programs in the year. And it could well be somewhat sensitive to it. So certainly a lot of the dividends would be tax-free. But it could be that it is not all going to be, because of the drilling programs.

Separately, we are certainly aware of this possible legislation, when we consider our own dividends. But typically our Board has not looked at dividend policy until February or March of each year. We have – of course we increased the dividends in early – we announced an increase in dividends in early 2002, and previously in early 2001. And the Board is expected to revisit that topic in February or March. And they are certainly aware of this pending legislation when they consider that topic.

Well thank you very much. And congratulations.

Thank you.

Thank you. The next question is from [Maura Shaunicey] of [MSS] Investment Management. Please state your question.

Yeah, good morning. I was just – I actually was going to ask on the dividend. Let me just ask it a bit of a different way. Let’s assume that something gets passed in Congress, which maybe is a big assumption. I mean your payout ratio is extraordinarily low relative to your peers. So there is a tremendous amount of dividend growth, when many of your peers are hopefully maintaining their dividends.

Would you think about, once something is passed in Congress, that you would re-look at the policy? Or there is obviously a lot of potential there on the dividend. But given the existing laws, we certainly can understand why you have been focusing on share repurchasing. So can you flesh that out a little bit more?

I can’t give you any specifics, because of course all of that requires Board action. But again, while I agree that the Board is likely to re-look at the policy once legislation gets passed, what I was trying to communicate is they are going to re-look at it, even knowing that there is pending legislation.

So I am not expecting that they are going to wait for final votes. But I think it is fair for any – any of us who read the newspapers would have to think that there is some doubt about whether that proposal is going to get passed in current form.

But as far as dividend versus share repurchase, we absolutely agree that the two reasons that we have been stressing share repurchase over dividends is that we have perceived that share repurchase are in the best interest of our shareholders. One of the reasons is they are being taxed. The other being that they control when something becomes – when the earnings become taxable. So that affects it.

And also, it allows us to vary our share repurchases, depending on cash availability. We will re-look at that mix when any of those factors change. So clearly if this legislation goes through, it would cause us to re-look at our mix, because on payout ratio, actually we say if payout ratio meets the total amount of money returned the shareholders of dividends and share repurchases, we think we have been at the high end. If we are not at the high-end, it is because we above the high-end of the range of our peers.

And yeah, we will re-look at that balance when any of the factors that influenced it change. And most immediately, of course, that would be the tax status of dividends.

I will say, for those that might be jumping in to ask that question, that there is some variation in opinion on the value of dividends versus share repurchase among our current shareholders. So – and we are aware of the arguments both ways. And of course with the new pending legislation, we will have to, as Dave said, take another look at it. Thanks [Maura].

Thank you.

Thank you. The next question is from [Gil Gavey] of JP Morgan. Please state your question.

Hey, good morning everybody. Congratulations on a great quarter and a great year.

Thanks [Gil].

I was wondering if I can get a little more color on your asset optimization plans, what the opportunity is as you see it, and how exactly organizationally such an activity could be executed – whether it would be done within the utility, or perhaps in an unregulated entity.

That is a great question. And Dave and I both mentioned we had separately named the president of Equitrans, which includes both our pipeline and our storage business, as well as – who is Arthur Cantrell. And Equitable Gas is our distribution company. And we have named Randall Crawford as President of that unit. Both are very good executives.

But one of the reasons we did that was to focus explicitly, as we really haven’t done, on the pipeline and storage business. And there has been work done in our utility over the last year – some very, very good work – by one of our most senior executives, [Fred Delana], who has shown us that there was significant potential to improve our storage facilities, all the way from the commercial aspects to the operating aspects, the drilling – I am sorry, the wells, the reconditioning of the wells, etc.

So we are very pleased with the results there. And it has caused us to think that more of that kind of stuff might not be bad to have for Equitable. That is to say maybe some more pipeline, and certainly some more storage, if it is available, and at the right price of course. So we are concentrating efforts. And the new structure of our organization is allowing us to put more focus on that than we have before.

As to whether it is regulated or unregulated, at this point I am not really willing to say. But the optimization has just been hammer and tongs stuff, getting the wells to produce better, that is, to perform better, and to just do more work on commercially arbitraging that asset. So that is really what is going on there. As is typical with Equitable, it is an operating excellence philosophy. But we are getting a little more excited about it. And we will talk about that a bit more in March.

Okay. Wonderful. Thanks a lot guys.

Okay.

Your next question is a follow-up coming from David Maccarrone of Goldman Sachs. Please state your question.

Thank you. In your release you indicate that you base your average NIMEX price on a conversion rate of $1.05.

No. Not $1.05.

Not a dollar – 1.05 MMBTu per Mcf.

Yeah.

Is that consistent with your production? And what is it that you are actually hedging? Are you hedging on an MMBTu basis, or an Mcf basis?

We hedge on an MMBTu basis, because we use NIMEX. But the production group – the supply group has found it more useful to use volumes throughout at this point. What we produce – and incidentally, and we get into little debates on this internally – my recollection of chemistry is that there is around about 1,035 BTUs per cubic foot in methane, CH4. So that is about – the norm that the gas company buys at is about 1,050 - so there is an assumption - or 1.05, if you will. So that there is an assumption that maybe there is something a little bit other than pure methane in it.

We produce at – what comes out of the ground for us, the stuff that comes out of the ground probably averages a little bit more like 1,100 or 1,140, something like that. It is certainly above the 1,050. Or I will put it another way. The 1.1, 1.2, 1.4, something like that – definitely higher than the 1.05 conversion. But obviously, by definition, that can’t be methane, because that has got more energy content than methane. But the nature of a lot of the commercial contracts we have is that, it is buried in those contracts, the liquids get stripped out, because of course that is what helps us going on there, liquid. The liquids get stripped out. And there is a variety of contracts with pipelines and such, where we have got our own processing plants as well, whereby those get stripped out.

So if you are trying to look at what comes out of the well head, you do have to use a higher conversion rate, to find out how much energy is coming out of it, if that is what you are asking. But we do hedge in MMBTu, because that is the way the hedging market works, since that is the way NIMEX works.

Okay. Thank you.

There are no further questions. At this time I would like to turn the floor back to the speakers for any closing comments.

Okay. And that does conclude today’s call. I remind you, this call will be replayed for a seven day period, beginning at approximately 1:30 p.m. today. That is Eastern time. The phone number for the replay is (973) 341-3080. You will need a confirmation code of 3377379 to hear the replay. And the call will also be replayed for 30 days on our Web site. Thanks again for everybody participating.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day.