EQT Corp (EQT) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Equitable Resources first quarter 2003 earnings conference call.

At this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation.

I would now like to turn the floor over to your host, Mr. Patrick Kane.

Sir, the floor is yours.

Thanks, Meadow.

Good morning, everyone, and thank you for participating in Equitable's first quarter 2003 earnings conference call.

With me today are Murray 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 to date.

Dave will then review the first quarter financial results that were released this morning.

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

But first I'd again like to remind you that today's call may contain forward-looking statements related to such matters as improvements in commercial and industrial customer margin, realizing value from our Westport investment without causing any undue disruption to Westport, accruals for executive performance incentive plans, the percentage of expected operated gas volumes that are affected by changes in [niemex] gas prices, the company's EPS sensitivity to changes in gas prices, the anticipated diluted core earnings per share, the targeted growth of dividends and 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 MD&A section of the company's 2002 Form 10(k) as well as on our web site.

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

Murry?

Pat, thank you.

My comments will be fairly brief.

We have a fair amount of financial detail to share with you today and we think it's an efficient way to do it over this call.

Overall, my comments on the first quarter are these.

EQT is on track.

We're on track with our prior commitments that we've made to you as far as earnings outlook for 2003.

As you saw in the press release, we reiterated our EPS guidance in 2003.

We expect to earn between $2.70 and $2.80 per share this year.

I would like you to keep two things in mind from a shareholder perspective.

And even though I think we're still in a catalyst and headline driven invested environment, there are relatively few places where money can be invested in a simple story.

EQT is one of those places.

Our returns lead the industry.

We have paid attention to the impact of risk factors on our cash flow earnings volatility and on our cost of capital.

We grow our bottom lines faster than our competitors, and we invest money profitably.

And where we have excess cash, we give it back to shareholders as fast as we can.

The management team here has a pretty good track record and we're getting smarter and deeper every day.

So this is a pretty, pretty good story right now and we're very, very proud of it.

Secondly, I would like to highlight the fact we did raise the quarterly dividend this quarter from 17 cents to 20 cents per share, about an 18% increase.

This strategy, we hope, will continue with time.

That is, we are targeting dividend per share growth to be in the general neighborhood of our anticipated earnings per share growth, that is to say, low double digits.

Now, that's going to be -- the actual dividend increase may be a little lumpy.

We prefer to have non-fractional increases in dividends so the percentage could bounce around a little bit this time it was 18%.

And this dividend strategy will allow our pay out ratio to be about flat over time.

So that's where we are right now.

We are now an 18% increase this time.

And you can at least use that general strategy as guidance for the future.

Incidentally, the debate in Congress on the tax impact on dividends is not affecting our decision to raise this dividend.

We've completely ignored that debate, and that debate is getting more and more complex with time.

If there is a change we will reconsider the dividend policy.

And with that I'd like to turn it over to David Porges who is the Executive VP and CFO and most importantly is a proud new father.

So congratulations to Dave.

Dave?

Thank you, Murry.

Equitable Resources today announced first quarter 2003 earnings from continuing operations before cumulative affective accounting change of $1.02 per diluted share on a net income of $64. 5 million. --- this represents a 28% increase over the 80 cents per diluted share from continuing operations in the same period a year ago.

After that cumulative effect of that accounting change, the company earned 96 cents per diluted share in the first quarter of 2003.

As you may recall, and as the attachment to the press release notes, the first quarter of last year had a retroactive effect due to another accounting change and last year's earnings after that change were 72 cents per diluted share.

Separately, the company declared a 20 cent per share dividend this quarter representing an 18% increase over last quarter.

My comments will focus on the factors leading to the 28% increase in EPS from continuing operations, but it will also discuss the accounting changes and some other issues.

With the new rules requiring detailed reconciliations to non GAAP numbers along with our move to the cost method of accounting for our stake in Westport resources, we will dispense with the notion of core earnings, except in the event of very unusual items that would otherwise make comparisons from period to period uninformative.

Please note, though, that this quarter's earnings include 4 cents per share from our stake in Westport, which was essentially offset by a 3-cent charge for establishing a charitable foundation with the donation of some of that stock.

As is our norm, we will begin with Equitable Utilities.

Equitable Utilities had earnings before interest and taxes or EBIT of $59.0 million dollars for the first quarter, a 10% increase over the $53.5 million reported for the same period last year from early due to the colder weather in 2003. --- Heating degree days for the first quarter, 2003, totaled 3 ,115 which was 29% more or colder than the prior year and 6% colder than normal.

The increase net operating revenues due to weather were partially offset by weather related costs.

Since weather had material positive and negative effects this quarter we decided to provide a few more facts to put this quarter’s weather into perspective.

First, this was the most degree days we've experienced since 1994, that is for our first quarter.

Second, the official 30- year average maintained by NOAA or the National Oceanic and Atmospheric Administration has just changed.

And the new average is 2% warmer than the prior average for the full year and 3% warmer for the first quarter.

Still the first quarter was colder than the current average, colder than the prior average, and colder than the average for any decade this century, as well as being 10% colder than the 100 year average.

So it was cold.

While the colder weather certainly is beneficial at the revenue line for our gas distribution business equitable gas company, most of the other effects of having such extreme weather are negatives, thereby mitigating much of the beneficial effect on LCD revenues.

The obvious examples of this are reserved forbad debts and the expenses associated with fixing leaks and the like, but there are some less obvious costs also.

As a baseline, we estimate that this colder weather increase EBIT by about $11 million versus the prior year before the negative weather impacts.

Bad debt reserves recorded at just over 6% of residential revenues for the quarter, which is almost double the normal rate and on the high revenue numbers at that.

In dollar terms this added about $4 million to expenses versus last year's quarter.

The operating expense increase due to weather was about $0.6 million. --- the less obvious offsets were to our commercial activities.

In particular, since the nature of this winter was a sustained level of noticeably colder and normal weather, rather than short intervals of bitter cold weather, our storage and firm transportation assets were essentially at full utilization throughout the quarter.

All customer needs were met other than some occasional reductions for interruptible customers, but these assets were not available for additional commercial uses.

This effect similar to a curtailment of some non-regulated activities reduced EBIT by $2.8 million.

To save you the effort of doing the arithmetic this means all but $3.6 million of the weather related benefit versus prior year EBIT was offset.

This leaves unexplained about $1.9 million in non-weather benefit versus last quarter which we attribute mainly to increased margins in our commercial and industrial business.

Even that may in fact be an indirect benefit of the colder weather but we have revamped this activity and believe the C N I improvements are real.

Incidentally another side effect of the colder weather which is buried in the cost above is that a higher proportion of labor hours were devoted to expense related items in a recently completed quarter.

Compared to our norm with a result of decrease in activity of capital related spending. --- primary examples of this are as follow.

We prepared 876 new leaks in this year's quarter compared to 449 new leaks compared in last year's new quarter.

We answered 3 ,303 calls related to emergencies in this year's quarter compared to 2509 emergency calls in last year's quarter.

On the other side, and largely as a result of the above weather related priorities, we installed only 9 miles of new pipe in this year's quarter compared to 20 miles in last year's quarter with a commensurate decline in capitalized labor.

Now onto Equitable Supply.

This unit had EBIT of $47.8 million for the first quarter, 29% higher than the $37.2 million earned in the same quarter in 2002. --- primarily due to higher commodity prices.

Production EBIT was also up 29% at $42.0 million dollars compared with $32.5 million in the same period last year, while gathering EBIT grew from $4.7 million to $5.8 million year on year.

The main reasons for these increases were volume and price so we did not achieve as much of a benefit in either case as one might typically expect.

And I will comment on that after providing the numbers.

Sales volumes increased 0.6 BCF E versus the prior year while defective oil head gas price increased from $3.21 per NCF E to $3.99 for NCF E in 2003.

Unit costs held pretty close to constant versus last year, excluding the large price related increase in severance packages.

And that was a positive given the current price environment.

Those factors basically explain the $10.6 million increase in EBIT for Equitable Supply, but I would like to return to the issue of expectations for volumes and prices. --- total operated volumes were essentially flat year-over-year at 22.4 BCFE versus 22.5 BCFE in 2002.

We have expected pro forma sales volumes to be up about 4% annually versus the experienced increase of just over 1%.

This should translate into a 2% per annum increase in total operating volumes rather than slightly decreased volumes absent acquisitions and divestitures.

Here are the issues. --- first the simplest and smallest factor was the sale of 511 marginal wells containing 15.3 BCFE reserves in one of our non-core fields in the state of Ohio.

This reduced volumes in the quarter by 69 million cubic feet equivalent or just under 0.1 BCFE at the sale closed on the last day of February.

Next, transportation curtailments primarily on dominion pipelines cost us about 0.3 BCFE more than expected and more than last year.

Working in and around coal mines is always an issue in this region and dominion has experienced pipeline problems that we believe have been caused by coal related issues, though they have been exacerbated by the new Department of Transportation safety requirements that have made it more time consuming for them to bring the pipeline back up to full capacity.

This obviously affects our ability to move volumes to market.

Third, coal[inaudible] reduced volumes by about 0.2 BCFE due to freeze offs one expects in this type of weather.

Finally and more controllably, we estimate the 0.3 BCFE shortfall due to hiccups in some of our automation projects due to widespread application.

Basically we begin to can you back on [inaudible] and other activities a little too early.

This helped keep expenses down but it made it more difficult to identify and respond to technological glitches.

Much of equitable’s expense philosophy has been to cut until it hurts and then back off.

Well, it hurt and we have already begun revising this approach.

We hope we have been clear that our many pilot programs will cause some successes and some failures.

In some cases in which some revision is needed to achieve success.

We experienced all three, learned from the experience and applied the lessons learned going forward.

Incidentally, if you are trying to track our operated volumes over the course of the past couple years, sales and acquisition activity does have to be taken into account to allow for the comparisons.

While the only purchase that of the Appalachian based partnership minority interest did not affect operated volumes, but the presales did.

Some in the oil field sale in late 2001 and the sales in the first quarter of 2003, we have sold about 83 BCFE proved reserves for just under $67 million.

These were all non-core to our operation, but reduced annual operated volumes by just under 5 BCFE or just over 1 BCFE per quarter.

Price story is simpler.

We were nearly fully hedged on a plan basis coming into the quarter but above volume issues meant that we were essentially were fully hedged.

We used up our cushion.

Secondarily our modified gases sold predominantly at the basis point that it was most affected by the price increases to dominion point, surprise prize.

Meaning, we did not benefit from much of the basis increase.

My summary, given high prices, everything else was only so-so, but we still increased EBIT by 29%.

A final note on this segment regards the Appalachian Basin Partners transaction.

As mentioned a moment ago, we finally did complete the acquisition of the minority stake in this partnership of $44.2 million.

The effects you will see are a slight increase in DDNA rate and an elimination of the minority interest deduct on our income statement related to this partnership --- this was all effective mid quarter.

As for Noresco, this segment had EBIT of $4.9 million in the first quarter of 2003 compared to EBIT of $4.2 million in the first quarter last year.

As has been the trend for past several quarters, the performance contracting business was strong while international power projects showed weakness.

Performance contracting drove the 28% increase in total revenues.

Partially offsetting this, the smaller of the two Panama power projects saw its initial power purchase agreement end, thereby causing it to sell power at much lower prices.

This was the largest factor in the $0.6 million increase in earnings.

This segments quarter end backlog was $89 million versus $108 million a year earlier, continuing the lumpy nature of this metric.

I would like to finish by discussing a few other items of potential interest to investors.

First, stock repurchases.

During the quarter, equitable resources repurchased 448,000 shares of eqt stock.

Total number of shares repurchased since October, 1998 is approximately 15.7 million out of 18.8 million currently authorized.

Next, the community giving foundation.

Equitable established a community giving foundation, Equitable Resources Foundation, Inc., to facilitate the company's ongoing charitable giving program for approximately ten years.

The foundation was funded through a donation of 905,000 shares of Westport Resources Corporation common stock.

We calculated the number of shares required to optimize the after tax benefit to shareholders of giving this appreciated asset.

Therefore, even though the total gift had a tote a market value of about $17,000, earnings were negative only by $2.2 million or 3 cents per share in the quarter as a result of the contribution.

Due to SEC rule 144 restrictions, the foundation was only able to sell just over 861,000 shares in the quarter, with a remaining 44,000 shares remaining to the foundation' benefit.

If you are trying to figure out the $2.2 million figure from our press release, here is some help.

Book basis of the stock was $10.25 per share.

Multiply that by 905,000 shares and you arrive at the $9.279 million shown on the income statement.

Now, the taxes that we would have recorded in the quarter as of the foundation would have equaled 34% our ongoing book tax rate times the income from continuing operations before income taxes, etc., if one adds the charitable foundation expense back.

In other words, it would have been 34% of the sum of $90.982 million, and $90.279 million dollars charge for a tax expense of $34.1 million dollars.

Subtract from that the amount of the actual tax recorded which was $26.966 million and you have a $7.1 million --- tax benefit against a $9.3 million expense.

The next related topic is obviously Westport.

Equitable resources reported $3.6 million in equity earnings from its minority ownership in Westport Resources during the first quarter of 2003. -Earnings net of tax were $2.3 million or 4 cents per share.

Perhaps more importantly, Equitable now owns approximately 13 million shares or 19.5% of Westport which is down from 20.8% at the end of 2002.

The company does not have operational control of Westport.

As a result of the decrease of ownership the company changed the accounting treatment for its investment from the equity method to cost method effective March 31, 2003.

The change in accounting methods will eliminate the inclusion of Westport’s results in Equitable’s earnings in future periods.

We will continue to examine -- methods of using this stake to assist our shareholders in realizing share without causing any undue --- disruption to Westport resources.

I would now like to discuss the effect of our executive incentive compensation program which we have discussed at our investors meeting and also in our financial filings.

These plans more formally referred to as executive performance incentive plans, or EPIP, tied long term compensation for the top 11 executives to our total shareholder return relative to 30 comparable companies.

They are obviously designed for both incentive and retention purposes.

The assumptions we have used for accrual are a final pay out price and $47.00 per share of EQT stock for the 2002 through 2004 EPIP and $49.00 per EQT share for 2003 to 2005 plan.

We have also adopted the approach of accruing approximately 50% of the cost of the plan in its first year and approximately 25% in each of the next two years.

If these plans paid out at par with the above stock prices, for 2002 to 2004 plan would have a total cost of $7 million and the 2003 to 2005 plan would have a total cost of $22 million.

However, we have further determined that it is currently appropriate to accrue as if the first plan paid out at the maximum 2 times par and the second plan paid out at 1.5 times par.

This is consistent with our general preference for a pay as you go approach to these things.

The result is that 2002 had total accruals from these plans of about $6 million, while 2003 will have a total accrual of about $18 million.

If we continue to accrue at these levels, the 2004 accrual would be about $14 million and the 2005 accrual would be about $10 million.

As time passes we may have reason to change these assumptions.

If so, we will adjust the accruals and keep them consistent with pay out.

From a broad bush perspective, total cost over four-year period can range from 0 to $58 million with par being $29 million using these assumptions.

Compared to this range, we will have accrued $24 million at this pace by the end of 2003, and are currently accruing in a manner consistent with a total four- year cost of $47 million.

This program is replacing about 75% of the options these executives might have expected to receive during 2003 to 2005, but unlike the options expense, these expenses are hitting in the income statement.

A further benefit from our perspective it is reducing the effect of various option expensing.

Yet another item of possible interest is February of 2003 the company issued $200 million of notes for an effective interest rate of 5.22% and a maturity date of March 2018.

The proceeds from the issuance will be used for retiring the trust preferred securities and general corporate purposes.

So the company will exercise its option to redeem the entire $125 million of 7.35% trust preferred capital securities tomorrow.

The timing of these transactions has probably added $700,000 interest expense in the first quarter, but we wanted to take advantage of low interest rates and had no particular desire to get to greedy.

We believe the trust preferred is basically debt by a fancy name and do not want to pay for the name.

My penultimate topic is an accounting item.

June 2001, the financial accounting standards board issued financial statements number 143, accounting for asset retirement obligations, FAS 143.

This became effective in the first quarter of fiscal 2003.

FAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized by the company at the time the legal obligation is incurred.

When the liability is initially recorded the company must also capitalize the cost by increasing the carrying amount of the related long life asset.

The liability is accretive to its future value through charges to operating expenses and a capitalized cost is depreciated over the useful life of the asset.

If the obligation is settled for other than the carrying amount, the company may recognize a gain or loss upon settlement.

The company adopted FAS 143 on Jan 1, 2003.

This cumulative effect of change in accounting principle resulted in a one time charge to earnings of $3.6 million or 6 cents per diluted share during the three months ended March 31, 2003.

So the purpose of this accounting item is not industry specific for equitable it pertains to plugging and abandonment liability, for wells and the production portion of Equitable Supply.

My final item is the balance sheet.

As of the end of the quarter our book equity totaled about $880 million, long term debt totaled $762 million, including the $125 million of preferred trust securities.

Short term debt including current maturities totaled $91 million and cash invested totaled about $146 million, the latter as a result of the financing timing issues I mentioned a moment ago.

The deferred revenue related to the two prepaid forwards, continues to amortize as the three-year $104 million transaction concludes at the end of 2003, and the five year $104 million transaction now has 11 of its original 20 quarters to run.

Other comprehensive income for the quarter was $58 million which is primarily attributable to the $83 million net gain from the mark to market adjustment of the Westport resources investment offset by the losses associated with cash flow hedges.

As a result of moving from the cost method accounting for our Westport stay, we will now be required to move a mark to market adjust the for this investment on the equity portion of our balance sheet.

And finally, I am now ready to turn the floor back to Pat Kane.

Pat?

That concludes the comments portion of the call.

Now can we please now open the call up to questions?

Thank you.

The floor is now open for questions.

If you have a question, please press the number 1 followed by 4 on your touch tone phone.

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

If you ask poll your question, pick up your handset to provide sound quality.

Gentlemen, your first question is coming from Ron Barone of UBS Warburg.

Please state your question.

Thank you.

Good morning.

Hey, Ron.

How are you?

Well, thank you.

Good.

Could you give us a little bit more flavor on the well automation program?

Not to dwell on it, but what went wrong, has that been corrected?

And also I know it's early, but maybe you can give us some real time update on the receivables and how they're looking.

I'll take the wells, Dave can take the receivables.

I think it would be unfair to characterize anything as wrong, Ron.

I think the technology is out there.

It's being used very aggressively.

The field has taken to it quite aggressively.

I think we just pulled well tenders out of the field sooner than we should have, we probably did not get the training as well integrated as we should, but make no mistake about it, the people in the field appreciate the information and are making a lot of progress.

And furthermore, as you look at the numbers that Dave talked about, the total sum of the purse, if you will, to production far exceeded what our -- what -- way more than explained, the little shortfall that we've had there.

So we continue to be pretty optimistic about what's going on.

So please don't characterize it as a negative.

It's just more of a growing pain.

And I'll turn the receivable question over to Dave.

At this point, really, Ron, what we've done is gone through customer segment by customer segment to come up with what we think are appropriate reserves as I mentioned a little over 6% of revenues.

Frankly, I'd say it's a little early for us to really know what our collections are coming in any different from that level.

At this point we think that's a pretty good number to be using.

And we haven't seen anything yet that would suggest that collections would justify some different reserving level than what we've got.

But as that develops more over the second quarter, we'll let huh-uh know if that does turn out to be the case.

Great.

As a strategic issue, it is clear to us that obviously there is a relationship between this receivable issue and how cold it is.

More people don't pay more -- is that the way to say it?

More people don't pay more when it's very cold.

And that does vary seasonally.

So I think we've got a lot of work to do [inaudible], but you know, as best we can, we've tried to estimate what that charge would be so we get it behind us.

Thanks, guys.

Congratulations on a good quarter and Dave congratulations on your new addition.

Thanks, Ron.

Appreciate it.

Thank you.

Your next question is coming from Curt Launer of Credit Suisse First Boston.

Please state your question.

Yes.

Good morning and thank you and congratulations, again, Dave, from all of us.

Three quick questions if I could.

First, relative to the stock buy back plan, you're getting close to the number of shares authorized to be repurchased.

I'd like to ask for some ongoing thinking on that.

Second, if you can give us an update on the capital expenditure budget breakdown for '03 and ahead for '04, if you have it.

And third, I was writing as fast as I can.

I know I missed some of the numbers relative to the expense assumptions for the new management compensation program.

So if I could ask you to repeat those for '03 and '04.

Okay.

Curt, we've got the stock -- you asked about the stock buy back relative to the authority.

Where are we on the capital budget, and then the expense related to the executive compensation plan.

And you wanted '03, ’04 numbers, is that what you were saying?

Yes, please.

Okay.

On the stock buy back, the board authority is really just that.

It's a milestone, Curt.

I would call it a milestone.

And as we get closer to that milestone, my intention would be to go back to the board and then discuss whether we wanted to increase it.

I don't think there's been any -- that wasn't a hard and fast number, nor should it be considered a hard and fast number.

It's just purely a milestone.

As to the capital budget, I don't think we've got a number right here.

Suffice to say, I think it's pretty much on track, I think, with where we expected it to be for this year.

You recall the Cap Ex expenditures for '03, that is capital out the door, is expected for '03 to be nearly in the range that it was for '02.

In '02 we spent about $218 million in cash, and this year we're targeting about $228 million.

The supply business is about on track with their spending.

But as Dave mentioned, because of the cold weather, the utility is spending a little less in cash or did spend a little less in quarter 1 than we anticipated.

I can even on that provide a little detail maybe on the Cap Ex for the utility.

And as Murry said, consistent with the weather issues, we mentioned before.

Our actual Cap Ex in the first quarter in the utility was about $8.7 million.

It was -- the prior first quarter was $9.3 million, but because of a little bit of a step up in infrastructure spending and some technology spending we actually had a plan of $12.9 million of expenditures in the first quarter.

So that's an 8.7 actual versus a 12.9 plan.

That plan would have been consistent with the overall numbers Murry spoke about.

And the 8.7 is also comparison to the 9.3 we had in the first quarter of 2002.

The technology related expenditures in utility weren't affected, as you would imagine they weren’t really affected by the weather.

And then, David, you might want to repeat the '03 '04 PI executive compensation numbers.

Ron, rather than going through the specifics on that's correct I'd be glad to E-mail you the transcript of Dave comments.

And anybody else on the call, if you'd like to a copy of Dave's comments via E-mail, please send me an E-mail PKane@EQT.com and I'd be glad to get you an E-mail.

You can probably get that out by noon, shouldn't we?

Right.

Thank you.

That would be very helpful.

Appreciate it.

Okay.

Thanks, Curt.

Thank you.

Your next question is coming from John Edwards of Deutsche Bank.

Please state your question.

Good morning, everybody.

Hi, John.

Just on the executive compensation, I just want to make sure I understood what you were saying.

So you're already beginning to accrue and at the stock price benefit -- am I correct in understanding that if it doesn't reach $47 a share, then what happens -- I guess the question is what happens to the total pod that you accruing?

Is that down significantly?

Directly, if we were -- let's say we were at the medium -- it's ourselves and 30 other companies, so total of 31 companies.

Let's say for the sake of our discussion we end up being number 16 total share [inaudible].

So we're right in the middle.

Then the multiplier on the number of units let's say Murry has would be 1.0.

Now, that multiplier wouldn't be indifferent as a result of the stock price being $47 versus the current $38.

But, the value of the units would be different if the stock price is different.

So, there is no direct -- the direct impact from a change in share prices versus the assumption I've got is purely proportional to those dollar amounts.

If the price is one-third less or one-third more without changing our relative standing in total shareholder return, then the expense would be one-third less, or one-third more, etc. --- presumably if the stock price is lower, or higher, that may impact what our relative ranking was and that would affect the multiplier.

So, John, is that getting you where you want to --

I'm just trying to -- I mean, it sounded as if you were taking a somewhat conservative view on what you're accruing.

Maybe I can get to that.

John, --

Several years ago equitable put in place what was called a break through plan.

A $50 a share stock price, and which we made and then paid out of that.

I kind of liked that plan at the time because it was fairly simple.

But, as we thought about it more, it's not only important that our stock price go up, but it's also very important that, as you know, we really focus on how we're doing against other people.

Sure.

So we had to, on the one hand, consider what price level for the company do we think is consistent with the plans that we have going forward so that I can push the management team to a number, you know, that says, look, this is what I think the company is worth if we execute.

Right.

So there's that on one side.

And then also the desire, as Dave said, to make sure that the payoff does not occur unless we are performing well against the peer group.

Because if everybody is performing well and we just are performing modestly and we get the $50 a share, that's not real cause for celebration, nor is it cause for great pay out.

So we had to make this compromise.

And in our analysis of the charge that we should take, we had to make some assumptions.

And basically Dave is just being very transparent on those assumptions.

But philosophically I will tell you, you're asking if -- are we being a little heavy or a little light.

We're trying to be reasonable.

To the extent that there's judgments, we'd rather not under estimate it.

Philosophically, the one thing we really want to avoid because we just don't think it's right, will be to get to the end of one of these periods, let's say we get to the end of 2005 and have not fully accrued.

Right, right.

The executives would get the benefit of a share price that did not fully reflect the cost of that program, because payouts in each case [inaudible] March of the year following the end of the three-year period frankly in another month, two and a half months of retention.

So the real concern as we look at -- to the extent there is any judgment, mainly we're trying to be accurate.

To the extent there is judgment involved, we acknowledge we don't want to leave any accrual hanging out there at the end of a period because you create an unusual dynamic where management can benefit and shareholders don't and that's not a good way to show our own credibility.

But in any event, you've got 18 million that accrued in '04, '03, and that's what you're expensing I guess in SG&A?

Yes is the answer, John.

As Murry mentioned you've got transparency.

If you want to use different assumptions, it winds up being more or less money, that will wind up affecting the accrual going forward.

That's what I was trying to figure out, how much head room do we -- in terms of if they're in these assumptions.

We hope none, John.

Okay.

And then can you talk a little bit more about the bad debt expense?

I thought you said it's about $4 million or so.

Prior year?

I mean for this quarter you're reserving $4 million.

No that's versus the prior quarter.

That's a delta because of the cold weather.

Oh, okay, then.

How much are you expensing for the bad debt this quarter?

Well let's see -- I'm not sure if I have that total number in front of me.

We can get that for you.

But we typically have been accruing a number that is more in the 3% of residential revenue, 3.5% of residential revenue.

And it's the bad -- or closer I think close to 4%.

And it's the weather that caused it to move above 6% of residential revenue.

I'm sorry.

So last year was around 4%, this year 6%?

A little over 6%.

Goes from around 4% to a little over 6%.

Okay.

And where are you -- where do you -- what line item do you run that through?

That goes through SG&A.

Okay, it does.

Yeah.

You're going to look at first the press release if that's what you're referring to.

Right.

The segment page on utilities shows -- let's see -- it shows SG&A --

The SG&A was a lot higher.

It shows that up $3.9 million.

I said about $4 million.

But actually if you wanted to get precise, it is -- if you want to go to the 10th, it is $3.9 million rather than $4.0 million.

That fully explains -- if it happens, that fully explains the increase in SG&A expense from first quarter of 2002 to first quarter of 2003.

As faras why it doesn't show up in -- as a constant revenue or something, that's why I didn't become -- that's why I didn't go into accounting.

Okay.

And if you end up realizing collections better than what you're reserving, how will that be treated?

It will get rolled -- you roll through contra expense in SG&A.

Okay.

Okay, great.

I'll follow-up with Pat with the others later thanks a lot.

John, thanks.

Thank you.

Your next question is coming from Carol Coale of Prudential.

Please state your question.

Hi, good morning, everyone.

Hi, Carol.

Hi.

A couple questions on the prepaids that are maturing this year.

As I understand it, these were sold forward at a fixed price of about $4.

Are these expiring periodically during the year, and are you trying to lock up the hedges at prices that I would guess would be above that $4?

So along those lines, can you give us an idea of what your average hedge price in '03 and '04 are going to look like and a percentage of how much of your production do you think will be hedged?

That's the first question.

Then the second, just what is the recurring nature going forward of this charitable giving and these legal expenses?

Was this more of a one time first quarter, are you going to continue to give to the charity and incur legal expenses going forward that we need to [inaudible] into our numbers?

Thanks.

I'll talk about the prepaid and hedging.

And Murry will talk about the chair tables and the [inaudible].

Yes, your assumption on the prepaid forwards going forward, they amortize, so they roll off really on a monthly basis.

The three-year one has been rolling off in 36 equal amounts over the 36 months of that transaction, so yes, that continues to roll off.

Actually you'll notice at the end of each quarter we had been showing the current maturities of that constant, but the current maturities of that will even start to decline because we're now inside of a year to the expiration of the first one.

So we just continue to deliver these volumes.

And at the end of this year we will stop delivering the volumes because the obligation will have been met.

Whereas with the one that ends at the end of 2005 we'll obviously continue to do that and you'll see the reductions on that showing up in the long term section until we get into 2004, which the current maturity also starts to decline and those balances due to those transactions will be completely gone by the end of that.

But you'll see a step down in both current maturity and the long term portion as of the first quarter numbers.

As far as the hedges, the average hedge that we have in place for 2003 are $4.22, in 2004 are 4.45, and yes we have been taking into account the rolling off the prepaid.

The hedges that we put in place for that.

We have had a tendency to spread the hedges out over a few more years even though we only talk about '03, '04, '05, in the press release.

It has been our tendency to put flat pricing in there.

That's why you notice in the press release our hedge prices actually increase over time as we keep laying in more hedges as these things roll off and the market happens to have been stronger [inaudible].

And on the charitable foundations?

I can take that in two parts, Carol.

First the charitable and then the second legal, which is a little more detailed than just legal, I think.

Let me try to give you color on that topic.

The charitable of course with the foundation, we prepaid about -- prepaid, if you will, about ten years of contributions so there will be an ongoing benefit if you will to the income statement from not having to recognize those charges in the specific years going forward.

So that is nonrecurring, if you will.

But the one time expense of course is nonrecurring and you will have a recurring reduction, if you will in the charitables.

On the legal expense side I think that's kind ave basket of expenses that we've taken.

I mean, first, we are recognizing in our Kentucky case made it very clear to us, as has been clear to a lot of companies, that even when a company is bona fide right in their assessment of a particular risk, legal risk, that it is possible that a jury of our peers may choose to decide otherwise.

And that's what happened to us in Kentucky.

I think it's just [inaudible] of our increase in the legal reserves as recognition of that very sorry fact, I'm afraid.

But also, I think it's likely that those expenses would not only go to legal reserve, but also to other, if you will, charitable areas.

Some of these may be handled in the foundation, some may not be.

But in particular what I'm talking about is a little more community support in Kentucky.

We've got a pretty big presence there right now.

And I know that from the standpoint of need it's a place of extraordinarily high need.

We also probably haven't done as good a job as we should in just managing our community relations in Kentucky.

I think we've been a good steward of the assets down there and we're certainly a good citizen in Kentucky.

But we don't do as much as we probably should do.

So we're going to step that up.

And so I wouldn't expect on a recurring basis the numbers would be higher than you've seen, but I would expect to see a little more legal expense day to day.

The other thing, of course, is insurance generally is going up.

And D and O is a prime example thanks to some of your friends there down in Houston.

But D and O has been a problem and all of our insurance renewals are up a little bit.

So hopefully we've tried to capture and we always try to do conservatively, what the increase in that expense is and try to reflect it as soon as we know that it is going to be a problem.

I hope that's enough.

There's a lot of detail in there blow by blow perhaps Pat will give you some of the details.

By philosophically it's recognition of litigation, insurance and giving a little bit more back to the community there.

I might just add one bit more detail on the charitable giving.

It was our assessment that in the contribution of the appreciated stock that if we had given less than the 905,000 shares, we wouldn't have been getting the full tax benefit, PV tax benefit from that contribution.

If we gave more than that we would have too much money caught up inside the foundation.

We did a little optimization.

We had to use a variety of assumptions to come up with that, but we thought that this was the best approach from a PV tax perspective.

And to give that number of shares.

Going forward, should we use the lower effective tax rate in our modeling?

The 34% is still a good tax rate.

Actually get more specific on the charitable giving, it's what we've assumed is that we have been incorporating $1.5 million of cash contributions, that those have come out of our income.

It's that $1.5 million cash contributions that is going away going forward.

Keep in mind that number is a board, that 1.5 million is a board approved number.

Based on management's recommendation, but it is their prerogative to change that up or down.

That 1.5 represents approximately what we have done .

And that's how we got to the approximate ten- year life of this current donation to the foundation in terms of its ability to payoff our charitable.

Okay.

And just to clarify, Dave, back to the hedging.

The hedges that you discussed in your press release, those could actually be higher if as the prepaid roll off you're able to walk in [Prepaids] ---

They wouldn't be higher as a result of the pre-paids rolling off.

But in today's market if we were to add them as hedges as a result of that, you'd probably wind up averaging off [inaudible].

But we have been taking the pre-based amortization into account as we've been determining what our hedge level should be.

Okay, okay.

Thank you very much for your time.

Thanks, Carol.

Great quarter.

Thank you.

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

Please state your question.

Thank you.

The question is on the production of first quarter.

Dave, I was wondering if you could compare that with the fourth quarter rate because basically if you look at the operator bonds you're looking at 5% decline from the fourth quarter.

Is that mostly curtailments that that relates to?

Yes.

Okay.

And do you get that back in future quarters or is that kind of a lost number for the year?

I should say not just curtailments, but freeze off.

The first quarters are always going to be colder than fourth quarters, you would think.

Uh-huh.

Murry, you're in a better position to comment whether knob.

I don't think it's fair to say, David, that we will get it back.

The way production works in this particular basin, it's hard to have an extraordinary spike.

So I think it's fair to say that we believe --- [inaudible]] it will get more on track with what we thought it would be, excluding the unusual freeze offs and the operational problems that Dave mentioned.

So in direct answer to your question, we will not get it back.

Okay.

And then with respect to the 6% or so bad debt accrual, can you give us a sense for how that compares with what you've collected so far in your December bills?

Basically you're looking at three months' worth of collections and also what you experienced in the winter of 2000, 2001 when gas prices also spiked?

It's pretty similar to what we experienced in the winter of 2000-2001 when gas gas prices spike.

We collected more than that in the December billing, but we didn't really have the weather issues in December.

December was pretty -- much of December was reasonably mild.

I mean, there were some cold periods, but it was not extremely cold to the extent the first quarter was.

The difference between 2000-2001 which we are not assuming some liquidity accrual then, is we did get -- that turned into a regulatory asset.

So we did wind up being allowed by the public utilities commission to collect more of this through our rates with the entire customer base.

That is not an assumption that we're making at this point.

And I think that would be the single biggest area where this differs from 2000-2001.

Okay.

And then finally, what is the status of the union contract?

David, the union contract expired Monday of last week at midnight.

And there has not been yet a resolution on that contract.

We and the union have agreed to continue to work under the existing contract and continue to work on closing the gaps between the management and the union proposal.

And beyond that it's really not really appropriate to talk about what's going on there.

Did you talk about what the gap between the management and union is?

Pardon me, David, say that again, I'm sorry.

Can you quantify what the gap is, or is that not --

I certainly can't -- I have a view of what the quantifiable value is, but that's really not something we want to talk about at this point in time.

For those that don't know, David is talking about the steel workers contract, The Equitable gas company, our distribution company, has most of its fieldwork force, the people out in the field, covered under a -- most of those people are in the U.S.

Steel workers union.

The field people in the steel workers union.

David I can't really comment on the monetary value.

You know that generally speaking our philosophy has been to move to a more mobile work force, etc., and there are aspects of the existing contract that aren't consistent with our overall operating practices.

And it's on that basis that we're continuing to negotiate.

Okay.

That's great.

I don't want to be circumspect, but I don't think it's appropriate to talk about it.

No, I wasn't sure if that had been published somewhere or not.

No, sir.

And congratulations, Dave.

Thanks.

Thanks, David.

Appreciate it

Gentlemen, your final question is coming from Sam Glasswell of Merrill Lynch.

Please state your question.

This is going to be quick because you've answered all of my questions.

Thanks.

Hey, Sam.

Oh, you didn't have another one?

No, you covered them all.

Okay, great.

Thanks, Sam.

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