EQT Corp (EQT) 2003 Q2 法說會逐字稿

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

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

It is now my pleasure to turn the floor over to your host, Mr. Pat Kane, Manager Director Relations.

Good morning, everyone, and thank you for participating in Equitable second quarter 2003 conference call.

Today with me are Murry Gerber, Chairman, President and Chief Executive Officer and Dave Porges Executive Vice President and Chief Executive Officer.

In just a moment Murry will make a few comments regarding Equitable's progress to date, Davewill then review the second quarter financial results released this morning.

Following Dave's marks, we we'll open the phone lines for questions.

First I'd like to remind you today's call will contain forward-looking statements relating to the structure of executive compensation, the percentage of expected operating gas volumes that are affected by changes in non-ex gas price, the company's EPS. sensitivity changes in gas price.

Earnings per share, targeted growth of earnings per share.

Financial performance, future cost savings, growth, the appropriate pay-out ratio, yield and total payout, regulatory matters and changes in law and regulation, operational matters including the success of the drilling program, our action plan with respect to the under-funded position of our defined benefit plan and seasonality of our earnings.

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 the website.

Finally, the reconciliations required under the new SEC regulation G. for all non-gap financial measures mentioned on the call today are contained in our earnings release available on our website at www.eqt.com in the investor relations section.

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

Thank you.

Before Dave talks in detail about the second quarter results, I want to make a couple of comments about the company.

First as noted in the press release this morning, I'd like to reiterate our full-year earnings per share guidance at $2.70 to $2.80 per share. share.

FYI, this has not changed since we reported it last fall.

Second, I'd like to report on the dividend announcement and give you color on why we raised it and why we raised it the amount we did.

It has been my position since I came on board here that we would at EQT return the cash to shareholders by either dividends or share repurchases that management-- we could not put to use investing in our businesses.

I believe--If you look at our record over the last five years, we've actually done that.

We do this, and we have this philosophy, because we believe companies like ours who earn a proper return on capital have heightened credibility in the market for raising capital when it's necessary to do so and, therefore, we don't believe we should hoard cash or keep it around on the balance sheet for comfort.

As you saw in this morning's press release, yesterday our board declared a regular quarterly cash dividend of 30 cents per share payable on September 1st 2003 representing a 50% increase in the quarterly dividend.

This comes on the heals of heels of an 18% increase that we announced in April.

As you remember, at the time of our April declaration, we made clear the intentions to move to a point where we grow dividends per share at a rate consistent with our ESP growth rate.

We also at that time made a commitment we would review our dividend policy in the event of tax law changes pertaining to dividends.

Prior to the recent change in tax law the position was returning cash by share purchases was more tax efficient on the margin for our share holders in dividends, however, the reason tax law has eliminated that tax advantage other than timing, and we felt an adjustment to the policy, particularly the mix between dividends and share re purchases was warranted.

In answering the how-much question, we looked at peer group, cash flow, relative growth prospects and we came to a conclusion with a 50% increase we could approximate the peer group average yield and pay-out while maintaining ample financial flexibility to fund our growth.

With this move we are not altering the total amount of cash returned to shareholders, we are just changing the mix.

We therefore still retain the flexibility to flex our share re purchases for changes in capital expenditures for credit rating considerations and other variables while, at the same time, increasing the sure level of return to shareholders.

I'll now turn it over to Dave Porges..

Lastly, I'm sure you all know this, I'm not going to El Paso.

Ill turn to David.

Equitable Resources today announced second quarter 2003 earnings from continuing operation before accounting change of 50 cents per diluted share.

This compares with earnings from continuing operations before accounting change of 45 cents in the second quarter 2002.

As usual I will cover the results for the three business units briefly before proceeding to other news of interest.

Before starting in with the business units, however, I'd like to remind you of a recent change in reporting requirements.

We recognize there have been many changes in reporting requirements lately, and there are more to come.

But the particular one I have in mind is related to so-called non-GAAP measures.

As you may or may not realize, Earnings Before Interest and Taxes or EBIT has been deemed a non-GAAP measure, so we'll not refer to EBIT as we discuss segment earnings.

Rather we'll discuss operating income, which, for our business segments is the earnings prior to expenses for such items as interest and taxes.

More substantively the segment operating income also excludes minority interest and equity earnings from non-consolidated investments.

Therefore, the segment pages now sum to an operating income number, and then separately note any minority interest or equity earnings related to that segment.

Let's now proceed to discuss Equitable Utilities.

This segment had operating income for the second quarter of $12.7 million.compared to the $15.1 million as reported for the same period last year.

A warm April curtailed the heating season early accounting for 60% of this decline.

There were 12% fewer heating days for the second quarter versus the prior year and 21% fewer than normal.

The other negative variance-was an increase in expenses of just under $1 million due to increased costs for insurance, legal, and pension and medical benefits.

Of less direct financial impact but still notable was a year over year decline in industrial and commercial volume of about 15% after the consideration of the effect of a warmer April.

This does include some loss of power load which may have resulted from a cooler May, but it still suggests higher prices are leading to demand destruction at least temporarily.

Moving now to Equitable Supply.

This segment had operating income of $45.8 million, 12.5% higher than the $40.7 million earned in the same period last year.

However, during the prior year this segment recorded a minority interest of $1.9 million.

In the old EBIT days this would have been a deduct from segment earnings.

The minority interest is notable this year because our February purchase of that minority interest removes this negative item for the quarter, but it also contributes to an increase in the depletion rate.

Therefore, on an apples to apples basis this segment's earnings improved by more like 18% versus the prior year.

Net equity sales volume increased by .17BCFE versus the prior year and average well-head sales price increased to $3.83 per MCFE versus $3.46 per MCFE for the same period last year.

These price and volume increases explain the entire increase in earnings for the segment.

There were several other variances in this segment and they essentially offset each other.

Most notable amongst the other items were an increase in gathering revenues and an increase in a variety of expenses.

Gathering revenues were up on both volumes and unit fees.

The expenses were up due to the effect of the development drilling on the depletion rate (4 cents per MCFE), the effective of FAS 143 on the depletion rate (3 cents per MCFE) as well as increased legal and an insurance expense and increase in professional staffing.

An additional issue that negatively affected reported earnings for this segment is the effect of FAS 133.

We now have a number of hedges in place for 2006 through 2008.

These hedges are NYMEX related as it is not practical to hedge location bases that far out.

However, this has led to so-called over-effectiveness of hedges under the definitions of FAS 133.

What this means is that we are required to realize a loss in earnings for this deemed over-effectiveness.

This reduced operating earnings by over $1.5 million or $1 million net of taxes in the second quarter, thereby reducing EPS for the corporation by 2 cents per share.

This non-cash item is incorporated into the calculation of wellhead sales price that I cited a moment ago.

My final comment on this segment's results is that we continue to experience the negative effects of a wet spring and early summer, as I believe much of the East Coast has.

For us, this means drilling rigs cannot be utilized optimally, compression stations can flood and lead to curtailment, etc.

We believe that the 2003 drilling program is performing as expected but readily acknowledge that this is not finding its way into the total volumes to the extent expected.

We believe that this can be explained accurately by weather, additional instances of curtailments, some cases of in region industrial demand destruction temporarily shutting in some gas and other known factors.

But, we have been reviewing our drilling program with increased rigor to determine whether more controllable factors are at work.

At the NORESCO segment operating income increased to $2.4 million in the second quarter compared to an operating loss of $1.0 million posted in the same quarter last year.

Included in the loss of $1.0 million in the second quarter of last year was an impairment of $5.3 million for the Jamaican power plant.

The NORESCO operating income numbers do not include equity earnings previously reported in EBIT.

Those figures show an increase to $1.5 million in the second quarter 2003 compared to $0.4 million in 2002.

NORESCO's quarter end backlog was $78 million compared to $157 million one year earlier as two large projects slated for signings in the second quarter have been temporarily delayed.

I will now proceed to discuss the additional items referred to earlier.

My first topic is the 2003 earnings guidance.

The press release addressed our full-year guidance, but as is our normal practice, we have not commented on quarterly guidance.

While we prefer to maintain the posture of only providing annual guidance, I do wish to offer the following observation.

In recent years, we have on average earned about two-thirds of our full-year income in the two winter quarters, and about one-third in the two summer quarters.

It appears, however, that the quarterly consensus estimates do not reflect this level of variability as demonstrated by those historical results and by our internal models.

Now we would like to reiterate the hedging update.

As a result of new hedges that cover the period of 2004 through 2010, we now have 49 BCF in natural gas price hedges in '04 at an average price of $4.50 per MCF and 46 BCF of natural gas hedges in 2005 at an average price of $4.60 per MCF.

As we have mentioned often, we continue to believe that the prices that have been available in the hedging market exceed the price level that can be supported by fundamentals.

We fully understand that weather can move prices up or down dramatically versus current levels for short periods of time, but we wish to run our business, including our price portfolio, based on price ranges that seem to make more economic sense long-term.

Stock buy backs.

During the quarter Equitable Resources, Inc. purchased 483,000 shares of EQT stock.

The total number of shares repurchased since October 1998 is approximately 16.2 million out of the current 18.8 million share authorization.

Westport.

Equitable owns approximately 13 million shares or 19.5% of Westport Resources Corporation.

The company does not have operational control of Westport.

The company changed the accounting treatment for its investment in Westport from the equity method to the available-for-sale method effective March 31, 2003 This change to an accounting method previously referred to at least by me, as cost, but is now more correctly referred to as available for sale, eliminated the routine inclusion of Westport's earnings results in Equitable's earnings but affords mark to mark adjustment through the other Comprehensive Income line in Shareholders Equity.

In the second quarter 2002, Equitable recognized a $0.6 million loss in equity earnings from its investment in Westport.

I would now like to turn to some regulatory items.

First, the Securities and Exchange Commission has used the occasion of our recent debt registration statement or S4 relating to our exchange offer for debt issued earlier this year to conduct its first routine review of Equitable's filings, including our financials in several years.

On balance the existence of this process is constructive in the long-term as it gives us the opportunity to learn from the SEC about their current judgments regarding a variety of interpretations of accounting and disclosure principles.

There do not appear to be any materially negative issues outstanding but we are still in discussions with them about a variety of issues and this may result in some adjustments to the balance sheet and cash flow statements though it is not yet clear.

Since accounting rules and interpretations are in a state of change, we recognize that this will be a good process to have gone through, though our legal and accounting staffs are certainly looking forward to the end of the process.

My next regulatory topic is Equitrans.

Breifly as mentioned in our various public filings we are due to have a rate case by August 1 of this year.

We have attempted and still attempt to reach negotiated settlements, but the most recent attempt ended when a party that had utilized Equitrans for transportation but no longer does so was aloud to intervene.

Therefore, we requested that the Federal Energy Regulatory Commission, or FERC allow us to delay the rate case filing until later this year to provide us with more time for preparation and possibly more attempts at negotiating a settlement.

Interestingly, the single intervening party in the most recent attempt a settlement has filed a motion with the FERC in support of our request for an extension.

So we continue to move down the dual track of preparing for a rate case and trying to negotiate a settlement.

My final regulatory comment pertains to an article that appeared in one of the industry papers yesterday that included Equitable Resources in a long list of companies receiving inquiries from the Commodity Future's Trading Commission, or CFTC regarding reporting of prices to industry publications during 2000, 2001, and 2002.

The company has received informal requests for information from the CFTC and cooperated fully with them in this matter as we always do when regulatory bodies make requests.

The company has investigated this thoroughly internally and uncovered no evidence that any of its employees ever intentionally reported any false information to any industry publication.

Incidentally, the same article also reported that the CFTC was in court on Monday seeking to force the gas index publisher to comply with a subpoena to turn over gas-trading data submitted to it by named companies.

However, in June, at the request of the CFTC, Equitable voluntarily sent a letter authorizing release of Equitable's information to the CFTC.

The final topics relate to two employee compensation matters.

First, regarding pensions, we continue to work through our funding and accounting issues regarding the under-funded portion of our defined benefit plan.

Philosophically, we would prefer to provide shareholders with some amount of insulation from market moves related to these obligations, wish to forestall making decisions until the current deliberations in Washington make accounting and tax implications of the alternatives somewhat clearer.

Still, we do this as a 2003 efforts with a preference for some form of resolution in the third quarter.

Secondly, regarding executive compensation, you are, by now, aware that we have replaced most of the stock options for senior executives on a go-forward basis with performance-based restricted stock units.

As mentioned previously, this has resulted in a quarterly charge this year of $4.5 million for compensation that, if in option form, would not have appeared in the income statement at all under current accounting practices.

With the moves and sentiment away from options and towards expensing for options, we have undertaken to determine whether we wish to make further changes in our approach to executive compensation and also the accounting for executive compensation.

We would hope to have reached a grounding on this topic by the end of the third quarter.

With that, I'll turn the call back over to Patrick Kane.

That concludes the comment segment of the call. [Schwan] Can we please open the call for questions?

Certainly, sir.

The floor is now open for questions.

If you have a question or comment at this time, please press the numbers 1 followed by 4 on your touch-tone phone.

While you pose your question, pick up your handsets to provide on the optimum sound quality.

It's 1 followed by 4 on your touch-tone phone.

Hold while we wait for questions.

Our first question is coming from Mike Heim of AG Edwards.

Please pose your question at this time.

I noticed a jump up in the corporate other.

Is that related to the executive compensation you just referred to.

Yes, primarily that is the case.

The insurance issue are finding their way into the variety of expense line items as well but yes.

Also noticed a drop in the realized gas price from the March quarter.

Is that a function of the seasonality that of gas prices, or is there something else of the timing of when the hedges were put on place to explain that.

I don't think it was the hedges.

I might have to be a little more specific.

As I mentioned, there was $1 1/2 million that was a charge to that number from the FAS 133.

Okay.

And that over-effectiveness related to the basis portion, in essence, even though there wasn't a basis portion, those of you who follow 133 recognize it's hard to follow, but we took a non-cash charge for the 2006 through 2008 hedges that relate to basis, and that $1.5 million is buried in the revenue number and it's one of the things that reduced it to the 383.

That makes sense.

On the NORESCO backlog, is that in any way related to the Jamaican plant or just the issues that you touched on.

It's not related to Jamaica at all, Mike.

Okay.

It's two other projects.

Thanks.

Thanks, Mike.

Thank you.

Our next question is coming from David Maccanone of Goldman.

Pleas pose your question at this time.

I wanted to ask a question on Dave's comments about the weather, curtailments, shut-ins, and other known factors.

Putting in context the amount of money you've been spending in the E and P business over the last year and trying to understand better what sort of timing should we expect of that capital translating into volume growth, and what we should likely see over the remainder of this year in terms of commensurate growth in volumes with the amount of capital being invested?

David, I'll take that question.

It's obviously a good question.

And we are somewhat frustrated that, whereas the wells are performing according to what we thought they would by engineering estimates, we're not getting all the gas to the sales meter.

I would say that this is our highest priority internal item for investigation, and we need to come to a definitive answer on that.

I will say that, internally, the trends are positive, that now that the weather is sort of passing by, we're in the summer and starting to see positive trends for the rest of the year, so I'm somewhat encouraged by that.

But I want to make this very clear statement.

I have absolutely zero tolerance for investments that do not earn sufficient return.

You know that.

It's my creedo.

I live and die by that.

And if, for whatever reason, these investments fail to make some kind of return, we have to look closely at whether that money's being spent properly or not.

Now, again, I have no reason to think that there is any problem other than the items David mentioned at this time, and the trends are looking positive.

I will commit to this though, that we do have a capital budget discussion with our board in October and will finalize the number for 2004 in early December of this year, and you will know clearly where we stand.

But, right now, the internal trends look positive.

Could you be more specific about what's causing you to be frustrated?

I'm just looking at that bottom line where it says production volumes, and I'm looking at the wells that seem to show that they're making -- the new wells, at least, the new drilling wells -- that seem to be performing according to the engineering statistics and wondering why it isn't getting to the sales meter.

I will tell you David, this is the issue.

A lot of it has to do with curtailments by our competitors.

But I don't care what the answer is.

You see?

I mean, the dollar has to earn the return, whether it's an internal problem or an external problem.

And, so, we're looking at all of the pieces, right now.

Our guys are doing, I think, a pretty credible job.

But even if we do a perfect job -- and somebody, and I won't name them right now, that I'd like to hit over the head with a pot -- even if someone else doesn't do their job, it doesn't matter.

Our dollars have to be spent at a profit.

But the frustration aspect if that if it's not an pipeline having a rupture, it's weather that floods out a compressor station.

And if it's not that, there is some industrial demand that is in the system so that there's some gas that has basically been dedicated to that.

And they shut the facility because of the high gas prices, among other reasons, but they shut the facility, and we temporarily have to shut in the gas while we go about repiping so that we can find another exit from the basin for gas that previously didn't have to leave the basin.

So it does kind of feel as if we've been, for the last couple of months, in an arrangement where it's always something.

Is there a line pack that's building up in your systems?

We think that's probably some of it.

Although, David, I want to wait until Jim Funk and his team have this thing completely sorted out, without getting into the details right now, but I'll tell you that it seems as though -- and this is a more general comment based on not only our results but what is going on in the rest of the country -- the supply infrastructure generally -- it doesn't only apply to Appalachia this is applying more generally to the U.S. -- the supply infrastructure seems to be extraordinarily stressed at this point in time for us and for others.

And from a strategic standpoint, you have to wonder whether there just needs to be -- not just by us, maybe -- but there needs to be more investment in that infrastructure top loosen it up.

And I'm going to whether the shortfall that we're seeing or the apparent shortage that's causing the higher gas prices is not maybe more related to the supply infrastructure and less related to the capacity of wells to produce gas.

That's a more general question.

Do we have line pack?

Yes, we do, certainly.

But the reason I don't want to answer your question directly is I don't know what percentage of the problem is related to that versus these other items that David mentioned earlier.

It does mean, actually, as we look at our capital budget, you know, for the end of the year, we are more seriously considering the infrastructure investments, the pipelines and the storage, and we are wondering, you know, whether we need to be looking at a different balance between those kinds of investments and the well investments.

Just a couple of quick unrelated financial faults.

Bad debt expense in the quarter, do you have that year-over-year, and second the funding requirements of the pension, I think you said you needed a $39 million contribution going in to the year.

Is that still the right number and what you were referring to for the third quarter.

Yes it seems like that's the right number.

That seems like it's the right number.

The bad debt expense wasn't really much of an issue in the quarter.

There was -- the results do reflect that we decided to reserve at 4% just kind of across the board even weather and price issues aside to reserve it 4% rate in 2003 second quarter versus a 3% rate in 2002.

That did lead to $0.3 million -- or $300,000 in operating income reduction in the utility segment.

So, amongst the change in what was going on in the utility was a negative 0.3 million, due to that judgment, really, to use 4%.

The collections really haven't been much different than what they were, but we were a little concerned that 4% -- we thought 4%, which is the better -- a more prudent number.

Thanks for all your answers.

Thanks, David.

The next question is from Carol Coale of Prudential.

Please pose your question at this time.

Can you hear me?

Yes, we can.

A couple of questions.

First one's for Dave.

Not to bring up a bad subject, but I'm not sure I'm completely clear on exactly what the SEC is looking for in looking at a review of your debt exchange.

And is this an investigation or inquiry or review?

Could you be a little more clear about that?

Secondly, more broadly, a question for Murry, you have been more aggressive with your hedging program; and, to me, this says you think gas prices might be coming down from current levels or at least levels at which you're hedging, and I was wondering if you could give us a good comment about our outlook for gas prices over, say the next three years or so .

Thank you.

And Dave will take the first question and I will take the second one.

The Securities and Exchange Commission review is -- because I think I refer to it as a review -- is part of their normal process to review filings for all public companies.

It had been a few years since they'd reviewed ours, so we knew that -- you know, it's their job to review the firm's financials.

They happened to have decided that the S-4 filing on the debt exchange was a good time to do that.

So we don't see that fact as anything out of the ordinary, and we're just working through with them.

I do think it's inevitable that, as we go through putting together our own financials with the advice, et cetera, of our auditors, without SEC review, we probably, on occasion, come up with interpretations that aren't quite the same as the ones they you would be using.

That would be a fair characterization.

And we work through some of that stuff with them.

I think you're going to be seeing that with most companies.

Let's say the new SEC is that they're going to make sure they review in accordance with requirements.

They need to review filings with public companies once every three years.

But it's our turn.

Has it been three years?

It's been more than three years.

I think -- I'm extemporaneous here, you see, that part of the concerns with the Enron situation it's too many years since the filings have been reviewed.

Obviously we have no opinion on that one way or the other, but we do understand that that was one of the things that led to a more structured requirement for periodic reviews and it has been a little while.

Certainly it's more than the required amount of time since ours have been reviewed and it's our turn.

I would characterize this as nothing other than routine SEC examination of filings.

But that doesn't mean we won't wind up with any adjustments.

It could wind up being that there's adjustments that they want in past filings.

Carol, as to the price -- overall gas price, I think you and others have probably as knowledgeable about that as I am about that.

I have been quoting some of the statistics that you gave me the last time we were together, but, overall, we just see a couple of factors that tend to lead us in the longer term to be pessimistic about prices.

I think the LNG issue is one of them.

The capacity to bring LNG into the country exceeds the current rate and that is due to not enough boats, really, to be available.

I think people thought that LNG would be a peeking needs, and therefore will not be a base load fuel but clearly at $3.50 LNG is a base-load fuel, and I don't think it will be too long before what the time it takes to build new boats before we see that our existing capacity will be utilized I am pessimistic that that will happen.

Parenthetically, five to ten years from now, for those of us that survive all of this frustrations and in the current energy business, I think we'll see the beginnings and maybe even the early maturity of a world natural gas market.

And, so, I'm pessimistic from that macroeconomic level.

Closer to home and maybe more -- even more short-term is that we are seeing increasing in drilling rates, and I think the supply infrastructure is hiding, a little bit, the amount of production capacity that's really out there.

And as demand in the summer months has gone down a bit, we are seeing these fairly large injections.

And I think that that's reflective of latent capacity in the prodding producing segment and restrictions in the supply or the transportation segment.

So I'm concerned about that matter.

And the third issue which Dave highlighted is the demand destruction.

We have plants shutting down.

We saw an impact both in our utility and in our supply business from, we hope, temporary, but, nonetheless, real destructions in demand.

SO adding all those things together I am pretty pessimistic, but I'm not sure that ads much to what's already done.

Well I think that is an interesting theory for the infrastructure.

Can you remind us what your budget is for E & P spending versus last year?

It's almost the same as last year.

Let me give it to you in the sense of Cap Ex, which would be the actual dollars that we're going to spend, and Dave's slipping through here.

That commitment, Cap Ex, it's going to be about $150 million, which is almost exactly what it was last year.

Last year it was $147 million.

That's Cap Ex.

That will be dollars actually spent this year.

Okay.

Thank you very much.

Thanks, Carol.

Thank you.

Our next question is coming from [John Edwards] of [Deutsche Banc].

Please pose your question at this time.

Yeah, good morning.

Just an accounting question.

Did you guys change the amount of capital expenditures last year, second quarter '02, versus what you had previously reported for that?

Because I had you down at 51 million last year, then it came in at 36.5.

I don't think we made a change, but what I'll commit to you is we'll get an answer for you and get that out.

Maybe I'll have one at the end of the call.

Okay.

Because we looked at it and looked at it and -- okay.

Then, could you -- you had made reference to why the backlog was down on NORESCO.

I missed that, though.

Could you review that?

Yes, John.

There are two projects that are fairly substantial that we thought would be signed in the second quarter.

Really, I'd rather -- I'd rather not give those names.

I don't want to compromise anything that's going on in NORESCO at this point in time.

But there are two very substantial projects, both within our core capability -- that is to say, they're institutions or Government contracts, okay?

Can I leave it at that for right now?

Sure.

But you're expecting those to be back in the backlog in the third or fourth quarter.

Absolutely.

I think that there's no -- I can say this confidently.

There's no question that we will do something with both of these people.

It's just that the exact something is being tweaked a little bit right now.

And we thought it would be fully bedded, but it's not quite fully bedded.

They're both good projects.

Great.

Maybe you already alluded to this one, you were answering David's question, so I guess the gathered volumes came in less than you were expecting?

Can you go over that again?

Yeah, it's really the operated volumes.

Okay.

Yeah, I think, as you look at our segment results and we break out the gathering, the gathering revenues were actually up.

But what I'm talking about is the impact of the gathering infrastructure on the actual sales of our produced gas.

That's really the thing that's got us a little tide up in a knot.

We recognize our sales increased -- the sales number increased year over year, but not as much as we expected, given the amount of money we're spending on it.

Okay.

And Murry was just simply suggesting that it seems that, generally speaking, the infrastructure seems to be more at fault than the wells themselves, based on our current analysis.

John, does that cover your question?

Yeah, that's gray thank you very much.

I'll take the others offline with that.

Thank you.

Our next question is from Gil Gabby of JP Morgan Chase.

Your line is live at this time.

Good morning everybody.

I have two questions.

The first is, could you recalibrate the expectations regarding the share buyback program?

You mentioned a shift in mix.

Does the guidance of EPS growth of 10% plus remain constant?

Maybe we'll handle those in order.

First of all, yeah, what we talked about with the dividend or what we're going to do is a change in mix.

And if you make that calculation -- and assuming everything is constant, which it never is -- approximately 60% of the money we've been giving back to shareholders previously came from share buybacks and 40% from dividends, plus or mines.

And this moment, that percent is about reversed, so it's about 60% dividends and 40% share re purchases.

As to the growth rates, Gil, of course, we're not projecting, at this point, growth rates other than what I've said previously to shareholders, I'm not changing, we haven't projected the specifics for '04 or beyond.

But mathematically, the switch in mix would result -- all things being equal, now -- in a 100 basis point reduction in EPS growth rate, if nothing else changed.

We just didn't buy back as much stock, and we took more of that cash and put it into dividend, and that's about all we're prepared say at this time.

Unless Dave you want to say something else.

I think that's accurate.

And the net income wouldn't change in either case.

The net income growth is unchanged.

It's just that the EPS growth that came from share reduction mathematically gets reduce by 100 basis points by shifting that money from share re purchase into dividends.

That's of course holding all things constant.

In the fullness of time, that won't be the case, but it gives you a touchstone, if you will.

Thanks for the clarification.

And my second question relates to your gas storage injection efforts to date.

Will you provide us with the percentage of storage that's been filled to date at least from the last heating season, your weight average cost of gas at the point and maybe for comparative purposes what your weight log at this point was last year.

I think Pat's got the date on this, Gil, that he can share...he will share that with you.

Our capacity for storage for our distribution is about 15 bcfe.

We're approximately 45% full at this point.

Right on where we were at this point last year.

We don't put out the actual numbers, but it's a -- the season for filling goes from April through October, and [NYMEX] is a good gage if you want to estimate what the pricing is there.

This is over last year's no, NYMEX prices.

Thanks.

Gil thanks.

Thank you.

The next question is from [Sarah Raizatti] of Merrill Lynch.

Please pose your question at this time.

It's Sam Brothwell.

Can you hear me?

Yes, how are you?

Good, I am on the road so I'll try to make this quick.

I wanted to follow up on the discussion.

Sounds like you're having difficulty getting the gas into the transmission system.

I'm just wondering, some of it sounds like it's out of your control how are you going to be able to stay comfortable with your guidance if that situation persists?

Yeah, that's precisely the frustration that we have here is trying to plan, if you will, for things that are outside of our control.

Now, as you know, Sam, David and I are come compulsively analytical, and we're at least closet statisticians, and we have other people who are smarter than us doing it for us, and within the context of all our prior experiences, this year has been unusually bad for third-party curtailment, including weather factors.

Now, having said that -- so it's outside of the bounds of what we generally viewed to be a fairly conservative planning process, so it's hitting the limits on our statistics.

Having said that, Sam, -- and I can't predict the future -- but that data point -- this year's data point, obviously, is to be included in our planning.

And to the extent that things don't turn around on that matter, if it stays the same, then the only people that we can blame for not making profitable investments will be ourselves.

And I think that's really the calculus we're going through right now and will be over the next few months.

So I wish I had a definitive answer for you, but the problem is, this year's outside the bounds from a curtailment standpoint, and we can blame someone else, but, at the end of the day, it's our money we're investing and shareholders' money we're investing, and we have to make sure that regardless of cause to get a proper return on our investment regardless of cause.

So if you sense we're putting a lot of stress on our people in supply right now, yeah, you probably wouldn't want to be working over there right now.

And in terms of -- I think you alluded to looking at some things that you can do in your pipeline segment on your own to alleviate this.

Can you elaborate on that at all?

Yeah, maybe generally, this overall curtailment problem has always been a problem.

That is, at some level, every single year we're curtailed by pipeline systems.

And we had for a number of years considered other pipeline investments, quote, unquote, major pipeline investments to alleviate some of the stress of the system.

The way we did the economics on those however, and the reasons that they are not done is that we have always have had to rely on just losing the peak.

Basically, the economics were based only on purely the use of the pipeline to alleviate the stress.

And because the economics were based on only periodic cash flows coming from the pipes, the investments seemed not to be very worthwhile.

However, if this curtailment problem is going to be chronic, then the economics of the pipeline investments change.

Now, the most common proposal that we've reviewed -- seems like we've reviewed it about once a year -- is taking a pipeline down to the south and taking the stress -- most of our gas moves to the north or the northeast, but taking a pipeline down to the south towards the Carolinas and Atlanta that has been on the books discussed a lot.

And I think it is fair to say that if this curtailment is chronic, then that kind of investment needs to be re looked at.

Previously we haven't done it because you can't justify a pipeline to use it five or ten days a year .

That's basically the problem.

Okay.

Thanks a lot.

Actually, I want to get back to a question that John Edwards had asked.

It had to do with the capital expenditures in the supply unit.

And, simply, the number in today's news release for the year-to-date 2002 Cap-Ex what an bad number.

The number that was in the press release at that time was the correct number, and that, probably, is what led to John's -- John's confusion.

So that was 64047 that was in the 2002 year just wasn't correct and the number that was put in a year ago was the correct number.

So with that perhaps we can move to another question.

That's all the questions I'm showing from the phone lines.

I do show one follow-up question coming from David Maccanone of Goldman.

Your line is live.

Thank you Just a couple of follow-ups.

I was wondering if we had an update on the union contract at the utility.

Yeah, David.

You know, for those that don't know, we had a united steelworkers contract that expired earlier this year.

Basically, at this point -- I'll make one specific comment, then a more general comment -- we're still working with them.

The two outstanding issues are variable pay and work rules.

And, at this point in time, we're unyielding on those.

We need both of those in place to reach the operating excellence that we really want to have there, mostly related to mobile workforce.

So we're staying there.

I will to say that a larger issue is that -- and as David mentioned in his remarks -- health care costs and medical and pension costs are on the rise.

And one of the things that we are seriously looking at -- and I think other companies are, too -- is making sure that, when we talk about our compensation to employees, that we're adequately representing the actual increase in their compensation that is coming from covering these costs.

And I think its very important -- and it seems like it is elsewhere -- it's very important that employees realize that even if they were to get no increase in pay, that their overall compensation is increasing because of the healthcare costs.

So that's something to put on the table.

But, basically, variable pay and work rules are still on the table.

Are there any deadlines that we should be aware of that the union has set for a negotiation or anything o that effect?

There are none.

And second, can you give us what your current operated volumes are?

I think so, yeah.

Do we have -- well, let's see, I'm not sure if I've got a run rate.

David, let us get you that number.

We've it go before us.

We don't have the run rate today.

Okay.

Is that what you're asking?

Yes, exactly.

Okay.

We'll get back to you on that.

Okay.

Thank you.

If we can.

I mean, it may be that -- you know, normally, we disclose this only at the end of the quarter, so if we give that it will have to be many a broader context.

But Pat will discuss that with you.

Thank you.

Another follow-up question from John Edwards of Deutsche Banc.

Your line is live.

Yeah thanks I forgot to ask, have you made any adjustments or change to your own ship in Westport since the end of the first quarter.

No, we haven't done anything since the -- it was about near end of the first quarter that we had contributed those shares to the charitable foundation and that is what dropped us down to the 19.5% level which is where we are now.

You talked about the pension funding.

I assumed you would potentially took to sales of Westport resources as a vehicle for potentially funding, you know, the pension shortfalls.

Is that where you're looking.

That is absolutely one of the alternatives.

We haven't made it a seeking we're not seeking to shell all the Westport shares immediately by any mean, we've been it in it awhile, but it's not a core investment of the company.

So that's on the table.

Alluding to the follow-up to Sam's question, then, you're not changing guidance, or anything like that?

Obviously, because of those things outside your control.

But you are looking at that very hard as far as how you can control investment, et cetera, to, you know, remain on your double, low-double-digit earnings track.

Yes, the first part, and David wants to speak on the quarterly issue, but you're right, we're not changing our guidance at all, nor have I. I think one of the things that happens when you're a CEO is you have to try to anticipate things that happen out there, and, you know, I think our reputation is that we do a pretty good job at that.

I think, however, we've done maybe too good a job at that, and, so, what seems as though we put out some guidance, we tend to get top-leased top-bid a little bit on our guidance.

But I'm sticking to where we were before.

David did want to comment on the quarterly, though.

I wanted to reiterate, since we're talking about guidance, as I put in my prepared remarks, it is our observation that the consensus estimate for second and they did quarter reflect little bit more of a waiting towards the second and third quarter than we believe we have typically observed or that our model suggests that we will typically observe.

We think it's a little bit more like two-thirds of the earnings coming from a combination of first and fourth quarter and a third coming from the combination of the second and third quarter.

So we did communicated that in the area of guidance, but that had no impact on the annual guidance.

so you're suggesting third quarter estimates are high, fourth quarter estimates are low right now.

That would be a logical conclusion.

That's not inconsistent with our observation.

I'm just trying to get your affirmation from the conclusion I'm drawing from the suggestions and remarks.

I'd say that your comment was entirely consistent with the comments I've made.

Thank you.

Thanks, John.

I would now like to turn the floor back to management for any further remarks.

That concludes the -- this concludes today's call.

This call will be re played for a seven-day period beginning at approximately 1.30 eastern time today.

It the number for the re play is (973)872-3080.

You'll need a conference code, that is 369-9471.

Let me repeat that, 369-9471.

The call will also be re played for 30 days on the website.

Thank you for participating.

This concludes the teleconference.

You may disconnect your lines at this time and have a wonderful day.--- 0