EQT Corp (EQT) 2003 Q4 法說會逐字稿

Good morning and welcome to the Equitable Resources year-end 2003 conference call. (OPERATOR INSTRUCTIONS).

At this time, it is now my pleasure to turn the call over to your host, Mr. Pat Kane.

Sir, you may begin.

Thank you, Mauritia (ph).

Good morning, everyone and thank you for participating in Equitable's year-end 2003 earnings conference call.

With me today are Murry Gerber, Chairman, President and Chief Executive Officer; and David Porges, Executive Vice President and Chief Financial Officer.

In just a moment, Dave will review the 2003 financial results that we released this morning.

Murry will then provide comments regarding Equitable's future prospects.

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

But first, I would like again to remind you that today's call may contain forward-looking statements related to such matters as the anticipated earnings per share; the targeting growth of earnings per share; the company's EPS sensitivity; the changes in NYMEX gas prices and deviations from normal weather; the company's capital budget; financial performance, including the possibility of additional impairments of international projects; dividend payout and yield; the repurchase of additional equitable shares; operational matters, including the success of the company's drilling program and effectiveness of automation in infrastructure investments; and realizing value from our Westport investment without causing any undue disruption to Westport's share price.

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, the 2003 first, second and third quarter 10-Qs, as well as on our website.

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

I would now like to turn the call over to David Porges.

Thank you, Pat.

Equitable Resources Inc. today announced record 2003 annual earnings per diluted share, or EPS, from continuing operations before cumulative effect of accounting change of $2.74.

This represents a 16 percent increase over 2002 EPS from continuing operations before cumulative effect of accounting change of $2.36.

For the fourth quarter 2003, the company reported EPS of -- (technical difficulty) -- also a record, compared to fourth quarter 2002 EPS of 67 cents.

These numbers include several items that investors might not have factored into their earnings expectations.

On the positive side, the sale of some of our Westport resources stock resulted in a gain of 14 cents per share.

On the negative side, the impairment of a power plant in Panama resulted in a charge of 12 cents per share and a pension curtailment cost 3 cents per share.

These were all fourth quarter events, so the pension issue had been mentioned previously.

You will recall that the full-year results also included 4 cents per share from Westport earnings, while we were using the equity method of accounting earlier this year, and also a 3 cent per share charge for the creation of a charitable foundation.

As is our norm, my remaining remarks will summarize full-year results in the three business units, including further discussion on the fourth quarter items I just mentioned.

Equitable Utilities.

This unit had operating income of $109.9 million for 2003, compared with $101.9 million for 2002 -- an 8 percent increase.

Heating degree days total 5,695 for 2003, which is 8 percent colder than the 5,258 degree days recorded in 2002, but 2 percent warmer than the thirty-year normal of 5,829 degree days.

As an aside, fourth quarter weather, measured in degree days, was 11 percent warmer than the prior year, and 7 percent warmer than normal.

Thus, the weather in 2003 was actually marginally cooler than normal from a heating degree day perspective, through the end of the third quarter, with the fourth-quarter warmth accounting for the entirety of the full-year shortfall versus normal heating degree days.

As has been true throughout the year, weather-adjusted improvements have generally been as a result of improved commercial activities relating to storage and transportation assets and ongoing cost efficiency initiatives.

Equitable Supply.

The gathering and production unit recorded operating income of $195.8 million in 2003, 14 percent higher than the $171.2 million earned in 2002.

This increase was primarily due to a higher average wellhead (ph) have natural gas sales price, an increase in equity production in sales volumes, and an increase in revenues from gathering fees, partially offset by higher expenses for depreciation, depletion and amortization, as well as price-related increases in severance taxes and higher gathering fees paid to third parties.

Selling, general and administrative costs were basically flat versus 2002, but this obscures a decrease due to a reduction in legal costs and reserves in this unit, and an increase of $2 million due to a cash buyout of a natural gas marketing contract that was unfavorable for the company from the perspective of both price and operational flexibility.

Wellhead sales price in 2003 average 44 cents per Mcfe, or 13 percent higher than 2002.

This is less than the year-on-year increase in NYMEX, as our aggressive hedging program limited our exposure to high market prices in much the same way as it had limited our exposure to lower prices in 2002.

Equitable has hedged 50.4 Bcf of 2004 equity sales, at an average of $4.56 per Mcfe, and 47.5 Bcf of 2005 equity sales at an average price of $4.65 per Mcfe.

As most of you probably know, we typically denominate our natural gas volumes volumetrically -- that is, in cubic feet -- whereas NYMEX contract quantities are in energy equivalents.

The average prices I cited are based on a conversion rate of 1.05 MMbtu per Mcfe.

Our hedging activity means that we are again largely insulated from natural gas price moves in the near-term, that we recognize that our 20-plus year reserve life means that we remain quite exposed to longer-term natural gas prices.

Our equity sales volumes increased 2.6 Bcfe, or 5 percent versus 2002.

After adjusting for the sale of some Ohio properties in early 2003, equity volumes increased by 3.4 Bcfe versus 2002 -- an increase of 7 percent.

Still, this is not as much as we would have wanted, and the results have been a variety of organizational changes in the supply unit.

Murry will discuss this in more detail in a moment.

Finally, the NORESCO segment posted 2003 operating income of $16.9 million, compared with $9.8 million earned in 2002.

This unit ended the year on an operational upswing with higher fourth-quarter revenues and a year-end backlog of $134.2, representing an increase over the $118.2 million backlog at the end of 2002.

NORESCO also had an impairment charge in the fourth quarter of 2003.

This totaled $11.1 million, equating to $7.3 million after tax, and pertains to NORESCO's investment in Petroelectrica de Panama, LDC, and independent power plant located in Panama.

NORESCO owns a 45 percent interest in this project, and accounts for this investment using the equity method.

Consequently, this impairment is not included in NORESCO's operating income for the year.

This impairment represents NORESCO's entire investment in this project.

You will recall that the 2002 results included an impairment of NORESCO's entire investment in a Jamaica power plant, which resulted in a $5.3 million charge.

Since that project was consolidated, the charge did flow through the 2002 operating income.

The book value of NORESCO's other overseas power plant investments totaled $27.3 million.

This comprises a $21.7 million investment in another Panama power plant and a $5.6 million investment in a Costa Rica power plant.

The impairment test that we are required to perform indicated no impairment was justified at either of these two plants at this time.

However, while the analysis appears clear cut at the Costa Rica plant, it is not as comforting at the other Panama plant, which could be adversely affected by power contract bids to be awarded in late 2004 by the Panama government.

I will now discuss a variety of other topics of potential interest, including those that affected 2003 earnings, but have not yet been discussed.

The logical place to start is Westport Resources, as 2003 contained earning events both directly and indirectly linked to this investment.

During the fourth quarter 2003, Equitable sold approximately 1.48 million shares of Westport Resources stock in two separate transactions, resulting in a capital gain of $14 million, or $9.2 million after tax.

You will recall that we stated our intention to sell approximately 3 million shares of Westport stock in order to fund the roughly $50 million in 2003 contributions to our defined benefit pension plans.

That is still our near-term goal.

It simply could not be fully executed in 2003 because of SEC Rule 144 limitations.

As a result of the sales that did occur, Equitable owned 11.53 million shares of Westport Resources stock as of the end of 2003.

This equates to about 17.1 percent of Westport's outstanding stock.

As of year-end, our remaining stake had a pretax market value of approximately $344 million.

The tax basis of our remaining stake is approximately $61 million.

You will recall that at the end of the first quarter 2003, Equitable's ownership position of Westport resources dropped below 20 percent as a result of the funding of a community giving foundation.

As mentioned at the time, this had resulted in a net charge of about 3 cents per share, and also caused the company to change its accounting treatment for this investment from the equity method to available-for-sale securities, effective March 31st, 2003.

The establishment of this foundation also had the one-time effect of reducing our effective book income tax rate from about 34 percent to about 32 percent for the year.

Also, Equitable Resources did report $3.6 million, or 4 cents per diluted equitable share, in equity earnings from its minority stake in Westport Resources Corp. during the first quarter 2003, while we were still using the equity method to account for this investment.

I mentioned that we used the Westport stock sale proceeds to help fund our investment in the defined benefit pension plan.

As we discussed at the time, or philosophy is to try to keep our funded status at around 90 percent or more, so that we are not creating large unfunded future obligations to the shareholder.

We ended the year at approximately that funding level, but we did take another step to reduce the uncertainty of the shareholders' pension obligations.

In the fourth quarter, 2003, the company froze the pension benefit provided through a defined benefit plan to 344 non-represented employees.

The company now provides pension benefits to those employees under a defined contribution plan that covers all other non-represented employees of the company, including management.

As a result of the change, consolidated SG&A expense includes a charge of $2.5 million, or 3 cents per diluted share.

Total pension expenses for the company increased versus 2002 as a result of this charge, but absent the charge, total pension expenses would have been slightly lower, year-on-year.

We will continue to work to balance the need to provided a market level of benefits to employees so that we can attract and retain people with the shareholders' reasonable desire for as much cost certainty as possible in these benefits.

Separately, during the fourth quarter, Equitable repurchased approximately 250,000 shares of EQT stock for a total of 1,432,300 shares repurchased for the year.

The number of shares repurchased since October 1998 is approximately 16.7 million out of 18.8 million currently authorized for repurchase.

We recognize that we are beginning to approach the current authorized limit, and, as noted on previous occasions, we will seek a forward authorization for further repurchases before we reach this limit.

Staying with the topic of stock for a moment, we continue to shift our compensation focus away from options and towards performance-based stock and time-restricted stock.

As the upcoming proxy will detail, options awards to management in 2003 reflected a 75 percent decline versus the prior year.

Further, the compensation committee of our Board of Directors has indicated a desire to fully replace options with restricted stock this year.

As a result of these shifts, stock compensation expense for income statement purposes increased by about $9 million from 2002 to 2003, and is expected to be down slightly in 2004, so that 2004 book expense for stock compensation is expected to be up about $7 million versus the 2002 book expense.

However, this ignores the cost of options, a cost that is down sharply, but is not expensed on the income statement.

If options were expensed, total stock compensation expense for book purposes would be virtually unchanged from 2002 to 2004.

An ultimate topic relates to capital expenditures.

Equitable invested $221 million in capital projects during 2003.

This included $160 million for Equitable Supply; $60 million for Equitable Utilities; and $1 million for Headquarters and NORESCO.

During 2004, Equitable forecasts $210 million of capital expenditures.

This forecast includes $138 million for Equitable Supply; $58 million for Equitable Utilities; and $14 million for Headquarters and NORESCO.

Importantly, the 2003 supply CapEx figures include $126 million that is related directly to drilling wells, and $34 million for infrastructure.

Whereas the 2004 figures include $90 million for drilling-related CapEx, and $48 million for infrastructure.

Murry will discuss the strategic issues behind that shift in his comments.

As an aside, the majority of the capital expenditure increase at Headquarters is related to the planned move of the Pittsburgh-based office staff from five locations to a single new leased location.

At this time, we are anticipating this move will not happen until early 2005, but we have attempted to fully budget for the move in 2004, as a matter of prudence, as we may wish to make commitments for the necessary office furniture and equipment, computer equipment, etc. this year.

My final topic is the year-end balance sheet.

We anticipate that the final balance sheet will show $965 million in book equity; $653 million in long-term debt; $242 million in short-term debt and current maturities; and $37 million in cash.

Those debt figures include the remaining amount of deferred revenue from the prepaid sales that were executed at the end of 2000, with $21 million of deferred revenue being included in each of the long-term and short-term debt figures that I just cited.

With that, I will turn the microphone over to Murry.

David, thank you for a very complete report.

And thank you all for coming on the call this morning.

I did want to follow up by making a few points about Equitable, in general, about our capital program, and about our supply business, about which I am sure you all are thinking about.

First of all, though, I would like to reiterate our guidance for 2004.

We previously had given earnings guidance in the range of $3.00 to $3.05 earnings per share.

And, we are reiterating that number today.

If we achieve this level of earnings per share, and we intend to do so, this would represent the fifth consecutive year of record earnings per share for the company.

In terms of the longer-term, we remain committed to the same financial drivers we have discussed with you many times in the past.

We continue to expect to keep Equitable as a leader in the pack on return on total capital, which reflects value creation; it reflects our discipline and attention to operating excellence.

And, we also, of course, look to minimize the overall cost of capital for our company.

And, in that respect, we are trying to maximize the value reflected in the gap between our return and our cost of capital.

We are committed to superior competitive growth in earnings per share, targeting low double digits for the foreseeable future -- main commitment.

And, we also are committed to return cash to shareholders that is not otherwise necessary to maintain a strong balance sheet and fund growth.

So, there is, at the end of this year, absolutely no change in our fundamental long-term financial commitments to our shareholders.

On the capital budget, I did want to follow up on what Dave mentioned earlier.

The largest variance from year to year in our capital budget is in the supply business.

Dave mentioned these to you, but I will reiterate the basic metrics.

In 2003, we spent $160 million in CapEx in the supply business.

In '04, we are intending to spend about $138 million, which is a 14 percent reduction.

Drilling is down from 126 million to 90.

And infrastructure pipeline of facilities expenditures are up from 34 million to 48 million, which is about a $14 million, or 41 percent, increase.

This is what we're doing -- as you recall in 2003, we were somewhat disappointed with our drilling program in Southern West Virginia.

We did cut it back about midyear.

That cutback continues in 2004.

On the other hand, we were pleased with the drilling progress in Kentucky and Virginia, and are planning to increase drilling in both of those areas.

In total, our drilling will be down from about 401 wells -- exactly 401 wells in 2003 -- to 340 planned wells in 2004, and the reduction in drilling in West Virginia more than accounts for that reduction.

In other words, we are coming down fairly substantially in West Virginia this year, and increasing our drilling both in Kentucky and Virginia.

The capital spent for pipeline and facilities infrastructure follows the drilling plan.

We intend to increase investment in pipeline infrastructure in Kentucky and Virginia, mostly to accommodate the drilling program.

We will also spend capital in Southern West Virginia to de-bottleneck those systems so that we can accommodate future drilling there.

And so, effectively, we are taking a little breather in West Virginia this year; we hope to come back to that drilling program in future years.

Now, turning to Equitable Supply, in general.

As you know, I have been taking a personal role in Equitable Supply for the last couple of months.

On our last call, I told you that I was very confident in our ability to create more value in that unit, based on engineering studies, based on the progress that we are making in process improvements.

And, there is no question that we have the opportunity to significantly step up the performance in that unit.

Without getting into a lot of detail at this point, the gap between our expectations and our realizations in that unit has come from a couple of areas.

First, from a management standpoint, I think we lost some focus in 2003 by not being as disciplined as we normally are in keeping to a few priorities.

Excluding ongoing priorities in safety and compliance, the four things that we're focusing on there in Equitable Supply are -- first, we need to reduce bottom hole pressures in our wells to the minimum level.

For the most part, this means reducing impediments to flow from the geology into the borehole, mostly related to water or other facilities problems in the borehole itself.

And we are instituting, in 2004, a very detailed and disciplined surveillance process so that every well is treated in a systematic way.

That is number one focus.

Secondly, we are reducing surface pressures to the minimum level economically justifiable.

This, of course, reduces backpressures on the wells so that they can produce at their maximum rate.

This year's goal is to reduce overall system-wide pressure by 7 percent, and there are a number of capital projects -- pressure projects and pipeline projects -- that we are undertaking to affect that significant change in bottom hole pressures.

Third, we want to sell all the gas we produce.

For us, this means reducing our unaccounted-for gas, which has been a problem in the past, to zero.

And that means our measurements activity, which has been stepping up over the last couple of years, is going to take a big step up in this year, so that we are accounting for all of the gas that we have produced.

And, of course, we want to reduce the lost gas to the minimum level that we can economically justify.

So that is the third priority -- sell all the gas we produce.

And, of course, last is to effectively drill up our inventory.

I mention that we're going to drill 340 wells this year.

We still have a substantial backlog of drilling inventory, going forward.

So, the first thing we are doing, is getting our focus back in a few areas.

We'll be reporting our progress in those areas throughout the year.

The second issue -- I may have mentioned in the context of culture on my last call -- we were disappointed in basic execution on some business plan objectives.

And, in our company, we call those value drivers.

And we have missed some of those drivers and missed some of our objectives in 2003.

We are not used to doing that.

It causes me and others more than a minor share of angst when we do that, and we don't react very well to that.

I don't need to fill in the blanks for you, but more than half of the senior-most people in the operation area of our supply organization have been replaced over the last two months.

So, I am confident in the potential.

And, I'm also confident that we will get this unit back on track.

And as I said, we will report progress throughout the rest of the year on this turnaround.

With that, I will turn the discussion back over to Pat.

Thank you, Murry.

Before opening the phone lines for question, I would like to inform you of a few housekeeping issues related to our investor relations program this year.

As many of you know, Murry and I have made many trips to the major investment centers to update you on the company's progress and prospects.

Given Murry's increased role in the operations of the supply group, he will not be participating in as many trips in 2004 as he has over the past several years.

Murry will continue to participate in industry conferences to the extent possible, including upcoming Howard Weil and AGA (ph) conferences.

Equitable will host the conference for financial professionals in September this year.

We will be providing more details regarding the specific date and location as the arrangements are finalized.

And finally, we have decided to move our internal 2005 business planning process from the third quarter to the fourth quarter this year.

As a result of this shift, we do not plan to provide earnings guidance for 2005 until December.

That concludes the comment's portion of the call.

Mauritia, can we please now open the call up for questions.

(OPERATOR INSTRUCTIONS).

David Maccarrone, Goldman Sachs.

Good morning.

Murry, you indicated you remain optimistic about the outlook for growth, consistent with what you have said previously.

I was wondering, in light of the reduced capital expenditures budget -- a decline, 14 percent, overall, in supply; 29 percent in drilling, specifically -- the implication there is that you're getting higher returns to achieve your growth objects.

And I was wondering if you could be specific in what leads you to that expectation in terms of some of the projects in the infrastructure business?

Give us a sense for what type of de-bottlenecking projects might create that sort of performance.

Yeah, David.

Let me break it down in a couple of pieces.

First of all, based on our internal analysis, the drilling program for 2004, at a $3 gas price, as an IRR (ph) of somewhere between 11 and 12 percent, and significantly more at prices in the 450 range -- probably in the high teens, let's say.

So, first off, out of the box, the drilling that we are doing is profitable.

Now, in the last year -- I think we will discuss this in a lot more detail at the analyst conference -- in the last year, there was some concern about the increase in volume, or the lack of increase in volume versus expectations.

People were doing the calculation -- well, you put so much capital in the ground with these wells, how come we are not seeing the volume at the end of the day?

And, without getting into a lot of details, it is our considered view that the capital we put in the new wells was generating more volume, but the de-bottlenecking was reducing the overall volume from the base wells that were there prior to the new drilling.

And we will sort that out for you a little bit more later in the year.

So, it was not our -- it was not a problem, in our mind, particularly in Kentucky and Virginia, that the new wells were valuable.

It was that the old wells were not doing as well as we thought, so we needed to shift that capital to infrastructure.

Now, of course, you know as well as I do, that with long-lived reserves that the deferral of a cubic foot of gas that sales today does not mean the deferral for a day or a week or a month.

In a lot of cases, it means deferral or 40 years, and the PV effect of that is not very good; you don't get much value.

So, these infrastructure expenses, mostly pipeline, some compression, are -- you can look at this way -- our acceleration projects are volume, and that is how we are viewing it.

And, as we said earlier, I think in southern West Virginia, we were a little disappointed in the wells.

They were not quite as profitable as we thought.

They were a little more expensive than we thought.

And, we were running into de-bottlenecking problems, and that has caused us to shift the emphasis.

In the greater scheme of things, the slowdown of one year, let's say, in drilling -- and I fully believe we will get back up to higher levels next year -- does not really impact the overall value of the company very much.

I mean, it's one year, some incremental volume from some number of wells.

But, the potential to drill wells certainly has not decreased.

And, all we are trying to do is make sure that we don't get ahead of ourselves and spend capital more quickly than -- more quickly than we should.

I don't know if that answers your question completely, but that's -- you see what I'm saying?

Yeah -- it partly addresses the question.

I wanted to follow up on the lost and unaccounted-for gas.

I was wondering if you could quantify that relative to the company line loss and usage figures that you provide.

And also, if you could talk about how much you expect operated volumes to grow in 2004 from some of these initiatives, such as reducing surface pressures by 7 percent?

Yeah, let me address the lost and unaccounted-for issue first.

I think the major thing we learned in 2003, that lumping lost and unaccounted-for gas into one category was causing some behaviors that we really did not like very much.

And, those behaviors allowed there to be excuses for lost and unaccounted-for; it became almost a plug number.

Now, I will say that fundamentally, I believe that we did decrease lost gas in 2003.

We put a lot of money to it, a lot of time to it.

But the problem is that the measurement is not up to where we want it to be.

So, what I've done in 2004 is break that lost and unaccounted-for problem into two pieces.

First of all, we should accept no unaccounted-for gas within measurement limits.

You know, within the measurement tolerances of the meters and such.

So, we want to reduce that to zero, or whatever the lowest minimum level is that the meters will allow us to have, which is probably a couple of percent.

And then we can make a more informed decision about how to treat the lost gas.

So, that is what I've instituted; we're very early in that process right now.

It's causing us to spend more time on metering.

We've got some special studies internally working on exactly where we should put all the metering, and making sure they are all calibrated, and attending to the details that I think we kind of lost a little sight of in 2003.

So, that is long-winded, but I'm breaking the problem into two pieces, and I'll have more information to report as we go throughout the year.

Now, the direct impact of the 7 percent reduction in surface pressures -- I'm not going to get into the forecasting business on that.

As we reduce the pressure, we will see what the volumes are.

We certainly think that the investment is profitable.

But, let's look through the year and evaluate that as we go.

Okay.

Thank you.

John Edwards, Deutsche Bank.

Good morning.

Just a follow-up on David's question a little bit on the impact of reduction in surface pressures, how it translates into volume.

I mean, Murry, is there like a graph or a quantitative relationship for so much reduction in pressure, it results typically in so much improvement in production?

Yeah, you would think there would be, John.

And it is our ongoing frustration that we don't have that simple graph that we can share.

But, given 12,000 wells and 10,000 miles of pipe -- and this is not an excuse -- you can imagine this problem has to be broken down into pieces.

And, that is what I am working on -- breaking it down in pieces, And making sure, first, that we've got all the gas accounted for.

And then, as we take those actions to reduce pressure, what exactly happens?

We have not done as good a job as we did out there.

I really cannot give you that graph.

I would like to have it myself, and I am working towards getting it, (laughter) but I don't have it today.

I'm sorry.

Okay.

In terms of our trying to give a reasonable forecast as to expectations for '04, '05 volumes -- how should we be thinking about that?

I mean, we've been thinking in general, in the past, kind of mid-single digits.

Are we still on that kind of general growth?

I think -- let me be clear -- when we made our -- and have made our commitments to grow the company's -- overall company's EPS at low double-digit rates -- we had a number -- and we do have a number of ways -- drivers, let's say, to get there, including, of course, production increase, sales increase, reduction of cost, performance-based rates and all of that, and all the rest.

We have not wavered from any of that.

But, I think, to be clear, we are not backing off of our commitment to grow the company's earnings per share at low double-digit.

Now, the exact percentage of that growth that comes from production is going to be substantial.

But, I'm really not prepared to report that, precisely, at this point in time.

Well, in terms of just the volume -- not the actual earning contributions, but the volume of production --

Yeah, John, we have not given guidance on that.

Okay.

Yeah, and I think what we want to do right now -- the right thing to do right now is to take the four actions that I talked about and then measure how well we do as a result of those.

And then, take whatever other actions we need, if we are not satisfied, to increase it later.

And, I think that is the right thing for us to do right now, because we are not in a position to give you a graph or something simple, at this point.

And there is a lag between the actions that we take now and the results coming up out of the ground.

And frankly, a lot of the volumes -- the volume increases in '04 are going to primarily result from the drilling programs in '03.

So, what Murry is really more focused on, though, is not the volumes that we already know are going to be coming out in the form of increases from that drilling program, but the future increases, really, beyond '04 that we're going to get, so that we can keep the growth engine going for a few more years.

Yeah, I mean from a shareholder standpoint -- and I know you are trying to make your models work -- let me put it this way, John.

It would be a miracle if the way we are currently measuring and operating that this system is optimized.

It would be a miracle; it would be only a happenstance.

There are so many places for improvement, and it involves drilling, it involves measuring, and it involves reducing lost gas, and all that.

And I think we put a big bucket around it all.

But, as we've gotten into the problem, you know, and really torn it apart, number one, we will feel confident those buckets exist.

I mean, there is no question about it.

But I think we are, at this point in time, we don't -- although we've got more clarity on it internally, we are not ready to lay it all out, get.

Okay?

Because I don't want to get stuck by reconciling things that are not completely baked yet.

I cannot emphasize to you enough that the opportunity to improve is there, and I am going to get it.

Okay.

Can you talk a little bit about kind of integrating the new staffing, or the new editions to -- I think you said some higher level management positions.

Can you talk a little bit about that?

So far, the biggest gap we have seen in supply revolves around analytical talent.

And, we are adding resources there.

Okay?

But, in terms of the overall management positions, for the most part, to date, we are elevating people in the organization that have been successful to fill positions that have been occupied by people that have not been successful.

So, by and large, it has been an internal -- there have been internal appointments.

But, that is not to say that we might not add some other people to those operating levels later on, if we find out that we are not meeting our targets.

Okay.

And then last, we were thinking -- in terms of Westport monetizing, Westport Resources stock, can we expect some additional monetization to occur perhaps late this year?

Or, early next year?

Well, actually, as we had mentioned, the first step for us, John, is that we really meant it when we said we wanted to sell about 3 million shares of Westport stock to fund those pension contributions that we made in a couple of lumps -- primarily, near the end of the third quarter of 2003.

And, because of SEC Rule 144 limits, which have to do with the amount of stock -- unregistered stock that one can sell -- we were only able to sell about half of that.

So, when we mentioned a near-term objective of selling the other -- call it 1.5 million shares -- I really do mean near-term.

The 144 limits pertain to 90 day -- kind of rolling 90-day, or really rolling three calendar months, limitations.

And that would suggest that by the end of the first quarter or early second quarter, we would be looking at doing something.

Frankly, it seems as if Westport stock is getting to be liquid enough that the sales that we executed in the fourth quarter didn't really have much of an impact, and we would not expect it to have much of an impact.

So, I think you should expect to see something on the Westport front a lot earlier than the end of 2004.

Okay, but, I mean, I was thinking actually outside of the funding of the -- (multiple speakers) (inaudible)

It is a noncore asset.

We just don't want to do anything that is disruptive to Westport stock.

They've got other acquisitions that they, of course, concluded in the fourth quarter of 2003.

Presumably, they are trying to do things as well that may, at some point, involve transactions that would lend themselves to Equitable monetizing more of its stake.

So, I think it is probably fair to say that we are opportunistic in that regard.

But, we would be disappointed if any year went by without us further reducing that stake until we are all the way out of it.

Okay.

Fair enough.

Okay, thanks, guys.

Yves Siegel, Wachovia Securities.

Can I ask just a simple question to beat up on a topic that you've spoken about?

But, in terms of the supply business, is it fair to say that, broadly, you identified the problems, and now you're essentially coming up with a more specific game plan on how to address each issue?

And, at this point in time, you may not very well have all the specifics in place, in terms of production targets and the like, on how to attack it.

And, within that context, how long, Murry, do you think that you need to be in charge of that division?

And, how soon do you think you would like to hire someone that can run that, going forward?

Okay.

Let me answer that in two parts.

First, we do have a production target for this year that we will meet; we are just not sharing that number with you right now.

Okay?

So let's be -- that is number one.

Secondly, the priorities, as you mentioned -- we have focused those in the last couple of months.

So that is new.

And as Dave said, there is going to be a lag between the -- we call them value drivers, internally -- but, we put those in place.

But, we expect that we will make a lot of progress on those this year.

But, the third piece is just the raw execution on the things that we know we need to do.

And, as I mentioned in my remarks, I was not satisfied with the execution on the things that we have done and have made some replacements of staff.

So, that is -- I think that answers your question.

Now, as far as how long I'm going to stick around there?

I will be there until the message is clearly understood by everyone in that organization about what is expected, about these standards for performance, standards for our interactions and our values.

I will stick around until I know that to be true.

The board, of course, wants me to seek a replacement, which I will do.

But, I am going to make sure that this turnaround gets off the ground.

This is what I do best.

And, I cannot imagine that I will not be there for at least six months, and probably longer than that?

Yves, does that handle all the things that you were talking about?

Yeah, it sounds like you pretty much have the specific game plan down pretty well.

Yeah, but there's a big difference -- and I think Equitable has been pretty good at this in the past, and that is why the supply has been a disappointment for us -- there is a big gap between what you say you want to do and actually getting it done.

Normally, this company has been exquisite at getting things done, because we don't tolerate anything other than getting it done.

And in supply, we drifted away from that a little bit.

And so, until we get competently back on that track, I'm going to stick around there.

Okay.

All right?

Yeah.

If I could just follow up with a couple more and I will ask them quickly.

In terms of your overall view on the long-term natural gas prices -- and I think it is fair that gas prices may be above where you think the long-term value is -- is there any opportunity in terms of locking up more -- well, I guess hedging more of your gas longer term -- number one?

Number two, within the context of what you are doing at Supply, what are your thoughts on dispositions or acquisitions of properties at this point in time?

Thirdly, can you give reserve data, at this point in time?

And then finally, in terms of gathering, how are you doing there in terms of maximizing the gathering fees and improving income there?

Okay, let's see if we can get these in the right order here.

First, with hedging.

You asked me about my long-term view on prices -- I'm not a soothsayer on this, by any stretch of the imagination.

I have, for over a year now, been a bearer on prices.

And so (laughter) I want to tell you that Equitable is pragmatic on this matter.

First of all, I am a bearer on prices long-term.

And so, the downside hedge, if you will, for the company is making sure that our investments are made in a way that they are able to sustain a fairly substantial reduction in price.

Now, we have tested -- always tested our investments at 225, NYMEX gas, to make sure that there is a reasonable chance that we are going to earn our cost of capital at that level.

That becomes our downside hedge position.

But, on the upside, I am a practical guy.

And, between David and I and a couple of other people in the organization, we are tactical in the way that we hedge our long-term production.

We have not forecasted our intentions on that matter.

The only thing I have said in the past was that I like it when our earnings volatility in the current year is less than about a penny a change in EPS for every dime change in the NYMEX.

For the last three or four years, I think, David, we've been in that general position. (multiple speakers) So, that is about all the guidance we normally give on that.

But, we do look out.

When we're hedging at this point, we basically look out to the end of the last NYMEX contract, or a little beyond.

And, right now that means that we are certainly aware of what our hedge position is out to, say, 2010, 2011.

And that is kind of where we look.

Beyond that, it is not particularly liquid, so it is a little bit tougher to hedge.

But, we do have periodic discussions -- quarterly discussions, internally -- about how to adjust that, and we do often adjust that.

Adjust meaning, really, decisions at this point are to either increase the hedge position or not increase it.

I don't think, since we've been here, we have removed (indiscernible) hedges in the course of that.

But, you know, we make decisions on whether to increase or to not increase, basically, quarterly.

So, in a word, our downside hedge is operating performance.

And our upside hedge is based on our long-term view that these prices are very high, but we are kind of tactical in that regard, as David said.

As far as M&A is concerned on the production side, the answer is no, we are now looking to increase our position in the production side.

For a couple of years now, as you have heard us talk, we have been strong advocates for the consolidation of the LVC (ph) business.

We remain strong advocates of that.

We think there is tremendous value in that consolidation, albeit, it has its regulatory issues.

But, in the long run, I think it's a very good thing to do.

And, just to date, there has not been anything that we have been able to participate in that made sense for the shareholders.

But, you should not look at us and think that we are looking at M&A opportunities in the supply side.

It would have to be a wonderful deal in order for us to -- (multiple speakers)

It's more likely that, as we work through this, that you would mention the possibilities of divestitures.

It's more likely that, as Murry works through this, we would identify certain parts of the business, as we have over the last couple of years, that are, for one reason or another, noncore, and therefore, perhaps, more valuable to others than they are to us.

And, if that is true, that would lead to some continued pruning.

On the reserve side, no we're not ready to publish those reserve numbers.

I will tell you though, as a matter of course -- I guess after the Shell announcement, everybody is worried about that (laughter).

We have never really focused on the reserve number.

Because the reserve-to-production ratio in this business is so high, we have always worried about the production parts.

And so, we have plenty of reserves.

It's mostly for us -- the value driver for us is accelerating productions in those reserves.

And so, we really have not focused that much on there.

But to your point, and if you are referencing the Shell matter, there are no issues.

Lastly, you asked about gathering fees, that probably warrants a longer discussion at some point.

But, in general, in the Appalachian area, we think that the gathering fees have to go up.

And we are, of course, a large gatherer.

But, if you look at the pressures on compliance, the pressures on pipeline integrity, the pressures on security, and all those kinds of costs, we think, in general, the producers are getting a pretty damn good deal right now.

And, we are doing what we can to raise gathering fees where we can, and where it's appropriate, and where it's justifiable.

So, you will see some activity by us this year in that area.

I think that got the four points you were mentioning, Yves?

It did.

Thank you very much.

Carol Coale, Prudential Securities.

Most of my questions have been answered, obviously, since it's been 30 minutes of questions.

But, I had a few specific things, and I don't want to belabor this supply issue.

But, I recall last year, and actually in prior years, you have been talking about this well automation program and these handheld PalmPilots that you were distributing to your workforce.

I don't recall exactly what your investment was there, but are you basically saying that that technology did not work?

And, are you considering writing off the cost invested in that technology?

Or, as an antidote, are you expanding that technology to achieve your initiatives with your bottom hole pressures and service pressure (multiple speakers) and --?

That is a good question, Carol.

It is the latter rather than the former.

We have more investment to make in this area.

It is valuable investment.

And, I think that it is through that investment that we have identified some of the underlying problems that we are now trying to solve.

So, that is one piece of it.

The measurement is critical, and we are committed to continuing the investment, and we think it is going to be valuable in the long run.

I think, where the execution has falling down a little bit is in the use of that information.

And, some people are a little scared of it, as you can imagine.

It looks like -- technology is scary for a lot of people.

When we did the Pilot that we reported to you on, we were very excited about the results of our Pilot programs.

We automated wells and production with up.

You know, the people that were involved in that were the early adopters of the technology and they were very excited.

But, as we made the broader rollout of the technology, it turns out that the early adopters were not the norm.

And, so as I am taking over the business, the train has left the track on this technology issue.

And, those people that are not willing to get on the train are going to get left behind.

But, the short answer to your question, it is the latter rather than the former; this is a great use of company asset and shareholder asset.

Okay, are you willing to disclose what you have invested so far in that technology?

You know, I would, it's not a great deal of money, frankly.

But I don't want to give you an imprecise number.

Maybe what we can do is provide that at a later time.

But, it is less than $25 million.

Okay.

All right.

Thank you.

The question for Dave real quick, just a clarification.

You mentioned in you earlier comments about how, without the charge, your pension expense would have been lower.

Can you provide any guidance on what you think pension costs will look like going forward, as far as decrease?

Or quantify what you meant by how much lower?

The decrease in '03 versus '02, if you exclude that charge, was around about a half-million dollars.

Okay.

And, we expect it to be flat to down in '04, but really what we're getting is, we don't have to amortize the underfunded piece anymore.

I think what I keep reading about is people's pension costs going up.

And, our steps are designed to make sure that doesn't happen to us.

So, I mean, of course, that does continue to depend on the investment returns, as well as discount rates that we have to use and things like that.

But, really, what we're trying to do is prevent our pension costs from going up.

From what we can gather, from looking at our peer group, we are the only ones whereby you can ask questions about how much is pension cost down by, as opposed to how much is it up by?

That is true.

Well, thank you for the clarification.

Jason Seltch (ph), Wagner Asset Management.

Yeah, (indiscernible) shareholders in Talisman production that has a lot of very exciting production in New York now in the Trenton Black River.

Yeah.

And I was wondering whether you're going to participate in that at all?

Well, we're not going to participate in their wells.

But Jason, we have 3 million acres in West Virginia and Kentucky and Virginia.

And, if that trend that Talisman has discovered, apparently, comes anywhere close to West Virginia, Virginia or Kentucky, we are going to own it.

So, we are hoping that it will come our way.

We have no specific intentions this year to drill one of those wells, but there is no question that the potential could exist.

We've always said it could.

It's just that our participation there is going to be, firstly, by contributing some acreage, maybe, if someone has an interest.

And of course, since we own it all, again, we will be the most well-positioned fast-follower on that trend.

This is really the first time that somebody major has come up with some clearly positive, concrete news on that Trent Black River (multiple speakers) Those articles have been finding their way around our office as well; we are very aware.

We do know that was good news on their front, and we are certainly aware of the implications it could have for us if it proves out.

But, it's a bit of a long way from New York to West Virginia.

So we will see how the trend develops.

But, if it makes it down there, Jason, we will be dutifully reporting that good news to you.

Yeah, then another analyst was telling me the other day that there is new, I think, Knox regulations going in for coal-fired power plants in the northeast this summer. (multiple speakers) And, they thought that that might make the Appalachian gas more valuable than it had been in the past.

Do you have any view on that?

I know that you have been thinking that the prices at Henry Hub were too high.

But what about the differential between Appalachia and the Henry Hub?

Is this thing going to affect that at all?

Have you thought about that?

Well, yeah, there are pluses and minuses.

Setting aside the Algerian problem, the LNG has, if it continues to come or they are not big prohibition, that could have a negative effect on basis.

On the other hand, the point that you raised could have a very positive impact on basis.

And we have less basis unhedged.

So, if there is a positive -- and really, I don't know how to balance those two things.

But, we've left it unhedged, and if there is a positive, we will substantially benefit from it.

Okay, and maybe there will be more throughput through your systems -- (multiple speakers).

No question.

A couple of years ago we did a project with Allegheny where we -- you know, you don't have to stop burning the coal, but if you add gas to the coal, it substantially reduces the emissions.

And we did a very successful project, but then everybody sort of lost interest in that when gas prices got so high.

But, to the extent that regulations are forcing the reduction, then those projects become very good projects.

And, as you say, they are internal markets for gas.

So it could be a real positive.

We will see. (multiple speakers)

Okay.

Great.

I look forward to hearing more about the Trenton Black River and this power plant issue.

Yeah, we don't normally beat the table to pump things up, but between the value that we have in our existing production base -- production assets and Talisman and other basis issues, there's a lot of room to be very optimistic about Equitable.

Okay.

Thank you.

Sam Brothwell, Merrill Lynch.

I think most of them have been covered, but Murry can you just give us where your thoughts are lately on NORESCO?

Well, is Dave mentioned in his remarks, NORESCO had a real step-up in backlog.

And, so they ended on a pretty good note there.

We are -- and of course, this is mostly Legacy, Sam, but we have decided that our predecessors' wisdom in investing in foreign power plants was not such a great idea.

And so, we are not doing that.

But, beyond that, the energy infrastructure business, in general, that we had put some focus on previously, is not bearing out as a separate business unit as well.

But, on the other hand, our performance contract tracking has done extraordinarily well.

And, as you know, we are the leading supplier of energy services to the government.

Now, the one little problem -- and by the way, that is going very well; the team is doing very well; and I am really feeling good about their growth prospects -- but, the energy bill is holding up the re-authorization of government spending on energy conservation projects.

And, you would think that would be a no-brainer.

I think what is happening is everybody is trying to hold the whole bill together, but no one disagrees that the re-authorization of the government's spending on energy savings should go through.

There is no disagreement about that; it is just being held up with the rest of the bill.

So that's the only little bit of a downside.

We are hoping that will get done soon.

It has not stopped people from continuing to work on projects.

But they've got little authority to execute right now.

And so the backlog, should kind of be -- as we said before, it is going to be a little bit lumpy.

But, when that gets re-authorized, it should plow through a bunch more backlog.

So, I feel pretty good about NORESCO.

Okay.

Thanks.

Jay Yannello, UBS.

I'm going to jump in at the end here.

Murry, the good news is the stock is up, but the yield is down.

I realize you're continuing to buy back stock.

I realize you have mentioned the 60/40 in the past.

Can you think aloud a little about what you and the board might be thinking about the dividend, going forward?

Just to reiterate, Jay, our policy -- let's say our operating practice, which is that we have said that we are going to try to keep DPS growth on the same track with EPS growth.

The board generally looks at this issue in the spring, and at that time will come out with what we're going to do, going forward.

There is no reason to change that policy.

We are still on that policy.

So, generally speaking, it should be an annual policy?

Yeah, yeah, right.

Exactly.

We made that one change, Jay, kind of midyear last year, because of the tax law change.

But, our attitude is that we're still on that same spring, April-type of schedule as we had been on.

And, as Murry said, we said that we're going to try to keep the dividends per share basically in line with EPS.

So basically keeping the payout ratio where it was then.

Okay.

I just wanted to confirm you're still on that.

Yeah, still on that.

Thank you.

John Edwards, Deutsche Bank.

A couple of minor items here.

On the severance taxes, it looked like the rate went up quite a bit this year-over-year -- it went up, I think, 18 cents from 15 cents.

What should we think about, going forward, on that?

(multiple speakers) you want to handle that -- ?

John, that is all gas price.

That is all gas?

Yeah, and what happens, though, we paid severance tax based on the actual market price.

So, it is going to disconnect a little bit from our average realized price, because we have hedging that gets taken into account.

We're looking at our wellhead price.

But, we pay to the local municipalities, states -- counties and states -- based upon current market gas prices.

We do take that into account when we are hedging.

We view that as if you will hedge volumes when we are figuring out how much we should hedge.

So the reason it went up is that NYMEX was up by a fair amount.

NYMEX was lower than most people seem to remember in '02 calendar year.

I think we remember that it was high in '03 calendar year, but it was a pretty big percentage increase from '02 to '03.

Okay, and then the equity in unconsolidated?

That kind of bounces around.

Yeah, but, you know a lot of that is due -- now, is really, in large part, due to the -- there's the NORESCO nonconsolidated projects are in that; there are some of the little pieces that we had when we sold Net Profit's (ph) interest in reserves, as well.

And, of course, we would have lost some things out of it from last year with Appalachian Basin Partners, in particular, having dropped out.

So -- (multiple speakers)

At this point, it should be a little bit simpler, because we don't have as many of these unconsolidated investments anymore.

You know, Westport, of course, is going from equity to cost -- or to available-for-sale securities.

And we have written the -- what we call the PEP (ph) project, Petroelectrica de Panama -- down to zero.

So, that has dropped off also.

We still do have the net profits interest sales, in which we have retained a tiny little piece.

But, I would say that a lot of that -- (multiple speakers)

So, it should be small, Dave, going forward?

It should be.

What you really see, then, going forward, is more the effect of the Pan-Am project and the Costa Rica project for NORESCO.

Relatively small.

Okay, great.

David Maccarrone, Goldman Sachs.

Thanks.

Dave, just a quick one.

With the focus on the dividend, are share buybacks now more a way to offset the gradual creep in the number of shares outstanding?

Or, do you continue to view that as a way to return significant value to shareholders?

We still view it as a way to return value to shareholders.

We do have discussions with the rating agencies on that topic, but our basic view is that the start point is that we should be able to keep the share count where it is.

That kind of creates a floor level for what we should be doing there.

And then a lot of it, as Murry said, is related to our (indiscernible) capital expenditure programs.

I mean, we want to return -- we are returning the unused capital to shareholders.

So I actually do expect that that stuff is going to keep up.

There was a reduction in share repurchases in 2003, but we did have the increase in dividends.

But we also had, absent acquisitions, it was probably the highest level of CapEx that we've had in the company.

Okay.

Thank you.

Thank you.

I am showing no further questions at this time.

I will now turn the call back over to the speakers for any further or closing comments.

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