EQT Corp (EQT) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Equitable Resources first quarter 2004 earnings conference call. [OPERATOR INSTRUCTIONS].

It's now my pleasure to turn the floor over to your host, Pat Kane.

Sir, the floor is yours.

Thanks, Ashley.

Good morning, everyone, and thank you for participating in Equitable's first quarter 2004 earnings conference call.

With me today are Murry Gerber, Chairman and President and CEO, and Dave Porges, Executive Vice President and CFO.

In just a moment, Dave will review the first quarter financial results, and other matters addressed in the press release this morning.

Murry will then provide an update on the supply business.

Following Murry's remarks, we'll open up the phone lines to questions.

But first I'd like to again remind you that today's call may contain forward-looking statements related to such matters as the anticipated earnings per share, the company's EPS sensitivity to changes in NYMEX gas prices and deviations from normal weather, the company's financial performance, dividend pay out and yield, the repurchase of additional Equitable shares, infrastructure investments and supply, operational performance, and realizing the value from our Westport investment, including the anticipated closing of the announced Westport-Kerr McGee merger.

It should be noted that a variety of factors could cause the company's actual results to differ materially from these 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 2003 Form-K, as well as on our Web site.

Finally, the reconciliation's required under SEC.

Regulation G for all non-GAAP financial measures mentioned on the call today are contained in our earnings release, which is available on our Web site at www.eqt.com in the investor relations section.

I'd now like to turn the call over to Dave Porges.

Thanks, Pat.

Equitable Resources today announced first quarter 2004 income from continuing operations before cumulative effect of accounting change of $1.10 per diluted share.

This represents an 8% increase versus the $1.02 reported on the same basis in the first quarter 2003.

We'll very briefly touch on results from the three business units.

I will devote the bulk of my time in this call to the Westport situation, the dividend increase, and the increases in share repurchase authorization.

First, Equitable utilities.

This unit reported a decrease in operating income for the first quarter versus the first quarter of last year of $3 million.

This decrease is primarily due to weather that was 6% warmer than last year.

Specifically, our operating territory recorded total heating degree-days of 2,925 versus last year's 3,115.

However, this year's figure was essentially equal to the 30-year average, so it represents a normal first quarter.

In a regulatory matter that had little direct effect on first quarter results but is a positive development for the future, Equitable gas company did reach agreement with the Pennsylvania public utility commission to make participation on the company's low income energy assistance programs more accessible and to improve participant's ability to pay bills.

So this development will not be of much benefit to 2004 earnings as it comes after the end of our highest volume quarter.

Over time, this will become a key part of our effort to reduce bad debt expense.

Another part of this effort is the first quarter implementation of a new customer information system.

This new system will help us segment customer information, thereby making it easier for us to differentiate between customers who can pay but do not versus those who cannot pay.

With the latter group being eligible for the energy assistance programs.

The net result of these efforts is likely to be slightly higher cash cost in 2004, but with benefits in 2005 and beyond.

Next is Equitable's supply.

The production and gathering unit had operating income for the quarter of $61.5million, or 27% higher than the $48.4 million reported for the first quarter 2003.

Though a variety of factors figured into this improvement, I will highlight three.

First, total sales volumes increased by just over 1.5 Bcf, or9.8% versus the prior year.

As Murry will discuss, we are beginning to see improvements in our operations in this segment, though you may also recall that one year ago we said that a number of negative factors led to our sales volumes being about 3% lower than we would have expected.

When the absence of those negatives from last year is added to the fact that the 2004 quarter was, of course, one day longer than the 2003 quarter, the normalized improvement versus last year was actually about 5%.

Second our average wellhead sales price increased by 51 cents per mcfe.

This increase was despite a reduction in NYMEX natural gas prices of just over $1 per mcfe.

This was the result of the stabilizing effect of our hedging program, along with the satisfaction of a prepaid contract at the end of 2003.

Finally, gathering revenues were $2.8million higher at $19.8 million due to an increase in gathering rates as part of a program to recover the increased costs and the increased needs for improvement to infrastructure in that business.

Finally, NORESCO operating income decreased slightly in the first quarter 2004 to $3.8 million from $3.9 million in the same period of 2003.

In addition, the net of equity and earnings and annuity interest associated with NORESCO was down by about $0.6 million versus the same quarter last year due to our international power plant and a re-consolidation of a domestic facility, the latter causing increased operating income and the minority interest.

NORESCO quarter end backlog was $118 million, compared to $89 million a year earlier and the $134 million at the end of 2003.

I would now like to discuss the other topics I alluded to at the outset of my remarks.

First, there has been a development with respect to our ownership stake in Westport Resources Corporation.

On April 7, 2004, Westport announced a merger with Kerr-McGee Corporation.

Westport and Kerr-McGee have indicated that they expect that the merger will close in the third quarter of 2004.

Under the terms of the agreement, each share of WRC stock will be exchanged for 0.71 shares of KMG stock.

Therefore, equitables of 11.53 million shares of WRC stock would convert to 8.18 million shares of KMG at close.

This would equate to approximately 5.5% of Kerr-McGee compared to the 17% stake we currently own in Westport.

As part of this agreement, Equitable, along with other large shareholders of Westport, entered into voting agreements with Kerr-McGee to vote in favor of the merger.

As part of that agreement, Equitable agreed to refrain from selling Westport shares through the expected closing date.

In addition, Equitable will be subject to the limitations of SEC rule 145 for any potential fails during the first year after the closing of the proposed merger.

As you may imagine, we are still determining what specific steps we should take as a result of the prospective transaction.

However, to aid our investors in making their own determinations of the effect the merger and any subsequent amortization of shares may have on Equitable, we would like to provide with you some of the assumption that we are using in our internal analysis.

Share counts, actual and pro forma, are provided in the press release and in my opening comments.

Economically, we are using a tax basis of about $61 million, which equates to about $5.30 per WRC share and would, on a pro forma basis, equate to about $7.50 per KMG share.

Using an Equitable tax rate of about 35% and as an example a KMG share price of about $50, this would mean a potential Capital gains tax liability of about$120 million on total pretax proceeds of just over $400 million.

As you can imagine, this means that we are examining whether there are reliable methods of mitigating some of this tax exposure.

The most significant impact on Equitable from this proposed merger is the prospective increase in liquidity for its equity position.

Kerr-McGee averaged trading volumes over 5 times that of Westport.

This liquidity does allow us to consider a wider range of alternatives as we undertake this examination.

From an income statement perspective, our book basis defined for these purposes as the sales price at which no incremental or decremental income would be reported.

It seems a $16.50 per WRC share, which would equate to about $23.30 per KMG share.

At the end of each financial period, the balance sheet reflects the market value of the stake with the difference between the $16.50 per share and the market value being reflected in other comprehensive income.

When shares are monetized, that difference flows through the income statement and then into retained earnings, thus hypothetically, if all pro forma KMG shares were sold at $50, our income statement will reflect pre-tax income of $219 million, and after tax income of$142 million.

The difference between that implied tax liability and the cash tax noted earlier would be reflected in deferred tax.

As an aside, we would like to note that we agree with the merger rationale that is being cited by both parties to the merger.

From a distance, if it is true that KMG's discount to it's peers is because of a combination of too much leverage and too little in the way of medium risk and medium return projects, the merger with WRC would seem to mitigate these risks.

As a result, we are not particularly worried about any KMG specific equity risk that this merger has created though we continue to be exposed to ENP factor risk through this transaction.

As a result, we are also looking at methods of hedging this exposure, though it is not yet clear whether the best hedges from a theoretical perspective, basket hedges, will prove to be practical.

On a related note, on April 14th 2004, the board of directors of equitable resources took two steps that were influenced by the west port developments.

First, they declared a regular quarterly cash dividend of 38 cents per share; payable June 1 2004,to shareholders of record on may 7, 2004.

This represents a 27% increase over the last quarter.

This dividend reflecting an annual rate of $1.52 per share is greater than the rate required to maintain pay out ratio for two reasons.

First, our confidence in our future cash generating and earnings generation capability is consistent with this level of dividend.

We have aggressively hedged gas price risks.

We have relatively little interest rate risk, because we have never swapped back into floating rate obligations when replacing commercial paper with longer-term instruments.

We have brought our defined benefit pension plan up to nearly full funding, and we have moderated our Capital expenditures as we focus more on infrastructure and optimization issues and supply and near the end of our major pipeline replacement program in the utility.

Second, we were some what concerned that should we determine that the best use of the eventual proceeds from a Westport stake includes equitable share repurchases, those repurchases might have be affective crowding out any base low share repurchases.

Therefore, we felt we needed to shift more of our return of money to shareholders into the form of dividends.

Net of the dividend increase necessary to maintain pay out ratio, this represents a shift of only about $10 million per year, so we view this as fine tuning.

Prospectively, we expect to increase the dividend per share at about the same rate as earnings per shares, per share increases.

The second step taken by the board was to increase the share repurchase authorization by three million shares.

This means the total of the four increases in share repurchase authorization since the board first authorized share repurchases in late 1998 equals 21.8 million shares.

After the repurchase of 350,000 shares of EQT stock in the recently completed quarter, the total shares repurchased since that first authorization now equals 17 million.

As this increase suggests, one of our alternatives for the eventual use, for the use of eventual WRC share monitorization proceeds each share repurchase.

Other alternatives include the retirement of financial liabilities, such as debt and prepaid forwards, and the acquisition of other core assets.

The mix of these alternatives has not yet been determined.

But we did feel that the increase in dividend and increase in share repurchase authority were prudent steps to take in light of the Westport developments.

As a final item, here are some preliminary march 31, 2004 balance sheet items.

Book equity total the about $982 million.

Long-term debt totaled about $628million.

The long-term portion of differed revenue totaled $21 million.

The current portion of long term debt totaled $11 million.

The current portion of differed revenue totaled $21 million.

Commercial paper totaled $81 million.

And cash on hand totaled $5 million.

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

David, thank you and good morning everybody.

I will have a few brief comments this morning, but I know there is some interest in the ongoing progress of our supply business.

To start off, I am still confident in the opportunity we have from our supply business, and while we have a pretty good operational quarter, I would caution against irrational exuberance emanating from that quarter.

One point does not a trend make, and we do have a lot more work to do in supply.

But to set the stage, I would like to outline our change in strategy that we have had in supply by contrasting our previous, if you were in business model with our present business model.

In the past, consistent with the way a lot of EMP.

Companies operate, our supply business had a model that suggested that growth would occur through drilling, and then subsequently tending in the cheapest possible manner to the base wells and the infrastructure that supports that drilling, as a very typical strategy in Appalachian.

Our current model is a lot different.

Our current model is, of course, two drill wells, and we do have a lot of well locations to drill, but spend a lot more time tending aggressively to the improvement of the base infrastructure.

The logic for this change in strategy here in business model is pretty clear.

First of all, obviously, we can get an improvement in return from accelerating sales from the existing well, so that sort of a no-brainer.

But the subtlety is that increasing sales from our existing wells and infrastructure reduces our requirement for maintenance capital in the sense that we define it as the capital required to maintain production flat.

And the P.V. value of both of those steps has a tremendous value increase, if we are able to successfully execute on the long-term value of equitable supply.

While the economic logic of this change has been clear for some time, and it is easily calculate able on paper, the execution of the plan to effect the change has had some challenges that we are addressing in a most urgent manner.

First, we needed a management group committed to the new business model down to the first-line supervisors.

As I've mentioned previously, more than half of the operational management team has left the company, and many, many changes have been made to align responsibility with our key value drivers.

Second, as of March 1, we've more functionally specialized our organization.

Now, what that means is that we have people tending to the wells exclusively, people tending to the compressor stations exclusively, people tending to the drilling exclusively, whereas in the past, job responsibilities were mixed and matched and homogenized among those major activities.

Each of the jobs we have in a new world of automation in Appalachia is much more specialized.

It requires specialized training and in addition, we needed clear ownership of the value drivers associated with each of those areas.

Third, we have dramatically increased our emphasis on measurement.

Currently, about 1/3rd of our wellhead volume and about 70% of our sales volumes are measured using real-time electric flow measurement.

By year-end, we will have more than half of our wellhead volume and over 90% of our sales volumes measured.

Measurement, of course is critical to ongoing improvement of sales from our base and ongoing improvement in areas such as lost gas.

Fourth, we are accelerating implementation and installation of compressor stations.

At year-end, we had about 92,000 horsepower of compression distributed in our Appalachian supply business.

We are intending to implement another 30,000 horsepower in projects that we are budgeting this year and installing both this year and early next year.

So there is a dramatic increase in horsepower related to reducing our overall field pressures to accelerate production from the existing wells.

Also, we are upgrading our talent in the area of maintenance of our existing plants.

Each plant is currently more sophisticated than it used to be and requires a higher level of operational capability.

We are just beginning that process.

Fifth, we have dramatically increased the sense of accountability, ownership and attention to detail in the field and engineering areas.

We've reduced finger pointing.

We reduced excuse making to a minimum level.

Last, and I don't know exactly how to quantify this issue, but I think after particularly - after having a pretty good quarter in supply, my sense is that we've got a winning attitude, developing down there.

People like being successful.

They didn't like being unsuccessful, and I think that pays off tremendous benefits in the long run.

In sum, we are making some good progress on both the asset side and the human capital side in supply.

We will let you know next quarter about our progress.

And later this year, we'll hopefully be in a position to be more quantitative in expressing our thoughts about the future of prospects and supply.

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

Thank you, Murry.

That concludes the comments portion of the call.

Ashley, can we please now open the call for questions?

[Operator Instructions] Our first question is coming from Anatol Feygil, JP Morgan.

Please go ahead with your question.

Good morning, everyone.

You had mentioned that you're subject to FCC rule 145 when it comes to the west port, soon to become Kerr-McGee stake.

Can you give us a sense for what that means functionally for you in monetizing that stake and perhaps in repurchasing Equitable stock?

Sure, I can show some more numbers at you Anatol.

Thanks.

In the 145 restrictions, it would only pertain - they pertain to the post-merger period.

And in essence, it means that absent to registration statement that would fully register those shares, would be subject to Rule 144 limitations for a year after closing.

And as you may recall, since that affected us - has affected us during the west port ownership period, the 144 restrictions mean that over any three calendar months - now again, this is absent registration statement.

So if we had registration, if the shares were registered, this would not be an issue.

So let's take the non- registered or non-fully tradable share situation.

Over any three calendar months, we'd be limited in selling an amount that was equal to the greater of 1% of the outstanding shares of Kerr-McGee or an average weekly trading volume defined as the last four calendar weeks.

So that would be the way id you look, typically, for most companies, and we certainly experienced this in the most part with Westport, I think this is generally true of Kerr-McGee, that four - although the weekly average over a four-week period typically exceeds that 1% number, so that's the way you could wind up looking at what our maximum volume would be.

And I believe, as I look at -- to give a plug to your Mayor, I look at Bloomberg, it seems like Kerr-McGee volume is about a million shares -- well, I guess, million shares a day is what the average is, which would mean -- if that were the case over a particular four-week period, then you'd say, Oh, the weekly average is 5 million shares, and we'd be able to sell 5 million of the 8.18 million shares over a three-calendar months period.

Terrific.

Thanks Dave and then in terms of buying back Equitable stock -- are there any incremental restrictions that apply, you know, above and beyond what you guys have been going through?

No.

OK.

Great.

Thanks very much.

Thank you.

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

Please go ahead with your question.

Thank you.

I was hoping you could provide a little more perspective on the agreement with the Pennsylvania utility commission.

It would have seemed like the incremental revenues are in the neighborhood of $7 million and I wanted to get a sense for what the bad debt expense has been, let's say, over the trailing 12 months, and what portion of that bad debt expense, in your view, is tied to customers that may qualify under this program?

David, as we -- Dave Porges mentioned in his remarks, we have just put in a new customer information system, and I really believe to your last point, we are just in the process of clearly and quantitatively segmenting the don't pays, can't pays, from the don't pays, can't pays.

And I think, we had sort of an idea of it, but now we're really just in the process of doing that, so if you could give us another quarter or two on that, I'd appreciate it.

And the reason we're not really associating a lot of money for the rest of '04 as far as earnings, you know, if we look at the second through fourth quarter of '04, it's partly due to the higher revenues that you get in the first quarter.

But frankly, we've also undertaken, consistent with what Murry said, more of an effort to devote analytical resources, etc., to this segmentation.

So frankly, in the near term, I expect us to spend some of the money and may be actually most of the money that we would get from in the form of benefits to try to create a better long-term solution.

The solutions we had at our disposal, David is probably for everybody - are somewhat limited by what the commissions allow us to do.

However, as usual, Equitable is not blaming anybody for our own problems.

But on the people that can't pay, you know, this is a very positive measure, and we -- it is up to us at Equitable to make sure that everybody that does qualify for the energy assistance program actually does get the energy assistance program and that's easier said than done, believe me.

People, for whatever reason, don't sign up or they don't know that they have this ability, and to the extent we're more effective in bringing them into the programs, that's a good thing.

As far as the people that don't pay and can't pay, we are in the process of devising what we hope will be some clever strategies to deal with that.

Obviously, there is some political implications of that.

We know that there is a person in Pittsburgh in one of our better neighborhood that has a $2 million house that hasn't paid us for about four or five months.

You know, we're trying to look for those outstanding examples that might be something that will - will the public utility commission to make some changes in how we deal with those kinds of customers.

So - but, stay tuned.

This is going to be a big area of emphasis for the utility in reducing its overall cost structure.

Can you tell us what a trailing 12 months bad debt expense number is?

And is there any reason why we shouldn't think that the bulk of that $7 million gets applied to that number?

Well, it's been in the 5% range of residential revenues, five or a little above 5% range of residential revenues.

But again, the reason that it wouldn't get fully applied is that we need to spend more money to bulk up our analytical resources, our collection efforts, etc.

And that's what we're planning on doing, because we don't think that is prudent for us to assume that we're just going to get regulatory bailouts for all of this, especially since really just part of the problem is, as Murry referred to it, the don't pay and can't pays.

We have to improve our efforts on the don't pay, can't pay, as well as spending money at the out set to get people who can't pay into the program that requires costs, as well.

So that's the reason -- I mean, over time, I would not disagree with your assumption of it hitting earnings.

All I'm really suggesting is, I don't expect that to happen in '04.

Of course, we've got other-we've got to bulk up our own efforts.

OK, and then separately, are there any hurdles to registering the shares that you ultimately get from Kerr-McGee?

And why wouldn't you consider that?

Well, it's not really within our -- that's not something that we control.

That's not something that we control and our Kerr-McGee is committed to undertake that, but, you know, they're the ones who have to take the lead, not us.

OK.

Thank you.

Thank you.

Our next question is coming from Rebecca Followill.

Please go head with your question.

Good morning.

On the tax -- potential taxes that is associated with the sale of the Westport Kerr McGee shares, what options do you have for a like kind exchange?

What are the range of possibilities that you could do that maybe could minimize that tax consequence?

Well, there are a lot of possible alternatives.

There are a lot of alternatives we will look at.

As far as the likekind exchange, you know, if it looks as if there are assets that Kerr-McGee has that are good fits for us, we'll certainly explore that.

We have to tell you, at first blush, it's not clear that that would be the case.

I know we have been asked questions about what other folks have done in similar circumstances.

And, of course, the final word on any of the examples we heard is not in, because the final word comes from the internal revenue service.

We have definitely not heard any comment from them on any of these transactions.

But in addition, our first blush, and I emphasize it's the first blush, is that our fact pattern isn't as -- doesn't lend itself as readily to some of the things you might have read about as would be the case for the companies that you might have read about.

Now, there's always exchangeable and things like that that are out there also, and we will look at the range of alternatives.

So maybe a better way to put up we're backing is that exchangeable and like kinds if there all out there, but we really have to do a lot more analysis to get ourselves comfortable that this stuff works.

We do not want to be in a situation where we do something that looks good when we first announce it and then it winds up being splashed all over the newspapers a couple of years later.

As you can tell from some of the stuff out there, that is happening to people, you know, when the IRS gets around to look in at it, you wind up paying up.

So that's, obviously, not a situation we want to find ourselves in.

That is going to take a little bit more analysis for us to get comfortable.

Thank you.

Thanks, Rebecca.

Thank you.

Our next question is coming from Mike Plum (ph).

Please go ahead with your question.

Good morning.

I was wondering if you could just give us an update on where you're headed in terms of NORESCO.

It's clear the business is stabilized, but I'm wondering what sort of progress you're seeing there and what options you're considering.

Well, I'll just tell you what Mike, I'll repeat what I've said, really, in the past, and that is that, you know, I like NORESCO.

I think it provides the company with some expertise that it doesn't currently have in the areas of project management, and it is at the leading edge of some energy management areas.

But I haven't said that there is no such thing as a strategic business at Equitable that doesn't earn its early return in excess of the cost of capital, and I told by that currently, NORESCO does not earn its cost of capital, and we are making changes there, such that we hope over the next couple of years it will do so.

I will say that, as an aside, that in reviewing the supply operations over the last three or four months, there are a number of areas where the expertise from NORESCO is becoming very valuable to the company.

So I think we're getting leverage from our expertise in project managements, in running plans, in executing compliance programs that NORESCO's experience, particularly with the federal government, is extremely valuable.

So my view in looking at NORESCO is that we've got a good capability.

I always thought it was a good capability; and I'm trying to leverage it beyond the financial results that you see currently attributable to that unit.

But the bottom line is we have to get that business up to the cost of capital, and we're doing everything we can there, particularly increasing our sales.

Our cost structure is good there, but we really have to ramp up sales, about 25% above where we are right now in order for that business to earn its overall cost of capital.

Thank you.

[Operator Instructions] Our next question is coming from Jay Yannello.

Please go ahead with your question.

Good morning.

I think there's a little noise from prepay roll-offs in the equity sales volume line.

Do you have the apples to apples sequential increase in production numbers?

Thanks.

Jay, I'll give that to you off line.

The values are in the k for the prepaid sales, and it's about a one-and-a-half BCF number, but I'll give you the exact number.

OK.

Is there any kind of quarterly run rate, Murry, you want to quote, or a band just of where you think production should be trending quarterly going forward?

I think Dave said right in his comments.

I think we're sort of back this quarter to where we expect it to be over the last couple of years.

But Jay, I'm going to defer comments on quantifying that till we have a couple of quarters in a row from which to draw a trend line.

OK.

Fair enough.

Thanks.

Thank you.

Our next question is coming from Carol Coale.

Please go ahead with your question.

Hi, good morning. (inaudible) I do have a few specific things.

Murry, you mentioned that if you reduce your requirement from maintenance CAPEX that there would be tremendous value if you can execute on that plan.

I noticed there was a slight reduction in CAPEX adjusted for the Appalachian Basin Partners in the recent quarter.

What are your goals?

Can you quantify what we're talking about in reducing maintenance CAPEX?

Are we talking about $5 million, $10 million?

And how are you going to run this company?

Are we looking at you running it more like an annuity that generates positive returns?

Because with reduced capital, it seems that that would be limiting in your growth prospects.

Those are both good questions.

I think, number one, I wouldn't quantify this number, but certainly, you know, $5 million to $10 million is not a bad -- I'm not uncomfortable putting that kind of a number out there in terms of reducing maintenance capital with slight reductions in the decline rate you know it may be more than that, but I think that's not a bad number.

And so that if you -- you know, you figure the company's got an 8% cost of capital or something, you can figure there's $120 million or so, maybe a little bit more of that in PV value, which I think is a substantial amount of money just from that fact.

But to your other point, Carol, I am not suggesting in my comments that we're moving to an annuity strategy at this point for supply.

I think -- and it's a very good question.

What I'm saying is that for a while we're going to work on this infrastructure issue and try to do what I just described.

That is, make sure we're getting the most out of the existing asset, flattening the decline curve as much as we can by accelerating production, and lowering the amount of capital we need to maintain that level.

When we get to the point where we've got sufficient confidence that that's done, then we still do have a lot of wells to drill out there.

So, you know, we can reaccelerate that drilling program at some point in the future.

So please don't take my comments at this point as indicating that we're moving to an annuity.

We're not.

We're just refocusing for a while.

Now, it could turn out the way you described.

I doubt it.

Or it could revert back to a more accelerated drilling program.

And we'll talk more about that as we go.

But I'm glad you asked the question, because it allows us some clarification on that.

Good question.

OK.

And one more thing.

I know you're spending a lot of time on this project.

On a percent basis, how much of your time is devoted towards fixing the EMP company?

Probably about 130%, I'd say, something like that.

It's a fairly significant problem.

No, no, I would say that the great thing about Equitable right now, and it frankly is one of the reasons, I know there had been rumors about my leaving and all the that, that's one of the reasons why my own personal goal is to try to grow this company and stay here and do that.

I mean, that is really what I want to do, is because the people we have around me have really, really stepped up.

And so while I'm probably spending, Carol, you know,1/3 of my time, probably to be honest, 30%, 40% of my time between office and field visits to kind of get this thing rolling, you know, everybody around has picked up the slack.

I mean, we've got -- I've got the utility group doing a lot of the commercial work.

David is taking over a significant amount of the analytical evaluation of our capital program.

We've got NORESCO taking up --taking construction projects over and really looking at how we maintain our facility.

I mean, the standard to which NORESCO must maintain its facility is much higher than supply is currently accustomed to maintaining their facility I mean, even Johanna, who runs our General Counsel, who runs our health, safety, and environmental program, has taken up a huge amount of slack on the compliance and safety areas.

So this is really not just the Murry project.

This is a fairly broad range.

Now, I will tell you that my board wishes that at some point I no longer have this responsibility, and I usually do what my board tells me to do.

So I won't be doing this forever.

OK.

All right.

Thank you.

Thank you.

Our next question is coming from Mike Breeder (ph).

Please go ahead with your question.

Good morning, guys, just a quick question to follow up from Carol's question philosophically.

The fact that you're not spending incremental CAPEX to drill at this point, focusing more on the tending of the base infrastructure, would suggest, at least implicitly, that prices certainly maybe aren't gong forward high enough to meet your return of invested capital threshold.

I was wondering if we could get a sense, if there's a price at which you would start to drill or if this is really a cost issue?

No, it absolutely has nothing to do with the price of natural gas, what I'm talking about here.

It has absolutely nothing to do with that.

The issue here is making sure that when we employ the capital that we're getting every bit of the return that we expect from that capital.

It is not a price issue.

For those of you who've been once a long time, you know that our hedge, if you will, on the down side of price for this business is to maintain a cost structure that's resilient to a fairly low gas price.

And if you do the sums on our gathering expenses, including taxes and everything, including overhead, you'll see that we can withstand prices and still make a return on Capital at our cost of capital in prices well below $3 per MCF.

So that's not what I am concerned about.

What I am concerned about is reducing the overall maintenance capital level and making sure that we get everything out of the base.

And I think we have to focus on that problem for a little while before we return to drilling.

In fact, you know, to quantify, at one point we were drilling about 300 wells a year, and then we upped it, so that in '03, it was 400, maybe it was 401.

But 400 over the year at one point, let say, as recently as a year ago, we were talking about the prospect of eventually scaling that up to say 450 or 500 wells.

What we were talking about now, though, is that we scaled back to 400 so that it's about 10% lower, you know, which is not a huge change.

It's probably you know, wind up in -- I don't know, the third highest or something well drilling year that we had.

But instead of being on that trend line that keeps bringing it from 400 or 450 to 500, at least for the time being it has dropped down, it's dropped by 10% as opposed to being up by 10%.

So, really we were talking and a lot of that is focus-related, too.

You can only do so many things.

So, really talking about is, do we stay more in that range?

Do we get back to the 400-well level, or do we resume at some point that upward trend line?

And that's what Murry is saying is, you know, that will wait for another day.

I guess it's just not fairly clear why you wouldn't do both at the same time.

But if -

I'll tell you what, because, right, from the stand your question is correct and it's valid.

If you have the money to do it, why don't you do both?

That is absolutely true.

We agree.

Any investments over the cost of capital should be pursued as quickly as possible.

The problem is one of organizational focus and we tried doing both.

And what happened when we did both was that most, if not all of the attention to the organization, went to drilling.

And we lost some focus on the infrastructure, and, you know, this is just my experience, you can take it or leave it, it's hard to have organizations simultaneously focusing on multiple, big opportunities.

We have sufficient drilling going on right now to maintain our expertise there, but we are really focusing on making the base improve.

And I will tell you there will be multiples on this investment, you know, there will be good things that will happen because of that.

We were unable to do both at the same time.

And my experience is it's very hard for organizations to do multiple, big things at the same time.

OK.

Fair answer.

I appreciate it, guys.

OK.

Thank you.

Our next question is coming from Matthew Jones.

Please go ahead with your question.

Hey, guys.

Great quarter.

Murry, can you talk about the acquisition front and what you are seeing out there?

And if so on the potential to add to may be the E&P side, or if price is too high there, would you look to possibly grow your utility business or what you are seeing in that front?

Yeah, in general, we are just - we are not in a position right now to be adding to that E&P base regardless of the price.

I mean, I just I don't think it's the right time to do that.

There are fairly limited opportunities there.

There are some, but they are fairly limited opportunities.

Where we see that the real value for the industry and for Equitable is the consolidation of the LDC's.

As I have mentioned before, there is a lot of opportunity in the area of performance-based rates to manage the commodity cost, the transport cost, and the cost of running these distribution companies if there's some regional consolidation.

This includes the optimum use of transport, the optimum use of storage, and that sort of thing.

And of course, just street crews and overhead and call centers, etc., etc.

And we think that it makes a heck of a lot of sense, and as you all know, we have looked at all the opportunities that have come up in the footprint of our area of Pennsylvania, Maryland, West Virginia, to some extent Ohio and Kentucky, and even down further south a little bit attached to our production base.

I would say that it has been a complete dry hole over the last two or three years.

I mean, there's not even -- not even a much seismic being done.

There's a very little activity, but in the last six to nine months, people are starting to talk a little bit more, and I am confident that over the next 5 to10 years we will see this consolidation, and at the right price we like to participate.

We will not participate at the wrong price, however.

And we are not, just to reiterate, though you should not expect to see us participating at all in the purchase of E&P assets.

That is not something that is on our plate at all.

We never look at those.

To the extent that especially new investors might have thought that that purchase of Appalachian-based partners represented an acquisition of E&P, we did not view it that way.

Our view was there was a minority interest in wells that we already operated fully we gathered fully, we marketed fully, etc.

We were simply buying in a minority interest.

We have no interest, especially at these prices, in even looking at natural gas-producing properties.

So, that is not something you should expect to see from us in the forceable future.

And if you look at our business mix right now, we were about 2/3 supply and 1/3 the rest.

I would not be dissatisfied if that is 1/3 being mostly utility.

So, 2/3supply, 1/3 utility plus or minus I would not at all be dissatisfied if that percentage reversed.

Great quarter, guys, thanks.

Thank you.

Thank you.

Our next question is coming from Philip Salles.

Please go ahead with your question.

Thank you.

Murry, while I appreciate that you don't want to give us any specific projections for the results in E&P with this quarter, is there some examples that you can give from a specific well is from a specific area and describe some of the accomplishments and successes.

Thank you.

Yeah, just a couple of Vineyards, and I realize we are I guess we are short of time here, but I was somewhat criticized for wanting to put as much automation out in the field as I had in metering.

In our area in Virginia, we call it big stone gap.

One of the problems we have had is freeze offs, and our pipes run through hills and Dales and in the low areas sometimes water accumulates and it stops the flow of natural gas.

One of the unintended consequences of all the metering was that this past winter we were able -- because this particular area is fully automated and metered, we were able to very quickly identify the freeze offs in the wells and goings and deal with those problems.

The people on the ground there said that we had that because of the lack of interruption of natural gas flow, we were able to really recover the full cost of the metering down there in one winter, and that was a completely and unintended consequence, because most of what we are putting the metering in for is to make sure that the wells are producing an optimum rate and make sure we were not losing any gas in the pipeline system.

So, that's one very good example of the progress.

Another one is one I saw just last week.

An operator saw in a particular well that he had a drop of about 2/3 in the production of a particular well.

There was a fairly easy solution, but he saw this from the office.

He saw the alarms that we have now on these wells.

They were able to repair that problem in 24 hours.

The normal course would have been for that problem not to been identified for a month or two, and then a couple of months more to fix it by the time the engineering got through it.

So there's -- sort of imagine that, that 2/3rd of that well volume is now delayed four months.

The way I calculate it, it was, you know, this guy in this one action had saved -- in a PV sense that made the company 10,000 bucks just in that one action.

And Bill, this is the kind of thing that it's hard to call it a silver bullet, but this thing is happening every day out there.

So those are a couple of examples.

Thank you.

One follow-up question, if I may.

Just against the back drop of your comments of shifting, the company may be perhaps, you know in the future outlook towards, you know, distribution and consolidation, compare that, we'll contrast that with, as you do with the backlog in NORESCO, can you talk about the backlog in E&P- and I heard your comments today about acquisitions and tying that in with additional ENPS.

It's -- well looking at your prospects, looking at your - looking at your drilling locations, if you start gearing up and revert back to an accelerated drilling program, it would seem to me that may be you have, you know, three years of drilling instead of five if you up the number of wells.

I mean, put that in context to your company of shifting the business back towards, you know, back towards the regional sense of an LDC and what happens to the supply business-- what are your thoughts there?

Well, I think you're really asking a question about inventory of drilling locations, really, is what you're asking.

And despite the fact that we're putting a little bit more emphasis on infrastructure for a year, but we've only decreased the drilling by a little over 10%, we have not changed our view on the number of perspective locations out in Appalachia, which I think, a couple of years ago, we talked about being more than 3,000 that we thought were economic, which would represent more like eight years of drilling or so.

And keep in mind, the way this thing gets drilled, that for each well that is drilled, you don't remove one drilling location from the inventory.

You actually add about a half a drilling location to the inventory, because the field is very, very broad and wide, and every well we drill proves up a little bit more acreage.

And so, it's kind of like a little bit of a lot rhythmic equations going forward.

So, I am not worried about having drilling locations out there as far as all of us would consider to be a relevant time frame from our own careers, from our own career standpoint.

It is not going to run out in three years is what I'm saying.

It will last a long time.

Thank you very much.

At this time, there are no further questions in the queue.

I'd like to turn the floor back over to the presenter for any closing remarks.

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