EQT Corp (EQT) 2004 Q2 法說會逐字稿

Good morning, and welcome to the Equitable Resources Incorporated Sponsored Second Quarter 2004 Earnings Conference Call.

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

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

Sir, you may begin.

Thanks, Melissa.

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

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

In just a moment, they will review the second quarter financial results that were released this morning.

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

Following Murry's remarks, we will open the floor for questions.

But first, I would 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 targeted growth of earnings per share, the company's sensitivity to changes in non-mixed gas prices and deviations from normal weather, the company's capital budget, financial performance, including the repurchase of additional Equitable shares, operational matters including operational and staffing changes in the company supply segment, the company's exit from international markets, and the method and timing of any transactions to realize the value from our Kerr-McGee investment.

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 2003 Form-10K, as well as on our web site.

Finally, the reconciliation's required under the new 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 second quarter 2004 earnings per diluted share of $2.06 compared with 50 cents reported in the second quarter 2003.

Most of this increase was directly or indirectly related to the gain recognized as a result of the June 25 merger between Westport Resources Corporation and Kerr-McGee Corporation.

The largest offset to this gain were charges related to our remaining international power projects with the results of those charges being that we have generally written off those investments and provided for reserves related to potential sale and wind-up activities.

Because this quarter's results were dominated by these unusual gains and losses, I intend generally to limit my comments to further explanations of these items, though I will attempt to do so in the context of the business unit in which the activities and actions reside were applicable.

Starting with Equitable utilities, which saw operating income for the second quarter decline by $1.7 million to $11 million compared to $12.7 million reported for the same period last year.

There is one item we would like to bring to your attention.

Our implementation of a new customer information system, or CIS, caused an increase in expenses that more than fully explain the entire decrease in operating income versus the prior year.

More specifically, a key tool in recovering delinquent receivables is the threat of termination of service, which is only allowed in our region once the winter has ended.

Inaccuracies in billing, which have since been corrected, caused us to be less aggressive on this front than we would typically be this time of year and delinquent receivables rose.

We decided the prudent step from an accounting perspective was a $2 million increase in bad debt reserves associated with this issue.

This has increased reserves as a percentage of delinquent receivables to an unusually high level and, we certainly hope that some of these reserved receivables will still be collected eventually but, while we are still working through remaining bugs in the new system, we have decided to be more conservative in our assumptions about collections.

We remain confident that the new CIS will eventually help improve the effectiveness of our credit and collections activities by improving our customer segmentation ability and proving our access to real-time usage in payment information.

Now, onto Equitable's supply.

I will let Murry comment on operational issues and limit my own comments to two charges and one unusual gain.

As you know from the press release, operating income at this unit was up by almost $7 million, or 15% versus the prior year.

Included in those operating income results is a $1 million accrual to cover the cost of necessary activities to comply with the recent Oil Pollution Prevention regulation adopted by the US Environmental Protection Agency.

This is alternatively referred to as the Spill Prevention Control and Countermeasure or SPCC regulation.

This one-time charge increased the lease operating expense in the quarter by about 6 cents per Mcfe versus the expected run rate for the rest of the year.

The other income line in the supply segment page includes the net of one gain and one loss.

The gain was $6.1 million from received of an insurance payment related to events that occurred in late 2000 in our Kentucky-West Virginia unit.

The other item in that line is a $5.5 million charge for an amendment to our remaining prepaid forward with the result being that this transaction is no longer a prepaid forward but is rather a simple fixed price, pay as you go sale.

I will also discuss this in the context of the Westport Kerr-McGee transaction in a few moments.

The only topic related to NORESCO that I wish to cover is our decision during the second quarter to exit the international power generation business.

As a result, the company recognized an impairment of $40.2 million essentially the entire value of the company's investment plus the related costs of exiting these investments.

The company is actively evaluating alternatives for the sale of its international assets.

These charges include about $31 million related to the largest project called Pan-Am.

This amount, triggered by changes in the power bidding process in Panama comprises a $22 million impairment in the equity investment, about $6 million related to loan sureties, and the rest for other cost associated with the impairment.

The next largest amount is about $4 million related to the Costa Rica project called Dona Julia for which we are actively involved in sale negotiations.

So, the cash flows this project remains strong, we've decided that this minority investment does not make sense in the context of a broader exit from the international business thereby explaining why a write-down is needed.

The remaining charges pertain to various exit related requirements for the previously written down project in Jamaica and the smaller Panama project called HEP.

I will now spend several minutes talking about the effect on Equitable's second quarter numbers of the Westport merger with Kerr-McGee.

This merger closed on June 25, 2004, leaving Equitable with about 8.1 million shares of KMG stock.

The accounting standard known as EITF-91-5 with the letter standing for Emerging Issues Task Force pertains to non-monetary exchanges of cost method investment such as this merger from Equitable's perspective.

EITF-91-5 states the company holding a cost method investment in a public company that merges into another public company is required to record the transaction at fair value establishing a new cost basis for the investment and recognizing any gain or loss in earnings.

Consistent with this as a result of the merger, Equitable recognized a capital gain of $217 million pre-tax, or $2.26 per share after-tax.

The revised book basis of the KMG shares is $49.82 per share, which was determined by applying a small discount to the June 25, 2004 market price of the KMG shares.

Transaction related expenses, including compensation of $10 million pre-tax were also recorded at this time.

In addition, there were several second quarter events that resulted in effects on earnings for the quarter.

First, Equitable sold 800,000 shares of KMG for cash after the merger was completed.

The sale resulted in cash proceeds of $43 million and an additional pre-tax capital gain of $3 million that is versus the new basis.

Equitable owned approximately 7.4 million shares of KMG at quarter-end, so the sale transaction settlement occurred just after the quarter ended, so the cash from the sale did not yet appear on the balance sheet of June 30, 2004.

Second, Equitable irrevocably committed 357,000 shares of KMG stock to the charitable foundation established in 2003.

This increase represents the optimal net present value for Equitable with the two factors having changed since the original establishment of the foundation being the passage of time and the sizable increase and the gain associated with this stockholding.

This contribution causes a pre-tax charge of $18 million in the quarter.

The shares are expected to be transferred from the foundation in the third quarter reducing the number of shares held by Equitable to just over 7 million.

The third KMG related activity in the quarter pertained to use of cash proceeds.

As mentioned a few moments ago, we amended the prepaid forward contract in the second quarter.

The prepaid forward contract was economically similar to a loan in a hedge contract.

The amendment required the company to repay the net present value of the portion of the prepayment related to the undelivered quantities of natural gas in the original contract.

The company continues to have an obligation to deliver the original contract volumes at the original contract price, but we will receive cash revenues of $4.50 per MMbtu prospectively.

The contract amendment resulted in a payment by Equitable of $36.8 million, which included a retirement of the obligation on the balance sheet and a $5.5 million pre-tax expense due to the decline in interest rates since the transaction was entered into in late 2000, as well as the natural move down of the maturity curve years after the transaction was executed.

This has been to date the only debt or financial liability that we have been able to retire economically with KMG proceeds.

However, we also repurchased exactly 1 million shares of EQT stock during the second quarter representing an increase in what had been our recent rate of stock repurchases.

A fourth indirect effect of the transaction was a step change in our accruals for our previously discussed executive performance incentive plans.

This increase in accrual, a total of $6.1 million, was formulaically driven explicitly by the increase in EQT stock price.

Though this price increase was probably influenced by the crystallization of value in the WRC/KMG holding, our earnings guidance treats this expense as part of core earnings, as is our normal approach for this program.

The EQT share price assumptions used to determine this accrual are $53 per share at the end of 2004 and $56 per share at the end of 2005.

These assumptions are reviewed and adjusted periodically.

A final KMG item is that the company recently entered into cashless collars for approximately 2 million KMG shares.

The floor is about $53 per share and the ceiling is about $100 per share.

Equitable is evaluating additional sales and/or hedges of the Kerr-McGee shares and the use of the proceeds for such transactions.

The potential use of such proceeds includes, among other things, reinvestment in the company's core businesses, stock re-purchases and debt repayment.

We continue to examine a variety of methods of increasing the net present value of after-tax proceeds from such transactions and do not believe that the collars, we have entered into or might in future enter into preclude such methods.

My final comment is that on July 14th, 2004, the board of directors of Equitable Resources declared a regular quarterly cash dividend of 38 cents per share payable September 1, 2004 to shareholders of record on August 13, 2004.

I will now turn the call over to Murry.

Thanks, David.

And good morning, everybody.

My comments will be relatively brief this morning, but I know there is some interest in the ongoing progress of our supply business.

First of all, I'm still confident in the opportunity, we have for our supply business.

We have a pretty good operational quarter.

Again, I would caution against exuberance regarding the ongoing quarter-to-quarter increases in sales volumes, and as I mentioned last quarter, we only have a couple of data points and so I'm not really ready to make a trend out of that yet.

I would like to review some of the specific actions we've taken and review progress against our value drivers.

First, regarding the change in culture that I have mentioned on several previous occasions, so far this year, we've added about 62 new people to our supply organization and about 40 have left.

With other moves, we've made in the supply company that align our staff directly with our value drivers, 82 of the 446 jobs in supply are now filled by people that were not in their current position six months ago.

That represents a dramatic 20% turnover in the staff.

We think we are getting a much better team in place, but they have mostly just arrived and we expect to experience a lag between the arrival of the new talent and the positive expected impact on operations.

Obviously, the staffing change has consequences for our cost structure and as Dave has already mentioned, costs were up in the organization for the second quarter versus last year.

In addition to some staff increases, we are putting an enormous effort, some of it in deferred maintenance, metering and compliance to get our system running optimally.

I have two things to say about the cost increases.

First, by any measure, the increase in overall unit cost structure and supply does not compromise our making an ROTC in this business that substantially exceeds its cost of capital even at a discount at the current market gas prices.

I am comfortable sacrificing absolute ROTC in the business as long as incremental costs, both capital related and expense yield returns in excess of our cost of capital and we are able to consequentially grow cash flow in earnings.

As you know, I am a zealot about ROTC and will not allow expenses to outrun returns.

Second, at this point, I am not exactly sure what unit operating cost is optimal for this business.

I will tell you that the unit costs we had in Q2 '03 were too low to maximize production and keep our system running in the matter that we want it to run.

On the other hand, we do not want unit costs to exceed a level that is absolutely necessary to maximize value.

Over the next two quarters, we will be working to find the right balance and at year-end or so, I will share with you our internal metrics for determining this balance.

Again, I would caution against making a general statement of trends in unit costs from the specific results of this quarter.

Turning to our value drivers, I wanted to give you a quick update on where we stand.

First, regarding the reduction of bottom hole pressure, which relates to our getting each well to produce at its maximum rate.

You recall that's last quarter reported, we had reorganized our field staff along functional skill levels, meaning that people now focused exclusively on well performance, compression operations, pipeline compliance, etceteras.

In the second quarter, we provided 70% of our field operators with one-on-one field training by our technical specialists and engineers.

This training relates to the specific surveillance process that we want to have employed at all of our wells.

To the latter point, we have fully reviewed the highest volume wells that represent 10% of our sales volume and are implementing plans to get each of these wells to maximum production levels.

By year-end, we expect that we will have reviewed and begin remediation actions for the wells that represent 50% of our sales lines.

Second, regarding reduction in field pressure, which allows the wells to flow at higher levels by reducing back pressure.

You recall that we've targeted an overall reduction in field pressure of 7% for this year through investment in new compression, gathering system, de-bottlenecking and the like.

So far this year, we are ahead of expectations on this important metric.

As an aside, normally we see a pretty large increase in pressures during the summer months when gas usage for heating is low.

We are not seeing that increase this year.

I believe this observation is a leading indicator that we are on the right track in our pressure reduction program.

We have about $15 million in new projects coming on-line in the late summer and early fall that should keep our pressures falling.

We have other projects scheduled to come on-line later in this year.

As to our value driver to sell all the gas we produce, I'd like to comment on lost and unaccounted for gas, and also on curtailment, both internal and external.

First regarding lost and unaccounted for gas, improvements here are largely the results of audit work performed at our key sales points by the Field Measurement staff.

This year, we are getting a much better handle on accurately accounting for our LUF problem.

We have completed improvements in the integrity and calibration of our meters.

We've completed calibration work on more than 80% of the volume related to third-party volume transits, which is a large area of major discrepancy.

Over 1600 meter calibrations have been performed.

We are on track to have installed electronic flow of measurement on 90% of our sales volume transfer points by year-end, which is up from about 70% at year-end 2003.

All of our measurement technicians have been trained, and we've increased our staff in this area by almost 50%.

Second with respect to curtailment, reduced internal and external curtailment resulted in a slight benefit to this quarter's results versus the second quarter last year.

At this point, we are expecting some external sales curtailment in August due to construction on Dominion transmission, and are working to mitigate this problem.

At this point we don't expect this curtailment to have a major impact on sales.

We also do not expect external curtailment issues in the fourth quarter, as that is a time when pipeline maintenance work has generally been completed before the heating season.

With respect to drilling, while we are currently on track so far with our drilling program, which is about 150 wells, we are going to rebalance our capital plan a bit toward infrastructure, and a bit away from drilling for the rest of the year.

This does not signal a lack of drilling locations or my lack of enthusiasm to eventually ramp up drilling substantially in the future.

However, at this point, I this think it is prudent to ensure that all new wells are supported by the proper infrastructure to get the gas to market.

This re-balancing of capital will result in our drilling about 320 wells this year rather than 340 wells that we'd previously discussed.

We expect a deferral of the 20 wells really to be only a month or two and this deferral will not impact our overall sales and financial plan.

My last comment relates to the new earnings guidance we have provided.

As you know, we have raised guidance a dime for 2004.

We have done this mindful of the rise in gas prices but also cognizant of the many challenges we are facing in all of our business units.

I am very pleased that we have been able to overcome these challenges and maintain our profitability.

We have also given early guidance on 2005 earnings per share.

We normally do not give guidance this early.

You should infer two things from this earlier than normal signal.

First, we have less exposure to natural gas prices resulting from our hedging program.

Second, the work we are doing to quantify our value drivers and improve operating discipline gives us more comfort in making forward projection of sales volumes.

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

Thank you, Murry.

That concludes the comments portion of the call.

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

Thank you.

The floor is now open for questions. (OPERATOR INSTRUCTIONS)Our first question is coming from Craig Shere with Standard & Poor's.

Hi.

I just wanted to clarify what is and isn't in your EPS guidance for the year.

As near as I can tell, there are about seven potential one-time items for the quarter.

We have spill prevention for 1 million, insurance gains for 6 million, pre-paid amendment for about 5.5 million, then we have some after-tax numbers of the sale of 800,000 Kerr-McGee for 15 million aligned from incentive plan expense which seems to be, if I understand it correctly, a one-time touchup because of changed assumptions because things have gone well, not a part of what one would naturally assume to be regular expenses associated with that incentive program and would only repeat if the shares went up and people are happy again, the donation for 12 million and exiting international for 26.5.

Can you help me understand what is and isn't in the guidance?

Craig, this is Pat, and I'm more than happy to do that for you.

The gain from the sale of Kerr-McGee is not included in the guidance.

The transaction cost associated with that is not included.

The charitable contribution is not included.

The prepay restructuring is not included.

The insurance payment is not included.

The international payment or international charge is also not included.

What is included from the things you mentioned is the executive compensation expense, which we have consistently counted that as poor.

That is included in our guidance.

Did I describe that 4 million charge accurately, that this is kind of a one-time touchup because of a revaluation with new assumptions and reflection of repeated ongoing expenses?

Your understanding is correct.

Although, it's not necessarily one-time because each time the price changes a significant amount, we review the appropriate expense.

Well, the whole point of us trying to determine what's one-time is to see whether the stocks could trade higher and the only way this will happen again is if the stock does trade higher.

Right.

OK.

So of that list of things we talked about, the only thing included was executive comp?

Right.

Thanks for the help.

Thank you.

Your next question is coming from James Yannello with UBS.

Good morning.

You guys have one of the best-hedged positions in the business, but I'd like more data beyond fixed right now.

Can you give us a little flavor on what the '07 through '011 looks like as far as volumes in price banks?

Good morning.

We're really not ready to do that at this point in time.

I'll speak to the volume issue first.

Maybe Dave can speak to the hedge position, or I can speak to the hedge position.

But, the volume position, you know, I'm getting a little more confident as you can tell from the remarks, but I really need a little more data and another quarter or so before I'm willing to stretch.

Now, I will tell you that we would not be giving the '05 guidance without a little better feeling about sales volumes.

OK?

Because that would be a little silly, and you know we've been pretty conservative in this area, so that you can take a little signal from that, but beyond that, I'm really not ready to go from a volume standpoint.

On the hedge position, we're just not ready to do that at this particular time.

Sorry.

That's OK.

I tried.

Just the usual question, Murry.

You've got this cash flow machine here.

You've got options of what to do with the cash flow?

How is the -- I ask you this all the time and others do, too.

How is the M&A environment we saw in the transaction announced today and kind of what is your pecking order?

What is your latest view on pecking order on what to do with this cash flow?

I mean, I know you said, reinvest in the business, buy back stock and lower debt, but if you could just put a little --

more color on it?

Yes, thank you.

Just a little color, Jay, my number one use of cash flow is to drill a bunch more wells.

That is my number one use if we can with another couple quarters of confidence believe that there will not be a delay between the time we drill the well and access that gas to the time we actually get it to market.

I mean all organic growth is always the best thing to do.

Setting that aside as I have said previously, we are interested in regional consolidation of LDCs at the right price.

And you can infer that anything, any LDC that is attached to the same pipeline systems that we are attached to, where we can have some synergies in buying gas, buying capacity and also in operational synergies, call centers, etceteras.

We will look at or we have looked at and where we apparently have lost to others, you can determine from that that we did not think that we could get to the prices that others got to or our own internal profitability reading.

But anything that is in that neighborhood, which really surrounds our supply business includes New Jersey, Maryland, Pennsylvania, Kentucky, West Virginia, even the Carolinas and down into Georgia.

We are interested and because of the synergies that we think, can be had between our supply business and among the various LDCs.

So we're active, but I'm a return zealot.

You know that, and whereas we are willing to take appropriate risks, we haven't been able to overcome our feelings on the risks of some of these projects.

Just for your latest view, I know in the past you said or you employed immediately accretive.

Would you do anything that possible could not be immediately accretive?

When I said previously, Jay, is two things and I really led with profitable.

If we can't see our way to earning the cost of capital on investment, that's an immediate, -- we immediately exclude that price or have to lower the price or whatever to make sure that we can make a return.

Beyond that, we've also said, that we desire that the acquisition is accretive in the first full year of operation, but really, we're leading with profitability and return first.

At this point, Jay, the fine nuances of that don't really matter because the prices that we're seeing in the marketplace are extremely rich.

OK.

Thank you.

Thank you.

Your next question is coming from Steven Parla with Foresight Research.

Good morning.

Steve!

Good morning.

Nice to speak with you again.

Two questions, perhaps one for Pat or Dave, could you run through all of those items that are in or out?

And just give us a bottom line EPS number adjusted that is consistent with your guidance, and then for Murry, understanding your caveat, I saw expenses up across a couple of different business lines.

Is that symptomatic of you starting to cut to the bone, or can we expect the cost-cutting trends in general to continue despite the quarter?

Thanks, Steve.

This is Pat.

I will handle the first one.

Rather than go down the list again, it will be in the transcript, I'm sure, and it's also listed in the press release under the non-GAAP reconciliation associated with the guidance.

But the bottom line number that you're looking for is a core EPS number of 48 cents from the adjustments that we have excluded from our guidance for the second quarter.

Thanks, Pat.

Sure.

To your point on cost, Steve, it's a very good question.

Let me talk about supply first and then I'll talk about the utilities second.

What I said in my comments was that last year's unit operating costs, I think, was too low to run the business effectively.

And what I mean by that is that increasing unit costs to produce more gas, you know, is a very good trade-off, a leverage trade-off, if we add a nickel for MCF on unit costs but are able to access gas of $6 at MCF, those tradeoffs are fairly good.

What I said specifically, though, is that 2003-second quarter was a bit low and if you recall, that was about 30 cents or so.

Excluding the one-time charge that David discussed, the SPCC charge for this quarter we were at about 35 cents.

I'm not signaling anything other than 30 is too low at this time.

If that's helpful, 35 might be the right answer, it might be a little lower, it might be a little higher.

But I need a couple more quarters to hone in on that.

Sure.

With respect to the utility, David talked a little bit about the increase in bad debt and the customer information system.

I think it is fair for you to conclude that the increase in cost that you've seen this quarter in utility was a little bit unexpected by us, but we're committed to make sure that we can reduce this issue of bad debt.

And I think, David, in my view that we need to spend a little money now so that we're confident on how to deal with this very difficult problem of bad debt.

That's money well spent, and you should be thinking that or, you should be challenging us to see a reduction in the amount of cash outstanding to delinquent customers over time, and that will be the quid pro quo.

So hopefully in the utility, the costs we're spending today will result in lower costs tomorrow.

Sure.

And I appreciate that.

I'm very confident in both you and David's ability to spend money to make money or earn positive returns, no doubt, but behind that, is there a continued, ongoing ability to take costs out throughout the system or after, I guess, it's five years or so now, are you starting to come to the end of that process?

I think as we talked about earlier, Steve, first of all, it's been six years, but who's counting, and --

We're older.

We're signaling in '05 with our guidance continued confidence in being an added value and of course it's not only cost cutting in the supply side, it's adding sale.

Sure.

And beyond that, I'll just defer to what I have said probably over and over again for a long time.

We are not going to be a low growth company and hang back with the pack.

If David and I feel that we can't continue to grow the earnings at rates that are superior to our competitors, then we need to seek some alternatives.

And OK...

And Steve, we clearly have moved into a phase over the last couple of years, which we are still in, or instead of just cutting costs, we have to invest to improve productivity.

The CIS is an investment, there were capital associated with that, of course, but then there's also the kind of a speed bump, as you will, that we've had in implementing and training folks to use it properly, etceteras, but they're investments.

We've been investing in pipe replacement programs to reduce our maintenance and our loss unaccounted for, but it's an investment.

Not just an improvement in procedures.

A lot of what's going on in the supply unit is investment in infrastructure, such as compressors and things like that, that are true capital.

In other cases, operating expense oriented investments and training, whereas when we first came here, a lot of it was just doing things differently or stopping doing things, but didn't actually involve such investments, but we do think we've got a ways to go on these opportunities to reduce the overall operating cost structure through such investments.

OK.

That was the crux of the question.

Thank you all.

OK.

Thanks.

Steve.

Thank you.

Your next question is coming from Sam Brothwell with Merrill Lynch.

Hi, guys.

Hi, Sam.

Murry and Dave, a while back you guys did a presentation here in New York, and I have been searching around trying to find it, so you can tell me, that I'm making this up, because I have not been able to find the evidence.

But, there was a slide in there where you characterized your overall ability to grow the bottom line absent any acquisitions, and as I recall, you kind of came to a conclusion that out through the '06, '07 timeframe, you were able to sustain something in the low to mid double-digits.

And what I wanted to ask you is, if you had to reproduce that slide today, would you still be comfortable with the thesis that you have laid out then?

I don't have any reason to think that thesis is wrong, Sam and with the early guidance, incidentally, that was through '06.

OK.

While I was trying to bait you there.

Yes, that was through '06 that we talked about it.

But you can see that the '05 guidance is, certainly consistent, exactly consistent with what we said, low double-digit growth, and we're not ready obviously to give '06 guidance at this particular time, but I don't have any reason to think that what we said at that time is unachievable.

OK.

Thanks a lot.

Thank you.

Your next question is coming from Andy Levy with Bear Wagner.

Hey, guys.

Just three quick questions.

I missed the beginning of the call.

Are you -- the clean number that you guys are considering is what's 48 cents?

Is that the number?

Right.

OK.

And then can you talk about repurchase, future repurchases of stock?

We'll probably continue to repurchase our stock.

But, yes, I'm not sure if we want to give our run rate.

We did repurchase 1 million shares in the second quarter and for having then trending from since the last big dividend increase at more like half that level.

It continues to be one of the reasonable, plausible, economical uses of proceeds from the Westport and now Kerr-McGee investment, and we'll continue to weigh it against other alternatives.

And does price matter?

Yes, it does, but as Murry communicated, our confidence in our own earnings is such that we still think it's a pretty reasonable investment.

OK.

And I was in and out on the M&A thing, I'm sorry if you said this already.

But when you talk about making acquisitions is that basically of asset or on the gas side, are you talking us about a possible LDC, as well?

Well, it could be.

We typically said that what we would be looking at are either, the things that are most interesting are likely to be either LDCs or gas pipe lines.

It's less likely that we would be interested in a sizable investment in proved reserves, because our view is what Murry was getting at, is, that we have a lot more economical opportunities by just taking advantage of opportunities that we have in our own about 3 million acres of properties in Appalachia.

And on the LDC side, I mean, would you actually look to purchase a public company, or would it just kind of be an opportunity that would, allow you to buy part of somebody else's system?

Well, within our region there are both public companies that would be interesting to us and assets that are held by public companies that would be interesting to us.

So, the answer to your question is both things are interesting.

I mean most obvious, you don't have to go very far from Pittsburgh to see that there are two assets held by public companies right next to where we are here, and one would think those might be interesting.

OK.

Thank you very much.

Thank you.

Your next question is coming from Yves Siegel with Wachovia.

Good morning.

Several questions.

One is, can you specifically highlight what's giving you the difference in the second half to be able to raise guidance by a dime?

I can probably answer that question.

Traditionally, Equitable and it holds true to today, we've been much more willing to give guidance for the year than we have to be real specific about the quarter-to-quarter.

So, basically our confidence in giving you that guidance for this year, it relates to our plan and not to our quarter-to-quarter results, if that makes sense to you.

I mean, we think, based on the rest of the year, what we're doing, etceteras, etceteras that this guidance is a good.

We have never, just a reminder.

We have never given second quarter '04 guidance.

No.

My thought is it just perhaps from my vantage point, it's difficult to at points in time to say that, you are going to grow earnings 10% or 12%, whatever the number is year-over-year, but the growth quarter-to-quarter, I guess is going to be lumpy, because from our vantage point, it looks like the second half is going to be up 20 to 25% relative to the same period a year ago?

Yes and like I said, the number that we gave is based on our plan and not based on quarter-to-quarter comparison.

OK.

You know and as David mentioned, we have never given quarterly forecasts.

You know, we much more focused on the 12-year based on our plan.

But your assumption your ...

Your analysis is right.

Your analysis of the lumping of expenses is certainly consistent with our experience, and I guess I would have to look back and we just haven't, or I haven't.

This is what Murry is saying.

There's no reason to look back at the second quarter of '03 and re look at what lumps of expenses for instance might have existed there that we don't think will exist.

You've heard from us what lumps existed in the second quarter of '04 that we do consider to be part of our core, but you know, lumpy expenses that showed up in the second quarter '04, you heard what those are.

Right.

But, we do see that there's a variety of places where we're going to continue to see our business improve in the second quarter of '04 versus what the performance had been in '03.

Now if I could just follow up with another questions.

On the bad debt expense, can you just say what that number is?

And you know what the goal is again in terms of a normalized run rate?

Yes.

The only thing I said was it was there was a item that goes beyond what our normal accrual would have been of $2 million that was related to implementation and usage of our new customer information.

Right.

System.

What I guess what I'm trying to get at, David is, I think the number has been running 4 to 5%, and I think your goal is 1 to 2%.

I just want to make sure that.

Over time, absolutely our goal is to get much lower than the 4 to 5%.

I expect I guess maybe what I'm trying to get across, Steve, is even though we do summarize it into the 4 to 5% or the 1 to 2% and you use those kinds of percentages, that's not actually the way we or I think anybody goes about calculating it.

There's much more customer segmentation involved in it.

So that 4 to 5% number, even though that is true, that's a result not really the way that we look at the business.

The way we look at the business is from an operational perspective has got to do with customer segmentation, well, how many accounts become delinquent, how many can we get into payment plans.

I mean, for instance, I mentioned that what we're expecting, the reason we're expecting these reductions overtime from the CIS is because it allows for better customer segmentation which allows to us make better decisions on the front end so that, for instance, we wouldn't be letting some customers who have a history of not paying back onto the system.

Since as Murry mentioned, we have multiple utilities around here, that is an issue in this region that customers will jump off, jump from one system to another not paying the bills and when you got a better system, you can prevent them from jumping on.

So it doesn't literally improve the like we've recovering receivables from them.

It means that you're not going to have receivables from them because you won't let them back onto the system.

That's one side.

Something would have been very aggressive on is that expanding the payment programs for the people who are eligible for those plans and I think we have been reasonably successful in expanding the eligibility for some of those and working with others to expand eligibility for those plans in our set.

If you're what you're trying to get at, I think you're trying to get at, is where we might be headed or we might dream to be headed in terms of how low this number can go, and I do want to emphasize what David said is we're focused on collecting the money.

Not so much on the accrual.

That's exactly right, Murry.

I'm sort of thinking what kind of delta could we see so that maybe you can see 4 to $5 million of incremental income out of the utility just by reducing bad debt for '05.

That's were I'm trying to go with this.

Here's what I would do.

Here's what I would do if I were you, and I don't know.

You will have to make your own judgments on this, but the 4 to 5% is high.

It's high for us and it's high for other LDCs.

So that's one number.

The other side is that the best in the country are in the 1%, all right?

And at one time way, way, way back, Equitable was in the 1 to 2% range, but you should modify your thinking for Equitable because we do have a large percentage of people who are in the category that David mentioned who are unable to pay.

I think you're going to have to make your own conclusions from there.

I mean I think it's hard to get to one.

Four to five is unacceptable, and there's some other number in between there that I hope we settle out at, but as David said, we're focused on collecting the money and not the accrual.

But if you are trying to do this kind of arithmetic, that's about as much as I can give you.

OK.

I don't want to push it, but I do have two quick ones.

One is the timing on the sale potential sale of the 2 million of Kerr-McGee.

You said you have the collar.

When does that expire?

And then the second, David, could you just go over the thinking on why you came to the conclusion that it made sense to take out the pre-payments?

Thank you very much for the answers.

OK.

You bet.

First of all, on the collar, I recognize that wasn't in the press release, but it was a recent transaction, so the judgment we made was we'll just wait for the conference call to put it in.

It was a third quarter event not a second quarter event maybe is another way to put it, and it matures in 2012, so I think that's an answer to that question from me.

On the prepay, we do believe that we should be looking at all possible uses of the proceeds from what is now the Kerr-McGee states, and in that what we've mentioned all along that one of the possibilities is repayment of a reduction of financial liabilities.

And, I recognize that I think a lot of you folks know, we think that under funded pension is the same as a financial liability.

We did deal with that a year ago, and the only thing that we found amongst our financial liabilities right now that we thought was economical to remove was that pre-paid forward, which expires and certainly would have expired, I should say, on 12/31/05 even if we hadn't done anything.

But on margin, we just ran economics and thought this was a positive thing to do, so it was purely an economic decision.

But we did have a bias that said that that reduction of some financial liabilities was one of the reasonable uses of proceeds from the Kerr-McGee transaction, Kerr-McGee Westport transactions.

I think we're ready for another question.

Thank you.

Your next question is coming from Peter Hark with Talon Capital.

It's actually Peter Hark, Talon Capital.

Good morning.

Hi Peter.

Hi guys.

Just to clarify, does the 345 to 350 earnings guidance for 2005 contemplate the use of the Kerr-McGee proceeds?

Assumptions about that would be included as would any number of assumptions in that guidance, yes.

OK.

The thought would be you have some residual value here in KMG, and I thought perhaps that the, the core legacy businesses could put up that kind of number without either paying down debt or buying in stock or reinvesting in the business.

Actually, we've always said that the use of proceeds from Westport, now Kerr-McGee, was part of our plan for growing EPS.

OK.

Yes, we've always included that.

Now, it wouldn't include and we told you what our book base is and incidentally, our tax base remains in dollar terms what it was, which is quite low.

Yes.

But to the extent that we were selling other shares and had a gain, a book gain versus that book basis, that's not included.

That's right.

I don't know if you were asking about that anyway, but just to clarify, if its were a gain on a sale, that would not be included.

Exactly.

Thank you very much.

Secondly, have you explored opportunities to avoid the tax payments through some type of like kind of exchange of assets?

For instance, to the extent you sold down Kerr-McGee and go and buy like kind property you avoid the tax payment.

We, actually you, asked that kind of in past sense and I would say you can say past and present tense, that we have and continue to look at any of a variety of ways to maximize our after-tax proceeds, and when we enter into, kind of reiterate what I put in and included in my comments, when we entered into the collar that we entered into recently, one of the considerations was that, that not be inconsistent with some of those approaches.

OK.

Got you.

The '05 guidance, is there an opportunity here to break that out by business segment?

At this time, no.

No.

OK, and then lastly, do you have an update on what your approved reserve base is?

No we do that at yearend.

OK.

I mean there's little updates along the way, but they're non-audited so I'd prefer to wait until yearend to do that.

OK.

Great.

Well thank you and congratulations.

Thank you.

Thank you.

Thank you.

Our next question is a follow-up question coming from Sam Brothwell with Merrill Lynch.

Hi.

With regards to the EPIP program, maybe you could just give us a little bit more color on that.

Specifically, you've laid out some target stock prices associated with that.

What are the impacts you guys, if those aren't met?

Actually, the way it works, I think it is explained at least in one of the Ks in a reasonable amount of depth, but the way it works is the participants have a certain number of, let's call it, stock units, and there are two things that can affect what that turns into as far as money.

One is a relative ranking in total shareholder return.

There's a peer group of 31 companies that we look at.

The lowest multiple that could be applied based on that relative ranking is zero and the highest multiple is two times the number of units, so that's one factor.

And if, we were at the, mid-point, it would be at one.

So that's kind of goes from zero to two.

If you were number 16 to the 31, you would be at one.

We have to make a judgment of what we think the appropriate ranking is and then you have to multiply that by a share price.

So the share price actually has two impacts and the numbers we use are just the assumptions that we're using for the accrual.

I wouldn't view it as a target, and then obviously, the share price goes up or down, the value of the units go up or down, that's the direct effect.

It also tends to be consistent with a, but it doesn't have to be, with a change in relative ranking.

Right?

So a hard stock price drops by 10% but the whole market drops by 10%, so the dollars involved would drop by 10%.

If we dropped by 10% but the market stayed constant, then presumably our ranking would drop, as well, so you get this multiplier affect on the downside.

On the upside, the same thing happens.

Right, an increase on its own would just be a direct increase in the value of the units, but then there's also the possibility that if we are increasing versus the market that it might be enough to be increasing our ranking amongst that group of 31.

Its there, where, we look at it, we are one of 31 companies so we're just seeing where we place amongst that group of 30 other companies or 31 total companies.

OK.

That's helpful.

Thanks.

Thank you, your next is a follow-up question coming from Yves Siegel with Wachovia.

Thanks.

Murry or David, do you have any comments on the outlook for NORESCO?

It looks like you had a good quarter and backlogs increasing?

Yes and maybe I will just answer that question.

I think it is true that second quarter to second quarter has been, was pretty good.

I would remind you though that NORESCO is still not making a return on capital that we think is acceptable.

And we think it need to make a 8% return on total capital and at least a 100 basis point maybe 100, a little more than 100 basis point below that.

So as I've said repeatedly there are no strategic business at Equitable that don't earn their cost of capital.

And so we're still looking to see that go up.

You will also recall that in NORESCO, in our, the main business in NORESCO is performance contracting meaning saving energy usage and the main customers that we have for that performance contracting business are, well, they're split into government and then the Federal government and non-Federal government and institutions.

In the Federal government piece, we have not yet had the reauthorization legislated to continue that program.

Although, everyone believes, including most people in the government, believe that it's a very good thing for the government the Federal government to do, but it has not been reauthorized.

The program, itself, is still included in the overall energy budget or the energy plan, and today there's been a little activity trying to disconnect the reauthorization of the Federal portion of the performance contracting from the rest of the energy bill, but there's no assurance that that will happen yet.

So what I'm saying is that because the Federal government contracting is a pretty big portion of NORESCO, you know, we're going to see, we could see a bump in the road if that Federal piece is not reauthorized pretty soon.

Which is not a good thing.

How quickly do you run through the backlog?

The backlog, I mean, we could probably get back to you generally on that.

You meaning, the group on that, but generally, I think the backlog, it's about a year, you know.

Something like that.

Thank you.

Thank you.

Gentlemen, there appear to be no further questions in the queue at this time.

OK.

Thank you.

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