EQT Corp (EQT) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Equitable Resources Third Quarter 2004 Earnings Results Conference Call.

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

It is now my pleasure to introduce your host, Mr. Pat Kane.

Sir, the floor is yours

Thanks, Anthony.

Good morning, everyone.

And thank you for participating in Equitable 's third quarter 2004 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, Dave will review the third quarter financial results that we released this morning.

Murry will then provide an update on the supply business.

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

But first, I've an administrative announcement;

Equitable will host its 2004 Analyst Conference on December 2nd in Boston, which will be webcast.

We will repeat the presentation in New York on December 3rd; both presentations will start at 930.

And we'll be providing details in a few weeks.

Also, I'd like to 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 EPS 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 the desired improvements in bottom hole pressure, field pressure, as well as metering.

In the method and timing of any transactions to continue to realize the value from the 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 website.

Finally, the reconciliation's required under the 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 website at www.eqt.com in the Investor Relations section.

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

Dave?

Thanks, Pat.

Equitable Resources today announced the third quarter 2004 earnings of 57 cents per diluted share.

This compares with the diluted earnings of 45 cents in the third quarter 2003.

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

First, Equitable Utilities, this unit had operating income for the third quarter of $3.7 million compared to $5.3 million reported for the same period last year.

This decrease in operating income is primarily the result of increases in insurance and legal costs of $0.9 million, the recent implementation of our customer information system, $0.4 million, and over time and contractor costs of $0.5 million due to the flooding in its operating region as the remnant of Hurricane Ivan made their way north.

These costs increases were partially offset by $0.5 million increase in commercial revenues related to our gathering assets.

Next, I'd like to briefly mention Equitable Supply.

Though Murry intends to discuss this unit in a little more depth in his remarks.

Equitable Supply had operating income for the quarter of $58.9 million or 16% higher than the $50.6 million earned in the same period last year.

This increase was driven by a sharp increase in revenue that was partially offset by an increase in expenses.

The revenue increase was a result of both our net equity sales volume increase of 0.6 Bcfe and an average sales price increase of 61 cents to $4.43 per Mcfe, compared to a $3.82 per Mcfe for the same period last year.

The basically flat revenues in gathering contained a decrease due to lower third-party gathering volumes resulting from pipeline curtailments, offset by $2.7 million due to the true up of a processing agreement that we've been renegotiating for several months.

Under the new terms, which look more like a processing fee than the old make-whole terms, we'll have increased exposure to liquid prices.

As you can imagine that feature makes the new agreement much more attractive to Equitable economically in the current price environment.

It is also somewhat more attractive at historical average prices.

We were being compensated for the additional commodity price risk we are taking, but believe we are more capable of managing this risk than is the gas processing entity.

Operating expenses for the quarter were $39.7 million, an increase compared to $32.4 million last year.

The increase resulted from the increase in sales volume, along with 5 to 7 cents per Mcfe increases in each of depletion rate, lease operating expenses, severance tax related to higher gas prices and selling, general and administrative expense, with the SG&A expense being largely tied increased compliance related expenses related to Sarbanes-Oxley and similar requirements.

Finally, I'll discuss NORESCO.

NORESCO's operating income for the third quarter was $3.5 million, $1.3 million less than the $4.8 million reported for the same period last year.

NORESCO's construction revenues trailed last year by about 10%, and this was the primary reason for the decline in operating income versus the prior year.

NORESCO's quarter-end backlog was also lower than a year earlier at $93 million versus $158 million.

So much of this decrease could be attributed to the normal lumpiness of this business.

It is certainly true that the lapsing of the Federal Energy Conservation Enabling Legislation one year ago was an important reason behind the high backlog of last year, just before the legislation lapsed, and the run-off of backlog that was evidenced in the just completed quarters results.

Importantly for NORESCO, new legislation was passed by the Congress this month and awaits signature by the president, extending the ability of federal government facilities to enter into energy performance contracts through October 2006.

Though it may take a short while to ramp this activity back up, this removes an area of uncertainty from NORESCO's business climate.

You'll recall that this legislation seemed quite uncontroversial, but it became entangled in the efforts last year to achieve a more comprehensive energy bill.

And there had been some resistance in Congress to allowing individual components of that effort to be hide-off, especially if they were controversial.

Eventually, the federal energy performance contracting extension was put into a defense appropriation act where it probably does fit more neatly.

Now, I'd like to mention a couple of other items of interest.

Westport Resources merger into Kerr-McGee Corporation at the end of the second quarter of 2004 continued to lead to value maximization efforts at Equitable.

In last quarter's call, I mentioned that we had placed 2 million shares of Kerr-McGee stock inside a structure that have the effective collaring our exposure to KMG price movements.

This was executed in such a way that it is consistent with a variety of alternatives to maximize the after-tax net present value of that stake.

We subsequently executed similar transactions for an additional 4 million shares of Kerr-McGee stock.

The average floor for those 6 million shares is $53 per share and the average ceiling is just over a $100 per share.

The settlement date for the three collars vary slightly, but are all in early 2012.

We also received a portion -- currently 40% of the dividends paid on those shares.

The price of Kerr-McGee stock is up the ends of the third was $57 per share and it is still trading at about that level.

This compares to the current carrying value of just under $50 per share.

We continue to examine the best uses of that asset.

Now that those transaction have been executed as -- have the previously discussed out right sale of some stock and contribution of other stock to our charitable foundation, there remains 1 million shares to Kerr-McGee stock that we own outside of the structured transaction.

The reason we have not sold that remnant yet is that we are working to determine whether it makes most sense to sell those shares out right or execute a transaction similar to those executed for the other 6 million shares, because of the dividend Kerr-McGee pays and our highly hedged gas portfolio, we have not felt rushed to execute a transaction involving the remaining shares until we determine whether we can utilize the additional shares effectively inside the collar structure.

By the way our portion of the dividends related to the 7 million shares of Kerr-McGee stock referred to above totaled $1.6 million in the third quarter and this essentially covers the carrying cost of that investment, though we do understand that it is below our cost of capital and we are accordingly looking to utilize this investment as soon as practicable.

The dividend.

On October 20th, 2004, the Board of Directors of Equitable Resources declared a regular quarterly dividend of 38 cents per share payable December 1, 2004, to shareholders record on November 12th, 2004.

Also during the quarter, Equitable Resources repurchased 500,000 shares of EQT stock.

The total number of shares repurchased since October 1998 is, approximately 18.5 million out of the current 21.8 million shares repurchase authorization.

With that, I would like to 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 ongoing interest in the progress of our supply business.

First of all, let me say that I'm still very confident in the opportunity we have within our supply business.

Our sales volumes year-to-date are up about 7.8%.

In this quarter, our increase is not as high as the previous two quarters, but that in part is due to nearly 0.35 Bcf positive adjustments from prior periods that was included in last year's quarter.

But that's not the most important issue I would like to talk about today.

Equitable Resources is building a platform in the Appalachian basin that has the potential to lead to substantial growth in the future.

This platform for growth brings modern technology to a long forgotten backwater of gas production and supply.

We believe it will accelerate profit growth.

And it will continue to support the industry leading position that Equitable occupies in our industry in terms of return on capital.

This platform is built to support a strategy that has profit maximization as an objective and not cost minimization as an objective.

We are quite aware that the cost of this platform is greater on a unit of sales basis than the previous strategy would have allowed.

We accept that in the short-term our costs will be higher as we build the infrastructure to sell more gas in the future.

Investments in staff and technology to accomplish our major value drivers of reducing bottom hole pressure, reducing surface pressure and reducing curtailment and leaks, are working.

They are good investments that will pay-off in the future.

Our business is not completely fixed at this point, but is well along the way to being fixed.

As you all know by now I seem to be the only bear left in our industry regarding the sustainability of high gas prices.

Personally I still don't believe gas prices will exceed $3.50 to 400 per MMbtu NYMEX in the long-term.

However my opinion on gas prices is not necessarily relevant to what our supply strategy should be.

Our previous strategy in supply based on low price assumptions forced us to explicitly design the business with a cost structure that would earn a cost of capital return at between $2 and $2.50 per MMbtu NYMEX gas prices.

Such a strategy presume the high gas prices we observe today are neither sustainable nor, more importantly, are realizable.

While the former maybe true, the latter is certainly not.

To assume low prices forever in spite of current market conditions, limits opportunities for shareholders and we are not going to allow that to happen.

As I will outline in our December shareholder meetings, at the prices we can lock in now through hedging, the drilling opportunities we have under lease in Appalachia far exceed any of our previous expectations.

At our meeting, I will show you why building the infrastructure platform is so important to supporting this drilling opportunity.

The margin leverage from realizable gas prices substantially outweighs the rather modest increase in unit cost structure necessary to build this platform for growth.

If I were not confident in that arithmetic, I would not be increasing the costs in our supply business.

In short, we are trying to maximize the margin and return on capital of our supply business, not minimize the costs.

The bottom line is that I strongly believe EQT will be able to properly employ more capital in this business than we have previously thought.

This is the ultimate prize for our shareholders.

Continued superior growth at industry leading returns on capital.

As an aside, the opportunity for us to invest in our supply business to grow organically generates an opportunity for capital investment that is at least as large as recent LDC acquisitions.

In addition and perhaps more importantly, we believe the profitability of our supply organic growth program will substantially exceed what is achievable in a typical acquisition.

With that, I'll turn the call over to Pat and I think we will be taking some questions.

That concludes the comments portion of the call.

Anthony, we can now open the phone lines for questions.

Thank you.

The floor is now open for questions.

If you do have a question, you may press "*" then "1" on your touch-tone phones.

If at any point your question has been answered and you would like to remove yourself from the queue, you may do so by pressing the "1" key.

We do ask that you please pick up your handset to minimize any background noise.

Once again if you have a question, please press "*" "1" on your touch-tone phones at this time.

Please hold while we poll for questions.

Thank you.

Our first question is coming from Ronald Barone of UBS.

Good morning, Murry.

I was wondering if you could give us a little bit more detail on this platform, size, cost, date of commercial operation and so forth.

Anything more you can share because it sounds like it's going to be a very significant event?

Ron, what I'd prefer to do to lay it all out for you on the meetings in December at this point.

I think it is fair to say, though, that the, as I said in the remarks, that the drilling opportunity is substantially larger than what we said before.

Certainly that generates capital, but you know, to make a long story short, our ability to be able to hedge prices out in the future and lock in margins allows us to invest in the kind of technology and the platform that we need to be able to get that gas to market.

And I think we've sufficiently examined that calculus.

And we still have a little bit more arithmetic to do on it.

But I would rather we wait until that meeting to lay it out in detail for you all.

Great.

Thanks.

I certainly could appreciate that.

It's just so tempting to ask.

Thanks anyway.

We'll wait until December.

I figured we had the question.

Thanks, Ron.

OK.

Thank you.

Our next question is coming from Anatol Feygin of Banc of America.

Good morning, everyone.

I wondering if you can give us a little bit more flavor for the G&P contract?

If memory serves, this used to be the processor had a keep whole contract, I think with you guys announced.

That's right, Anatol, yes.

And now Dave you are saying, that you guys will be taking the liquids is that...

They actually get some of it.

It looks more like a processing fee agreement.

I'm not sure if I can tell you who it is.

I know that they put it in the public documents.

They also noted the agreement but...

Mark west...

There you...

Did you...

Yes, they got on that stuff out on that agreement as well, but really all you know, as you know, I think, Anatol, there are a couple of different standard types of agreements.

And you mentioned them.

And we've -- we did not think that it was in our best interest long-term to have that type of a keep whole arrangement where in essence we got a value of gas back that was kind of equivalent to what the liquids value would have been.

With even though that relieved us of the liquids prices, it -- let's just say it creates counter party exposure.

We think we are good at managing commodity price risk and therefore we prefer something that looked more like fee for service.

Just slightly we create the commodity price exposure with our -- the production side of our supply business, right?

Sure.

We're producing a stream that is a combination of gas and liquids.

So it is ours.

And the issue really is if the prior agreement was off loading that risk to a relatively small company...

Sure.

Whose skill set is much more in processing.

And we decided to restructure that agreement and frankly we have been in the process of doing that for months.

I think they're comfortable with this, as well.

Great.

Murry, I guess a question on this evolving strategy.

You guys, there are companies out there that are very successful getting low R over P products and hedging out the gas and locking in that margin.

The problems that you guys have though is you have high R over P properties and can only still hedge out X number of years.

Can you give us a sense for, how that part of the strategy reconciles?

Yes.

Again, we will talk about this more in December, Anatol.

But conceptually, the timeframe over which we are able to hedge, these days is substantially longer than it ever has been.

And you can look at it this way.

We either accept operating risk in terms of our ability to sell the gas, that is to make the investments, get the gas to market, and then, sort of hedge along the way.

Or we -- or we have to accept the price risk associated with waiting.

And for my money, given where we stand in the business right now, I think I would rather secure the price.

That is, hedge.

And accept the operating risk.

I mean, I'm much more comfortable doing that.

And I think the company's demonstrated a long-term ability to operate well.

And we made substantial progress here over the last year.

So it really boils down to a tradeoff between those two risks, operating risk and price risk.

And I'd rather take the operating risk and lock in the prices given we can do that

Sure.

And when you say substantially longer, is that kind of high single digit years?

Or more.

Really?

I mean, you have to be patient about it.

But you can't do it all in a day.

But you can take some substantial steps.

And keep in mind, as you're looking at our cost structure, you have to kind of reset the bar on what is acceptable.

I mean, we -- our costs are going up both absolutely and on a unit basis.

But they look like they are going up only in relation to a strategy, which presumed that we would always need to have a bear bones minimum cost structure.

And frankly that's not the cost structure that allows, the most volumes to come out.

And so we have to reset the mindset.

And that's the sort of thing I'm going to talk about in December.

And just a quick follow-up to that.

Is the infrastructure that you are putting in place the metering and the modernization, if you will, of the Appalachia, can that be something that is leveraged with other producers?

Yes.

It really isn't only metering and infrastructure.

I mean this year, for example, we've increased our horsepower in, our compression stations by almost 30%.

We had about 90,000-horsepower, at the end of last year.

By the end of this year, we'll have, around about 120,000-horsepower.

So it's pipes, pumps, valves, meters and more skilled people.

So it's a big thing.

And it's not a one-year deal.

I mean, this is --- this process of change is going to take multiple years.

But I'm sufficiently confident that, we made enough progress that it's time to seize the day, so to speak.

Great.

One last quick question.

I notice that you guys didn't take a sort of a true-up charge for expensing the compensation plan, even though the stock has gone up in the quarter.

Is that something that - And I believe you guys set the dollar value of the stock for this year at 53 bucks.

So is that piece of the expensing something, we should expect in the fourth quarter?

No, we are constantly reassessing.

Every quarter Anatol, we do reassess our compensation expense.

So we reassessed our compensation expense at the end of the third quarter, just as we did at the end of the second quarter and the first quarter and every other quarter.

What we actually got ourselves into a little bit and we're --- so I use this as an excuse to get off on the topic of core and non-core earnings guidance.

We had started going down a road -- we used to just talk about how the earnings were the earnings.

And we just gave you enough information and then the analysts, the market, etcetera, decided what they thought was core.

With Westport earnings, we moved down the road of separating some, those earnings out and as part of that, we then eventually led to us designating some earnings as core and non-core, which was really only within the past couple of years.

That kind of got us into a situation where we felt in the second quarter that, to be consistent with that, we had to make a judgment on, and to call out some compensation expense as being considered part of that.

Is it core or is it non-core?

What we're really trying to do now is, that's taken up too much time to figure that out.

We'd rather tell you what the earnings are and give you the factors.

However, given that we had identified, when we talked about core and non-core in the second quarter, we had talked about some short-term compensation expenses associated with Westport.

We did feel that we should tell you when that had changed.

The judgments we make on what we call out in other compensation expenses are depending on materiality in the quarter.

But we make changes in compensation accruals every single quarter.

As incidentally, does every other company just based on what appears to be...

Sure.

And we call it out, if we think it's sufficiently note worth think or in this case because we had previously given guidance that was on the divided core versus non-core.

When it affected one it didn't affect the other, we thought we should highlight that.

We work on value drivers here, Anatol.

And one value driver we've tried to institute as far as our financial reporting is to minimize the use of non-GAAP reconciliation tables.

So that --

To specifically -- your question, I guess, about the compensation expense and the long-term plan, of course, as you know, we don't have options anymore.

So all of our long-term expenses, all our long-term compensation is stuff that hits the income statement.

Your assumption should be that we looked at our prices and our relative ranking at the end of the third quarter and we made whatever adjustments, we felt were necessary to our accruals as of 9/30 so that we felt comfortable with those numbers 9/30 just as we felt comfortable at 6/30 and 3/31.

Sure.

So I wouldn't expect - I don't no ---- you should never expect there is going to be a true up in the fourth quarter of 2004 or any other time, because we make sure we feel comfortable with them at the time that we put out our financial statements or, in this case, at the time we put out the earnings release.

Understood.

So we feel comfortable with those accruals as they stand now.

Thanks very much for your time, everyone.

Thanks, Anatol.

Thank you.

Our next question comes from Mike Heim from AG Edwards.

Thanks.

I'm not sure I fully understand how the 6 million Kerr-McGee share system works.

Does that in anyway restrict your ability to sell the Kerr-McGee shares?

Yes, I guess what you really say is that we kind of committed those shares already, but we can still - it doesn't restrict - how about if I'll answer it this way.

It doesn't restrict our ability to monetize the value.

Can you explain that a little bit further?

Well, look anytime you put stuff into a structure like this, you've some restrictions in place.

But we retain the right to monetize the value.

Like if you were to go short?

Well, we don't have to go short.

In essence, the price exposure we've got is collared already.

OK.

But we can use the value that's in there for basically whatever purposes we wish to.

OK.

This is a couple quarters of utility costs going up and everyone is facing that.

What's your thoughts on the regulatory environment?

That's a good question, Mike.

Recently at one of the conferences, I made a rather -- first of all I'll speak generally and then I'll speak of Equitable.

OK.

How about if we do it that way?

Sure.

I made a rather strong comment about the need for industry consolidation.

And I really believe that to be true.

And I realize that we have not been a consolidator, recently.

I hope you'll excuse the fact that, we haven't found the prices to be attractive for the things that what we've looked at.

I hope you all excuse that.

But at any -- in any rates, in the long run I am -- we are facing in the utility business most quickly, or just soon, a distribution integrity regulation, in my opinion.

Just as we had pipeline integrity legislation and regulation, a few years ago.

I don't think, this is something that we should've been surprised about.

And believe me, Equitable is way out in front of that in terms of investing in our pipeline system.

But that's one cost that is increasing.

And of course, we have continued costs that we are by and large industry is by and large passing on for high commodity prices.

And I don't think that's tough.

So, in general, I think the regulators are getting a little grumpy about price increases or rate increases or whatever.

And I think, you know, the best thing that we can do as an industry is to get on down the road on consolidation with rational mergers and assume that there won't be big premiums paid one way or another, but there will be rational deals made that allow shareholders and customers to win down the road.

And I think that's the most attractive outcome in the future.

Speaking specifically to Equitable, our costs have gone up.

Some of that has to do with some more platform building for customer information system and being able to really understand this customer base, and because we do have problems with people not paying our bills.

Regulatorily and legislatively, it looks like we're as close as we have ever been in Pennsylvania to getting some good legislation to give us some tools to better collect money from people who are playing games with the system.

I don't know that I need to get into all that right now.

We'll talk more about that in December.

But it's suffice to say that here in Pennsylvania, it's quite difficult to get people to pay among that group of people that have the resources to be able to pay.

And certainly there are people that can't pay and don't pay, and there are IE programs and everything else to help fix that.

But we, unfortunately, let too many people off the hook.

So, my view, locally, is that the investment we've made in the information system, et cetera, and the new legislation will help reduce those costs substantially.

This is probably not the format for this question, but I can't resist as you talk about consolidation and leading to synergy savings, et cetera.

Do you feel comfortable those types of savings would be stuff that would be kept for the shareholders instead of just going to the ratepayers?

Say that again, Mike?

I'm sorry.

I guess, I'm just kind of taking the counter argument against consolidation that any type of savings that would come from consolidating would most likely just go to the ratepayers anyway?

I don't share that view.

I think that that's -- that is the wolf cry that most of my competitors talk about.

But I think when you look underneath some of the recent acquisitions, I don't think that's true at all.

I think that most of the commissions are amenable to situations where rates are frozen, and there's rate stability.

I can appreciate that occasionally that might not be true.

But I think out here in the east, maybe I'm colored by that that it's not true, I mean, I think Dominion when they bought CNG and Night Source when they brought the Columbia did not see what you are talking about substantially.

And I think -- and those are two of the biggest acquisitions.

The ones in North Carolina were pretty good from that standpoint.

And, you know, I hear what my counterparts say, but I don't really buy it.

And here in Pennsylvania, we've been very successful with performance-based rates.

So, we get to keep some of the good work that we do, give it to shareholders, and then, of course, share some with the customers.

I think there will be sharing, but I don't think it's a valid assumption to say that all of the benefit will automatically go to the customers.

Yes.

The bigger issue for the industry, Mike, we think right now, as Murry is alluding to is high customer bills are not good for the gas distribution business.

High bills are not good for anybody 's business.

It tends over time to curtail demands.

It tends to increase in the case of a regulated entity, reduce regulator scrutiny of what is going on.

It has -- it puts pressure on bad debt.

And, of course, these are not Equitable gas problems; these are -- if you look at an industry where because of their costs their prices are forced up, that's not good.

Obviously for Equitable, it gets more than overwhelmed by the exposure we have to higher gas prices in other parts of the business.

But if you just focus on the LDC, that's not a very good business environment.

That's a bigger issue than how the commissions will respond to a merger.

So, I think it's time.

And if it's not this year or next year, over the next few years, I think we should, you know, if we are doing the right thing as an industry, we will see a lot less gas companies, a lot less CEOs, a lot less CEO bonuses, a lot less CEO senate cost, fewer call centers, less trucks in the field, more technology and a much -- a renewed industry.

And I think that's what we need to have here.

Now I'm philosophizing with you, more than telling you what's actually going to happen.

That's what I hope and I think should happen.

Well, that's the purpose of asking the question.

OK, Mike.

Thank you.

One last one and more specific.

Yes.

Do you have the share count for the quarter end?

Gee, I'm not sure that I have it with me.

OK

We can put it out, Mike -- yes, just give us a minute.

OK.

That's all my questions.

Thank you.

And, Mike, we got a question for you.

Is your team going to make it to the World Series?

Can you ask me that again tomorrow?

We are hopeful.

It's a lot better -- it looks a lot better than it did yesterday.

Thanks.

Thank you.

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

Thank you.

Dave, I was hoping you could expand upon on one of Mike's question regarding the facts efficient options to monetize KMG stake.

Basically, you're implying here that you can monetize the value of the stake you locked in with the collars without paying taxes, sort of like a loan against the shares?

Well, yes, I was implying it but now I'll just say it.

Yes.

And if -- I would prefer, though, if any of you want any more information on those structures, what we're talking about at this point is stuff this -- or what we've done is stuff that's actually considered to be pretty accepted financial technology on Wall Street.

I know that for instance you're probably not allowed to talk to Goldman Sachs Investment bankers, but maybe you folks could all swap off and talk to Lehman bankers and they can talk Merrill bankers, et cetera.

So you can each talk because I think you'll find if you talk to the investment bankers at, really, any of the big financial services firms, you can get a sense of how that stuff works in general.

And that -- and we have executed.

Now, when I was talking about different ways of monetizing it, we could just borrow money against that.

That's used -- basically used a floor -- the price floor as kind of the equivalent of collateral, or we could buy assets against that as well.

So there are -- that's why I guess I was being a little vague on how we go about utilizing the value.

But we really don't have many restrictions on the ability to utilize the value, whether it's pulling cash out of it or otherwise.

And the way it typically works is that you have to -- you do in that standard structure have to pay income tax at the time that the shares are constructively sold.

Do you anticipate using the potential proceeds here to help fund accelerated growth strategy of the production business?

That is one of the alternatives.

OK.

As that occurs, you could fit into this?

Look, I mean, frankly, we need to -- we don't want to do something that just looks good from the perspective of that structure, because there's a lot of other things that go on in our calculations of value.

But, yes, that would be one of the approaches to using that value.

And for Murry, has your view of what a superior growth rate is, has that changed at all with the utility growth challenges across the industry, production being anemic across North America, but also having a higher price deck to work from?

Well, I'll first answer it generally.

I think that a company -- and David and I have been pretty firm on this since day one when we got here.

I think a company deserves to exist when it is able to offer the shareholders a premium to its cost of capital return and it has to grow -- grow some.

Now, what I've always done is modified that by saying -- and I still hold true to this -- that growing some can mean different things for different companies, but as a relatively small company in an industry that needs to consolidate, both Dave and I have always said that not only do we have to have a return above the cost of capital, a superior return, but also we have to grow more than the others.

And so that's what I've meant by a superior return.

I've always said targeting low double-digits.

My opinion in direct answer to your question is that we will see stress on earnings in the industry for the reasons that I outlined previously.

That's my own opinion.

And this is a general statement and, of course, there can be individual companies that don't meet that criteria.

And on average, you know better than I that 5, 6, 7% has been sort of an industry growth rate.

And our desire in the long-term is to beat that, continue to beat it.

I mean, we've done it in the past and I wanted to it in the future.

And I think if we are capable of continuing to do that, and I believe we will be, that we deserve to hang out for a little while longer.

So I hope that answers your question.

Do you need a faster growth rate if you are investing more in a riskier business such as EMP?

You mean from a credit risk -- you are thinking that the risk, the return goes up so you need a higher growth rate -- as the return requirement goes up, is that what you mean eventually?

Right.

Yes.

I really -- we looked a lot of cost of capital for our supply business.

And although not everyone agrees with us, if you just strictly look, and I know you have Dave, you look at volatility of cash flows based on operating rates that we have which are relatively minor.

I'm increasing OpEx a little bit and cost of steel has gone up, so drilling prices have gone up.

I mean it doesn't -- it's not strategically a lot higher, particularly in relation to the prices and the fact that we hedge.

You know, I think it really has dampened that cost of capital.

As we said, we think its 7.5 to 8% there, and I have no reason to think that changes.

Whether the market perception is that we -- you are a riskier company because we've got more investment in EMP, what they view us to be EMP, I'm not so sure that I necessarily; (a): agree with that; and (b): they don't have that big an effect.

Yes.

When you look at the profile of our business, what the volume, the ability to forecast volumes over long periods of time, maybe not month-to-month or week-to-week, as well as the ability which has grown dramatically in recent years to hedge prices, I'm not -- its not clear to us that that business needs to be any riskier than the utility business.

But that said, our growth rate over the years, when you wash out the effects of share repurchases, et cetera, has certainly been stronger in our supply business, our production and gathering business than it has been in our utility business.

Well, one thing, we love to talk about this and I hope it's not too long of a discussion, but if you look at our business in Appalachia and our current returns on capital, for example, which are in the high teens, well earned high teens, and if you look at what we are thinking in the future, we are not expecting that that will be compromised dramatically.

So, and that's an extraordinary Delta return versus our cost of -- versus cost of capital for an EMP business, even assuming prices go down somewhat.

So the way to look at it for us is, that although our wells come on, they'll come on like gangbusters and that's a long period of time.

When you PV their Delta Capital, the value added, our return versus the cost of capital, you PV that over a long period of time bring it back and then you compare it to other MP businesses which frankly, particularly in these cost environments tend to drive themselves down to nearly cost-to-capital returns, even though they may get a little spike in earnings next year, because of rapid production, we think there's extraordinarily - extraordinary value in EQT.

And but that's how we think about things, and we think about things in terms of EVA type metrics.

And not everybody thinks that way, but we think it's a going to pretty strategy and we're going to hang with it.

OK.

Thanks for that perspective.

Thank you.

Our next question is coming from Yves Siegel of Wachovia Securities.

Hi.

Just a couple of follow-ups.

Number one, Murry, Dave, are you concerned at all about the availability of rigs and oil service type of equipment going-forward as you perhaps ramp up your drilling activity?

Yes, it's a good question, Yves.

I think that the -- this time around, let's call it this boom, energy boom, has brought with it a little bit more rationality, I think than previous ones have.

My opinion -- direct to answer to your question is no.

But it is pretty much dependent on our desire and our intestinal fortitude to commit to a program that is more than one year.

And I think that commitment, which I hope we'll be making and will be able to outline for you, it draws people there.

And so the people are a little bit more rational.

They would like to sign up for multiple years at maybe a slightly lower cost than take all the money today recognizing there is going to be a bust down the road.

Of course, you have to have certain price protection, so you don't get yourself priced out of the market.

But my short answer is no, but it takes some planning.

Steel has been a problem.

I mean that's a big issue.

And I don't want to get into all that here.

I'm here in Pittsburgh and our buildings looms in the shadow of the US Steel building and I hate to say anything negative about my partners here in Pittsburgh.

But God, they're costing us a lot of money.

Could I just follow up with additional questions?

One is, what you plan to do in Appalachia, is that replicable anywhere else in the United States?

And is that something that you are thinking about further down the road?

And within that context, are you at all concerned or troubled by the balance of earnings?

Because it seems like if you are successful, you will be continuing to grow the EMP business faster than you will the regulated businesses.

Are you concerned or any thoughts about trying to rebalance that going-forward?

Recognizing you would like to buy a utility.

But if it's not there, it's not there?

Good question.

I'll take the second one, first if you don't mind.

As I said earlier, I would like very much for Equitable to be a very good LDC company.

I think there is tremendous opportunity there and I think generally speaking, in the long-term, a good thing for the industry and a good thing for our shareholders.

As far as and the mix issue, I can't really manage that.

I sort of have to figure out where the best opportunities are at the time that earn at least the cost of capital and put the money where those are.

So that's really leading us to this investment in Appalachia.

So, yes, I'd like to be a bigger LDC company.

I'd like us to be, but I'm not really going to worry too much about that mix issue.

And we're not going to overpay for an LDC.

I mean that's not going to do that.

I mean we'd like to do a reasonable merger and hope that we get partners, and merger partners that see the vision that we see and create a great company that won't have sacrificed shareholder value.

So, that's what we are hoping to do.

As far as your other question is, is the Appalachia technology transportable?

In short, I don't think so.

Basically there is absolutely no exploration that occurs here.

In most other basins, you have to have seismic technology and geophysicists and all that stuff in order to find the drilling locations.

I mean here we are stepping out, in-filling; we're both accelerating and adding to reserves, adding production to existing reserves as well as adding reserves.

We tried to go down to the Gulf of Mexico once and took the guys from West Virginia and took them down to New Orleans and Houston and we lost them for a while, couldn't find them.

They had a good time down there;

I don't think we're suited to culturally move too far away from our roots.

Thanks.

And just Dave, housekeeping, can you just review again what the unallocated expense is?

The fact that it looks like it moves around from a year ago to this year?

And could you also repeat the number that you gave out in terms of the impact of Ivan on the utility?

Yes, what I mentioned was a $0.5 million for Ivan.

And as far as the unallocated expense, for the most part what -- that those headquarters related expenses for the, lately for the most part have been related to long-term comp.

Now, I'll dig more into what the exact differences are that have been going on at that level for unallocated, but that is what typically has happened for us, where you see the biggest changes.

Thanks for the answers.

OK.

Thanks.

Thank you.

Our next question is coming from Sam Brothwell of Merrill Lynch.

Hi, good morning.

Hi, Sam.

I think most of this has been covered, but I guess it sounds to me, Murry, like you guys are willing to step out a little bit more in terms of risk and you alluded to being willing to accept the operational risk in this price environment.

How far out are you willing to go in terms of selling ahead of actually having the production?

Well, there's a practical issue of how long you can and then there's the other economic issue of how far you need to at least assure shareholders that they have some kind of return.

I think practically and economically, 8, 10, 12 years is probably sufficient, Sam.

So it's a both earn back the capital, earn a return, and then, from there on continue, of course, to hedge, as we are able to.

But I think, that's sort of a range that we have to go to.

In order to lock in the returns on a drilling program.

Does that answer your question?

Yes.

Thanks a lot.

OK.

Thank you.

Our next question is a follow-up from Anatol Feygin of Banc of America.

Murry, I have just a quick question.

You mentioned not a lot of exploration going on in Appalachia.

If memory serves, CNR did some deep drilling a couple years back.

Have you guys thought about maybe spending some money on 3-D seismic and looking at the black river formations and things like that and maybe going out along that dimension?

Anatol, we haven't.

Now the part of that is driven by my experience, list of and my past life with shell, looking at drilling and folded belts in the Rocky Mountains, et cetera.

And then, believe me, the geology is extraordinarily complicated and barely inscrutable.

And I'll tell you that in relation to the geology in the Rocky Mountains, the Appalachians is more complicated.

It's older.

The trend is not as steep, but it is more cut up by property boundaries, lots of weathering of soils, et cetera, that make seismic data very difficult to obtain and very difficult to process.

And also extraordinarily expensive.

So no, is the answer.

We are, though, and have been open to others coming in and drilling on our acreage and have them provide the risk capital for drilling it.

If they've got a good idea, and us providing at least some acreage.

And then, being able to follow-up.

Let me make this statement, though.

Anyone that wants to drill for deep black river in west Virginia, Kentucky or Virginia will run into Equitable Resources.

There is no way that if that play is successful that we don't get a very large share of it with our 3.5 million-acres.

And I just think that it's worth it for someone else to spend the capital.

And frankly, we haven't had that many offers for farm-ins (ph).

So, we'll see.

Thanks, Murry.

OK.

I want to elaborate on an answer I gave, I think to Yves, on the unallocated issues, really at the corporate level.

The all of though what -- in addition to what I mentioned on long-term comp, all of the Westport Kerr-McGee things, that we've discussed whether will be earnings from the second quarter, but also more specifically the compensation related adjustment that we talked about in the press release, find their way into the corporate line item.

So the compensation -- so that -- some of the moves around the UT and in those other unallocated expenses are related to really all forms of compensation.

And all forms -- and actually, in the other items generally, if you don't talk about unallocated expenses but you just talk about corporate generally, it gets heavily influenced in 2004 at least by earnings, dividends, et cetera, from the Westport-Kerr-McGee situation.

Thank you.

And as a reminder for any further questions, you may press "*" "1" on your touch-tone phones at this time.

There appear to be no further questions at this time.

I would like to turn the floor back over to management for any closing remarks.

Thank you.

That concludes today's call.

This call will be replayed for a seven-day period beginning approximately 1.30 Eastern Time today.

The phone number for the replay is 973-341-3080.

A confirmation code is needed.

The code is 440-3607.

I'll repeat that.

The number is 973-341-3080.

The code 440-3607.

Thanks, everybody for participating.

Thank you.

And thank you callers.

This does conclude today's conference you may disconnect your lines at this time.

And have a wonderful day.

CONFERENCE CALL CONCLUDED