EQT Corp (EQT) 2005 Q2 法說會逐字稿

Good morning and welcome to the Equitable Resources second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to Mr. Pat Kane, Director of Investor Relations.

Sir, the floor is yours.

Thanks.

Bood morning everyone, and thank you for participating in Equitable's second quarter 2005 earnings conference call.

With me today are, Murry Gerber, Chairman, President, and Chief Executive Officer;

Dave Porges, Vice Chairman, Executive Vice President of Finance and Administration; and Phil Conti, Vice President, Chief Financial Officer, and Treasurer.

In just a moment, Murry will briefly provide an update on our drilling program and guidance.

Then Phil will review the second quarter financial results that were released this morning.

Following Phil's remarks, Murry, Dave, and Phil will be available to answer questions.

But first, 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 forecasted drilling program, and sales volumes and supplies segment and other operational matters.

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 2004 Form 10-K, the 2005 second quarter 10-Q that will be released today as well as on our website.

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

Thanks Pat.

Good morning, everybody.

Inclusive of the noise and the numbers for the quarter related mostly to the KMG transaction and other items Phil will discuss, we are upping full-year earnings per share guidance today.

Operationally, we are on target with our expectations and I believe we're having a good year so far.

Accounting for four unusual items that I'll detail in a moment, we are increasing our full-year earnings per share guidance to 3.90 to 3.95 per share on a GAAP basis based on the current share count as our previously announced split is set to occur September 1.

Our previous guidance which did not include the effect of the unusual items was 3.45 to 3.50 per share.

To be clear and perhaps somewhat redundant, we are projecting full year EPS to be slightly better operationally than previously anticipated accounting for the following four unusual items.

Those items are one, a $60.8 million gain on the sale of approximately 5.9 million shares of Kerr-McGee.

Number two, an 11.1 million negative tax impact related to the American Jobs Creation Act which affects how we are booking our executive performance incentive plan.

Three, a $7.3 million office relocation cost charge from the consolidation of several offices into one new building in Pittsburgh.

And finally, a 6.7 reversal of a reserve taken previously for our one remaining Panama power plant reflecting better financial results owing to unexpected and improved power contracts and lower than anticipated compliance costs.

Regarding the office relocation expenses, in the second quarter we completed consolidation of six separate Pittsburgh and Charleston office sites into one new but modest location in Pittsburgh.

The charges relate in part to recognition of market deterioration of lease rental rates for some of our prior space that was taken years ago for long term and high prices.

We delayed this obvious move until we were certain that efficiencies pursuant to the move would more than offset the associated costs.

Essentially, we are in the process of centralizing all non field related and administrative functions into Pittsburgh.

As Phil will discuss, the expense of the executive performance incentive plan linked to total shareholder return and share price was much higher in the second quarter than the first.

The quarterly change is due mostly to our rising share price.

Second half EPIP expense is expected to be in line with the first half expense based on stock price at the end of the quarter.

We did not change our guidance for the year despite this higher than expected compensation expense.

As an aside, I want to emphasize that our compensation strategy at EQT provides investors with full transparency as to the cost of our executive incentive plans.

We use performance based shares as an incentive vehicle rather than options.

Based on research by our consultants and by ourselves, we conclude that our plans don't actually cost more than other companies with similar performance, but our plan costs are much more visible and generate a little more quarterly earnings volatility as they should than other company's plans.

Finally, related to guidance in the supply business, we expect to record sales of 73 Bcfe for 2005.

That sales number is exactly the same as we have previously projected.

You will have seen from our release that the first half sales performance is well in line with this projection, it's actually a little bit better.

However, I would caution you to recognize that the summer months are times when curtailments by major pipelines usually occur due to planned and sometimes unplanned maintenance activities.

Furthermore, our drilling program is on target for the year.

I'll now turn the call over to Phil for more details on the quarter.

Thanks, Murry.

As Pat mentioned earlier this morning, Equitable Resources announced earnings per diluted share of $1.04 compared for the second quarter of 2005, compared with EPS of $2.06 in the same quarter last year.

The second quarter in each year was dominated by large transaction related gains associated with our investment in Kerr-McGee, as well as various other unusual gains and losses which tend to complicate any comparison of the quarter over quarter results.

I'll spend some time at the end of my comments walking you through those items that impacted the 2005 quarter.

But first I'm going to briefly review the second quarter performance of each of the three business units starting with Equitable utilities.

The second and third quarters of each year are generally relatively uneventful quarters for our regulated distribution and transmission business, particularly from a revenue perspective.

That is basically the case again this year, although there are a couple of expense-related items worth noting.

Utilities did achieve operating income in the quarter of $5.7 million which was down from $11 million in the second quarter of '04.

Reduction is largely driven by a $3.8 million pre tax charge resulting from the early termination of our current utilities operating lease associated with the consolidation of our Pittsburgh based work force into a single office building, as Murry mentioned.

The Company's total consolidated charges associated with that move in the second quarter were $7.3 million with the remaining $3.5 million not allocated through any business unit.

Utilities also experienced an $800,000 charge from an enhanced severance program which came as a result of jobs eliminated by the impending implementation of our new automated meter reading system, which will be operational in 2006.

If you exclude those two items, total expenses for utilities in the quarter were down about $2 million versus last year.

The decrease is a result of a $3.7 million reduction in bad debt expense compared to the second quarter of '04.

You may recall that a year ago, we were in the process of implementing a new customer information system.

And because of uncertainties and delays experienced during the implementation of that system, we thought it was prudent to increase our bad debt reserve by $2 million.

Now we have the CIS up and running and are able to take advantage of the system's enhanced capabilities to help us understand customer data and behaviors and assist us in collecting the money that's owed to us.

Because of those capabilities coupled with legislation that permits winter terminations and more aggressive nonwinter collections practices, we were able to reverse $1 million of our bad debt reserve as well as reduce the level at which we accrued bad debt expense during the current quarter.

We continue to be encouraged by the results of our collections efforts so far and this area will continue to be a key value driver for utilities going forward.

Finally, utilities results are also continued to be helped by lowered DD&A expense associated with the application of a longer depreciable life to some of our pipe assets.

These improvements were partially offset by increased insurance, employee related, and other costs.

Moving on to Equitable supply, supply generated $63.2 million of operating income in the quarter, 20% higher than what was reported in the same quarter last year.

Supplies results continue to be driven by higher sales volumes and higher natural gas prices.

Sales volumes in the quarter were up 10% versus the second quarter of last year and up 19% versus the second quarter of 2003.

The higher sales volumes in this year's quarter are a result of our early '05 acquisition of the remaining 99% interest in Eastern Seven Partners limited partnership or ESP as we've always referred to it.

We continue to be encouraged by the volume growth at supply, especially when we take into account the slowdown in drilling in '04 to approximately our maintenance level which continues to create a bit of a drag on our 2005 volumes.

Through the first six months of 2004, we drilled 146 wells versus 173 so far this year, and in the second half of this year, and in the second half of this year, we expect to drill almost 100 more wells than we drilled during the second half of last year.

As we continue to ramp up our drilling program, we expect that the negative impact of last year's slowdown will be behind us by late this year as we head into 2006.

As I mentioned a minute ago, revenues at supply in the quarter were also assisted by higher natural gas prices.

Average wall head prices were $0.49 per Mcf higher in the same quarter last year.

The average realized price of $4.77 per Mcf and the realized price improvement year-over-year were significantly limited by our hedge position.

As to the expense side of supply, total operating expenses were up $9.2 million in the quarter versus the same period last year and were about $1.1 million higher than the first quarter of 2005.

Operating expenses associated with ESP represent $4.1 million of the increase versus 2004.

The balance of the increase comes from some of the negative impact all producers appear to be experiencing from higher natural gas prices.

Namely higher production taxes which are a function of higher revenues and general oil field inflation.

As well as from our increased activity level around drilling, well surveillance, gathering and compression, and metering, all of which we believe will lead toward greater profitability in the supply business.

Finally, on to NORESCO.

NORESCO's operating income and backlog continued to slip a bit in the second quarter as a result of continued delays in completing any significant new federal business.

Recent developments with regard to the energy bill, however, suggest that there is an increasing probability that the reauthorization of the energy services performance contract legislation that is currently scheduled to end late in 2006 could be significantly extended.

If so, that should help NORESCO's efforts on the federal side.

On the plus side, NORESCO was able to reverse a portion of a charge taken in the second quarter last year related to its international power plant portfolio.

This $6.7 million pre tax reversal was possible due to NORESCO's success in bringing our remaining Panamanian power plant into compliance with a local noise restriction without incurring the expected level of costs.

In addition, improving business conditions in Panama resulted in an anticipated award of a power sales agreement, which allowed us to reduce a liability we booked last year associated with Equitable's support of a project line on the Panama plant.

As we announced in May, we have hired an investment bank to assist us in exploring strategic alternatives around our NORESCO investment and we will provide an update once we get more clarity around the best alternative.

So that's the operating story.

I also want to provide some comments regarding the unusual items in the second quarter of 2005 as well as some other items that we think would be of interest to you.

First with regard to the Kerr-McGee position.

As we noted during our first quarter call, early in the second quarter of '05, we sold a little over 1 million shares of Kerr-McGee which at the time represented the last shares that we owned that were not hedged with collars.

In May, in consideration of the increase in Kerr-McGee stock price as well as their Dutch auction tender offer, we made the decision to prepare to liquidate the majority of our major position.

The first step was to terminate the three previously discussed collar transactions that covered our remaining 6 million shares.

In connection with the early break up of those callers, we incurred a cost of $95.8 million.

You may recall that these collars were not scheduled to expire until early 2012 and the option value associated with that lengthy remaining tenure resulted in a termination payment.

Simultaneously with breaking the collars, we sold $4.3 million shares to the three collar counter-parties at the average market price of $75.43 per share.

Our logic for selling these shares ahead of the tender was that we were expecting a relatively low acceptance rate on the tender and by selling at market to the collar counter parties we could avoid up to a 4% discount that we expected if we sold the shares into the market post tender while still taking advantage of the tender offer premium priced into the shares at that time.

We did then tender all of our remaining 1.7 million shares into Kerr-McGee's Dutch auction and just over one-third were accepted at a price of $85.

The net result of all of those Kerr-McGee transactions is that Equitable realized, as Murry mentioned, a pre tax gain of $60.8 million in the second quarter and received $354 million of pre tax proceeds.

We still have about 1.1 million shares of Kerr-McGee remaining that are available for sale and currently unhedged.

Kerr McGee was not our only asset sale during the quarter.

As expected, we also closed the vast majority of our divestiture of 66 Bcf of noncore proved natural gas reserves during the second quarter for $147 million.

Subject to a purchase price adjustment of $5 million which was mainly attributable to the fact that while the effective date of the sale was January 1, of 2005, Equitable received and kept the net profits from these properties from January 1, '05 through the transaction close date of May 31, 2005.

A small remaining portion of this sale will close at primary receipt of some outstanding third party approvals.

The success of that sale coupled with Console's announcement of their intention to execute an 18.5% private equity placement of their largely Appalachian gas production business and continued rumors around impending Appalachian MLPs and other offerings continue to suggest that Appalachian reserve values remain strong.

Another observation we have made with regard to Appalachian reserves is that based on a couple of pieces of public data, our approach to booking reserves, particularly proved undeveloped reserves appears to differ from the approach that we infer is being taken by other market participants.

For example, last year, Range Resources purchased from a third party a 50% working interest in properties that we operate.

They subsequently announced in a press release the purchase of 205 Bcf of crude natural gas reserves which was approximately 46% higher than we had booked on basically the same properties.

Another example on our recently completed reserve divestiture, we announced the sale of 66 Bcf of reserves and a couple of days later, the buyer announced in a press release again a purchase of 96 Bcf of proved reserves or 45% higher than we had booked.

The point is that reserve estimates require a fair amount o judgement, particularly proved undeveloped reserves which will fluctuate with the future gas price and discount rate assumption.

And again, our judgments may result in lower assessment of proved reserves than that of others.

I think it's particularly important for us to understand the basis of these differences in estimating reserves as we consider future selective divestitures.

As mentioned in this morning's press release and Murry alluded to as well, we also realized an $11.1 million increase in income taxes in the second quarter as a result of an expected change to certain of our executive compensation plans necessitated by congress' passing of the American Jobs Creation Act of 2004.

Upon review of the Jobs Act, it came to our attention that certain of our plans were not compliant with the new law.

Specifically, in order to avoid the imposition of a significant excise tax on our plan participants, each plan must be paid on a date certain.

Our plans currently restrict payment to periods when the executives compensation is deductible under Section 162M of the Internal Revenue Code, adding a degree of uncertainty about when actual payment will occur.

As a result, the -- as a result of the Company's review, we anticipate that the compensation committee of our Board will lift that restriction in order to make our plans compatible with the new law, which means that certain future executive payments that were a soon to be tax deductible will no longer be deductible and thus the $11.1 million increase in income taxes in the current period.

This explains why our effective tax rate in the quarter of 42.7% is well above where it normally has been.

Another compensation expense related item involves our executive performance incentive programs.

The pay out for these programs is a function of both Equitable's absolute stock price and our relative return versus a group of peer companies.

Because of the significant increase in our stock price during the second quarter of '05 where it went from $57.44 at the end of the first quarter to $68 even at the end of the second quarter for an 18% increase, we have accrued expenses associated with these plans that are $8.3 million greater than what we accrued during the first quarter of 2005.

We expect that based on the quarter end stock price and our current relative rankings we would experience approximately the same expense associated with these plans in the second half of '05 as we did in the first half, or approximately $15 million.

Because of the variable accounting of these plans reflects their true economic costs, they tend to suppress our earnings and earnings per share when compared to another well performing company that primarily uses only stock options and time restrictive stock to provide long-term incentive.

A brief update on the balance sheet.

When our 10-Q is released later today, you will see a short-term loan balance of around $156 million, and we also have around $179 million of cash in interest bearing margin accounts associated with our natural gas hedging program.

In addition, we have 30 million -- we had $30 million of restricted cash associated with the supply asset divestiture at the end of the second quarter that has since become available for general corporate purposes.

As I mentioned last quarter, given that there was an offsetting asset in our accounts receivable balance associated with those interest bearing cash margin accounts.

We tend to net the asset and liability when we think about our short-term debt position would suggest a current net short-term debt position of negative $52 million or put differently, no short term debt and instead cash on hand of $52 million.

That net short-term debt position which is normally low in the second quarter due to seasonal effects is especially low given the previously mentioned proceeds received from the supply asset sale as well as proceeds from the sale of Kerr-McGee shares during the quarter.

Finally, we did repurchase 560,100 shares of Equitable stock in the second quarter bringing the total number of shares repurchased since October 1998 to about 19.9 million shares.

As we announced a couple of weeks ago, Equitable's Board of Directors recently increased the share repurchase authorization to 25 million shares on a pre split basis, leaving us with just over 5 million shares of head room under the current authorization.

Also in case you missed it, the Board also did approve a 2-for-1 stock split payable September, 1, 2005, to shareholders of record on August 12.

I'll now turn the call back over to Pat Kane.

Thank you, Phil.

That concludes the comments portion of the call.

Can we please now open the call for questions?

[OPERATOR INSTRUCTIONS] Our first question comes from David Reynolds of Tribeca.

Yes.

Good morning.

I just wanted to touch base with you on any developments or thoughts you may have regarding partnerships or potential joint ventures to further tap into the large acreage position.

I know that that's been at least a strategic alternative at some point.

I was curious as to whether or not you had any update there.

No specific update.

But I think it's a really good question.

As you all know, our plan is to get up to a 600 well per year run rate.

I'd like to do that, although internally, we've looked at the impact of a 900 well run rate, which of course would be a substantial increase in value to the Company.

I think, though, your question raises the issue.

Particularly in light of the kind of values that are being ascribed to these reserves that Phil talked about earlier, whether we should accelerate dramatically the drilling by taking partners on some acreage that perhaps we don't view as favorably as others do.

All I can say is that we're studying that issue right now.

Phil Conti has got that ball along with Diane Prier in our supply business and hopefully we'll have more to report on that at the end of the year.

But it's certainly an interesting alternative, let's put it that way.

Acceleration and/or partnerships could add significant value.

Thank you.

Thank you.

Our next question comes from Steven Parlor of Foresight Research.

Good morning.

You're obviously already cash rich, you have a strong balance sheet, and while the gain on Kerr-McGee was only 60 million or something like that, the proceeds were multi-hundred million.

It's not like you fellows not to have a pretty good plan of where you're going with all the cash in the balance sheet strength.

Could you discuss that, please?

First of all, our plan is not to stay capitalized the way we are at the end of the second quarter.

I think our net capitalization -- our net leverage if you will is lower than it has been in a long time, so we're not anticipating staying there or anticipating it going up over time.

How we spend the money will be based on investment alternatives that we have including the drilling infrastructure project that we're taking a look at.

If we don't have a better use of the cash, we'll use it to buy back stock like we have in the past.

If I can add on to that, Steve, I think that's a great point.

We'll do one of three things.

We'll buy stock back, we'll invest in our company, or potentially increase dividends, or pay down debt.

I guess there's four items.

As Phil said, we're sort of overcapitalized.

I would say that the main things we're thinking about now are increasing the drilling program potentially, infrastructure in the Appalachian Basin is a large opportunity, I think.

The pipelines are a bit tight, and we think there's opportunity to perhaps build some more gathering assets or buy other gathering assets and tie them together in a better way.

As you know, particularly here in Pittsburgh, there still hasn't been the kind of LDC consolidation that needs to occur.

Assuming that we can do any of those three things, the drilling, the infrastructure, the LDC at a price that we think earns a return on capital for our shareholders that's acceptable, those could be substantial investments so we're looking at all of those.

If none of those pan out, then we'll look at some other things.

But that's what we really have our eye on right now.

Thank you.

This is Dave Porges, I do want to remind investors though that Steve had mentioned in his preamble, the relatively low gain that -- relative to the proceeds.

I want to remind you that that's because we took so much -- we were caused to take so much of that gain in the second quarter of last year.

So the gain that occurred in the second quarter of this year was the delta between that increase that we had already recorded on the books, even though we'd received no cash for it but reflects it on the books.

The delta between that and the sales prices.

Sure.

David, my only point was that the cash proceeds were so much larger.

Yes, they are.

Absolutely.

Okay, thank you.

I know you're aware of that, Steve, I just wanted to make sure that everybody was aware of the gain that we'd--.

Sure.

Thank you.

Thank you.

Our next question comes from Jaff Okhan of Citigroup.

(INAUDIBLE) Just a question on the EPIPs.

So the second half of this year you are expecting another 15 million and that's just based on your stock price depreciation if I understand it correctly.

Going into next year, what should we expect if the stock price keeps going up, are we going to expect to see the same sort of expenses?

This is Dave Porges again.

Actually it would be a -- look if the stock price keeps going up, these are basically accounted for.

It's the equivalent of using variable accounting.

So, yes, it would go up, but do remember the unusual aspect of 2005 is that we have two of these long-term incentive plans being accrued for.

We've got the three-year plan that went from the beginning of 2003 the end of 2005 and the four-year plan that began at the beginning of 2005 and ended the end of 2008, paying out in early 2009.

There is no anticipation that there would be any new equivalent plan that would come into effect this year or next year, so next year would be, our anticipation is that next year we will be accruing for just one of those plans.

So actually, you'd probably assume that that number's coming down in 2006 and the only way to keep it even flat is for stock price to accelerate a fair amount.

Okay.

Then the 15 million was not in your guidance -- the incremental 15 million--.

Yes, that's all baked into that.

When we reaffirmed, that was Murry's point in reaffirming guidance, was that we were reaffirming that guidance at the -- the upwardly revised guidance for the unusual items that that -- that we were stressing that that is inclusive of those increases in expenses.

I understand that but the guidance you had before today was the incremental $15 million in the second half of '05.

That's not an incremental 15 million, that's an all-in.

But, yes, the long-term incentive plan assumptions have been incorporated in all of our guidance.

Okay.

Every time we've put out guidance for 2005, we've incorporated those.

But again, to be clear, the numbers that Murry and Phil cited for the second half is an all-in number, not an increase.

Okay.

On the reserves, when you sold the reserves to G.E., the -- they obviously had a different number than you guys did.

Your reserves are based off of your reserve engineers audit of your acreage in your area.

Who's your reserve engineer again and are they also responsible for also looking at your probables and possibles as well or is that internal?

That's two questions.

First, with respect to the proved.

Writer Scott does our reserve evaluation.

Of course, the way this works is we do the evaluation and they audit us.

Right.

So, for example, specific assumptions about prices, and discount rates and all that sort of thing, there's sort of -- they review that in light of our own assumptions, right?

Unless they are completely out of whack, they don't say much about it.

As far as the probables and possibles are concerned, they look at those reserves and they opine on those reserves internally but there is -- they don't attest to those probable and possible reserves.

Those are our numbers.

And the reason for us raising the issue at all is as we look at selective divestitures in conjunction with our own increased drilling programs, the things that we don't think we can get to, et cetera, we obviously prioritize in terms of being most interested in divesting assets whereby we think the market's estimate of value is a fair amount higher than our own estimate of value.

It's important for us to come up with a good prioritization of that for us to have a pretty good feel for what the market's assessment is and all Phil was trying to mention in bringing that up was that these data points are causing us to revisit our assessment of the market view.

They might alter our own prioritization of what assets would make most sense for us to keep and which assets make most sense for us to examine divestitures or joint ventures, et cetera.

I think Dave's point's important here.

I don't want to belabor this too much.

But in the past, frankly since we had so many reserves that Dave and I never really thought too much or put much emphasis on the whole issue of reserve replacement and all that stuff.

Basically, we had more reserves than we knew what to do with.

Our main focus was accelerating the development of those reserves and getting it to the producing line so that we get the revenues out.

Okay.

What we're noticing is that apparently because of higher price assumptions and lower discount rates, people are really valuing the longer tail of those reserves a lot more than we had in the past.

And that causes us to think about what we should divest and keep versus our own expectations and our own abilities to develop this stuff.

So we're having to put a new emphasis on how we evaluate reserves in light of how other people are doing it so that we can make the most money for our shareholders.

Okay.

In terms of the balance right now where it stands, and if we look at it net of all of the cash you are going to take in, it does seem to be, as you said before, it looks to be more than capitalized compared to the rest of the industry.

Have you thought about recapitalizing the balance sheet and raising debt to buy back shares or is that something that you wouldn't do because you have that dry powder to invest in other projects like E&P and the infrastructure in Appalachian basin?

Let me take the first question first and then Phil will take it.

We don't like the concept of dry powder here, okay?

That is not something that we talk about.

We feel like we have a good investment, we need to come to our investors or go to the market and raise money.

Let me just put that to rest.

Dry powder is not in our thinking.

I'll let Phil take the rest of the question.

The only thing I'd say about the recap is it's one of the alternatives we would look at versus some of the other operational and organic growth opportunities that Murry mentioned.

It is certainly one of the alternatives.

And you talked about going possibly looking at a 900 well run rate at some point in time.

I know there's been infrastructure constraints.

You don't know if you can really get to that 900 well cap because of the infrastructure constraints.

Is there something that's changing your thinking recently that would suggest that that might be possible?

No, first of all.

We're working on 600 so let's be clear about that.

Right.

But these prices and apparently the sustainability of these prices and certainly the ability to hedge them as far out as you are able to hedge them has caused us to challenge ourselves to think about this.

I do not have a plan for a 900 well drilling program, let's be very clear about that, but I'm looking at one.

That's all I'm signaling at this point.

Fair enough.

Thank you.

Thank you.

Our next question comes from Chip Bruwry of Kramer-Rosenthal.

That last question was kind of the first question I had.

Maybe I'll ask it a little differently.

What are the constraints in the market as you move forward on ramping up to 600?

What's the crew availability and the what's the -- what are the hurdles or bottlenecks in getting the completions in and would those exist if you did find a partner that wanted acreage to work on?

Are they facing the same things or are these kind of bottlenecks that are unique to you?

I don't think they are unique to us, and so, you know, the equation can't be solved so easily as saying let's get a partner and together we'll increase the total number of wells to be drilled in the area.

And the reason you can't make that assumption, because you think, well, that ought to be easy.

Just let someone else put capital or effort to the equation.

The problem is that the pipeline infrastructure, the compression infrastructure, the ability to get permits, coal permits and other drilling permits done limits a bit the ability to get some of that drilling done, and the rig fleet out there was sized for a certain level of drilling.

It's now sort of creeping up, but it's not nearly at the level where all of us can go out there and drill 5, 6, 7, 8, 900 wells.

There's some infrastructure constraints there are some people constraints at this point.

If it was as easy as saying, look, we'll get up to 1000 wells or 2000 and just farm out all of these other locations, we'd have done that already.

The problem is we don't think the capacity to handle all that gas is there or the capacity to get all of the permitting done is there at this point in time.

So we have to bridge our way into a much higher drilling program given that other people are drilling more, too.

Given the fact there's capital available and other companies MLPs or whoever would be more than willing to put in pipeline and compression, and that stuff doesn't take too long to come on.

Is it more of a permitting issue that's the gating factor if you rank everything that you listed, could you rank them?

I don't think it's a permitting issue and I don't think your statement is exactly true.

It's not like there are -- maybe other people are claiming this ability, but just going out there and saying you can drill more wells, believe me, I've been doing this for a long time, and I'm hearing claims out there about how programs can be ramped up and it's just not true.

You run into infrastructure constraints.

I don't think it's just permitting, it's all of the above.

It's rig availability, infrastructure availability, some permitting issues to get wells drilled and pipelines permitted.

And, I can't tell you what the limiting factor is on us to drill wells.

I think we're pretty confident we can get up to the 600.

As I said, I'm not so sure how we take that next step to 900.

But it's a lot of details.

There's no silver bullet.

And actually with regard to pipelines, what we're finding is, it's really only working as we look at those investments if we're prepared to wear the requirements for almost all of the volume that's needed to justify the economics on the pipeline because a lot of these producers, despite your comments about capital, they really aren't prepared to step up for long-term commitments across the board.

And of course, if you try to build interstate pipelines then the regulatory limitations through the FERC stretch those out over quite a long period of time.

There's a few pipelines that are taking more gas out of the -- proposed to take more gas out of the reach than have been on -- well, they've been on the blackboards for or drawing boards for years and they just can't get the commitments to make those go.

So what we're concentrating on is the smaller interstate pipelines where we can control more of our own fate.

Even then you have right of way issues and things like that.

So we do think there are a number of opportunities but it's not as if all you need to do is throw money at it and that will solve the problem.

I think Dave's point is good.

Some people are saying we'll just do it.

They know how to do it somehow.

We'll do it.

Well, okay.

We'll see.

And just as a point -- one of our guys on our commercial group thinks that there's as much as 100 to 200 million a day just shut in in the Appalachia during the summertime because of lack of access to pipeline capacity.

Most of these are small producers who, as Dave said, have not been willing to sign up for firm gathering and/or transmission capacity.

So , to me, that's a great opportunity.

We already have 10,000 miles of pipe out there.

We're looking at ways to debottleneck that.

Hopefully others will join in doing it and it will provide a good opportunity.

That's a little more than you wanted but I think that's--.

It is and I don't want to go too far down the road.

I guess signing a multi-year commitment given your reserve base shouldn't be too scary.

No, it's not.

And that's not -- no, you are absolutely right.

And we can do that, have done that on occasion and certainly for pipeline capacity, we are willing to sign up for and have signed up for multi-year commitments for firm capacity.

We've done a lot more of that this year.

But that doesn't solve the right of way issues.

It doesn't solve the FERC approval issues for the interstates that are trying to build those.

We're not saying this isn't doable, because clearly we think it is.

We're just -- we're trying to caution that it is not just a matter of throwing money at the problem.

Yes.

And we know that the best answer for us is to have all of the gas from all of those reserves and all of that acreage produced tomorrow.

All of it.

We know that's the best PV.

Believe me, we're working to it.

Our main value driver in supply is accelerate sales.

That is by any measure possible.

We're high on it and we'll be doing everything we can.

And certainly we have the money for it, so we have the money to be able to do it.

Great.

The second question I wanted to ask, this relates to the 2003 to 2005 incentive program.

Can you talk about how that plan plays out for the -- through 2005?

Is it a year end stock price?

Is it an average price over the year?

Because it would seem to be that if the stock works higher before December it benefits a lot.

It's the average of the last ten trading days of 2005.

So it is closer to being a year end stock price than it is to being an average stock price.

And any idea, is it linked to a certain number of shares or what kind of parameters around that are there?

There's a multiplier on the number of shares that any individual received.

Right now, the assumption is that that multiplier would be approximately 1.6 times the number that somebody receives.

I think that total is about--.

About 620,000 shares.

As a result of the 1.6.

As a result of the 1.6.

Since we're two and a half years into a three-year program, as that happens, there's been enough stratification that there would have to be a pretty fair move either direction in our stock price relative to our peers to cause that multiplier to change by much.

So it's a relative, it's not an absolute?

No.

The cap on that is two times.

Practically speaking that's really not going to happen.

Are the peers ENPs or LDCs?

It's a group of 30 companies, actually, I think it's in some of our public documents.

It's in the 10-K, so it's 30 companies.

Okay.

I'll take a look.

And it's a mix of -- unfortunately there's not a lot of people who are perfect peers for us but the ones that you would think as the absolute best peers for us, the Questar's et cetera are certainly in that group.

There are no pure ENPs but there are certainly companies that have such small regulated operations that they don't refer to that.

Okay.

Thanks a lot.

You bet.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Rebecca Followill of Howard Weil.

Good morning.

Several questions for you.

I know you've gone over this but just to clarify once again.

The cash position that you have has been building considerably over the last six months.

Is there a timing to make a decision on whether or not it's an increased drilling program, additional infrastructure for Appalachia, a consolidation, or is it you just continue to wait for specific opportunity?

Are you waiting on trying to find out how the pricing of the lend or the consol deal goes?

Is there some particular catalyst that's going to drive that decision making process?

I'll take the first part.

The issue is we're developing the opportunities and I just want to emphasize, our history -- history is a key to the future here.

We don't like dry powder.

Obviously, if we can't develop the opportunities, we'll use the money for other purposes as we've done previously.

Either do it on increases or share buybacks.

I just don't have a time frame on that right now.

I'm excited about what I see in terms of opportunities and I don't want to get the cart before the horse but there just might be a little bit of timing issues between getting the money and spending the money.

Okay.

On whatever it is we spend it on.

Thanks.

Two other quick questions.

On your earnings, you said right at the beginning that you wanted to emphasize that the change in guidance, even though that it is higher operationally, so compared to the 3.45 to 3.50 and I'm sorry I don't have all the numbers here in front of me, the 3.45 to 3.50 that you had had before, what is the delta there on an apples to apples.

Rebecca, this is Pat Kane.

On an operational basis, it's about $0.03 increase from the previous guidance.

The majority of the change is from those four items that Murry listed.

Okay.

Great.

Then -- I'm sorry.

Yes.

We're not counting the compensation issues as one of those items.

Right.

Right, that's just -- it's up -- operationally, it's up $0.03 despite that increase.

Perfect.

Finally, to clarify once again on the reserve issue, the reason that you're relooking at the reserve issue is related to trying to evaluate the potential sale of acreage or JV and how others review your reserves.

It is not as if you are going to go back and relook at how you book reserves?

That is basically -- I mean, it may result in some changes in that area if we find that we're chronically, conservative is a word.

But I think the real issue here is what is the difference between how we view the reserves and others view the reserves when we look at long term and does that change?

And we're asking ourselves the question, does that change: what acreage we sell, where we drill, and where we might partner for drilling.

Those are the real questions, and I just don't have answers for those right today.

Perfect.

Thank you.

Thank you.

Our next question comes from Peter Hark of Talon Capital.

Good morning.

Sorry.

I joined the call a little late, but if you can give me the actual cash balance at June 30, and the equity ratio at that both the corporate level and at the utility?

Our Q's going to be released later today so you'll get the results.

We didn't talk about a cash balance, what I talked about was a short-term loan balance of $156 million and you will see all that in the Q this afternoon.

You'll see all of the information you want to make those calculations later today.

Okay.

Secondly, do you have an update on the roll off of existing hedges and forward sales?

Yes.

We have the -- there's been no change in our hedge position from the last time we put that out.

Can you just review that again for us, Pat?

Sure.

For the remainder of 2005, we have 30 Bcf hedged to 489, 2006, 59Bcf at 477 and 2007, 56 Bcf at 474.

That's in the press release today.

Great.

Thank you very much, guys.

Thank you. [OPERATOR INSTRUCTIONS] At this time, I show no further questions.

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

Thank you, everybody.

That concludes the Equitable Resources second quarter 2005 earnings conference call.

I do want to tell you that this call is available on replay for a seven day period, beginning at approximately 1:30 p.m. today.

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

You will need a confirmation code, which is, 5611161.

And this call will also be replayed for seven days on our website.

Thank you, everybody, for participating.

Thank you.

This does conclude today's conference.

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