EQT Corp (EQT) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen, my name is Alexa and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Equitable Resources third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

It’s now my pleasure to turn the floor over to your host, Patrick Kane.

Sir, you may begin your conference.

Thanks, Alexa.

Good morning, everyone, and thank you for participating in Equitable’s third quarter 2005 earnings conference call.

With me today are, Murray Gerber, Chairman, President and COE;

Dave Porges, Vice Chairman, EVP of Finance and Administration; and Phil Conti, VP, CFO, and Treasurer.

In just a moment, Murray will provide an update on our 2005 operational progress and guidance, and then Phil will review the third quarter financial results that were released this morning.

Following Phil’s remarks, Murray, Dave, and Phil will all be available to answer questions.

But first, I would 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 capital, 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 third quarter 10-Q that will be released today as well as on our website www.EQT.com.

And now I’d like to turn the call over to Murray Gerber.

Pat, thank you very much, and welcome everybody this morning.

We have an extremely upbeat story this quarter.

I’m usually not so ebullient as this, but the Company is doing very well and we had a very strong third quarter.

I just wanted to give you a little bit of an update, operationally, on our scorecard against those commitments that we made to you in December of last year at our last analyst meeting, to kind of get you up to speed on where we are.

First, on the supply group, we have, we said and we have increased our well drilling.

We expect to have a record number of wells this year.

We’re targeting 440 as you know and it looks like we’re going to hit that number.

As I mentioned, we’re building the capabilities for a much larger program, in the short term, targeting 600 wells, to that, and our board increased our ’05 capital commitment authorization by $28 million to facilitate next year’s 550 well programs so we can get out there and we’re committing those wells early and committing equipment that’s necessary to drill those wells and support those wells right now.

As I mentioned in last December, we have been working on increasing our gathering rates, just FYI.

The average gathering rate that we charged in 2004 was about $0.58, in Q3 2005, we are now charging $0.81, reflective an increase in capital expenditures in that area, and that’s about a 40% increase in gathering rates.

These rates are commensurate, as I said, with increased infrastructure capital.

Capital commitments in 2004 in our midstream business were 63, this year we’re budgeting 82.

I would say in the supply business, generally, looking forward as we’re just kind of peeking at our plan for ’06, you can expect that Equitable will continue to increase the amount of investment that we make, and of course, focusing as we always do on assuring that you make a spread for your cost of capital on that investment.

So, it’s a very positive story going forward.

On the utilities, we had mentioned several areas that we were targeting for operational improvement.

We are on target for reducing our leaks and the commensurate cost reductions associated with that.

As I mentioned, we also are looking to increase our efficiencies through automatic metering.

So far, we’ve installed and are operating 45,000 of those automatic meters.

The full program is 260,000, so we’re a little over 20% complete with that, and then investment will take us a couple of years to implement, but we mentioned operating cost improvements that are attendant to better processes, attendant to automatic metering and that sort of thing.

We’re well on track.

On the collections side, we have, it’s a good news/bad news story from our standpoint.

We’ve got 30% fewer active delinquent customers that are over 60 days past due versus October 2004.

That’s a tremendous change, but the current gaps in environment is likely to lead to more people not paying their bills in the future.

The Company is working with Federal and State officials to assure that all customers that are needy and that are likely not to pay are getting money to pay those bills through LIHEAP and other assistance.

And the Company itself has prepared to make a contribution to that effect.

On the Kerr-McGee side, our holdings there are now fully monetized.

Phil will discuss that in just a minute.

So, our foree into the Gulf of Mexico is now complete and Phil will sort of summarize that for you.

And, we have bought back, this year, 2.6 million shares of Equitable stock, about 900,000 shares in this quarter.

So, a very upbeat operational report that we’d like to give you this quarter.

As far as earnings guidance is concerned, we’re reiterating 2005 guidance adjusted to reflect the third and fourth quarter sales of Kerr-McGee and the third quarter pension related expense.

The company expects to earn between $2.15 and $2.18 per share this year.

And with that, I will turn the conversation over to Phil Conti.

Thanks, Murray.

This morning, as all of you would have seen by now, Equitable announced earnings per diluted share of $0.38 for the third quarter.

That compares with earnings per share of $0.28 in the third quarter of last year.

The most recent quarter result include a gain from the sale of Kerr-McGee shares and a pension settlement expense at Equitable Utilities.

I’ll discuss the status of our Kerr-McGee position, as Murray mentioned, as well as a couple of other items of interest to you, before I wrap up.

But first, let’s briefly review the third quarter performance of each of the three business units, starting with utilities.

Given the relatively few heating degree days from April through September, the second and third quarters of each year tend to be somewhat uneventful for our regulated utility business.

In fact, the third quarter represents only 2% of the 30 year normal heating degree days for the entire year.

There are, however, a couple of items worth noting that drove results this quarter.

First, the Steelworker’s Union ratified a new three year contract during the quarter.

As you are aware, the Steelworker’s have been working without a contract since April of 2003.

The new contract includes a settlement of pension benefits for 182 represented employees.

Based on our vast experience, we expect this settlement package to result in the vast majority of these employees converting from a defined benefit to a defined contribution plan.

So, Utilities third quarter ’05 results are dominated by a $12.7 million charge as a result of that settlement.

But, our Company did get three benefits from this restructuring.

First, defined benefit plans directly link pension expenses to the period in which the employee actually earned the benefit.

Second, the lower pension obligation reduces the shareholder’s back-stopping of investment returns from employee benefit plans.

And, I think, as many of you would be aware, that that’s been a long term objective of our management team.

Finally, and perhaps most importantly, with the prior plan, with employees who had earned the maximum pension benefits, actually lost pension value if they continued to work.

The restructuring removed this disincentive to stay on board for some of our more experienced and valuable workers, many of whom actually prefer to continue working anyway.

On that last point, one of our longer term concerns with regards to our human resources, is that demographics will eventually cause a loss of skilled workers, beyond what can be filled with productivity improvements.

To combat that, we try to reduce the incentive to retire early, which also tends to reduce the overall retiree expense to our shareholders.

So, excluding the $12.7 million pension charge, Utilities saw a $1.4 million decrease in SG&A expense.

And that improvement was largely the result of a reduction in bad debt expense.

Our improving customer information system, customer data, and collection practices continue to result in Equitable collecting more of the money that is owed to us.

Utilities also had a half a million dollar decrease in DD&A expense versus last year.

L&M expense, on the other hand, was $1.5 million higher than the same period last year, because of higher vehicle fuel and maintenance expenses, as well as we continue to have some incremental costs related to step up activity in our collections area.

But, as Murray said, overall, it was a pretty good operational quarter for Equitable Utilities.

Our Appalachian Supply business also had a very good operating quarter.

Supply generated $79.9 million of operating in the quarter and that represents a 36% increase over the same quarter last year.

Supply’s results are driven by higher sales volumes and higher natural gas prices.

Sales volumes in the quarter were up 10% versus the third quarter of last year.

And the higher sales volumes came mainly from our acquisition of the remaining interest in Eastern Seven Partners, or ESP, as we’ve often referred to it.

And as you know, that acquisition occurred early this year.

But, we’re also starting to see results from our expanded drilling program.

For the first nine months of 2005, we drilled 310 wells versus 237 wells last year at this time.

Production from these new wells helped to offset both lost sales from the properties we sold in the second quarter, as well as the normal decline from existing wells.

It appears that we are starting to overcome the drag-on volumes created by our slowdown through a maintenance spilling level last year.

Revenues at Supply were also affected by average well head prices, which were about $1 per thousand standard cubic feet higher.

In addition, consistent with our stated strategy of moving toward more appropriate gathering rates, gathering revenues were 33% higher than last year.

Higher gathering rates more than offset the lost through-put associated with those sold property.

Moving on to the expense side of supply, total operating expenses continue to run higher.

They were up $7.6 million in the quarter.

Over half of that increase is due to $4 million of operating expenses associated with the acquired ESP volumes.

The balance of the increase continues to come from the negative impact many of us are seeing from higher gas prices, in the namely higher production taxes.

And, by the way, ours are up 50% year to date and almost 60% in the third quarter, as well as general oil filled inflation, which is affecting all producers.

Just a quick side note, you may have noticed our operating expenses in the third quarter supply were about $1.7 million lower than the second quarter of 2005.

So, just last quarter.

As you tweak your models, what we ask you to bear in mind, that fluctuations from one quarter to the next can be related to the timing of expenses hitting the income statement.

They don’t necessarily indicate a trend and it’s our current belief that the year to date results are probably a better reflection of our current per unit cost structure in the supply business.

A few comments about NORESCO.

At the end of September, NORESCO had over $125 million in letters of intent for new business, which tend to be a strong indicator of future contracts.

However, the actual signing of construction contracts related to the letters of intent is not expected to occur until later this quarter or even as late as the first quarter of next year.

Since NORESCO’s backlog only includes signed contracts, backlog did not, actually did continue to slip in the third quarter.

But, we believe higher energy prices provide a strong macroeconomic backdrop for NORESCO’s business and we are hopeful that that will translate into additional sales.

As everyone knows, we are in the midst of a review of strategic alternatives around our NORESCO investment.

And, in anticipation of your questions, we will not be able to provide an update on that review during this call.

Now, I would like to cover a few other items that we think are of interest to you.

First, as stated in the press release, in the third quarter, Equitable sold approximately 400,000 shares of Kerr-McGee at a price of $95.59 per share.

These transactions resulted in a gain of $19.4 million in the third quarter.

Subsequent to the end of the third quarter, the Company also sold our remaining approximately 700,000 shares of Kerr-McGee at an average price of $91.90.

And that sale resulted in a gain of $30 million.

But that gain will show up in the fourth quarter of this year.

Now that we no longer own any Kerr-McGee shares, we thought it would be interesting just to take a quick look back at our exit from the Gulf of Mexico EMP business.

When Equitable first decided to exit the Gulf business back in ’99, we were advised by investment bankers that we would receive approximately $140 million in cash if we ran an auction for these Gulf properties.

And while it was tempting to go that route and get the properties behind us, we were intrigued that at the time Equity Market Reserve multiples suggested nearly twice that valuation.

So, five years later and after a series of various transactions, Equitable ended up receiving cash proceeds nine different times totaling $650 million from that original Gulf investment.

The after tax IRR implied by those transactions compared with the cash sale alternative is nearly 43%.

On a not completely unrelated note, third quarter expenses related to the executive performance incentive programs was higher than expected due to the almost 15% increase in Equitable stock price in the third quarter.

The third quarter expense for these plans was $15.3 million.

Now, some of you may recall that during the second quarter earnings call, we estimated that these plans would have an expense of $15 million for the entire rest of 2005.

That estimate was based on the June 30th stock price and Equitable‘s relative rankings at that time.

We now estimate that we will experience approximately 9 million in additional expenses in the fourth quarter based on current assumptions.

Moving on, during the quarter we also completed two financial transactions.

In August we replaced our revolving credit facility, which would have expired in 2006 anyway, with a five-year facility that is subject to PUC approval.

This credit facility provides support for our commercial paper program, which is used primarily for working capital.

In addition to extending the tenor we increased the size of the facility from $500 million to $650 million to allow for higher working capital requirements brought on by higher natural gas prices.

We will touch on that more in just a minute.

Given our plans for investing such significant growth capital we also completed a second financial transaction late transaction late in the quarter.

The company issued $150 million of notes with a 5% coupon and a maturity date of October 2015, again subject to PUC approval.

There are two topics related to our hedging program that are worth noting.

First during the quarter we took advantage of high commodity prices to increase our hedge position by about 7 billion cubit feet annually, through the end of 2012.

You may have noticed in our press release, that the new hedges are in the form of collars.

That is somewhat of a departure as we have generally favored the use of swaps.

However, our internal analysis suggests that collars probably are a more effect means and swaps above hurdle rate economics on ramped up billing program.

As we proceed with aggressively increasing our drilling activity we may layer in more collars to lock in those returns.

Collars have the added benefits of one, providing some protection from cost inflation and secondarily they somewhat dampen margin requirements, which as been somewhat more relevant given the highly volatile gas price environment.

On that topic, our hedging contracts require that the company collects collateral when gas prices rise significantly.

The recent increase in natural gas prices has resulted in much higher margin balances.

At the end of the quarter we had almost $550 million on deposit in margin accounts.

The higher prices for natural gas also resulted in higher costs to purchase inventory on behalf of our utility customers.

Given those impacts of higher natural gas prices on our working capital, we will likely seek an additional increase in the size of the revolver.

The new facility contains an accordion feature, which means that on a one-time basis we can request that the lenders commit the increase at their discretion to an aggregate amount of up to $1 billion .

To wrap up, just a brief update on the balance sheet.

When our 10Q is released you will see a commercial paper balance of about $438 million .

As I have mentioned in the past there is also an asset in our accounts receivable balance with the cash margin accounts.

Although that cash is not currently available to us it is interest bearing and therefore has very little cost of carry.

We tend to net the asset and the liability to determine our short term debt position.

The $550 million in these accounts at quarter’s end, suggests the current net short-term net position of a negative -$112 million to put more simply, a net cash position of $112 million.

That concludes my comments and I will turn the call back over to Pat Kane.

Thank you Phil.

That concludes the comments portion of the call.

Alexa, can we please now open the call up for questions?

[OPERATOR INSTRUCTIONS] Thank you.

Our first question is coming from Anatol Feygin with Banc of America Securities.

Couple of quick questions.

First of all Phil, can you give us a sense of these 125 million letters of intent of NORESCO, what has been historically the conversion rate?

Or something along those lines of LOIs into backlog.

Anatol, this is Murray.

It is not 100%.

I do not think that there is a generalization we could make on that.

I mean, all I can say is that we are pretty encouraged by that -- that early indicator of money that will get into backlog.

I might make a more general statement though Anatol, and I think this will get to your question, perhaps more directly.

At this energy crisis environment, why are not more contracts being signed up?

And that of course is actually of course signed up, and that has been a concern.

I think the best reason that I can think of for that is that, first of all we have a lot with the Federal Government as you know.

A; they have been distracted with Katrina over the last three or four months.

And B; it has only been since this recent re-authorization of the energy services contract through the energy bill that I think the people in the government are confident enough that this program is going to be going on for a while.

That they have been willing to start re-engaging us on these matters.

And so I don’t have any apologies for the lower signed backlog, but I just wanted to give you some idea that at least activity is ramping up here.

But I can not give you the conversion rate yet precisely.

Sorry.

Thanks Murray, have you seen an acceleration there?

Yes, yes, yes.

Since the President mentioned that the Federal Government needs to become more energy efficient.

Yes, yes, yes.

It is just now that, that desire, that strategy has to get – we do not put it into backlog unless it is signed up.

It is not a deal until it is a deal.

But all indications are that these should start ramping up pretty aggressively.

As you recall Anatol, most of the energy savings that the rest will achieve are in electricity statements rather than natural gas or oil savings.

And of course if electricity prices spiked up it is kind of – they are lagging natural gas.

I think that we all know if we can see it starting and it is, and we can see it that more increases are on the way.

But since, as I look in the rearview mirror electricity prices didn’t increased more than natural gas prices, did not respond as aggressive a way as you may have expected --

Makes sense, thanks Dave.

I do not want to belay this question any more than I should, it is just that keep in mind, the government does not look at investments with return on capital.

As on a side, we are capitalistic country but our government does not look at capital as an investment.

They look at this as an expense.

And that was what the real issue was, was that they were affecting these programs.

It is silly, but that is the way it is.

But I think the new extension of the bill the 10-year term that is going to make it, it is going to facilitate more contracts.

Thanks Murray.

You sounded more upbeat to your point in the opening remarks on the progress in supply the goal of getting to this 440 well level 550 next year.

Any updates on what you think kind of the right number or what the maximum number may be of 900 a couple years out looks like?

Is it equally achievable…

See I do not know what the max is, suffice to say at this point I am searching for that and you know you, are right I am pretty upbeat about this and I am normally not so, so you should take that as a sign, that is different for me to be as upbeat as I am.

But you know this is a great opportunity for our shareholders.

We are going to do everything we can to maximize the value of that asset.

Whether we drill all the wells, others join us in drilling the wells, whatever is the most value, we’re going to extract the value from this 3 million acres as quickly as we possibly can.

And I think we are going to get there.

Can you comment on some of the recent activities.

Do you think that Chesapeake’s involvement now in Appalachia is a positive for the region?

Any thoughts on some of the deep wells that have been spouted midyear and kind of how those are looking and whether you’re seeing some more interest in perhaps, farm ends or any other activity in Trenton Black River.

Well, I think you know, Chesapeake’s entry and others who wished to enter and didn’t win that property certainly, I do not know, verifies I guess what my long term feeling has been.

That is that the Appalachian is a great province for, you know, as a natural gas province for all the reasons that we have talked about on a number of occasions.

So, I did not really need Chesapeake’s validation for that I was quite confident that my opinion of this basin was correct.

So, from that standpoint, no.

On the other hand, it might be helpful to draw lets say more service companies in, to the extent that activity will generally ramp up.

You know, maybe we will, there have been a lot of local providers of services here and perhaps with increased activity levels, we will be able to draw in some of the more national players for drilling and services and stuff like that.

And I think eventually with a little bit of lag we probably we will have a better suite or a better fleet of rigs and providers in Appalachians, so to that extent I am hopeful that their presence will be helpful.

It will make, incidentally, all the gathering investment a lot more valuable.

Because people need to get this gas out of the basin.

And as you know, I am very bullish on the infrastructure.

And you are on the ‘05 CapEx increase that you mentioned to tee up the ‘06 program.

Can you give us a sense of where that is directed?

Really primarily, it is directed at this point to making sure we have capacity for our wells to produce gas that gets to market.

I mean, that is the number one priority.

But, as I have mentioned before, increasingly, I am directing our people to make sure that infrastructure serves not only our wells but other wells -- other people’s wells also.

So, but the number one objective is to make sure that our gas gets to market.

Great.

Thanks Murray.

Thanks everyone.

Thank you.

Our next question is coming from Faisel Khan with Citigroup.

Good morning.

On the gathering side sequentially, quarter-over-quarter, the gathering rates were up and were up year-over-year.

If I remember right, a lot of that has to do with the gathering system charging the exploration and production -- of the production systems higher rates.

What about the third party rates?

Are those any higher than they were last quarter, or the year before?

Yes, I didn’t break that out in this particular note and I am not so sure that we speak to that in the Q either, so, but the answer to your question is yes.

Okay, and are they up significantly, or is it…

Yes.

Okay.

The entrance of Chesapeake in the basin, and them pushing -- putting the capital in the market.

Does that cause any concern for precaution placed in the basin too?

Clearly you have had a lot of local shops providing the services and that kind of gives you a little bit more stability in the rest of the nation.

So that would --

Well, I guess it would depend a little bit on where you are coming from on that, that measure.

As you know, and as we have talked about a lot, the Equitable’s fully loaded cost structure here recognizing first of all the present cash cost on a F & D basis, they are about, let us say a $1.10 or so.

Plus our operating costs which are all in including charges for me, are about a buck.

So you are talking about cost structure in the $2 range, cash costs.

You know, Equitable can withstand some considerable pressure --

Right.

On those, on these external costs.

And they are going up.

Certainly we are working with bidding and everything else to try to get them down.

But we have the capacity to be very profitable, even if prices come down substantially from where they are.

You know, other companies aren’t in that position and that is why we think that, whereas we are somewhat concerned about the inflation, we are working to procure better.

My opinion is that any of the pressures are relatively short-term and I mean, usually the supply in this business meets the demand and then you get over capacity and prices will start coming back down.

Steel for example has sort of hit the wall, it is coming back down.

That is a positive.

Okay.

So, I am not all that torqued off about it.

I mean I do not like -- as usual we are going to maintain discipline on this, but I am not that threatened and as a matter of fact, in a lot of ways significant price drop is pretty darn good for Equitable.

And it may be good in terms of our ability to take advantage people that are weaker when prices go down.

Do not get me wrong.

High prices are good for us.

Right.

But for a long-term, from a long-term growth perspective we are positioned pretty well.

And has your view on the long-term price of the commodity changed at all or is still is still kind of in that $4.50 to $5.00 range in the long run?

You know, I am the absolute last one you should ask about gas prices.

I am so wrong, or I have been so wrong on that that it is -- I do not qualify as an expert.

My only -- all along though, my only main issue has been to make sure that with an asset as long-lived as Appalachia, that the long-term cost structure is sufficient to withstand a long-term gas price, and you are right.

I still think $3.50, $4.00 is sort of a pretty good long-term price for this commodity.

And that is how we are running the business to make sure it is profitable at those levels.

But I have no idea what gas prices are going to be.

I am out of the forecasting business.

I would like to mention something that Phil Conti mentioned in his remarks.

To the extent that there are opportunities, development opportunities that we have, that require higher gas price than that our attitude is, the best thing for us to do is to pursue those opportunities, pursue opportunities that make sense at current gas prices.

And if we have any discomfort about gas prices, we can always enter into swaps or collars to make sure we have an acceptable hurdle rate on the, we need our hurdle rate returns on the, on the development.

We certainly are not going to slow down our development process because of any views on gas prices currently.

Okay.

And just looking at the operating income amount for supply X gathering, even if I plug in a 950 NYMEX gas price number, that the operating results seem to be higher.

I was just trying to figure out, what was the -- a couple of questions there.

What was the average etched, well, un-etched gas price you realized?

Your lifting cost seemed to be down sequentially and if I understand production taxes was it is based on a NYMEX price, not your realized price with the hedges.

Yeah, that is only part of what production taxes are.

Production taxes also include property taxes, which are on a one-year lag basically in evaluation.

Oh, I see.

That value.

So it is certainly fair to say that production taxes do move, it is certainly fair to say that production taxes move up with gas prices, but some of it is, in some cases they move up just as gas prices move up.

In other cases it has lagged by as much as a year.

Okay.

So that is maybe one of the reasons that you can’t, it is hard to draw a, kind of a straight line between gas prices and production taxes.

But your general conclusion is correct.

That when gas prices move up, production taxes move up.

Okay.

I will add to the operating part.

I think Phil is trying to address that in his comments a bit and I think what he said was he cautioned us to look at the absolute quarterly unit cost as an indicator of the future.

Yes, they are down in the third quarter, but I think we’re suggesting that maybe you look at the full year to date unit operating costs at this point is more of, kind of an ongoing, at this point anyway, ongoing cost structure number.

Okay.

If that is helpful.

Yeah, that is.

And the pipeline property income used to be just a little bit lower.

I know you had a large smug of capacity after re-contracting.

But you also, your marketing operating incomes seems to, your marketing results seem to be up substantially also.

Yeah, and I think as I have said before, I think those are fairly opportunistic revenues that we are able to take advantage of on occasion and I would not again make too much out of one quarter’s increase there.

I mean, I think looking at the last few years is more of sort of an indicator of kind of an ongoing trend there.

I would not make any projections off of a quarter-to-quarter increase on those.

Okay.

Fair enough.

Just as, just as a suggestion.

Okay.

Thank you.

Thank you.

Our next question is coming from Sam [Rothwell] with Wachovia Securities.

I think you were, we were just starting to touch on this in the last question, but as you look at the relationship, or the basis where you are versus NYMEX, can you maybe comment a little bit more on how, you know, how that dynamic changes, particularly as we come into winter, and you guys being closer to the market?

And secondly, given some of your bullishness on infrastructure, how do you think your efforts there might be able to change that dynamic?

I will take a stab Sam.

I am focusing on your question on basis first of all because obviously that is an issue.

And as you know, one of the reasons that we have been very bullish on Appalachia is because of the relative lack of volatility generally on that basis number.

Right.

However, I would, I need to tell you that when capacity, infrastructure capacity is tight, you know, and we haven’t been able to secure a long-term contract for capacity to take that gas away from the basin, on a day-to-day basis, it is possible to sell at under the NYMEX slightly, but not in a dramatically lower way.

So your point though is, and I think it is something that we are very interested in, is that the more capacity there is out there, the more likely this gas is going to get sold and, you know, at or close to a zero basis number to the NYMEX.

And to the extent -- people are still shut in the basin.

I mean there is a lot of gas shut in.

So, that should all stimulate -- first of all, having that backlog of gas that is trapped tends to put a damper on the day market for sales and therefore, the producers are starting to wake up to the need to secure firm capacity for their gas.

That is kind of new for Appalachia, because for so long the capacity was pretty loose.

And so it is getting pretty tight now.

And that is really driving our desire to invest more in that business -- because as the value proposition for the producers now, therefore they are willing to sign up for capacity and they are in a very positive dynamic.

Right and in the, as you look into the winter months, does that, as we generally get tight our here on the East Coast, does that relationship to NYMEX change appreciatively --

It gets better.

I would expect it to get substantially better.

There is a practical limitation as to how much better, because given the capacity considering what is coming out of there right now.

That is correct, but it does get much better.

Obviously because there is the strong usage.

We’re not all trying to get gas into a storage field somewhere.

You know, so it helps in the winter and it hurts a little in the summer.

The thing that has changed in the last couple years is that the delta between the help and the hurt from winter to summer is a little broader in Appalachia than it used to be.

But no where near where it is in other places of the country.

You are talking pennies or a dime, you are not talking about dimes or dollars.

Got it.

Okay, thanks a lot.

Thank you, our next question is coming from Rebecca Followill from Howard Weil, Analyst.

Hey, I hate to bring this up again just because I missed the beginning.

I may have missed this.

Murray you talked about you wanted to invest in more infrastructure.

Does this mean that you are kind of dusting off the big pipeline projects that you proposed in the Appalachian areas?

Well we have had a number of projects over the years that we have thought about.

I do not know which big project you are talking about.

You talked about at some point, wanting to build a pipeline out of there and then it kind of died.

I mean, did you propose a major pipeline or is it more compression gathering, can you be more specific?

Not really.

Okay.

At this point I think it would suffice to say that I think if there is a big project we want to do it.

Let me be a little more specific than that.

We are not likely to be interested in inter-state pipelines.

What we are interested in though, is in gathering infrastructure.

Okay.

In the likelihood that this is going to be a, that we are interested in building a thousand-mile pipeline, is probably zero.

Okay.

On the other hand, 50, 60 miles here, 80 miles there.

Lots of compression, there may be come processing, storage.

All of those things that facilitate people getting gas out of that basin.

Yes we are interested in all of that.

But I think that it is mostly going to be singles and double rather than any particular home run kind of an investment.

Okay, perfect, thank you.

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