EQT Corp (EQT) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

At this time, I would like to welcome everyone to the Equitable Resources year-end 2005 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

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

Sir, you may begin your conference.

Good morning, everyone, and thank you for participating in Equitable's year-end 2005 earnings conference call.

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

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

Phil will review the 2005 financial results that were released this morning.

Then Murry will provide comments regarding Equitable's 2005 performance and future prospects.

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

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; forecasted capital expenditures, including the projected well drilling program and a new infrastructure project; the Company's long-term compensation defined benefit obligations and operational matters.

Finally, 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 10-K, our 2005 10-Q's as well as on our website.

Before turning the call over to Phil, I would like to encourage you to participate in our 2006 analyst conference on February 24th at 9 AM in New York City.

This conference will also be webcast on our website live.

Now, I would like to turn the call over to Phil Conti.

Thanks, Pat.

Good morning, everyone.

Thanks for joining us this morning.

Earlier today, Equitable Resources announced 2005 annual earnings per diluted share or EPS of $2.10.

That compares with earnings per share of $2.22 in 2004.

For the fourth quarter, the Company reported EPS of $0.59 compared to fourth-quarter 2004 EPS of $0.35.

Several non-operational factors impacted fourth-quarter and full-year results in both years.

You are familiar by now with those 2004 items and also with the items that were discussed in the first three quarters of 2005.

The largest of those items in dollar terms involved the merger of Westport with Kerr-McGee in 2004 and the subsequent series of transactions to sell our stake in that Company.

As we discussed on the third-quarter conference call, the final KMG-related transaction occurred early in the fourth quarter of '05 and resulted in a $30 million gain.

There were also several smaller items impacting both years, both positive and negative to earnings, that I will remind you of throughout my comments today.

A fourth-quarter 2005 item that we have not discussed was our decision to sell NORESCO.

That decision resulted and a charge in the quarter and a reclassification of the NORESCO business as discontinued operations.

As you saw in the release this morning, Equitable recorded a loss from discontinued operations in the fourth quarter of $7.2 million and income for the year of $1.5 million.

I will discuss that topic in greater detail, as well as a couple of other topics after briefly reviewing full-year results for our two remaining business units.

First, Equitable Utilities -- Utilities had operating income of $98.3 million for 2005, compared with $108.1 million for '04, for a 9% decrease.

The 2005 results included $16 million in settlement charges related to our pension benefits plan, as well as a $3.8 million charge related to our previously discussed office move.

About $2 million of the pension charges were taken in the fourth quarter.

Net of those non-operational charges, Utilities' operating income was up about $10 million for the year.

2005 net revenues at Utilities increased $10.7 million or 4.4% higher than the previous year, although distribution net revenues were about 1.4% lower.

Even though weather was 3.4% colder, as measured by heating degree days, the use per heating degree day was down year over year, as you might expect in this high commodity price environment, where we are starting to see some signs of conservation.

Another factor contributing to the lower usage per degree day was the fact that, while heating degree days were higher for the entire year in '05, in the primary heating months of December, January and February they were actually more than 4% lower than '04.

On the plus side, higher commodity prices and volatility did provide significant opportunities for our marketing group to leverage our storage and commercial assets.

Marketing net revenues were 50% higher than in 2004, more than offsetting the lower distribution net revenues.

Utilities' expenses were $20.5 million higher than '04, and the biggest reason for the increase in expense was the $16 million pension settlement charge I just mentioned, which primarily resulted from the conversion of pension benefits of 229 primarily represented employees to a defined contribution plan from a defined benefit plan.

The settlement served to reduce shareholder exposure on ongoing defined benefit obligation, which has been our objective for a long time.

As discussed in previous quarters, Equitable also consolidated our Pittsburgh-based workforce into a single office building last year.

The Company's total consolidated charges associated with that move were $7.8 million for '05.

And, as I alluded to, Equitable Utilities recognized $3.8 million of that total.

Certain operating expenses were also up during the year, including employee benefit and other employee-related costs, which were $3.1 million higher than in 2004.

In addition, depreciation, depletion and amortization or DD&A expense for the year was a little over $2 million higher, primarily due to our recent stepped-up investment in mainline replacement and automated meter reading.

We were able to substantially offset those cost increases with a $4.7 million reduction in bad debt expense for the year.

The reduction in bad debt expense was due to our increased effectiveness in the collections area, and that progress was reflected in a lower accrual rate for 2005 and a reversal of bad debt reserves during the year.

Collections improved in 2005 as a result of a couple of key factors.

First, our customer information system, which was installed in 2004, now provides the functionality needed to segment and better understand our customer base and payment patterns.

In addition, we benefited in 2005 from legislation in Pennsylvania which allows winter terminations for customers above a certain income level.

High natural gas prices, resulting in higher average utility bills, are partially offsetting our improved collections efforts on an absolute dollar basis, as evidenced by a bad debt charge in the fourth quarter that was about $1.3 million higher than in the fourth quarter of '04.

We intend to provide a detailed update of our efforts to manage this industry challenge at our conference next month, and I think Murry will make a few comments about this topic in his comments today, as well.

Equitable Supply, the production and gathering segment, recorded operating income of $293.6 million in 2005, which is 29% higher than in '04.

Production revenues increased $74.3 million or 23.5%.

That increase was mostly due to the $0.71 per Mcf increased in Supply's effective wellhead price and a 9% increase in annual sales volumes.

Gathering revenues also increased $24.5 million for the year, due to a 40% higher increase in gathering rates.

The effective gas price benefited from the combination of higher NYNEX prices on unhedged volumes, higher averaged hedge prices and higher basis, but was somewhat offset by the $10.6 million adjustment mentioned in the press release.

With regard to volumes, we sold 73.9 Bcf in 2005, which was ahead of our guidance of 73 Bcf.

We have previously mentioned the drag on volumes in 2005 from our slowdown in drilling during 2004, and you should note that by the end of 2005, our drilling activity ramped back up to previous rolling fourth-quarter levels on a net well basis.

With our plans to drill 550 wells in 2006 compared with the 455 wells drilled in 2005, we expect to see the results of this increasing activity in our sales volumes in 2006 and beyond.

And Murry will elaborate more on that in a few minutes.

Partially offsetting Supply's higher revenues was an increase in operating expenses of $23.4 million net of DD&A expense.

DD&A itself was also up $9.1 million for the year.

Production taxes, which are costs that are directly related to the price and volume increases, were $13.7 million higher in 2004, representing a full 59% of the increase in operating costs net of DD&A.

If everything else remained equal, we would expect production taxes to continue to trend higher in '06, due to the significant increase in market gas prices in 2005, which won't fully be reflected until '06 due to the natural lag in property taxes.

The remaining increase in operating costs is due to continued general oilfield inflation, which is also clearly linked to higher natural gas prices, as well as our increased activity level in the field.

As you think about 2006, you should know that we believe the average unit cost for LOE and gathering and compression expenses for the entire 2005 are more reflective of 2005 operations than the somewhat lower run rates in the second half of the year.

Expenses at Supply are generally lumpy and tended to run higher in the first half of 2005, due to timing of compressor maintenance projects, weather, et cetera.

DD&A expense was obviously higher due to our increasing produced volumes, as well as our stepped-up investment in drilling and infrastructure.

For those same reasons, we expect DD&A expenses to also continue to trend higher in 2006.

A few comments about NORESCO.

As you know, early in 2005, we hired an investment bank to assist us in exploring strategic alternatives for our NORESCO investment.

At the conclusion of that process, we decided to sell NORESCO unit for $82 million and reinvest the proceeds in our core businesses.

The sale resulted in reclassifying NORESCO as discontinued operations.

As a result of the reclassification, current and prior results of NORESCO were reformatted to conform to GAAP.

In the fourth quarter, NORESCO recorded net costs related to the sale of $18.7 million.

Also during the fourth quarter, NORESCO recorded a $6.4 million tax benefit from reorganizing our international assets and an additional reserve reversal on international investments of $2.7 million in the quarter, all net of taxes.

The net impact of those three items was a negative $9.6 million after tax, and is included in the $7.2 million loss from discontinued operations for the fourth quarter.

For the full year, income from discontinued operations was $1.5 million, and if you take the $6.4 million tax benefit and total reserve reversals associated with the international investments for the entire year of $7.8 million after tax, and net them against the fourth-quarter effects of the sale, it suggests that -- again, net of tax -- NORESCO made about $6 million from its core business in 2005.

I would remind you that when comparing NORESCO and consolidated results to 2004, NORESCO did record a $24 million after-tax impairment last year associated with the international investments.

There are several other topics that we would like to cover that should allow you to make more meaningful comparisons of our year-over-year results.

First, Kerr-McGee -- during 2005, Equitable sold its remaining stake in Kerr-McGee, which was about 7 million shares, via a series of transactions.

These transactions resulted in the net pre-tax gain of $30 million in the fourth quarter that I mentioned upfront and $110.3 million total for the full year.

During 2004, Equitable recognized a net pre-tax gain of $202 million as a result of the closing of the merger between Westport and Kerr-McGee, as well as various other Kerr-McGee-related transactions in '04.

Moving on to the executive compensation, in 2005, we recorded compensation expenses associated with our executive performance incentive plans -- or EPIPs, as we call them -- of $43.8 million compared with 2004 EPIP expenses of $26.2 million.

That $17.6 million increase was primarily driven by the 21% growth in Equitable's stock price in 2005, as well as changes in our relative rankings among the group we are compared to in those plans.

It is important to note that during 2005, we were accruing for two of those plans, one of which paid out at the end of the year.

The $43.8 million in '05 expenses was split approximately evenly between those two plans.

Moving into 2006, there is only one EPIP plan in effect.

And because that plan runs through the end of 2008, we have no plans to implement another long-term compensation plan for executives through at least the end of 2007 and possibly longer.

As we have discussed in the past, Equitable has been ahead of the trend to provide more transparency in our earnings with respect to executive compensation.

It seems to us likely that new disclosure requirements on executive compensation -- and there certainly seems to be a lot of press on that topic recently -- will make it easier for investors to compare Equitable's compensation costs with other companies going forward.

A brief comment on income taxes -- as mentioned in this morning's earnings release, we also incurred a $15.3 million tax loss disallowance in '05, of which $5 million was recorded in the fourth quarter.

The disallowance was attributable to the payout of one of the two EPIPs as I just described, and as we discussed in previous quarters, the Company's decision to terminate it's deferred compensation plans based on a review of the changes necessary to respond to the American Job Creation Act of 2004.

The disallowance did result in an effective tax rate for 2005 that is somewhat higher than we have typically experienced.

You may have seen the article on the front page of the Wall Street Journal yesterday regarding Congress' recent focus on the deferred executive compensation plans.

Included in that article right on the front page was a bar chart showing that about 90% of the 1,000 largest US companies currently have such plans.

And while it is not clear yet where Congress will head with that, we just wanted to remind you that the action we took in 2005 to terminate those plans puts us among the 10% of companies that do not have such plans.

A comment on the pension -- I already mentioned the $16 million of pension-related charges that were included in Utilities' expenses in 2005.

During the fourth quarter of 2004, the Company incurred a charge of $13.4 million related to pension restructuring.

That charge was at the headquarters level and did not impact Utilities' results in 2004.

To conclude, just a couple of non-earnings-related items.

As we alluded to on the last call, during the fourth quarter we did increase the size of our revolving credit facility from $650 million to $1 billion, which provides us with the additional liquidity to meet our working capital requirements in this high gas price environment.

A brief update on the balance sheet -- and I'll remind you these numbers are being finalized as part of our ongoing annual audit and still subject to change.

But we do estimate that at 12-31-05, our commercial paper balance was $365 million, and our long-term debt was $766 million.

We also had $75 million in cash on hand and $318 million in margin accounts, with our hedging counterparties at year end.

The result of all that is that our net short-term debt position was negative -- that is, we had cash on hand and cash in margin accounts at year end that was $28 million greater than our short-term debt obligations.

One final comment on the balance sheet -- because of the NORESCO sale, we will no longer have project financing obligations that we know some folks considered in their leverage calculations on Equitable.

Those obligations tended to run about $100 million in the past few years; and, again, they won't be on our balance sheet any longer.

And with that, I'll turn the call over to Murry Gerber.

Thanks, Phil.

A lot of detail there, and I hope that helps you all get your models in shape.

I particularly want to comment just briefly on the last couple matters that Phil mentioned.

With respect to deferred comp and that sort of thing and pensions, we are taking the positions that we're trying to recognize now and deal with now all of those obligations that could -- and has, for some companies -- provided long-term legacy obligations in the future.

And we just don't want to do that for Equitable.

Operationally, we made a lot of progress in 2005, and I'm very pleased with the progress that we did make.

We are having an analyst meeting in New York in the latter part of February.

I think it's February 24th.

Is that the right day, Pat?

February 24th?

And so I'm just going to hit a couple of the high points, but we are going to get into a lot more detail at that meeting than we can do now.

But just to reflect on a little bit of progress, in Supply we drilled 455 wells versus our original plan of 440;

I think that was an outstanding achievement.

We sold a bit more than we have targeted, 73.9 versus 73.

And, as Phil mentioned, our gathering rates were up significantly, in accordance with our strategy to assure that we were getting proper returns on that gathering and midstream business.

In Utility, we did meet our goal, our value driver, of reducing our class two leaks, our leak balance, to zero.

We did that, and we did make significant improvements in collecting money, the effects of which are somewhat muted by the high price.

But just as a point of fact, our delinquency percent, 12-31-04 versus 12-31-05, is down from 30% to 22%.

So that's a significant achievement.

We did sell NORESCO, as you know, and we monetized KMG.

For 2006, we're providing some full-year guidance on several financial and operating drivers.

First of all, EPS -- we are guiding you to $1.90 to $2.00 per share at current NYNEX strip.

I will tell you that this guidance incorporates an assumption of a normalized market with respect to our marketing revenues.

And that is our normal practice; we don't forecast extraordinary market conditions in our marketing revenues.

So I just wanted to let you know that.

We are assuming a more normalized market condition in that $1.90 to $2.00.

Also, we are guiding you to sales volumes in the 76 to 77 Bcfe range.

Investment in support of organic growth will be up sharply in 2006, reflecting our intent to expand both the Supply business, including the wells, and the associated midstream activities.

We plan to drill 550 gross wells this year.

Of interest to some, perhaps, we also plan to commit 4 million to horizontal drilling, which will either be three or four wells in the Devonian Shales and in the coal measures in Virginia.

In addition to the drilling opportunity for Equitable, the increased general activity in Appalachia is providing a potentially significant opportunity for us to grow our midstream support businesses, that being gathering and pipeline, compression, processing and storage.

This investment supports our drilling program, and it supports the drilling program of others around us.

Case in point -- as many of you have read, we have begun the process with FERC to obtain a certificate to construct what we refer to as The Big Sandy Pipeline in Kentucky.

This pipeline is 60 miles long.

Its goal is to increase takeaway capacity and increase delivery flexibility out of Appalachia for us and for other third parties.

And just the shorthand is we are constructing this pipeline to provide access from East Kentucky to El Paso's TGPL line, and it also relieves a bottleneck on Columbia transmission.

The estimated cost of this project is between 80 and $85 million.

It's a 20-inch diameter pipe.

Initial capacity is 70,000 dekatherms per day, which is potentially expandable with more compression to 280,000 dekatherms per day.

We expect to put it in service in the latter part of 2007.

Subscriptions to the new capacity are fairly brisk.

We have signed up, of course, for our capacity.

We have got other third parties also signed up, and this is just one tangible and extent example of the midstream opportunity we see.

In total, we estimate capital for 2006 CapEx, capital expenditures, to be just under $0.5 billion.

And I'll remind investors that at Equitable, our mantra has been that you can't spend money unless you exceed your cost of capital.

And we believe the returns for these investments will in fact comfortably exceed our cost of capital when all the accounting is done after the investment is made.

We will discuss much more about our growth strategy in February, and the topics that we will cover will include drilling plans, of course, giving you '06 numbers now.

But we'll talk about the future.

We will talk more about midstream activities, more details on Big Sandy and other projects we have planned in the midstream area.

We will, of course, discuss our utility operations and our desire to improve the efficiency of that unit and, of course, our 2005 reserve report, which I know is of interest to many of you.

So in short, Equitable had a very good '05.

We are expecting to have an even better '06, and we are executing on plan with our organic growth strategy.

And with that, I will turn it over to Pat, and I think we'll take some questions.

That concludes the comments portion of the call.

Can we please now open the call up for questions?

(OPERATOR INSTRUCTIONS).

Anatol Feygin.

Can you, at this point, segregate what is conservation in the Utility versus what is warm weather?

Do you guys have a sense for how Pittsburgh is reacting to high prices?

It's a little hard to tell exactly what's going on.

I think our sense is that we are seeing a little bit of conservation, maybe about 2%, roughly.

But I think we're still working through exactly what's going on with the usage degree day.

And we will talk more about that at the conference at the end of February.

I will say that the AMR we're putting in is giving us a lot more data to really analyze this a bit better.

But we'll talk about this in February.

In terms of working capital, as we have seen commodity prices moderate and the strip come in a little bit, can you give us a sense for how your collateral requirements have changed?

I'm assuming you are not margin dollar for dollar.

So has that released some monies back to you?

Even the numbers at the end of the year, I think, were down a little bit.

And obviously, since then, our margin requirements have gone down.

I don't have the exact number as of, say, last night; but as of last night, it would have been lower than the numbers I provided in my comments, the requirements on those margin accounts.

Is it hundreds of millions, or is it tens of millions at this point?

More like tens of millions.

I think I said 318 million at the end of the year, and it's down from there; it's certainly not zero because, as you know, our hedge prices are still a fair amount lower than where the market is right now, even with the recent reduction in the market.

Sure.

Less lower by the minute, though.

Yes, well, that's true.

And Murry, can you expand a little bit on CapEx?

Obviously, we have been expecting increased activity on the drilling side.

But the biggest increase year over year is actually in infrastructure, this 222 million number that's more than three times the '05 CapEx in midstream and infrastructure.

I'm assuming that includes the bulk of the Big Sandy project.

But what else are you guys spending a lot of money on?

That's a good question.

It does include the Big Sandy project.

It does include some other large projects that we will talk about.

But in addition -- and this is again something we will try to get some more detail around in February -- we are expanding the installation of our infrastructure ahead of the drilling.

In the past, Equitable has taken kind of a view that we should have a just-in-time approach with respect to infrastructure and drilling -- that is to say, when the well is drilled, we want the infrastructure to be there, sort of Johnny-on-the-spot, so that the well can get on production.

We think that might not be the best way to maximize value.

And if drilling, in some cases, gets ahead of infrastructure or is infrastructure gets ahead of drilling, that's probably a better way to make more money.

At least, that's what we're thinking.

So in our plans is a significant amount of money to expand infrastructure to support our drilling and our future drilling plans.

And again, I will get into the details of that in February.

I guess the corollary to that, though, is that there will be slightly more of a lag in terms of returns, right?

Because you are not going to have all of the pipe filled right away.

Right.

We're trying to maximize PV, exactly.

But the exact timing may -- yes, so PV values are key.

We want to increase that, of course, obviously make access returns above the cost of capital on the individual investments.

But we are really focusing on maximizing PV, and you are quite right; there could be some lag because we're putting some more kit in earlier.

But then the anticipation is there will be more revenue and earnings down the road from that.

But it's a maximized PV strategy.

And as we think about this capital being employed, obviously, a lot of it is to support your own development plans, but third parties as well.

Is it kind of a two-thirds/one-third mix on the midstream side?

I'll tell you what.

Let's talk about that in February.

I haven't revealed that number, and I've got -- there's some other -- let's talk about that in February.

Let me just ask a follow-up, more generic question to that.

On the third-party side, are you going out and getting the commitments from the producers first?

Or is it your view that there's such a need for infrastructure and such an attractive basis that you don't need to take those precautionary steps?

I'll answer that in a general way, and we can, again, talk more in February.

One of the advantages at having all the wells that we have and all of the production that we have is that we can make commitments to infrastructure, wherein we can get most if not all of our return just from the gas that we produce.

In other words, we don't --

Understood.

Yes, you have to be in sort of a speculative mode.

So if that helps guide you, yes, we're strategically positioned to be able to make these investments because we've got stuff to back it up.

And the speculative aspect of these kinds of investments is relatively modest, in our view.

But we are getting commitments from (multiple speakers).

And on Big Sandy, as I mentioned, people are signing up.

Finally, people are signing up, and that's a good thing.

(OPERATOR INSTRUCTIONS).

Carl Kirst.

Murry, you'd made a comment about marketing and, certainly, the operating income in '05 was pretty strong, basically equal to your distribution.

When you say the $1.90 to $2.00 guidance assumes sort of a normalized marketing environment, are there some additional parameters you can put on that?

How would you characterize the volatility, say, for instance, in 2005, for the entire year, on average, if you will?

It has not been our practice, as you know, to try to incorporate -- for any number of reasons -- incorporate a lot of anticipated earnings from marketing.

But let me put it this way and see if it helps you.

In our 1.90 to $2.00, we are just -- and this is consistent with our normal planning process -- we've got about $0.05 less marketing margin in '06 than in '05.

So, in other words, we have not incorporated $0.05.

If 2006 turns out exactly the way 2005 had occurred, we would make $0.05 more, if that makes it clear to you.

That is helpful, actually.

One other question, if I could, and understand the reserve reports coming out for the February 24th meeting.

But presumably, there's no reason to think that organic F&D is straying too much from the $1.00, $1.05 range?

Or is that something --?

Well, those are two different questions.

On the reserve report, of course, the reserves in there will be calculated on what is F&D and what we think is profitable.

As far as ongoing F&D is concerned, you can see -- there is continued creep, and Phil mentioned that.

There will be continued creep in overall DD&A.

My view is, as it has been for a number of years, that our F&D continues to be extremely competitive, inclusive of all costs -- LOE costs and [G&C], that even if gas prices fall well below $4.00, we still earn the cost of capital.

So I don't want to give you an exact number.

I will, in February.

But I'm not concerned about the Company not earning a good return on these investments, if that helps you.

It's not the exact number you wanted, I realize.

I can wait until February, you know.

There's continued creep, but I'm not worried about it.

How about that?

(OPERATOR INSTRUCTIONS).

There appear to be no further questions.

That concludes today's call.

This call will be replayed for a seven-day period, beginning at approximately 1:30 PM Eastern time today.

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

You will need a confirmation code to access the call; that number is 561-1164.

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

Thanks, everyone, for participating.

This concludes today's Equitable Resources year-end 2005 earnings conference call.

You may now disconnect.