EQT Corp (EQT) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. I will be your conference facilitator today. At this time, I would like to welcome everyone to the Equitable Resources first quarter earnings conference call. [OPERATOR INSTRUCTIONS]

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

Thanks. Good morning everyone and thank you for participating in Equitable's first quarter 2006 earnings conference call. With me today are Murry Gerber, Chairman, President, and Chief Executive Officer, Dave Porges, Vice Chairman and Executive Vice President of Finance and Administration, and Phil Conti, Vice President and Chief Financial Officer. In just a moment, Phil will review the first quarter's financial results that were released this morning, and Murry will update you on the status of the Peoples and Hope Gas Acquisition, the Big Sandy pipeline project and our unconventional drilling efforts. Following our prepared 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 relating to such matters as the anticipated earnings per share, our pending acquisitions of Peoples and Hope, the forecasted drilling program, and sales volume at the supply 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 2005 Form 10-K, the 2006 first quarter 10-Q that will be released later today, as well as on our website.

I'd now like to turn the call over to Phil Conti.

Thanks, Pat, and good morning, everyone. As you saw in the press release this morning, Equitable announced a first quarter 2006 earnings per diluted shire of $0.59. That compares with earnings per share of $0.60 in 2005 on a continuing operations basis or, in other words, excluding NORESCO. In addition to the announcement of our purchase agreement to acquire Peoples and Hope Gas, which was clearly the highlight of the quarter, we would summarize the first quarters results as follows: First, unusually warm weather and lower usage per heating degree day had a significant impact on Utility net operating revenues and operating income; second, Equitrans received final approval for the settlement of our previously disclosed rate case, which had a positive impact on results in the quarter; and finally, we are off to a great start with regard to our ramped-up drilling program for 2006, which positions us for continued growth in sales volumes at Equitable Supply in '06 and beyond.

So, in summary, the Equitrans rate case offset the impact of warm weather at Utilities and Supply is on plan. Therefore, as you saw in today's press release, we are reiterating our EPS guidance of $1.90 to $2.00. I will discuss each of those items in my comments, starting with Equitable Utilities, which had operating income that was slightly down in the quarter at $16 million, versus $62.4 million in 2005. The high-level story at Utilities is basically that warmer weather and reduced customer usage resulted in significantly reduced distribution and commercial and industrial net operating revenue and operating income. But that reduction was substantially offset by income related to the settlement of the Equitrans rate case, increased revenues from our marketing business, and continued improvement in our collections efforts.

Distribution net operating revenues were $54.1 million, or 19% lower than the prior year, and the majority of that decrease, or $6.7 million was due to the reduced residential net revenues, as weather was 10% warmer than last year, and 13% warmer than the 30-year norm. January, which obviously is a key heating month, was actually 30% warmer than normal. In addition to lower residential through-put related to the warmer weather, use per heating degree day was also down year-over-year. In our view, the uncommon weather pattern makes it problematical and premature to extrapolate specific usage trends based on the first quarter. This is clearly an area that we will monitor closely, and will take into account as part of our overall regulatory strategy.

Commercial and industry net operating revenues of $16.1 million were also about $5.1 million lower than a year ago. [Spinning] for just a moment, lower heating demand by our commercial and industrial customers also reduced net operating revenues by about $1.2 million. Because a large portion of our CNI customers are schools, hospitals, universities, office building, et cetera,, we tend to have less process load than some utilities and, therefore, even our CNI revenues are very -- fairly weather sensitive. Also, net operating revenue on unregulated commodity sales to commercial and industrial customers was reported $30.6 million lower than the first quarter of 2005. About half of that decrease was actually earned, but reported in our marketing net revenues. The remaining $1.8 million decrease was erosion due to high inventory levels as we headed into the winter, followed by declining demand and commodity prices coincident with the warm weather in the quarter. In total, we estimate that warmer-than-normal weather and lower customer usage reduced our Utility operating income by about $8.5 to $9 million.

On a more positive note, higher commodity prices and volatility did provide some opportunities for our marketing group to leverage equitable storage and commercial assets. Net revenues from these commercial activities were about $4.1 million higher than in 2005. About $1.8 million of that increase was offset by lower margins from physical gas sales within the marketing business versus last year. As I mentioned up-front, the FERC approval of the Equitrans rate case settlement also add had a positive impact, adding a total of $9.2 million in net operating revenues at pipeline and marketing over the first quarter of 2005. Of that amount, as you see in the table in the press release, about $7 million was due to recognition of prior-period revenue that we had reserved, pending the ultimate rate case resolution. The rate case settlement also resulted in the recognition of $2.3 million of post-retirement benefit and rate case expenses, of which $1.7 million had previously been reserved, along with the increased revenues. So the net effect of the rate case on operating income in the quarter was about $6.9 million, $5.4 million of which was related to prior periods.

On a go-forward basis, we expect the rate case settlement will result in annual revenue increase of about $6 million, and an increase in annual operating income of about $3.2 million. Additional details on the settlement number in the 10-Q, which we will file later today. A Utilities operating expense highlight for the quarter, bad debt expense was $1.9 million lower than in the first quarter of 2005, despite the fact that customer bills were up 15%. The reduction in bad debt expense was due to continued focus and improvement in our collections effectiveness, as well as programs implemented to assist needy customers in heating their homes this past winter. As a result, we lowered the rate at which we accrue bad expense to 2.3% of residential revenues, compared with 4% in the first quarter of 2005.

Moving on to Equitable Supply, the production and gathering segment recorded operating income of $72 million in the first quarter, which was 10% higher than the same quarter in '05. That increase was primarily due to the $0.35 per thousand standard cubic foot increase in Supplies effective well head price. Some of the increase from higher natural gas prices was offset by a $2.8 million increase in production taxes, which, as you all are aware, are directly related to the price of natural gas. Gathering revenues also increased $2.8 million for the quarter, as higher gathering rates offset lower gathered volumes. With regard to volumes, we sold 18.3 million Bcf equivalent in the quarter, basically unchanged from last year. Production from new wells offset the production from the Snowshoe and Ohio wells that we sold last May, as well as the natural decline from the remaining wells.

Put another way, sales were actually up about 0.9 Bcf in the quarter, or almost 5% from properties that we owned last year that we still own this year. We are currently on track to reach our sales forecast of the year of between 76 and 77 Bcf equivalent. During the quarter, the Company drilled 133 wells, compared with 66 wells drilled in 2005, and we are on track to drill at least 550 wells this year. Net of the impact from higher production taxes, Supply’s operating expenses were slightly lower in the quarter. The average unit cost for LOE was actually lower than the first quarter of 2005, when we experienced an unusually high unit rate. The unit LOE rate for the first quarter '06 wars about $0.01 lower than the full-year 2005 average rate of about $0.29 per thousand standard cubic feet, which is our expected rate for the full-year 2006. DD&A expense continues to trend higher, due to our stepped up investment in drilling and infrastructure. A final note on Supply. Since the analysts conference in February, we have increased our hedge position by approximately ten Bcf per year for the years 2009 through 2013. That is consistent with our hedging policy, intended to assure a return above the cost of capital on our expanded drilling program.

A quick note on People's Gas and Hope Gas. We are actively working on the acquisition of those LDCs, which we announced in March. Murry will elaborate on the progress toward integration in his comments. I would like to, however, point out that we continue to evaluate our options to fund this acquisition. As we told you in March, financing will likely be accomplished through a combination of debt equity and, potentially, asset sales. We may also consider issuing hybrid securities that have characteristics of both debt and equity as part of that mix, but only if we are convinced that they will get treated in such a way that we can reduce the amount of equity that we would issue and lower the overall cost of capital for the acquisition. I cannot give you more specifics on our financing plans at this time. As you can imagine, we are working closely with the rating agencies, as we develop our final plan, and we will keep you informed of our progress toward an ultimate financing plan, as well as any acquisition related expenses, as the year progresses.

Just a quick update on the balance sheet at 3-31-06, which you'll see in the Q later today. Our commercial paper balance will be $67 million, and our long-term debt was $766 million. We also had $5 million in cash on hand and $186 million in margin accounts with our hedge, which was down $132 million from the end of '05, due to lower natural gas prices across the curve. The result of all of that is that our net short-term debt position was actually a cash-cash position of $124 million.

With that I'll turn the call over to Murry.

Thanks, Phil. This morning I'll just spend a couple of minutes updating you on progress we're making on growth initiatives and drilling mid-stream expansion, and our recently announced LDC acquisition. First of all, on drilling, conventional first. As Phil mentioned, at this point, our drilling is well ahead of last year's pace. Interestingly, rig availability continues not to be a problem for us; hopefully that means costs will moderate over time. And we are still forecasting 550 wells for this year, just like we said in our analyst meeting a couple of months ago. On the unconventional drilling side, I did want to report briefly on horizontal drilling and deep. On the horizontal side, we're actively working on the engineering and permitting of our first horizontal wells. And, while we've had some discussions with potential partners for the first phase of our program, at this point, we're likely to proceed with horizontal drilling without a financial partner.

The geologic risk is low, the cost for acquiring expertise through the partnership is likely to be high. And we are in discussions with some technical partners on this matter to gain some needed expertise in completing the horizontal wells. Recall that we have extensive experience completing shale wells that are vertical, so really, what we're just looking for is the completion on the horizontal side. We expect to start drilling two to three wells in the third quarter, with the intent to complete the wells and begin evaluation of the results by year end. As I've mentioned before, you should be aware that horizontal drilling in the low pressure shales in Appalachia will be a journey. We will be testing a range of geology and a range of drilling completion techniques over the next year or so, and while we are excited about the ultimate outcome, neither we nor you should expect that we will get everything right the first time. However, as I've mentioned, the price is well worth the effort. The scope for substantial reserve additions and production acceleration is vast, in this particular play. And we're still excited about it, obviously.

Deep drilling. We are in the process of seeking a partner for a deep drilling program, and in this particular area, we are committed to have both a financial and a risk-sharing partner here. The deep drilling is risky, and we want to test as many possible concepts as we can. And we will have a partner by the end of the year for that -- for that project, hopefully earlier than that, and we're in discussions with several people, at this point in time. Moving to the mid-stream, I think the key thing that you might want to know about is the Big Sandy. We are still starting second half of 2007 for startup of that project. At this point, we've had sufficient interest in the project to increase capacity from the original 70,000 decatherms per day to 130,000 decatherm per day. This increase in interest is a requirement to lengthen the pipeline about ten miles and increase horsepower to carry that additional capacity. As we hoped earlier, there is a lot of interest for this by producers who want to get their trapped gas out of the Appalachian Basin. There will be cost increases attendant to this increase in capacity, and we're working through those cost right now. But we are very confident that this will remain a project that will earn returns in excess of the cost of capital at even the increased costs Regulatory and administrative activities, permitting, land acquisition, et cetera are on track, so that looks pretty good.

On Dominion, we have formed our transition team to assure a smooth integration. We continue to be on track to meet our closing timetable. The regulatory approval filing in Pennsylvania and West Virginia were completed and submitted at the end of March. The expectation for PUC -- that's Pennsylvania and PFC, West Virginia -- approval can range from six to 12 months. And it goes without saying that we've got to prove -- we have the burden of proof that the transaction is in the public interest, and, obviously, at EQT, we believe this transaction is good for shareholders, customers, and the -- the region in general. So we hopeful to get approval in an orderly and timely -- in a short time frame.

I think that's really all I wanted to comment on at this point, and I'll turn the conversation back to Pat, who will open the line for questions, then Dave and Phil and I are available to take questions for as long as you want to ask them.

Thank you, Murry. That concludes the comments portions of the call. Denise, will you please now open the call for questions?

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Alex Meier of ZLP. Please go ahead, sir.

Morning, gentlemen. I just want to ask a little bit about your production guidance of 76 to 77 Bcf just relative to what you see in the to first quarter. Were you thinking the first quarter was going to be less than kind of a quarter of the total production for the year, just because you're ramping up your drilling program?

The answer to that yes, and we've historically seen, for various reasons, a little bit less production in the first quarter and for various reasons, some of which have to do with weather-related issues, freezeups and pipelines and stuff that occur because of water, that tends to have a bit of an impact. Also, as I've mentioned before, third-party producers in Appalachia are shut in for most of the year. But our tariffs and other tariffs allow those third party producers to deliver gas in the winter, and that causes, you know, sometimes some backoff issues and some rerouting of gas issues, et cetera, et cetera. So generally speaking, we've seen a little bit less -- a little bit of seasonality in our -- in our production, and I think that's -- we saw it again this year.

Can you maybe talk a little bit about kind of what the status o -- or f the curtailments are on the larger interstate pipe, as well as kind of what the cost of the Big Sandy expansion might be?

The latter, I won't give you at this moment, because we're still -- for various reasons. We're still seeing additional interest in that pipeline, and before I come out with a final number be I want to know where we'll settle in. We're getting a lot of interest. People are talking about expanding and adding on, and all of that stuff, so before I give you an interim on that, I want that to settle down a little bit, so forgive me on that one. On the other issue, I think it's fair to say that there's been no real surprise in the first quarter on the big pipeline curtailments, that is to say there weren't big things that we didn't anticipate. I mean, there's always some planned maintenance here and there, but basically I think its been within the norm of what we've thought is going to be out there for the quarter. No big -- no big surprise, let's put it that way.

Okay. Thank you.

Thank you. Our next question is coming from Ray Deacon of BMO. Please to ahead, sir.

Murry, I had a question on your comments last quarter regarding your rates of return and earning your cost of capital, you know, with a gas price below $4. With incremental money, you're spending, you know, where do you think that number might be, given that service costs have moved up year to date, and, you know, is that -- is that the reason you guys are putting on more hedges now?

Well, yes, that's a -- a couple of points imbedded in your question. Number one, I think Dave and I and Phil, first of all, are committed to make sure that this investment program earns it's return on capital, and as we've discussed previously and sort of given graphs are at it, these programs in total, if you look at all of the drilling capital, mid-stream capital and et cetera, the payouts are four and a half to five year, total PV payout, if you will. So that would mean zero PV profit discounted at our cost of capital. So we've had hedging programs in on the revenue side to be able to -- to cover that -- that issue, and to make sure tha,t in total, the programs are profitable. With the run up in gas prices, you are quite right. The costs have risen commensurately, and the ability to hedge that cost is a little more difficult than it is to hedge the price, and you don't want to get in a position where there's a squeeze where revenues and costs come together. We were certainly aware of that all along the way, and as a result, we put for ourselves internal hurdle rates that were, A, high, and B, struck at lower gas prices to accommodate the uncertainty related to that production. Right now it's fair to say that the way we're looking that's world is that we're kind of assuming, you know, that we earn a 10% after tax real rate of return at $6 gas, and other than that, -- and that's sort of how we're handling it. Now, I'm hopeful,-- I made the little comment about rig availability, I'm hopeful that maybe we're reaching the sort of the summit of this cost increase, and I know I'm challenging our guys internally to start thinking about how to, you know, try to reverse that trend on cost per well, because that's really the key driver. That's a long winded answer, but that kind of frames the whole thing.

That answers it and I guess just on more question on the Utility side. I'm not as well versed, but it seems like on the gas utility side, the regulators have been willing to allow a little more cost synergies to accrue to the utilities versus, say, in the electric utilities side. What would you view, I guess, as a positive outcome what would you view, I guess, as a positive outcome once these mergers are completed in terms of cost synergies, or can you talk about that?

Well, not really. I think the only thing I will say is that, at least for Equitable, since we've worked on trying to advance this whole concept of performance-based rates, we have, you know, been explicit with the regulators are about what we're making, and how to share the benefits of our activities that reduce the overall costs, and I -- I think at the sort of been our strategy, and I think that's been relatively effective. But I don't think you can generalize for the gas companies of our experience, and I certainly don't have a real good comparison with the electrics. And one other factor, though, I wouldn't presume that, particularly in the high gas price environment, than the exact kind of regulatory schemes that we've been working off the last few years are even appropriate going forward, so I think there are just going to be a lot of changes, and, you know, without getting into a whole discourse on that, I'd kind of like to leave it at that for right now.

Okay. Great. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] There appear to be no further questions at this time, Mr. Kane.

Thank you. That concludes today's call. This call will be row played for a certain-day period beginning at 1:30 p.m. Eastern Time today. The phone number for the replay is 973-341-3080, you will need a confirmation code. That code number is 6903979. The call will also be replayed on our website for seven days. Thank you everyone for participating.

Thank you, ladies and gentlemen. This does conclude today's Equitable Resources conference call. You may now disconnect your lines, and have a wonderful day.