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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 1-3551
EQUITABLE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0464690
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE OXFORD CENTRE, SUITE 3300 15219
Pittsburgh, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 553-5700
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, no par value New York Stock Exchange
Philadelphia Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Philadelphia Stock Exchange
7.35% Capital Securities due April 15, 2038 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III or this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of January 31, 2001: $1,886,728,416
The number of shares outstanding of the issuer's classes of common
stock as of January 31, 2001: 32,533,034
DOCUMENTS INCORPORATED BY REFERENCE
Part III, a portion of Item 10 and Items 11, 12 and 13 are incorporated
by reference to the Proxy Statement for the Annual Meeting of Stockholders on
May 17, 2001 to be filed with the Commission within 120 days after the close of
the Company's fiscal year ended December 31, 2000, except for the performance
graph, Compensation Committee Report, Audit Committee Report and the Audit
Committee Charter.
Index to Exhibits - Page 70
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TABLE OF CONTENTS
PART I
Item 1 Business........................................................................3
Item 2 Properties......................................................................9
Item 3 Legal Proceedings..............................................................10
Item 4 Submission of Matters to a Vote of Security Holders............................10
Executive Officers of the Registrant...........................................11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters..........12
Item 6 Selected Financial Data........................................................12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................13
Item 7A Qualitative and Quantitative Disclosures About Market Risk.....................30
Item 8 Financial Statements and Supplementary Data....................................32
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................66
PART III
Item 10 Directors and Executive Officers of the Registrant.............................67
Item 11 Executive Compensation.........................................................67
Item 12 Security Ownership of Certain Beneficial Owners and Management.................67
Item 13 Certain Relationships and Related Transactions.................................67
PART IV
Item 14 Exhibits and Reports on Form 8-K...............................................68
Index to Financial Statements Covered by Report of Independent Auditors........68
Index to Exhibits..............................................................70
Signatures.....................................................................75
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PART I
ITEM 1. BUSINESS
Equitable Resources, Inc. (Equitable or the Company) is an integrated
energy company, with emphasis on Appalachian area natural gas production and
transportation, natural gas distribution and transmission, and energy services
marketing in the northeastern section of the United States. The Company also has
an interest in another public company with exploration and production interests
in the Gulf of Mexico and Rocky Mountain areas and energy service management
projects in selected United States and international markets. The Company and
its subsidiaries offer energy (natural gas, natural gas liquids and crude oil)
products and services to wholesale and retail customers through three primary
business segments: Equitable Utilities, Equitable Production and NORESCO. The
Company and its subsidiaries had 1,614 employees at the end of 2000.
The Company was formed under the laws of Pennsylvania by the
consolidation and merger in 1925 of two constituent companies, the older of
which was organized in 1888. In 1984, the corporate name was changed to
Equitable Resources, Inc.
EQUITABLE UTILITIES
Equitable Utilities contains both regulated and nonregulated operations.
The regulated group consists of the distribution and interstate pipeline
operations, while the unregulated group is involved in nonjurisdictional
marketing and trading of natural gas, risk management activities and the sale of
energy-related products and services. Equitable Utilities generated 41% of the
Company's net operating revenues in 2000.
NATURAL GAS DISTRIBUTION
Equitable Utilities' distribution operations are carried out by Equitable
Gas Company (Equitable Gas), a division of the Company. The service territory
for Equitable Gas includes southwestern Pennsylvania, municipalities in northern
West Virginia and field line sales in eastern Kentucky. The distribution
operations provide natural gas services to more than 275,000 customers,
comprised of 257,000 residential customers and 18,000 commercial and industrial
customers.
Equitable Gas' natural gas portfolio includes short-term, medium-term and
long-term natural gas supply contracts obtained from various sources including
purchases from major and independent producers in the Southwest, purchases from
local producers in the Appalachian area, purchases from gas marketers, and third
party underground storage fields.
Because many of its customers use natural gas for heating purposes,
Equitable Gas' revenues are seasonal, with approximately 65% of calendar year
2000 revenues occurring during the winter heating season from November through
March. Significant quantities of purchased natural gas are placed in underground
storage inventory during off-peak season to accommodate higher customer demand
during the winter heating season.
INTERSTATE PIPELINE
The interstate pipeline operations of Equitable Utilities include the
natural gas transmission and storage activities of Equitrans, L.P. (Equitrans)
and Carnegie Interstate Pipeline Company, which are regulated by the Federal
Energy Regulatory Commission (FERC). The pipeline division offers gas
transportation, storage and related services to its affiliates and end users in
the Northeast.
The evolving regulatory environment designed to increase competition in
the natural gas industry has created a number of opportunities for pipeline
companies to expand services and serve new markets. The Company has taken
advantage of selected market expansion opportunities, concentrating on
Equitrans' underground storage facilities and the location and nature of its
pipeline system as a link between the country's major long-line natural gas
pipelines.
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The pipeline operations consist of approximately 2,800 miles of
transmission, storage and gathering lines, and interconnections with five major
interstate pipelines. Equitrans also has 15 natural gas storage reservoirs with
approximately 500 million cubic feet (MMcf) per day of peak delivery capability.
ENERGY MARKETING
Equitable Utilities' unregulated marketing operation, Equitable Energy,
purchases, stores and markets natural gas at both the retail and wholesale
level, primarily in the Appalachian and mid-Atlantic regions. Services and
products offered by the marketing division include commodity procurement and
delivery, physical natural gas management operations and control, and customer
support services to the Company's energy customers. To manage the price exposure
risk of its marketing operations, the Company engages in risk management
activities including the purchase and sale of financial energy derivative
products. Because of this activity, the energy marketing division is also able
to offer energy price risk management services to its larger industrial
customers.
In conjunction with these activities, the Company also engages in limited
trading activity. Equitable Energy uses prudent asset management to leverage the
Company's assets through trading activities. Trading activities are entered into
with the objective of profiting from exposure to shifts in market prices.
RATES AND REGULATION
Equitable's distribution rates, terms of service, contracts with
affiliates and issuance of securities are regulated primarily by the
Pennsylvania Public Utility Commission (PUC), along with the Kentucky Public
Service Commission and the Public Service Commission of West Virginia. Pipeline
safety is generally regulated by the rules of the Federal Department of
Transportation and/or by the state regulatory commission. The Occupational and
Health and Safety Administration (OSHA) also imposes certain additional safety
regulations.
The availability, terms and cost of transportation significantly affect
sales of natural gas. The interstate transportation and sale for resale of
natural gas is subject to federal regulation, including transportation rates,
storage tariffs and various other matters, primarily by the FERC. Federal and
state regulations govern the price and terms for access to natural gas pipeline
transportation. The FERC's regulations for interstate natural gas transmission
in some circumstances may also affect the intrastate transportation of natural
gas. For additional discussion of regulatory matters involving Equitable
Utilities, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (MD&A).
ACQUISITIONS AND DIVESTITURES
On December 15, 1999, Equitable acquired the distribution, transmission
and production operations of Carnegie Natural Gas and subsidiaries (Carnegie)
for $40.0 million, including transaction costs. The Carnegie acquisition is
complementary to Equitable's plans to grow its core business and increase
utilization and operational efficiencies of its local distribution and
interstate pipeline operations. The acquisition of Carnegie added approximately
8,000 new distribution customers. See Note G to the consolidated financial
statements for additional information related to the Carnegie acquisition.
COMPETITIVE ENVIRONMENT
Various regulatory and market trends have combined to increase
competition in markets served by Equitable Gas. In addition, Equitable Gas faces
price competition with other energy forms. The changes precipitated by the FERC
restructuring of the natural gas industry in Order No. 636 have significantly
increased competition in the natural gas industry. In the restructured
marketplace, competition is increasing to provide natural gas sales to
commercial and residential customers. However, since Equitable Gas has been
managing a transportation service and gas supply risk for a number of years, the
transition to a more competitive environment under Order No. 636 has not had a
significant impact on its operations. Equitable Gas has responded to this
competitive environment by offering a variety of firm and interruptible
services, including natural gas transportation, supply pooling, balancing and
brokering to industrial and commercial customers.
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Gas industry competition at the retail level is receiving increased
attention from both regulators and legislators. In June 1999, Pennsylvania
Governor Tom Ridge signed into law the Natural Gas Choice and Competition Act
(the Act) which required local natural gas distribution companies to extend the
availability of natural gas transportation service to residential and commercial
customers by July 1, 2000, pursuant to a PUC-approved plan. In accordance with
the Act, Equitable Gas made its restructuring filing on August 16, 1999. The
filing was generally a restatement of Equitable Gas' existing tariff previously
in effect. The tariff provides for recovery of costs associated with Equitable
Gas' existing pipeline capacity and natural gas supply contracts. After
negotiations with intervenors, settlement was reached with all parties. The PUC
entered an opinion and order adopting the settlement, and Equitable Gas'
restructured rates and services became effective July 1, 2000.
EQUITABLE PRODUCTION
Equitable Production develops, produces and delivers natural gas and
crude oil, with operations in the Appalachian region of the United States. It
also engages in natural gas gathering and interstate transportation and the
processing and sale of natural gas liquids. Equitable Production generated
approximately 53% of the Company's net operating revenues in 2000.
Equitable Production is one of the largest owners of proved natural gas
reserves in the Appalachian Basin. The Company's exploration and production
properties are located in the Appalachian Basin, which is the oldest and
geographically one of the largest natural gas producing regions in the United
States. Equitable Production currently owns 8,274 net producing wells in
Appalachia. As of December 31, 2000, the Company estimates the total proved
reserves to be 2,206 billion cubic feet equivalent (Bcfe), including undeveloped
reserves of 602 Bcfe.
The areas in which the Company's Appalachian properties are located are
characterized by wells with comparatively low rates of annual decline in
production, low production costs and high British thermal unit (Btu), or energy
content. Once drilled and completed, wells in the Appalachian Basin typically
have low ongoing operating and maintenance requirements and minimal capital
expenditures. These formations are characterized by slow recovery of the
reserves in place, low rates of production and wells that generally produce for
longer than 20 years and often more than 50 years. Many of the Company's wells
in these areas have been producing for many years, in some cases since the early
1900's. Reserve estimates for properties with long production histories are
generally more reliable than estimates for properties with shorter histories.
Substantially all of the Appalachian wells are relatively shallow, with
depths ranging from 1,000 to 7,000 feet below the surface. Many of these wells
are completed in more than one producing zone and production from these zones
may be mixed or commingled. Commingled production lowers producing costs on a
per unit basis compared to isolated zone completions. The average Btu content
for each cubic foot of natural gas produced from the Company's Appalachian
properties is approximately 1,130 at the well-head, which has historically
provided an average 13% premium over the standard measure of 1,000 Btu per cubic
foot when calculating realized prices on a per thousand cubic feet (Mcf) basis.
The productive lives of producing natural gas properties are often
compared using their reserve-to-production index. This index is calculated by
dividing total proved reserves of the property by annual production for the
prior 12 months. The reserve-to-production index for the underlying properties
at December 31, 2000 was approximately 23 years. This reserve-to-production
index shows a relatively long producing life compared to an average index of 13
years for U.S. natural gas properties at year-end 1999. Because production rates
naturally decline over time, the reserve-to-production index may not be a useful
estimate of how long properties should economically produce. Based on the
Company's reserve report, production from the underlying properties is expected
to continue for at least 50 more years.
Equitable Production currently has an inventory of 3.7 million gross
acres, of which approximately 71% have not been developed. As of December 31,
2000, the Company estimated the proved undeveloped reserves of the underlying
leases to be 602 Bcfe from 1,800 proved undeveloped drilling locations. In the
last three years, Equitable Production has completed approximately 99% of the
wells it has drilled in Appalachia.
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In December 1999, the unregulated production properties and well
operations of Equitable Utilities' Equitrans pipeline division were transferred
to Equitable Production (Appalachian). These properties include 800 producing
natural gas wells and 38.9 Bcfe of proved developed reserves.
ACQUISITIONS AND DIVESTITURES
In February 2000, the Company acquired the Appalachian production assets
of Statoil Energy Inc. (Statoil) for $630 million plus working capital
adjustments for a total of $677 million. Statoil's operations consisted of
approximately 1.2 trillion cubic feet of proven natural gas reserves and 6,500
gross natural gas wells in West Virginia, Kentucky, Virginia, Pennsylvania and
Ohio.
In April 2000, the Company combined its Gulf of Mexico operations with
Westport Oil and Gas Company for $50 million in cash and approximately 49%
interest in the combined company, Westport Resources Corporation (Westport). In
October 2000, Westport had a successful initial public offering (IPO) of its
shares. Equitable sold 1.325 million shares in this IPO for an after-tax gain of
$4.3 million. Equitable now owns 13.911 million shares, or approximately 36%
interest in the Company. Equitable's equity in Westport was $130.1 million as of
December 31, 2000.
On June 30, 2000, Equitable sold a substantial portion of its interest in
properties qualifying for nonconventional fuel tax credit to a partnership that
netted $122.2 million in cash and retained a minority interest in this
partnership. The proceeds received were used to pay down short-term debt
associated with the Statoil acquisition. Prior to this transaction, the Company
entered into financial hedges covering the first two years of production.
Removal of these hedges upon closing of this transaction resulted in a $7.0
million pretax charge recorded as other loss. Equitable accounted for its
remaining $26.3 million investment under the equity method of accounting.
Equitable estimates that it will receive $6.0 million in fees for operating the
wells and gathering and marketing the gas on behalf of the purchaser in 2001
based on expected production volumes.
In December 2000, Equitable sold 133.3 Bcfe of reserves acquired from
Statoil to a trust for proceeds of $255.8 million and a minority interest in
this trust. In anticipation of this transaction, the Company had previously
entered into financial hedges. Removal of these hedges upon closing of this
transaction resulted in a $57.7 million charge that was equally offset against
the gain recognized on the sale of these properties. The proceeds received were
used to pay down short-term debt associated with the Statoil acquisition.
Equitable accounted for its $36.2 million investment under the equity method of
accounting. Equitable estimates that it will receive $12.0 million in fees for
operating the wells and gathering and marketing the gas on behalf of the
purchaser in 2001 based on expected production volumes.
In 2000, the Company entered into two natural gas advance sale contracts
for 48.7 MMcf of reserves. The Company is required to deliver certain quantities
of natural gas during the term of the contracts. The first contract is for five
years with net proceeds of $104.0 million. The second contract is for three
years with net proceeds of $104.8 million. As such, these contracts were
recorded as prepaid gas forward sales and are being recognized in income as
deliveries occur. The proceeds received were used to pay down short-term debt
associated with the Statoil acquisition.
See Notes F, G and I to the consolidated financial statements for
additional information relating to the Company's acquisitions and divestitures.
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COMPETITIVE ENVIRONMENT
The combination of its long-lived production, low drilling costs, high
drilling completion rates at shallow depths and proximity to natural gas markets
has had a substantial impact on the development of the Appalachian Basin
resulting in a highly fragmented operating environment. In 2000, Kentucky and
West Virginia had approximately 3,000 independent operators and 90,000 producing
natural gas and oil wells. Also, the historical availability of tax incentives
has resulted in extensive drilling in the shallow formations with these low
technical risk characteristics.
HEDGING ACTIVITIES
Equitable has historically entered into hedging contracts with respect to
its natural gas and crude oil production at specified prices for a specified
period of time. The Company's hedging strategy and information regarding
derivative instruments used are outlined below in Item 7A, "Qualitative and
Quantitative Disclosures About Market Risk," and in Note B to the consolidated
financial statements.
NORESCO
NORESCO provides energy and energy-related products and services that are
designed to reduce its customers' operating costs and improve their
productivity. NORESCO's customers include commercial, governmental,
institutional and industrial end-users. NORESCO operates in a highly competitive
market segment, with a significant number of companies, including affiliates of
large energy companies that have entered this market in recent years. NORESCO
provided approximately 6% of the Company's net operating revenues in 2000.
The segment's performance contracting group provides outsourced solutions
for energy conservation and efficiency. Guaranteed energy savings are used to
pay for implementation of new energy-efficient equipment and systems.
Performance Contracting provides a "turnkey" solution including engineering
analysis, project management, construction, financing, operations and
maintenance, and energy savings metering, monitoring and verification. This is a
growing market, primarily in the public sector, with a considerable opportunity
in the Federal Government sector. NORESCO has significant federal contracts and
continues to pursue opportunities in this market.
The segment's energy infrastructure group develops and operates private
power, cogeneration and central plant facilities in the United States and
operates private power plants in selected international countries. These
projects serve a diverse clientele including hospitals, universities, commercial
and industrial customers and utilities. NORESCO's capabilities offer a "turnkey"
approach to energy infrastructure programs including project development,
equipment selection, fuel procurement, environmental permitting, construction,
financing and operations and maintenance. Some of these projects are held
through equity in nonconsolidated investments.
At the end of 2000, NORESCO employed 324 people. Revenue backlog
increased to $91.0 million at year-end 2000 from $71.0 million at the end of
1999. A substantial portion of the backlog is expected to be completed within
the next 18 months.
DISCONTINUED OPERATIONS
In December 1998, the Company sold its natural gas midstream operations.
The operations included an integrated gas gathering, processing and storage
system in Louisiana and a natural gas and electricity trading and marketing
business based in Houston, Texas, with an office in Calgary. These businesses
are classified in the consolidated financial statements as discontinued
operations. See Note E to the consolidated financial statements for additional
information relating to the discontinued operations.
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OPERATING REVENUES
Operating revenues as a percentage of total operating revenues for each
class of products and services greater than 10% of three business segments
during the years 2000 through 1998 are as follows:
2000 1999 1998
---- ---- ----
Equitable Utilities:
Residential natural gas sales ...... 15% 19% 26%
Marketed natural gas equivalents ... 53 33 29
Equitable Production:
Produced natural gas ............... 13 13 13
NORESCO:
Energy service contracting ......... 8 16 13
The Company believes that a better understanding of business segments
revenue contributions can be obtained by analysis of net revenues by class of
products and services.
2000 1999 1998
---- ---- ----
Equitable Utilities:
Residential natural gas sales....... 14% 16% 21%
Transportation ..................... 12 18 13
Marketed natural gas................ 15 8 10
Equitable Production:
Produced natural gas equivalents.... 40 30 29
NORESCO:
Energy service contracting.......... 6 8 7
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes U and V to the consolidated financial statements
in Part II, Items 7 and 8, respectively, for financial information by business
segment and information regarding environmental matters.
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ITEM 2. PROPERTIES
Principal facilities are owned by the Company's business segments, with
the exception of various office locations and warehouse buildings. A limited
amount of equipment is also leased. The majority of transmission, storage and
distribution pipelines are located on or under (1) public highways under
franchises or permits from various governmental authorities, or (2) private
properties owned in fee, or occupied under perpetual easements or other rights
acquired for the most part without examination of underlying land titles. The
Company's facilities have adequate capacity, are well maintained and, where
necessary, are replaced or expanded to meet operating requirements.
Equitable Utilities. This segment owns and operates natural gas
distribution properties as well as other general property and equipment in
Pennsylvania, West Virginia and Kentucky. The segment also owns and operates
underground storage and transmission facilities in Pennsylvania and West
Virginia.
Equitable Production. This business segment owns or controls all of the
Company's acreage of proved developed and undeveloped natural gas and oil
production properties principally located in the Appalachian region. In
addition, Kentucky West Virginia Gas Company, LLC owns and operates gathering
and transmission properties as well as other general property and equipment in
Kentucky. Equitable Production's properties also include hydrocarbon extraction
facilities in Kentucky with a 100-mile liquid products pipeline that extends
into West Virginia. Information relating to Company estimates of natural gas and
crude oil reserves and future net cash flows is provided in Note X to the
consolidated financial statements in Part II.
Natural Gas and Crude Oil Production:
2000 1999 1998
---- ---- ----
Natural Gas MMcf produced........................................... 87,134 66,328 59,893
Average sales price per Mcfe sold....................... $ 2.87 $ 2.39 $ 2.41
Crude Oil Thousands of barrels produced........................... 497 1,070 974
Average sales price per barrel.......................... $ 21.75 $ 15.53 $ 13.59
Average production cost (lifting cost) of natural gas and crude oil
during 2000, 1999 and 1998 was $.509, $.373, and $.462 per Mcf equivalent,
respectively.
NATURAL GAS OIL
---------------- -------------
Total productive wells at December 31, 2000:
Total gross productive wells......................................... 12,433 551
Total net productive wells(a)........................................ 7,791 483
Total acreage at December 31, 2000:....................................
Total gross productive acres......................................... 1,089,263
Total net productive acres........................................... 1,078,558
Total gross undeveloped acres........................................ 2,623,942
Total net undeveloped acres.......................................... 2,377,888
(a) Reflects 2,320 wells which are subject to a term net profits interest
and 2,017 wells which are subject to a term assignment of production which
reduce the Company's interest in the wells.
Number of net productive and dry exploratory and development wells
drilled:
2000 1999 1998
---- ---- ----
Exploratory wells:
Productive........................................................... -- 3.5 4.3
Dry.................................................................. 1.0 0.8 5.0
Development wells:
Productive........................................................... 284.6 118.6 74.6
Dry.................................................................. 2.0 -- 2.0
No report has been filed with any federal authority or agency reflecting
a 5% or more difference from the Company's estimated total reserves.
NORESCO. NORESCO is based in Westborough, Massachusetts, and leases
offices in 17 locations throughout the United States.
Headquarters. The headquarters is located in leased office space in
Pittsburgh, Pennsylvania.
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ITEM 3. LEGAL PROCEEDINGS
In May 1998, the jury in U.S. Gas Transportation, Inc. v. Equitable
Resources Marketing Company, a breach of contract action filed in the Judicial
District Court of Dallas County, Texas, in July 1996, returned a verdict against
the Company in the amount of $4.36 million. On motion by the Company, the judge
subsequently reduced the award to $762,000 on which final judgment was entered,
together with $550,000 in attorneys' fees. The case is on appeal.
In Interstate Natural Gas Company v. Equitable Resources Energy Company
et. al. (including Kentucky West Virginia Gas Company), a royalty case filed in
June 1995 in the Kentucky Circuit Court in Floyd County, the judge granted
plaintiff's motion for summary judgment against the Company for breach of
fiduciary duty and contract unconscionability. In late 1998, the court entered
judgment for damages totaling $1.9 million. After posting a guarantee of $2.6
million (including estimated postjudgment interest), the Company appealed to the
Kentucky Court of Appeals. During 2000, the Kentucky Court of Appeals reduced
this judgment from approximately $1.9 million to approximately $250,000 plus
interest. On September 25, 2000, the Company filed a motion for discretionary
review with the Kentucky Supreme Court.
There are no other pending legal proceedings likely to have a material
effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 2000.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Title Business Experience
------------ ----- -------------------
Philip P. Conti (41) Vice President, Finance and Elected to present position August 21, 2000; Director of
Treasurer Planning and Development from June 1, 1998, Assistant
Treasurer - Finance from January 19, 1996.
James M. Funk (51) Senior Vice President Elected to present position July 19, 2000; President,
Equitable Production Company from June 12, 2000;
President, J.M. Funk & Associates, Inc. from January 1999;
President, Shell Continental Companies from January 1998;
President and Chief Executive Officer, Shell Midstream
Enterprises, Inc. from April 1996; Vice President and
General Manager, Shell Offshore, Inc. from October 1991.
Murry S. Gerber (48) Chairman, President and Elected to present position May 30, 2000; President and
Chief Executive Officer Chief Executive officer from June 1, 1998; Chief Executive
Officer of Coral Energy, Houston, TX, from November 1995.
Joseph E. O'Brien (48) Vice President Elected to present position January 18, 2001; President,
Northeast Energy Services, Inc. from January 17, 2000;
Senior Vice President, Construction & Engineering from
June 14, 1993.
Johanna G. O'Loughlin (54) Vice President, General Elected to present position May 26, 1999; Vice President
Counsel and Secretary and General Counsel from December 19, 1996; Deputy General
Counsel from April 1996; Senior Vice President and General
Counsel of Fisher Scientific Company, Pittsburgh, PA, from
June 1986.
David L. Porges (43) Executive Vice President and Elected to present position February 1, 2000; Senior Vice
Chief Financial Officer President and Chief Financial Officer from July 1, 1998;
Managing Director, Bankers Trust Corporation, Houston, TX,
and New York, NY, from December 1992.
Gregory R. Spencer (52) Senior Vice President and Elected to present position May 23, 1996; Vice President -
Chief Administrative Officer Human Resources and Administration from May 1995.
- ----------------
Officers are elected annually to serve during the ensuing year or until their
successors are chosen and qualified. Except as indicated, the officers listed
above were elected on May 17, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange and
the Philadelphia Stock Exchange. The high and low sales prices reflected in the
New York Stock Exchange Composite Transactions as reported by The Wall Street
Journal, and the dividends declared and paid per share, are summarized as
follows (in U.S. dollars per share):
2000 1999
--------------------------------- ----------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
---- --- -------- ---- --- --------
1st Quarter...................... $46.00 $32.25 $0.295 $29.75 $24.25 $0.295
2nd Quarter...................... 52.88 41.63 0.295 37.75 23.25 0.295
3rd Quarter...................... 63.44 46.81 0.295 39.00 35.94 0.295
4th Quarter...................... 66.75 55.75 0.295 38.38 32.56 0.295
As of February 28, 2001, there were approximately 4,908 shareholders of
record of the Company's common stock.
The indentures under which the Company's long-term debt is outstanding
contain provisions limiting the Company's right to declare or pay dividends and
make certain other distributions on, and to purchase any shares of, its common
stock. Under the most restrictive of such provisions, $565 million of the
Company's consolidated retained earnings at December 31, 2000 was available for
declarations or payments of dividends on, or purchases of, its common stock.
The Company anticipates dividends will continue to be paid on a regular
quarterly basis.
ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating revenues ........................... $1,652,218 $1,042,013 $ 851,811 $ 886,525 $ 854,822
========== ========== ========== ========== ==========
Net income (loss) from continuing
operations (a) ............................ $ 106,173 $ 69,130 $ (27,052) $ 74,187 $ 53,527
========== ========== ========== ========== ==========
Net income (loss) from continuing
operations per common share:
Basic ................................... $ 3.26 $ 2.03 $ (0.73) $ 2.06 $ 1.52
========== ========== ========== ========== ==========
Assuming dilution ....................... $ 3.20 $ 2.01 $ (0.73) $ 2.05 $ 1.52
========== ========== ========== ========== ==========
Total assets ................................. $2,455,850 $1,789,574 $1,860,856 $2,328,051 $2,096,299
Long-term debt ............................... $ 287,789 $ 298,350 $ 281,350 $ 417,564 $ 422,112
Preferred trust securities ................... $ 125,000 $ 125,000 $ 125,000 $ -- $ --
Cash dividends paid per share of
common stock .............................. $ 1.18 $ 1.18 $ 1.18 $ 1.18 $ 1.18
- ---------
(a) Includes nonrecurring items in 1998 and 1997, as described in previous
filings of the Form 10-K.
Excludes discontinued operations and extraordinary items recognized in 1998
and 1997, as described in previous filings of the Form 10-K.
12
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Equitable's consolidated net income from continuing operations for 2000
was $106.2 million, or $3.20 per diluted share, compared with $69.1 million, or
$2.01 per diluted share, for 1999 and a loss of $(27.1) million, or $(0.73) per
diluted share, for 1998.
The improved 2000 earnings are due to increased natural gas production
attributable to the acquisition of Statoil's Appalachian oil and gas properties;
higher commodity prices; increased throughput associated with the Carnegie
acquisition; and lower operating and administrative expenses throughout the
organization due to continuing process improvement efforts in all significant
business units. The 2000 earnings were partially offset by increased
performance-related incentive costs that were not allocated to business
segments.
Earnings for 1999 increased over 1998 as a result of increased natural
gas production; increased throughput in the regulated distribution operations
primarily due to colder weather; lower exploration costs; and lower operating
and administrative expenses throughout the organization due to prior years'
restructuring efforts.
BUSINESS SEGMENT RESULTS
Business segment operating results are presented in the segment
discussions and financial tables on the following pages. Headquarters operating
expenses are billed to operating segments based on a fixed allocation of the
annual operating budget. Differences between budget and actual expenses are not
allocated to operating segments. In 2000, certain performance-related incentive
costs totaling $11.2 million were not allocated. Prior periods have been
reclassified to conform to the current presentation.
EQUITABLE UTILITIES
Equitable Utilities' operations are comprised of the sale and
transportation of natural gas to retail customers at state-regulated rates,
interstate transportation and storage of natural gas subject to federal
regulation, and the unregulated marketing of natural gas.
NATURAL GAS DISTRIBUTION
The local distribution operations of Equitable Gas Company (Equitable
Gas) and Carnegie Natural Gas Company (Carnegie Gas), subsidiaries of the
Company, provide natural gas services in southwestern Pennsylvania and in
municipalities in northern West Virginia. In addition, Equitable Gas provides
field line sales in eastern Kentucky. Both Equitable Gas and Carnegie Gas are
subject to rate regulation by state regulatory commissions in Pennsylvania, West
Virginia and Kentucky.
Gas industry competition at the retail level is receiving increased
attention from both regulators and legislators. In June 1999, Pennsylvania
Governor Tom Ridge signed into law the Natural Gas Choice and Competition Act
(the Act), which required local natural gas distribution companies to extend the
availability of natural gas transportation service to residential and commercial
customers by July 1, 2000, pursuant to a PUC-approved plan. In accordance with
the Act, Equitable Gas made its restructuring filing on August 16, 1999. The
filing was generally a restatement of Equitable Gas' existing tariff previously
in effect. The tariff provides for recovery of costs associated with Equitable
Gas' existing pipeline capacity and natural gas supply contracts. After
negotiations with intervenors, settlement was reached with all parties. The PUC
entered an opinion and order adopting the settlement, and Equitable Gas'
restructured rates and services became effective July 1, 2000.
INTERSTATE PIPELINE
The pipeline operations of Equitrans, L.P. (Equitrans) and Carnegie
Interstate Pipeline (Carnegie Pipeline), subsidiaries of the Company, are
subject to rate regulation by the FERC. Under present rates, a majority of the
annual costs are recovered through fixed charges to customers. Equitrans filed a
rate case in April 1997, which addressed the recovery of certain stranded plant
costs related to the implementation of FERC Order No. 636. The requested rates
were placed into effect in August 1997, subject to refund, pending the issuance
of a final order. On April 29, 1999, the FERC approved, without modification,
the joint stipulated settlement agreement resolving all issues in the
proceeding.
13
14
The approved settlement provides for prospective collection of increased
gathering charges. In addition, the settlement provides Equitrans the
opportunity to retain all revenues associated with interruptible transportation
and negotiated rate agreements, as well as moving its gathering charge toward a
cost based rate. In the second quarter of 1999, Equitrans recorded the final
settlement of the rate case. The final settlement includes the adjustment of the
prior provisions for refund and recognition of the previously deferred revenues
and costs related to the stranding of certain gathering facilities.
During 1999, the Company owned a third interstate pipeline, Three Rivers
Pipeline Company, which was interconnected with Equitrans. On November 29, 1999,
Equitrans filed an application with the FERC to acquire and operate the assets
of Three Rivers Pipeline Company that was granted by an order dated April 13,
2000.
ENERGY MARKETING
Equitable's unregulated marketing division provides natural gas
operations, commodity procurement and delivery, risk management and customer
services to energy consumers including large industrial, utility, commercial,
institutional and residential end-users. This division's primary focus is to
provide products and services in those areas where the Company has a strategic
marketing advantage, usually due to geographic coverage and ownership of
physical or contractual assets.
In conjunction with these activities, the Company also engages in limited
trading activity. Equitable Energy uses prudent asset management to leverage the
Company's assets through trading activities. Trading activities are entered into
with the objective of profiting from shifts in market prices.
CAPITAL EXPENDITURES
Equitable Utilities has set the 2001 capital expenditure level at $60.8
million, a 114% increase over capital expenditures of $28.4 million for 2000.
The 2001 capital expenditures include $29.5 million for the distribution
operations, $6.0 million for pipeline operations, including maintenance and
improvements to existing lines and facilities, and approximately $25.3 million
for new business development opportunities and technology improvements.
EQUITABLE UTILITIES
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
OPERATIONAL DATA
Operating expenses/net revenues ...................... 60.85% 64.62% 75.51%
Capital expenditures (Thousands)...................... $ 28,436 $ 43,979 $ 20,860
FINANCIAL DATA (THOUSANDS)
Utility revenues ..................................... $ 377,700 $324,869 $ 322,057
Marketing revenues ................................... 1,009,554 487,005 329,967
---------- -------- ---------
Total revenues .................................. 1,387,254 811,874 652,024
Purchased natural gas cost ........................... 1,149,775 583,974 460,685
---------- -------- ---------
Net revenues .................................... 237,479 227,900 191,339
Operating and maintenance expense .................... 59,072 57,844 57,466
Selling, general and administrative expense .......... 57,244 53,819 66,436
Depreciation, depletion and amortization (DD&A) ...... 28,185 35,596 20,570
Restructuring and impairment charges ................. -- -- 14,693
---------- -------- ---------
Total expenses .................................. 144,501 147,259 159,165
---------- -------- ---------
Operating income ..................................... $ 92,978 $ 80,641 $ 32,174
========== ======== =========
14
15
Operating income for Equitable Utilities increased 15.3% from 1999 to
2000. The increase in 2000 is a result of higher net revenues due principally to
the Carnegie acquisition and cooler weather during the heating season. Results
for the 2000 period include $.9 million for the recovery of stranded costs in
rates from the previously mentioned Equitrans rate case settlement, which was
partially offset by charges of $1.5 million for improvement of utility segment
operating processes and consolidation of facilities. Results for 1999 benefited
from the recognition of the settlement of Equitrans' rate case which included
stranded cost recovery that had a positive net result of $3.9 million. This
benefit was principally offset by charges of $3.0 million for improvement of
utility segment operating processes and consolidation of facilities. Excluding
the impact of the rate case settlement and process improvement charges in both
periods, operating income increased $13.8 million, or 17.3% over the $79.7
million in 1999.
Operating income for Equitable Utilities increased 151% from 1998 to
1999. The increase in 1999 is a result of higher net revenues due principally to
cooler weather during the heating season, increased revenues from energy
marketing activities and lower operating expenses due to restructuring
initiatives begun in the fourth quarter of 1998. Results for the 1999 period
include $3.9 million from the recognition of the settlement of Equitrans' rate
case described above. This benefit was principally offset by charges of $3.0
million for improvement of utility segment operating processes and consolidation
of facilities. Results for 1998 include a pretax charge of $14.7 million related
to restructuring as more fully described in Note C to the consolidated financial
statements. Excluding the nonrecurring items in both periods, operating income
increased $32.9 million, or 70.1% over the $46.9 million in 1998.
DISTRIBUTION OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
OPERATIONAL DATA
Degree days (normal* = 5,968) ............. 5,596 5,485 4,808
O&M** per customer (Thousands) ............ $ 271.94 $ 254.85 $ 311.94
Volumes (MMcf):
Residential ............................ 27,776 25,431 22,641
Commercial and industrial ............. 32,521 22,209 19,165
-------- -------- --------
Total natural gas sales and transportation 60,297 47,640 41,806
======== ======== ========
FINANCIAL DATA (THOUSANDS)
Net revenues .............................. $159,886 $144,969 $133,393
Operating expenses ........................ 78,523 73,179 85,130
Depreciation, depletion and amortization .. 17,410 17,086 14,986
Restructuring and impairment charge ....... -- -- 2,892
-------- -------- --------
Operating income .......................... $ 63,953 $ 54,704 $ 30,385
======== ======== ========
* Normal is based on the 30-year average determined by the National
Oceanic and Atmospheric Administration.
** O&M is defined for this calculation as the sum of operating and
maintenance and selling, general and administrative expenses, excluding other
taxes.
Net revenues for the distribution operations increased 10.3% from 1999 to
2000. The increase in net revenues for 2000 is due principally to the total
system throughput increase from the Carnegie Gas acquisition and the impact of
weather that was 2% colder than the prior year. Weather in the distribution
service territory during 2000 was 6% warmer than normal (normal is based on the
30-year average determined by the National Oceanic and Atmospheric
Administration).
Operating expenses for the distribution operations for 2000 increased
6.3% from 1999. The increase in 2000 is due principally to the acquisition of
Carnegie Gas, increased provision for performance-related bonuses and higher
administrative costs.
15
16
Net revenues for the distribution operations increased 8.7% from 1998 to
1999. The increase in net revenues for 1999 is due to the impact of weather that
was 14% colder than the prior year. In addition, total margin from delivery
service customers was higher in 1999, reflecting higher average delivery rates
and slightly higher volumes transported.
Operating expenses for the distribution operations for 1999 decreased
12.4% from 1998. Results for the 1998 period include $2.9 million related to the
restructuring of utility segment operating functions and consolidation of
facilities. Excluding the restructuring charges in 1998, operating expenses
decreased $9.9 million, or 9.8%, over the $100.1 million in 1998. The decrease
in 1999 is due principally to restructuring initiatives begun in the fourth
quarter of 1998.
Operating income for 1999 increased 64.4% from the operating income of
1998, excluding the impact of the 1998 restructuring charges. The increase was
due primarily to higher throughput, resulting from the colder weather and lower
operating expenses due to restructuring initiatives begun in the fourth quarter
of 1998.
PIPELINE OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
------- ------- -------
OPERATIONAL DATA
Transportation throughput (MMBtu) ......... 81,692 76,727 67,590
FINANCIAL DATA (THOUSANDS)
Net revenues .............................. $61,119 $73,273 $51,344
Operating expenses ........................ 29,040 32,607 28,611
Depreciation, depletion and amortization .. 10,577 18,312 5,299
Restructuring and impairment charge ....... -- -- 8,771
------- ------- -------
Operating income .......................... $21,502 $22,354 $ 8,663
======= ======= =======
Net revenues for the pipeline operations decreased 16.6% from 1999 to
2000. Pipeline revenues in 2000 include $3.8 million for the recovery of
stranded costs in rates from the previously mentioned Equitrans' rate case
settlement. Revenues in 1999 include $17.2 million related to recognition of the
rate settlement, pass-through of stranded costs, and pass-through of FERC
surcharges and products extraction costs. Excluding the impact of the rate
settlement, net revenues increased $1.2 million primarily due to the increased
throughput from the Carnegie Pipeline acquisition and increased gathering and
storage services.
Operating expenses for the pipeline operations decreased 22.2% from 1999
to 2000. The operating expenses for 2000 include $2.9 million of amortization
expense related to the recovery of stranded costs in rates. Operating expenses
for 1999 include $11.6 million of amortization expense related to the recovery
of stranded costs, $4.0 million for utility segment process improvements and
$1.7 million of pass-through products extraction costs. Excluding the special
items in both periods, operating expenses of $36.0 million for 2000 increased by
$2.4 million. The increase in operating expenses for 2000, excluding the special
items in both periods, was principally due to the acquisition of Carnegie
Interstate Pipeline and increased provisions for performance-related bonuses.
Net revenues for the pipeline operations increased 42.7% from 1998 to
1999. Pipeline revenues in 1999 include $15.5 million related to recognition of
the rate settlement and pass-through of stranded costs described above and $1.7
million for the pass-through of FERC surcharges and products extraction costs to
customers. Net revenues of $56.1 million for the period, excluding the impact of
the rate settlement and extraction revenues, increased $4.8 million, or 9.4%,
over the $51.3 million for the 1998 period. The increase in revenues for 1999
was due primarily to increased margins on gathering throughput and increased
storage service revenues.
16
17
Operating expenses increased 19.3% in 1999 over 1998. The operating
expenses for 1999 include $11.6 million of amortization expense related to the
stranded plant from recognition of the rate settlement, $1.7 million of products
extraction costs and $4.0 million for utility segment process improvements.
Operating expenses for 1998 include restructuring charges of $8.8 million as
described in Note C to the consolidated financial statements. Operating
expenses, excluding the nonrecurring charges in both periods, were essentially
unchanged. Excluding the nonrecurring items in both periods, operating expenses
of $33.6 million reflected a decrease of $0.3 million from $33.9 million in
1998.
ENERGY MARKETING
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
-------- -------- ---------
OPERATIONAL DATA
Marketed gas sales (MMBtu) (Thousands) .... 240,922 188,133 134,455
Net revenue/MMBtu ......................... $ .0687 $ 0.0513 $ 0.0471
======== ======== ========
FINANCIAL DATA (THOUSANDS)
Net revenues .............................. $ 16,542 $ 9,658 $ 6,603
Operating expenses ........................ 8,822 5,877 10,161
Depreciation, depletion and amortization .. 197 198 285
Restructuring and impairment charge ....... -- -- 3,030
-------- -------- --------
Operating income (loss) ................... $ 7,523 $ 3,583 $ (6,873)
======== ======== ========
Net revenues for energy marketing operations increased 71.3% from 1999 to
2000. The increase in net revenues is attributable to greater sales volumes
associated with asset management activities and higher unit margins. In
addition, the sale of gas in storage during the first quarter of 2000 allowed
the Company to benefit from the increasing natural gas prices.
Operating expenses increased 48.5% from 1999 to 2000. The increase in
expenses is due principally to the increased investment in the segment's asset
management and retail marketing activities.
Net revenues for energy marketing operations increased 46.3% from 1998 to
1999. The increase in gross margins in 1999 is attributable to increased
throughput and more effective use of storage. The increased volume in 1999
compared to 1998 is a result of the addition of residential customer choice
programs in Pennsylvania and Ohio and increased utility/marketing company
volumes transported during the 1999 winter heating season. Gross margin per
MMBtu was also higher in 1999, due primarily to the residential choice programs
and greater volatility in weather in 1999.
The 1999 decrease in operating expenses is primarily due to a significant
staff reduction and office closings completed as part of the corporate-wide
restructuring in the fourth quarter of 1998.
17
18
EQUITABLE PRODUCTION
Production operations comprise the production, gathering, transportation
and sale of natural gas. In April 2000, the Company merged its Equitable
Production - Gulf business with Westport Oil and Gas Company to form Westport
Resources Corporation (Westport). The operations of Equitable Production - Gulf
through the date of the merger are presented after the operations of Equitable
Production (Appalachian).
The operational and financial data presented below have been reclassified
to reflect the results in two business lines - production and production
services. Production includes owned production, which comprises "equity" volumes
(i.e., unaffected by monetizations) and "monetized" volumes, under the two
prepaid gas forward sales and the 1995 sale of interests in certain Appalachian
natural gas properties as described in Notes M and N to the consolidated
financial statements. Cash is received in the period in which these monetization
transactions are executed. In subsequent periods, monetized revenues are
recognized as volumes are delivered, but no additional cash is received. The
prices shown for owned production are well-head prices, which exclude gathering
fees but includes financial hedges. Crude oil and natural gas liquid (NGL)
product sales have been converted to natural gas volume equivalents and are
included in the "Mcfe" volumes described. Production service revenues and
volumes include gathering revenues and other revenues, principally fees for
operating production in which Equitable Production sold an interest, as
described previously in Item 1 of this Form 10-K. Total volumes handled include
all gathered volumes, volumes sold at the well-head and not gathered, and crude
oil and natural gas liquid equivalents.
EQUITABLE PRODUCTION (APPALACHIAN)
In February 2000, Equitable Production acquired the Appalachian
production assets of Statoil for $630 million plus working capital adjustments
for a total of $677 million. Statoil's operations consisted of approximately 1.2
trillion cubic feet of proven natural gas reserves and 6,500 natural gas wells
in West Virginia, Kentucky, Virginia, Pennsylvania and Ohio. In December 1999,
the Company acquired Carnegie. Carnegie Production Company operated more than
1,000 natural gas wells in Pennsylvania and West Virginia.
In the Appalachian Region during 2000, 305 gross wells were drilled at a
success rate of 99.3%. This drilling was concentrated within the core areas of
southwest Virginia, West Virginia and southeast Kentucky. This activity resulted
in an additional 21.3 MMcf per day of gas sales and developed reserve additions
of 99.3 Bcfe.
CAPITAL EXPENDITURES
Equitable Production has set the 2001 capital budget level at $96
million. This includes $73 million for development of Appalachian holdings, $17
million for improvements to gathering system pipelines, and $6 million for
technology initiatives. The evaluation of new development locations, market
forecasts and price trends for natural gas and oil will continue to be the
principal factors for the economic justification of drilling and gathering
system investments.
18
19
EQUITABLE PRODUCTION (APPALACHIAN)
OPERATIONAL AND FINANCIAL DATA
YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
--------- -------- --------
OPERATIONAL DATA
Production:
Net equity sales, natural gas and equivalents (MMcfe) 66,356 30,844 30,869
Average (well-head) sales price ($/Mcfe) ............. $ 3.06 $ 2.30 $ 2.04
Monetized sales (MMcfe) .............................. 11,105 11,819 12,792
Average (well-head) sales price ($/Mcfe) ............. $ 2.04 $ 1.85 $ 1.85
Company usage (MMcfe) ................................ 6,568 3,232 2,583
Lease operating expense (LOE),
excluding severance tax ($/Mcfe) ................... $ 0.33 $ 0.33 $ 0.34
Severance tax ($/Mcfe) ............................... $ 0.16 $ 0.09 $ 0.08
Depletion ($/Mcfe) ................................... $ 0.49 $ 0.42 $ 0.42
PRODUCTION SERVICES:
Gathered volumes (MMcfe) ................................ 92,440 49,396 49,380
Average gathering fee ($/Mcfe) .......................... $ 0.58 $ 0.59 $ 0.68
Gathering and compression expense ($/Mcfe) .............. $ 0.27 $ 0.33 $ 0.35
Gathering and compression depreciation ($/Mcfe) ......... $ 0.11 $ 0.15 $ 0.14
Total operated volumes (MMcfe) .......................... 89,932 45,896 46,244
Volumes handled (MMcfe) ................................. 101,889 58,196 56,539
Selling, general, and administrative ($/Mcfe handled) ... $ 0.23 $ 0.33 $ 0.37
Capital expenditures (Thousands) ........................ $ 84,661 $ 29,155 $ 29,175
FINANCIAL DATA (THOUSANDS)
Revenue from Production ................................. $ 225,774 $ 92,680 $ 87,600
Services:
Revenue from gathering fees ........................ 53,268 29,178 33,500
Other revenues ..................................... 10,120 4,152 8,028
--------- -------- --------
Total revenues ..................................... 289,162 126,010 129,128
Operating expenses:
Gathering and compression expenses ................... 25,237 16,424 17,345
Lease operating expense .............................. 27,893 15,009 15,913
Severance tax ........................................ 13,103 3,977 3,566
Depreciation, depletion and amortization ............. 57,175 29,141 28,728
Selling, general and administrative (SG&A) ........... 23,470 19,034 20,670
Exploration and dry hole expense ..................... 2,896 1,891 1,126
Strike-related expenses .............................. 18,694
Restructuring charges ................................ -- -- 7,574
--------- -------- --------
Total operating expenses ........................... 168,468 85,476 94,922
Equity from nonconsolidated investments ................. 167 -- --
Other loss .............................................. (6,951) -- --
--------- -------- --------
Earnings before interest and taxes (EBIT) from operations $ 113,910 $ 40,534 $ 34,206
========= ======== ========
Revenues from production, which are derived primarily from the sale of
produced natural gas, increased 143.6% from 1999 to 2000. The increase in
revenues from production of $133.1 million from 1999 to 2000 is due primarily to
increases in sales volumes related to the Statoil acquisition and higher
effective commodity prices. The Statoil acquisition added 32.1 billion cubic
feet equivalent (Bcfe) of sales in the current year. Equitable Production's
average selling prices for natural gas increased 33.0% over the same period. The
increase in revenues realized was reduced by the recognition of $77.6 million in
hedge losses. The revenue from gathering fees increased 82.6% primarily due to
the increase in gathered volumes related to the Statoil acquisition. Other
revenues increased
19
20
by $6.0 million due to the sale of nonconventional fuel tax credits acquired
from Statoil and from service fees from the sale of interests in producing
properties.
Operating expenses for the period ended December 31, 2000 totaled $168.5
million, an increase of $83.0 million from the same period in 1999, with the
increase due primarily to the Statoil acquisition. Gathering and compression
expenses per Mcfe decreased 18.2% due to lower cost gathering on the acquired
assets. General and administrative expenses per Mcfe declined 30.3% due to
initial synergies from the acquisitions. Severance taxes per Mcfe increased due
to increased natural gas sales prices.
Revenues from production increased 5.8% from 1998 to 1999. The increase
in revenues from production of $5.1 million in 1999 compared to 1998 is due
primarily to increases in natural gas sales prices ($8.0 million) offset by a
decrease in monetized sales volumes ($2.9 million). In addition, 1998 includes
$2.6 million of direct bill revenues resulting from a FERC pricing settlement,
as described in Note D to the consolidated financial statements. The $4.3
million decrease in revenues from gathering fees is a result of a decrease in
capacity fees earned at Kentucky West Virginia Gas Company, due to the
expiration of certain long-term contracts.
Operating expenses, excluding the 1998 restructuring charges, decreased
2.1% in 1999 from 1998. Included in 1999 operating expenses is $2.8 million
related to process improvements, including the Company's decision to close its
regional office in Kingsport, Tennessee, consolidate administration and realign
field offices; $2.0 million of charges related to the decertification of
Kentucky West Virginia Gas Company, LLC; and $1.8 million in performance-related
compensation. Partially offsetting these items are $.7 million and $1.0 million
reductions in environmental and pension liabilities, respectively. Overall the
decrease in operating expenses in 1999, excluding the items above, is due to
continued improvements in operating efficiencies and decreased staff, as a
result of the initiatives begun in 1998.
In the second quarter 2000, Equitable sold 66 Bcfe of reserves to a
partnership for $122.2 million and an interest in the partnership. This volume
represents seven years' production from wells acquired from Statoil that contain
approximately 200 Bcfe of proved reserves. The proceeds from this sale were used
to pay down acquisition-related short-term debt. Prior to the transaction, the
Company entered into financial hedges covering the first two years of the
production. Removal of these hedges upon closing of the transactions resulted in
a $7 million pretax charge recorded as other loss. Equitable estimates that it
will receive $6.0 million in fees for operating the wells and gathering and
marketing the gas on behalf of the purchaser in 2001 based on expected
production volumes.
In December 2000, Equitable sold 133.3 Bcfe of reserves acquired from
Statoil to a trust for proceeds of $255.8 million and a minority interest in the
trust. In anticipation of this transaction, the Company had previously entered
into financial hedges. Removal of these hedges upon closing of this transaction
resulted in a $57.7 million charge that was equally offset against the gain
recognized on the sale of these properties. The proceeds received were used to
pay down short-term debt associated with the Statoil acquisition. Equitable
accounted for its $36.2 million investment under the equity method of
accounting. Equitable estimates that it will receive $12.0 million in fees for
operating the wells and gathering and marketing the gas on behalf of the
purchaser in 2001 based on expected production volumes.
In 2000, the Company entered into two natural gas advance sale contracts
for 48.7 MMcf of reserves. The Company is required to sell and deliver certain
quantities of natural gas during the term of the contracts. The first contract
is for five years with net proceeds of $104.0 million. The second contract is
for three years with net proceeds of $104.8 million. As such, these contracts
were recorded as prepaid gas forward sale and are being recognized in income as
deliveries occur. The proceeds received were used to pay down short-term debt
associated with the Statoil acquisition.
On December 10, 2000, a labor situation involving the Kentucky West
Virginia unit of Equitable Production and members of the local PACE labor union
was settled, after a 56-day strike which had curtailed production in the region.
The agreement reached between the Company and the union resulted in a decrease
in the represented work force in this unit by 85 people. This reduction from 152
to 67 resulted in a fourth quarter charge of $18.7 million, recorded as
operations and maintenance expense in the consolidated income statement. It is
expected that ongoing cost savings from the labor settlement will be
approximately $5.0 million per year.
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21
EQUITABLE PRODUCTION - GULF
As described above, the Equitable Production - Gulf operations were
merged into Westport effective April 1, 2000. The following description included
results prior to the merger. During 2000, seven gross wells were drilled at a
success rate of 86%.
In the Gulf Region during 1999, 153 gross wells were drilled at a success
rate of 82%. This activity resulted in additions of 48.5 Bcfe. The increase was
the result of successful development of the West Cameron Block 180 and 198
fields and South Marsh Island 39 field. Equitable Production- Gulf operated both
fields.
Equitable Production also participated in exploratory activity during
1999, including a successful well at South Timbalier 196, in which Equitable
Production had a 50% working interest. Unsuccessful exploratory activity during
1999 on the West Cameron 575 and the Eugene Island 44 blocks resulted in dry
hole expense of approximately $2.5 million in 1999.
PRODUCTION - GULF OPERATION
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
------- ------- ---------
OPERATIONAL DATA
PRODUCTION:
Net sales, natural gas and equivalents (MMcfe) 6,087 26,853 19,493
Average sales price ($/Mcfe) ................ $ 2.77 $ 2.34 $ 2.33
LOE ($/Mcfe) ................................ $ 0.24 $ 0.25 $ 0.45
SG&A ($/Mcfe) ............................... $ 0.27 $ 0.26 0.46
Depletion ($/Mcfe) .......................... $ 1.11 $ 1.07 $ 1.20
Capital expenditures (Thousands) ............ $ 9,034 $62,944 $ 97,577
FINANCIAL DATA (THOUSANDS)
Revenue from Production ..................... $16,885 $64,050 $ 51,758
Other revenues ......................... 70 844 777
------- ------- --------
Total revenues ......................... 16,955 64,894 52,535
Gathering and compression expense ........... 17 155 45
Lease operating expense ..................... 1,454 6,868 10,090
Depreciation, depletion and amortization .... 6,891 29,424 27,652
Selling, general and administrative expense . 1,643 6,969 10,114
Exploration and dry hole expense ............ 524 7,396 26,083
Restructuring charges ....................... -- -- 37,100
------- ------- --------
Total operating expenses ............... $10,529 $50,812 $111,084
------- ------- --------
EBIT ................................... $ 6,426 $14,082 $(58,549)
======= ======= ========
Results of operations for the Gulf in 2000 include only the first
quarter. During that period, revenues per Mcfe increased 18% over the full year
1999 average, due to increased commodity prices. Sales volumes decreased due to
the faster decline of Gulf production and decreased drilling during 2000.
Operating expenses per unit were essentially unchanged from 1999.
Revenues from production for the Gulf operations increased 23.7% from
1998 to 1999. The increase in revenues from production of $12.2 million in 1999
compared to 1998, is due primarily to increases in natural gas and crude oil
sales volumes of $8.0 million and $2.1 million, respectively. In addition,
higher commodity prices in 1999 contributed $1.8 million to the increase in
revenues from production.
Operating expenses decreased 54.3% in 1999 from 1998. The 1998 expenses
include $37.1 million of restructuring charges and $23.1 million of dry hole
expense associated with the unsuccessful drilling of five wells. In 1999, two
unsuccessful exploratory wells were drilled for a total of $2.5 million of dry
hole cost. Other exploration expenses increased $2.0 million in 1999 due
primarily to a lease impairment and the impairment of an equity investment in an
oil and natural gas production company. DD&A increased $1.8 million in 1999
because of increased production. The remaining positive variance of $6.2 million
is due to continued improvements in operating efficiencies and decreased staff.
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NORESCO
NORESCO provides energy and energy related products and services that are
designed to reduce its customers' operating costs and improve their
productivity. NORESCO's customers include commercial, governmental,
institutional and industrial end-users. NORESCO provides the following
integrated energy management services: project development and engineering
analysis; construction; project management; financing; equipment operation and
maintenance; and energy savings metering, monitoring and verification. NORESCO's
energy infrastructure group develops and operates private power, cogeneration
and central plant facilities in the U.S. and operates private power plants in
selected international countries. During the second quarter of 2000, the Company
announced its intention to sell ERI Services due to an overlap with NORESCO's
federal contracts and contracting activities. Equitable subsequently
re-evaluated that decision based in part on the recent performance of these two
units and increasing energy costs which further improves their business
prospects. Subject to government approval, the Company intends to combine ERI
Services and NORESCO to take advantage of market conditions that are favorable
toward energy cost saving projects.
YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
OPERATIONAL DATA
Revenue backlog at December 31 (Thousands)(a) ... $ 90,978 $ 70,999 $ 97,394
Gross profit margin ............................. 24.8% 21.5% 26.2%
SG&A as a % of revenue .......................... 17.0% 11.7% 17.6%
Development expense as a % of revenue ........... 3.3% 2.6% 3.3%
======== ======== ========
Capital expenditures (thousands) ................ $ 1,596 $ 6,041 $ 11,102
FINANCIAL DATA (THOUSANDS)
Energy service contracting revenues ............. $134,620 $169,633 $109,493
Energy service contract cost .................... 101,266 133,088 80,800
-------- -------- --------
Gross margin ............................... 33,354 36,545 28,693
Operating expenses:
Selling, general and administrative .......... 22,873 19,889 19,218
Depreciation, depletion and amortization ..... 5,304 6,078 4,300
Restructuring charges ........................ -- -- 2,716
-------- -------- --------
Total operating expenses ................... 28,177 25,967 26,234
-------- -------- --------
Operating income ................................ 5,177 10,578 2,459
Equity earnings of nonconsolidated investments .. 5,109 2,863 2,667
-------- -------- --------
Earnings before interest and taxes .............. $ 10,286 $ 13,441 $ 5,126
======== ======== ========
(a) Beginning in 2000, backlog is presented on a revenue basis. For
comparison purposes, the 1999 and 1998 backlog was restated to conform with the
2000 presentation.
Revenues decreased from 1999 to 2000 by $35.0 million, or 20.6%,
primarily caused by low construction backlog at the end of 1999. In addition,
NORESCO refined its focus on larger projects with higher gross margin. Gross
margins increased to 24.8% in 2000 from 21.5% in 1999, reflecting a focus on
higher margin producing products and services and a gross profit increase in a
few operational energy services projects. During the fourth quarter of 2000,
NORESCO completed receivable sales resulting in a $2.0 million decrease in gross
margin and EBIT.
Revenue backlog increased to $91.0 million at year-end 2000 from
$71.0 million at year-end 1999. The increase in backlog is attributable to an
increase in the energy infrastructure project backlog. A substantial portion of
the backlog is expected to be completed within the next 18 months.
Total construction completed during 2000 was $85.1 million versus $151.7
million, a decrease of $66.6 million over 1999. This decrease was primarily due
to a $45 million decrease in construction of energy infrastructure projects in
1999.
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SG&A expenses increased from 1999 to 2000 by $3.0 million. Increases
during 2000 were $1.0 million related to the decision to discontinue developing
international energy infrastructure projects and the integrating of this
separate division with the energy services contracting business. Other costs
include $0.4 million of additional costs related to the closing of three
unprofitable energy services contracting offices in the Northwest United States.
Depreciation, depletion and amortization (DD&A) expense decreased from
1999 to 2000 by $0.8 million, or 12.7%. This decrease was primarily due to a
write-down of computer software development in 1999.
Revenues increased from 1998 to 1999 by $60.1 million, or 55%, reflecting
the continued expansion of the business. Total construction completed during
1999 was $151.8 million, an increase of $72.0 million over 1998.
Gross margins from energy services contracting activities decreased to
21.5% in 1999 from 26.2% in 1998. The deterioration in gross margin results
mainly from the higher proportion of lower margin government contracts
implemented in 1999.
SG&A expenses increased from 1998 to 1999 by $0.7 million. Increases
during 1999 include project development expense of $0.8 million, marketing
expense of $0.2 million and rent expense of $0.1 million that were partially
offset by a $0.7 million reduction in corporate overhead expense.
Depreciation, depletion and amortization (DD&A) expense increased from
1998 to 1999 by $1.8 million, or 41.3%. This increase is primarily due to the
Company's cogeneration facility in Jamaica, which was put into service in
February 1999.
Other income of $2.9 million in 1999 and $2.7 million in 1998 reflects
NORESCO's share of the earnings from its equity investments in power plant
assets, primarily a 50 mega-watt facility in Panama, which is 50% owned by the
Company. A 96 mega-watt facility in Panama and a 7 mega-watt facility in
Providence, RI were brought on line in late 1999.
1998 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
During 1998, management expressed its intention to focus on fundamental
strengths in its core businesses. In October 1998, the Company's Board of
Directors approved a restructuring plan. As a result of this plan, along with
its earlier decision to discontinue and sell the natural gas midstream business,
and the sustained decrease in oil and natural gas commodity prices, the Company
took specific actions to reduce its overall cost structure. Certain of the
actions taken by the Company resulted in pretax impairment, restructuring and
other nonrecurring charges in the fourth quarter of 1998 amounting to $81.8
million. The restructuring activities (shown below in tabular format) primarily
relate to the following:
The elimination of employment positions Company-wide: Early in the fourth
quarter of 1998, the Company announced that the restructuring plan would
eliminate a substantial number of positions. Related charges included severance
packages, cash payments made directly to terminated employees as well as
outplacement services and noncash charges for curtailment of certain defined
benefit pension and other postretirement benefit plans. A total of 164 employees
terminated employment.
Redirection of offshore Gulf production: As a result of the decrease in
oil and natural gas prices and unsuccessful drilling results in several of the
Company's nonoperated blocks, a review of the Gulf operations was undertaken.
The Company eliminated several layers of management and focused its operations
on lower risk, Company-operated exploration and development. In addition, the
production and commodity price trends indicated that the undiscounted cash flows
from this division would be substantially less than the carrying value of the
producing properties. Producing property write-downs were measured based on a
comparison of the assets' net book value to the net present value of the
properties' estimated future net cash flows. The undeveloped leases no longer
intended to be developed were written down to estimated market value less costs
to dispose.
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Improved integration of Appalachian production operations: To improve the
efficiency of Appalachian production operations, the Company obtained authority
in 1999 from the FERC to decertify the pipeline facilities of Kentucky West
Virginia Gas Company, LLC.
Decentralization of administrative functions: In the fall of 1998,
management initiated a major decentralization and downsizing of administrative
functions. Costs incurred, in addition to severance and other employee
separation costs described above, included one-time costs for third party
processing, costs to make assets available for sale, lease cancellations for
office and computer equipment and noncash charges for the write-down of assets
no longer in use and subsequently sold.
Exiting certain noncore businesses: As a result of the continued
evaluation of profitability of the Company's nonregulated retail natural gas
sales business, the Company has refocused its marketing along core regional
lines and eliminated five field offices. In addition, the Company intends to
curtail its involvement in several auxiliary business ventures, such as radio
dispatch operations and residential real estate development, and has written
these investments down to net realizable value.
RESERVE RESERVE
CASH/ RESTRUCTURING 1998 BALANCE AT 1999 BALANCE AT
1998 NONCASH CHARGE ACTIVITY 12/31/98 ACTIVITY 12/31/99
--------------------------------------------------------------------
(MILLIONS)
Elimination of employment positions Company-wide:
Severance and other employment packages .............. Cash $ (8.2) $ 2.6 $(5.6) $5.6 $--
Pension/other benefit plan curtailments .............. Noncash (2.1) 2.1 -- -- --
Other ................................................ Cash (0.8) 0.5 (0.3) 0.3 --
Redirection of offshore Gulf production:
Impairment of undeveloped leases ..................... Noncash (15.9) 15.9 -- -- --
Impairment of producing properties ................... Noncash (19.6) 19.6 -- -- --
Improved integration of Appalachian production operations:
Impairment of regulatory assets ...................... Noncash (4.0) 4.0 -- -- --
Impairment of undeveloped leases ..................... Noncash (1.4) 1.4 -- -- --
Decentralization of administrative functions:
Impairment of headquarters building .................. Noncash (5.1) 5.1 -- -- --
Impairment of enterprise-wide computer system ........ Noncash (7.7) 7.7 -- -- --
Impairment of other assets ........................... Noncash (3.3) 3.3 -- -- --
Exiting certain noncore businesses:
Office closing/lease buyout .......................... Cash (1.7) 1.6 (0.1) 0.1 --
Impairment of radio system assets/buyout lease ....... Noncash/Cash (3.3) 2.1 (1.2) 1.2 --
Impairment of investments ............................ Noncash (1.5) 1.5 -- -- --
Impairment of other assets ........................... Noncash (3.6) 3.6 -- -- --
Impairment of pipeline stranded costs ................ Noncash (3.6) 3.6 -- -- --
------ ----- ----- ---- ---
Total ..................................................... $(81.8) $74.6 $(7.2) $7.2 $--
====== ===== ===== ==== ===
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OTHER INCOME STATEMENT ITEMS
OTHER INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
---- ---- ----
(THOUSANDS)
Other income (loss):
Equity earnings of nonconsolidated investments $25,161 $2,863 $2,667
Gain on sale of investment ................... 6,561 -- --
Other loss ................................... (6,951) -- --
------- ------ ------
Total other income ......................... $24,771 $2,863 $2,667
======= ====== ======
Equity earnings of nonconsolidated investments increased in 2000 from
1999 primarily due to the equity earnings from the Company's ownership in
Westport. In October 2000, Westport Resources Corporation had a successful
initial public offering (IPO) of its shares. Equitable sold 1.325 million shares
in this IPO for a pretax gain of $6.6 million.
On June 30, 2000, Equitable sold a substantial portion of its interest in
properties qualifying for nonconventional fuel tax credit to a partnership which
netted $122.2 million in cash and retained a minority interest in this
partnership. In anticipation of this transaction, the Company had previously
entered into financial hedges covering the first two years of production.
Removal of these hedges upon closing of this transaction resulted in a $7.0
million pretax charge recorded as other loss.
INTEREST CHARGES
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
-------------- -------------- -----------
(THOUSANDS)
Interest charges............... $ 75,661 $ 37,132 $ 40,302
Interest costs increased in 2000 as a result of the acquisition of
Statoil's Appalachian assets which increased average debt outstanding by $580
million. The outstanding debt was reduced significantly during the fourth
quarter by the proceeds received from the two prepaid gas forward sales, the
sale of reserves to a trust and sales of assets. Interest expense also increased
as a result of higher interest rates in 2000 compared to 1999.
Interest costs decreased in 1999 as a result of an $86 million decrease
in average debt outstanding, due to proceeds from the sale in late 1998 of the
natural gas midstream operations, lower capital expenditures and improved cash
flows from operations. The savings from the lower debt level were partially
offset by a slightly higher overall interest rate, due to the full year effect
of the Preferred Trust Debentures issued in 1998.
Average annual interest rates on short-term debt were 6.4% for 2000 and
ranged from 5.0% to 5.7% between 1998 and 1999.
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26
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
Cash flows provided from continuing operating activities were $361.2
million in 2000 compared to $154.3 million in 1999 and $114.7 million in 1998.
Operating cash flows used in discontinued operations in 1998 were $24.5 million.
Cash flows from operations primarily increased in 2000 as a result of the $37.1
million increase in net income from 1999 and from cash received in December 2000
from two natural gas advance sale contracts recorded as prepaid gas forward
sale.
Equitable Utilities Distribution and Energy Marketing operations had
increased accounts receivable, inventory and deferred purchased gas costs due to
the increased natural gas commodity prices and the increased marketed gas sales
volumes in 2000 compared to 1999. This negative operating cash flow effect was
partially offset by the increase in accounts payable also attributable to the
higher gas prices and increased volumes.
Deferred income taxes increased from the prior year primarily due to
the Statoil acquisition and the deferred taxes associated with the undistributed
earnings from Westport. The undistributed earnings from nonconsolidated
investments also increased from 1999 principally as a result of the asset merger
with Westport.
During 1998, the Company divested its natural gas midstream operations
for $338.3 million, which included working capital adjustments. Prior to this
divestiture, these operations had entered into large volume natural gas trading
contracts with expiration dates in 1999. Subsequent to the divestiture, these
contracts were served out by the Marketing operations of Equitable Utilities.
The balance in accounts receivable and payable at December 31, 1998 included
$42.4 million and $44.8 million, respectively, related to these deals, which did
not recur in 1999. There were no other significant changes in cash flows from
operations between 1998 and 1999.
INVESTING ACTIVITIES
Cash flows used in investing activities were $363.0 million in 2000 and
$137.5 in 1999 compared to cash flows provided by investing activities of $142.0
million in 1998. Cash used in investing activities in 2000 primarily include the
first quarter acquisition of Statoil properties for $630 million plus working
capital adjustments for a total of $677 million and the increase in equity in
nonconsolidated investments due to the Westport merger and the ownership
interests received in the sales of producing properties in June and December
2000.
Cash provided in investing activities in 2000 includes the net proceeds
received from the reserve sales totaling $382.9 million, the proceeds received
from the Westport merger, the proceeds received from the sale of 1.325 million
shares of Westport stock in conjunction with the Westport IPO and the proceeds
received from the NORESCO receivable sales in the fourth quarter.
The Company expended approximately $123.7 million in 2000 compared to
$102.0 million in 1999 and $158.7 million in 1998 for continuing operations
capital expenditures. These expenditures in all years represented growth
projects in the Equitable Production segment, and replacements, improvements and
additions to plant assets in the Equitable Utilities and NORESCO units.
Equitable Production invested $84.7 million in 2000 in the Appalachian region
for new coal-bed methane and conventional natural gas wells. In addition to its
equity in nonconsolidated investments, NORESCO expended $1.6 million for
leasehold improvements and equipment additions and replacements. The Equitable
Utilities segment expended $28.4 million for distribution plant replacements and
improvements. The Company had $32.0 million in discontinued operations capital
expenditures in 1998.
A total of $175 million has been authorized for the 2001 capital
expenditure program, as previously described in the business segment results.
The Company expects to finance this program with cash generated from operations
and with short-term loans.
In December 1999, the Company acquired Carnegie for $40 million,
including natural gas distribution, pipeline, exploration and production
operations.
26
27
During 1998, the Company completed its sales of its natural gas midstream
operations for $338.3 million. Proceeds from the sales were used to reduce
outstanding debt, repurchase shares of the Company's common stock and for
operating purposes.
FINANCING ACTIVITIES
Cash flows provided from financing activities were $35.8 million in 2000
compared to cash flows used of $101.2 million and $199.2 million in 1999 and
1998, respectively. Financing activities in 2000 included the $630 million
increase in short-term financing associated with the first quarter 2000 Statoil
acquisition. Short-term loans were significantly reduced in the second and
fourth quarters of 2000 resulting from the proceeds from the Company's sales and
monetizations of 248 Bcfe of reserves in several transactions.
The Company continued its October 1998 stock buyback program in 2000.
Total purchases under the program of 6.7 million shares include .6 million
shares of stock repurchased in 2000 for $29.5 million. In total, the Company has
repurchased 12.7% of shares outstanding at December 31, 2000. On July 19, 2000,
the Board of Directors approved a resolution to increase the shares authorized
for repurchase to 9.4 million.
Cash generated in all years was partially offset by the payment of the
Company's dividends on common shares, which for 2000, 1999 and 1998 were $38.5
million, $40.4 million and $43.8 million, respectively.
In July 1999, the Company repaid $75.0 million of 7-1/2% debentures,
using cash proceeds received in 1998 from the sale of its natural gas midstream
operations.
In 1999, the Company received proceeds of $17.0 million from the issuance
of nonrecourse debt used to finance a cogeneration facility owned by a
subsidiary of the Company and located in Jamaica. The note is secured by the
assets of the Jamaican facility.
SHORT-TERM BORROWINGS
Cash required for operations is affected primarily by the seasonal nature
of the Company's natural gas distribution operations and the volatility of oil
and natural gas commodity prices. Short-term loans are used to support working
capital requirements during the summer months and are repaid as natural gas is
sold during the heating season.
The Company has adequate borrowing capacity to meet its financing
requirements. Bank loans and commercial paper, supported by available credit,
are used to meet short-term financing requirements. Interest rates on these
short-term loans averaged 6.37% during 2000. The Company maintains a revolving
credit agreement with a group of banks providing $325 million of available
credit, which expires in 2003. The Company also maintains a 364-day credit
agreement with a group of banks providing $325 million of available credit,
which expires in 2001. As of December 31, 2000, the Company has the authority
and credit backing to support a $650 million commercial paper program.
RISK MANAGEMENT
The Company's overall objective in its hedging program is to protect
earnings from undue exposure to the risk of falling commodity prices. Since it
is primarily a natural gas company, this leads to different approaches to
hedging natural gas than for crude oil and natural gas liquids.
With respect to hedging the Company's exposure to changes in natural gas
commodity prices, management's objective is to provide price protection for the
majority of expected production for the year 2001. Its preference is to use
derivative instruments that create a price floor, in order to provide down-side
protection while allowing the Company to participate in a portion of the upward
price movements. This is accomplished with the use of a mix of costless collars,
straight floors and some fixed price swaps. This mix allows the Company to
participate in a range of prices, while protecting shareholders from significant
price deterioration.
27
28
Crude oil and natural gas liquids prices are currently at relatively high
levels compared to historical averages. As a result, the Company has used swaps
and other derivative instruments to lock in current prices for the majority of
expected production of crude oil and of natural gas liquids for the year 2001.
EQUITY IN NONCONSOLIDATED INVESTMENTS
The Company, within the NORESCO segment, has equity ownership interests
in independent power plant (IPP) projects located domestically and in select
international countries. Long-term power purchase agreements (PPAs) are signed
with the customer whereby they agree to purchase the energy generated by the
plant. The length of these contracts range from 5 to 30 years. The Company has
invested approximately $32.7 million in these operations since January 1998. The
Company's share of the earnings for this same time period is approximately $10.6
million. These projects generally are financed on a project basis with
nonrecourse financings established at the foreign subsidiary level.
In April 2000, the Company combined its Gulf of Mexico operations with
Westport Oil and Gas Company for $50 million in cash and approximately 49%
interest in the combined company, Westport. In October 2000, Westport Resources
Corporation had a successful IPO of its shares. Equitable sold 1.325 million
shares in this IPO for an after-tax gain of $4.3 million. Equitable now owns
13.911 million shares, or approximately 36% interest in the Company. Equitable's
investment in Westport was $130.1 million as of December 31, 2000.
During 2000, Equitable Production sold 199.3 Bcfe in reserves located in
the Appalachian Basin region of the United States in two transactions which
resulted in Equitable Production retaining minority interest in a resulting
partnership and trust. The partnership and trust properties include assets that
qualify for nonconventional fuels tax credits. Both of these investments are
accounted for under the equity method of accounting.
ACQUISITIONS AND DISPOSITIONS
In February 2000, the Company acquired the Appalachian production assets
of Statoil for $630 million plus working capital adjustments for a total of $677
million. The Company initially funded this acquisition through commercial paper,
which was replaced by a combination of financings and cash from asset sales.
In April 2000, the Company merged Equitable Production - Gulf with
Westport Oil and Gas Company based in Denver, Colorado, for a 49% ownership
interest in the combined entity, Westport. In October 2000, Westport had a
successful initial public offering whereby Equitable sold 1.325 million shares
and reduced its ownership percentage to approximately 36%.
On June 30, 2000, Equitable sold a substantial portion of its interest
in properties qualifying for nonconventional fuel tax credit to a partnership
which netted $122.2 million in cash and retained a minority interest in this
partnership. The proceeds received were used to pay down short-term debt
associated with the Statoil acquisition. Prior to the transaction, the Company
entered into financial hedges covering the first two years of production.
Removal of these hedges upon closing of this transaction resulted in a $7.0
million pretax charge recorded as other loss. Equitable accounted for its
remaining $26.3 million investment under the equity method of accounting.
Equitable estimates that it will receive $6.0 million in fees for operating the
wells and gathering and marketing the gas on behalf of the purchaser in 2001
based on expected production volumes.
In December 2000, Equitable sold 133.3 Bcfe of reserves acquired from
Statoil to a trust for proceeds of $255.8 million and a minority interest in
this trust. In anticipation of this transaction, the Company had previously
entered into financial hedges. Removal of these hedges upon closing of this
transaction resulted in a $57.7 million charge that was equally offset against
the gain recognized on the sale of these properties. The proceeds received were
used to pay down short-term debt associated with the Statoil acquisition.
Equitable accounted for its $36.2 million investment under the equity method of
accounting. Equitable estimates that it will receive $12.0 million in fees for
operating the wells and gathering and marketing the gas on behalf of the
purchaser in 2001 based on expected production volumes.
28
29
In 2000, the Company entered into two natural gas advance sale
contracts for 48.7 MMcf of reserves. The Company is required to sell and deliver
certain quantities of natural gas during the term of the contracts. The first
contract is for five years with net proceeds of $104.0 million. The second
contract is for three years with net proceeds of $104.8 million. As such, these
contracts were recorded as prepaid gas forward sales and are being recognized in
income as deliveries occur.
RATE REGULATION
Accounting for the operations of Equitable's Utilities segment is in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As
described in Note A to the consolidated financial statements, regulatory assets
and liabilities are recorded to reflect future collections or payments through
the regulatory process. The Company believes that it will continue to be subject
to rate regulation that will provide for the recovery of deferred costs.
ENVIRONMENTAL MATTERS
Equitable and its subsidiaries are subject to extensive federal, state
and local environmental laws and regulations that affect their operations.
Governmental authorities may enforce these laws and regulations with a variety
of civil and criminal enforcement measures, including monetary penalties,
assessment and remediation requirements and injunctions as to future activities.
Management does not know of any environmental liabilities that will have
a material effect on Equitable's financial position or results of operations.
The Company has identified situations that require remedial action for which
approximately $8.7 million is accrued at December 31, 2000. Environmental
matters are described in Note V to the consolidated financial statements.
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the
past several years and has not significantly affected the profitability of the
Company. In prior periods of high general inflation, oil and natural gas prices
generally increased at comparable rates; however, there is no assurance that
this will be the case in the current environment or in possible future periods
of high inflation. Regulated utility operations would be required to file a
general rate case in order to recover higher costs of operations. Margins in the
energy marketing business in the Equitable Utilities segment are highly
sensitive to competitive pressures and may not reflect the effects of inflation.
The results of operations in the Company's three business segments will be
affected by future changes in oil and natural gas prices and the
interrelationship between oil, natural gas and other energy prices.
AUDIT COMMITTEE
The Audit Committee, composed entirely of outside directors, meets
periodically with Equitable's independent auditors and management to review the
Company's financial statements and the results of audit activities. The Audit
Committee, in turn, reports to the Board of Directors on the results of its
review and recommends the selection of independent auditors.
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30
FORWARD-LOOKING STATEMENTS
Disclosures in the Annual Report on Form 10-K contain statements that
express the expectations of future plans, objectives and anticipated financial
performance of the Company and its subsidiaries, future cost savings, growth and
operational matters including labor relations, and constitute forward-looking
statements made pursuant to the Safe Harbor provision of the Private Securities
Litigation Act of 1995. Except as otherwise disclosed, the Company's
forward-looking statements do not reflect the impact of the possible or pending
acquisitions, divestitures, or restructurings. We undertake no obligation to
correct or update any forward-looking statements, whether as a result of new
information, future events or otherwise. All statements based on future
expectations rather than on historical facts are fo