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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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23
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.
25
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 forward-looking statements that
are dependent on certain events, risks and uncertainties that could cause actual
results to differ materially from those anticipated. Some of these include, but
are not limited to, economic and competitive conditions, earnings to be recorded
for the Company's investment in Westport, inflation rates, changing prices,
legislative and regulatory changes, obtaining necessary regulatory approvals,
financial market conditions, availability of financing, curtailments or
disruptions in production, future business decisions, and other uncertainties,
all of which are difficult to predict. There are numerous uncertainties inherent
in estimating quantities of proved oil and gas reserves and in projecting future
rates of production and timing of development expenditures. The total amount or
timing of actual future production may vary significantly from reserves and
production estimates. In addition, the drilling of development and exploratory
wells can involve significant risks, including those related to timing, success
rates and cost overruns and these risks can be affected by lease and rig
availability, complex geology and other factors. Although the Company engages in
hedging activities to mitigate risks, fluctuations in future crude oil and gas
prices could affect materially the Company's financial position and results of
operations. Furthermore, the Company cannot guarantee the absence of errors in
input data, calculations, and formulas used in estimates, assumptions and
forecasts.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is the volatility of future
prices for natural gas, crude oil and propane, which can affect the operating
results of Equitable through the Equitable Production segment and the
unregulated marketing group within the Equitable Utilities segment. The
Company's use of derivatives to reduce the effect of this volatility is
described in Note B to the consolidated financial statements. The Company uses
simple, nonleveraged derivative instruments that are placed with major
institutions whose creditworthiness is continually monitored. The Company also
enters into energy trading contracts to leverage its assets and limit the
exposure to shifts in market prices. The Company's use of these derivative
financial instruments is implemented under a set of policies approved by the
Board of Directors.
For commodity price derivatives used to hedge Company production,
Equitable sets policy limits relative to expected production and sales levels
which are exposed to price risk. The level of price exposure is limited by the
value at risk limits allowed by this policy. Volumes associated with future
activities, such as new drilling, recompletions and acquisitions, are not
eligible for hedging. Management monitors price and production levels on
essentially a continuous basis and will make adjustments to quantities hedged as
warranted. In general, Equitable's strategy is to become more highly hedged at
prices considered to be at the upper end of historical levels.
For commodity price derivatives held for trading positions, the marketing
group will engage in financial transactions also subject to policies that limit
the net positions to specific value at risk limits. In general, this marketing
group considers profit opportunities in both physical and financial positions,
and Equitable's policies apply equally thereto. These financial instruments
include forward contracts, which may involve physical delivery of an energy
commodity, swap agreements, which may require payments to (or receipt of
payments from) counterparties based on the differential between a fixed and
variable price for the commodity, options and other contractual agreements.
With respect to the energy derivatives held by the Company for purposes
other than trading as of December 31, 2000, a decrease of 10% in the market
price of natural gas and crude oil from the December 31, 2000 levels would
increase the fair value of the natural gas instruments by approximately $12.7
million and would increase the fair value of the crude oil instruments by
approximately $1.0 million. A 10% decrease would have minimal impact on the fair
value of the propane instruments.
With respect to derivative contracts held by the Company for trading
purposes as of December 31, 2000, a decrease of 10% in the market price of
natural gas from the December 31, 2000 level would increase the fair value by
approximately $1.9 million. There were no crude oil or propane instruments held
for trading purposes.
30
31
The above analysis of the energy derivatives utilized for risk management
purposes does not include the unfavorable impact that the same hypothetical
price movement would have on the Company and its subsidiaries' physical sales of
natural gas. The portfolio of energy derivatives held for risk management
purposes approximates the notional quantity of the expected or committed
transaction volume of physical commodities with commodity price risk for the
same time periods. Furthermore, the energy derivative portfolio is managed to
complement the physical transaction portfolio, reducing overall risks within
limits. Therefore, an adverse impact to the fair value of the portfolio of
energy derivatives held for risk management purposes associated with the
hypothetical changes in commodity prices referenced above would be offset by a
favorable impact on the underlying hedged physical transactions, assuming the
energy derivatives are not closed out in advance of their expected term, the
energy derivatives continue to function effectively as hedges of the underlying
risk, and as applicable, anticipated transactions occur as expected.
The disclosure with respect to the energy derivatives relies on the
assumption that the contracts will exist parallel to the underlying physical
transactions. If the underlying transactions or positions are liquidated prior
to the maturity of the energy derivatives, a loss on the financial instruments
may occur, or the options might be worthless as determined by the prevailing
market value on their termination or maturity date, whichever comes first.
The Company has variable rate short-term debt. As such, there is some
limited exposure to future earnings due to changes in interest rates. A 100
basis point increase or decrease in interest rates would not have a significant
impact on future earnings of the Company.
31
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE REFERENCE
--------------
Report of Independent Auditors .......................................................... 33
Statements of Consolidated Income for each of the three years in the period ended
December 31, 2000 .................................................................... 34
Statements of Consolidated Cash Flows for each of the three years in the period ended
December 31, 2000 .................................................................... 35
Consolidated Balance Sheets December 31, 2000 and 1999 .................................. 36 & 37
Statements of Common Stockholders' Equity for each of the three years in the period ended
December 31, 2000 .................................................................... 38
Notes to Consolidated Financial Statements .............................................. 39-66
32
33
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Equitable Resources, Inc.
We have audited the accompanying consolidated balance sheets of Equitable
Resources, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, common stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Equitable Resources, Inc. and Subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
-----------------------------
Ernst & Young LLP
Pittsburgh, Pennsylvania
February 5, 2001
33
34
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31,
2000 1999 1998
----------- ---------- ---------
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating revenues .......................................... $1,652,218 $1,042,013 $851,811
Cost of sales ............................................... 1,075,267 586,663 450,115
---------- ---------- --------
Net operating revenues ................................. 576,951 455,350 401,696
---------- ---------- --------
Operating expenses:
Operation and maintenance ................................ 103,020 74,424 74,859
Exploration .............................................. 3,420 9,288 27,211
Production ............................................... 42,450 25,854 29,568
Selling, general and administrative ...................... 116,050 102,307 114,846
Depreciation, depletion and amortization ................. 97,777 100,722 85,170
Restructuring and impairment charges ..................... -- -- 81,840
---------- ---------- --------
Total operating expenses ............................... 362,717 312,595 413,494
---------- ---------- --------
Operating income (loss) ..................................... 214,234 142,755 (11,798)
Equity in earnings of nonconsolidated investments ........... 25,161 2,863 2,667
Gain on sale of Westport stock .............................. 6,561 -- --
Other loss .................................................. (6,951) -- --
---------- ---------- --------
Earnings (loss) from continuing operations,
before interest & taxes .................................. 239,005 145,618 (9,131)
Interest charges ............................................ 75,661 37,132 40,302
---------- ---------- --------
Income (loss) before income taxes ........................... 163,344 108,486 (49,433)
Income taxes (benefits) ..................................... 57,171 39,356 (22,381)
---------- ---------- --------
Net income (loss) from continuing operations
before extraordinary loss ................................ 106,173 69,130 (27,052)
Loss from discontinued operations after taxes ............... -- -- (8,804)
Extraordinary loss after taxes - early extinguishment of debt -- -- (8,263)
---------- ---------- --------
Net income (loss) ........................................... $ 106,173 $ 69,130 $(44,119)
========== ========== ========
Earnings (loss) per share of common stock:
Basic:
Continuing operations, before extraordinary loss ....... $ 3.26 $ 2.03 $ (0.73)
Discontinued operations ................................ -- -- (0.24)
Extraordinary loss - early extinguishment of debt ...... -- -- (0.22)
---------- ---------- --------
Net income (loss) ...................................... $ 3.26 $ 2.03 $ (1.19)
========== ========== ========
Diluted:
Continuing operations, before extraordinary loss ....... $ 3.20 $ 2.01 $ (0.73)
Discontinued operations ................................ -- -- (0.24)
Extraordinary loss - early extinguishment of debt ...... -- -- (0.22)
---------- ---------- --------
Net income (loss) ...................................... $ 3.20 $ 2.01 $ (1.19)
========== ========== ========
See notes to consolidated financial statements.
34
35
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31,
2000 1999 1998
--------- --------- ---------
(THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations, before extraordinary items.... $ 106,173 $ 69,130 $ (27,052)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Impairment of assets ................................................... -- -- 75,245
Provision for losses on accounts receivable ............................ 12,129 11,917 15,634
Depreciation, depletion and amortization ............................... 97,777 100,722 85,170
Dry hole expense ....................................................... -- 2,455 23,101
Amortization of construction contract costs ............................ 1,229 23,100 8,271
Recognition of deferred revenue ........................................ (13,715) (13,034) (14,498)
Deferred income taxes (benefits) ....................................... 54,519 14,635 (29,537)
Increase in undistributed earnings from nonconsolidated investments .... (23,632) (717) (2,617)
Gain on sale of investment ............................................. (4,265) -- --
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues ............................. (183,654) 30,722 101,887
Contract receivables .................................................. (50,903) (43,530) (8,400)
Inventory ............................................................. (35,853) (7,116) 3,413
Deferred purchased gas cost ........................................... (15,429) 10,370 5,646
Prepaid expenses and other ............................................ (12,429) (19,460) 32,353
Accounts payable ...................................................... 199,843 (66,535) (121,396)
Prepaid gas forward sale .............................................. 209,294 -- --
Other - net ........................................................... 20,069 41,659 (32,520)
--------- --------- ---------
Total adjustments .................................................... 254,980 85,188 141,752
--------- --------- ---------
Net cash provided by continuing operating activities ............... 361,153 154,318 114,700
Net cash used in discontinued operations ........................... -- -- (24,473)
--------- --------- ---------
Net cash provided by operating activities .......................... 361,153 154,318 90,227
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on continuing operations ............................. (123,727) (101,991) (158,714)
Capital expenditures on discontinued operations ........................... -- -- (32,004)
Acquisition of Statoil production assets .................................. (677,235) -- --
Carnegie acquisition ...................................................... -- (40,128) --
Proceeds from Gulf asset merger ........................................... 158,214 -- --
Proceeds from sale of interest in producing properties .................... 382,942 -- --
Increase in equity in nonconsolidated investments ......................... (181,757) (22,719) (14,393)
Proceeds from sale of equity in nonconsolidated investments ............... 19,875 -- --
Proceeds from sale of receivables ......................................... 56,553 18,360 8,859
Proceeds from sale of property ............................................ 2,127 8,935 338,255
--------- --------- ---------
Net cash (used in) provided by investing activities ................ (363,008) (137,543) 142,003
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ............................................................ (38,490) (40,384) (43,800)
Proceeds from issuance of common stock .................................... -- -- 2,496
Purchase of treasury stock ................................................ (29,483) (101,574) (41,737)
Proceeds from exercises under employee compensation plans ................. 9,039 6,959 3,990
Proceeds from issuance of nonrecourse note for project financing .......... -- 17,000 --
Purchase of debt due 2000 through 2026 .................................... -- -- (68,556)
Proceeds from preferred trust securities .................................. -- -- 125,000
Repayments and retirements of long-term debt .............................. -- (74,972) (10,880)
Increase (decrease) in short-term loans ................................... 94,781 91,783 (165,741)
--------- --------- ---------
Net cash provided by (used in) financing activities ................ 35,847 (101,188) (199,228)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...................... 33,992 (84,413) 33,002
Cash and cash equivalents at beginning of year ............................ 18,031 102,444 69,442
--------- --------- ---------
Cash and cash equivalents at end of year .................................. $ 52,023 $ 18,031 $ 102,444
========= ========= =========
CASH PAID DURING THE YEAR FOR:
Interest (net of amount capitalized) .................................... $ 81,023 $ 54,516 $ 46,973
========= ========= =========
Income taxes ............................................................ $ 11,711 $ 5,759 $ 15,568
========= ========= =========
See notes to consolidated financial statements.
35
36
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2000 1999
---------- ----------
(THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 52,023 $ 18,031
Accounts receivable (less accumulated provision
for doubtful accounts: 2000, $15,413; 1999,
$13,024) ........................................ 300,399 148,103
Unbilled revenues ................................. 80,157 46,686
Inventory ......................................... 85,246 40,859
Deferred purchased gas cost ....................... 44,504 29,075
Derivative commodity instruments, at fair value ... 31,220 2,695
Prepaid expenses and other ........................ 21,123 41,389
---------- ----------
Total current assets .......................... 614,672 326,838
---------- ----------
EQUITY IN NONCONSOLIDATED INVESTMENTS ................ 230,651 40,873
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Equitable Utilities ............................... 951,612 919,815
Equitable Production .............................. 1,248,605 1,107,345
NORESCO ........................................... 26,204 25,368
---------- ----------
Total property, plant and equipment ........... 2,226,421 2,052,528
Less accumulated depreciation and depletion .......... 806,992 831,097
---------- ----------
Net property, plant and equipment ............. 1,419,429 1,221,431
---------- ----------
OTHER ASSETS:
Regulatory assets ................................. 62,755 63,382
Goodwill .......................................... 60,635 64,382
Other ............................................. 67,708 72,668
---------- ----------
Total other assets ............................ 191,098 200,432
---------- ----------
Total ....................................... $2,455,850 $1,789,574
========== ==========
See notes to consolidated financial statements.
36
37
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2000 1999
----------- -----------
(THOUSANDS)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....................... $ 10,100 $ --
Current portion of nonrecourse project financing ........ 461 --
Short-term loans ........................................ 302,267 207,486
Accounts payable ........................................ 285,723 81,444
Prepaid gas forward sale ................................ 55,705 --
Derivative commodity instruments, at fair value ......... 30,243 2,914
Other current liabilities ............................... 192,018 151,402
---------- ----------
Total current liabilities ............................. 876,517 443,246
---------- ----------
LONG-TERM DEBT:
Debentures and medium-term notes ........................ 271,250 281,350
Nonrecourse project financing ........................... 16,539 17,000
---------- ----------
Total long-term debt .................................. 287,789 298,350
DEFERRED AND OTHER CREDITS:
Deferred income taxes ................................... 247,833 183,896
Deferred investment tax credits ......................... 15,411 16,614
Prepaid gas forward sale ................................ 153,589 --
Deferred revenue ........................................ 30,232 45,735
Other ................................................... 25,784 33,923
---------- ----------
Total deferred and other credits ...................... 472,849 280,168
---------- ----------
Commitments and contingencies .............................. -- --
---------- ----------
PREFERRED TRUST SECURITIES ................................. 125,000 125,000
---------- ----------
COMMON STOCKHOLDERS' EQUITY:
Common stock, no par value, authorized 80,000 shares;
shares issued: 2000 and 1999, 37,252 ................. 281,100 280,617
Treasury stock, shares at cost: 2000, 4,713; 1999,
4,522 ................................................. (151,167) (133,913)
Retained earnings ....................................... 563,755 496,072
Accumulated other comprehensive income .................. 7 34
---------- ----------
Total common stockholders' equity ..................... 693,695 642,810
---------- ----------
Total ............................................... $2,455,850 $1,789,574
========== ==========
See notes to consolidated financial statements.
37
38
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
COMMON STOCK ACCUMULATED
------------------------- OTHER COMMON
SHARES NO RETAINED COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING PAR VALUE EARNINGS INCOME EQUITY
----------- --------- -------- ------ ------
(THOUSANDS)
BALANCE, DECEMBER 31, 1997 ................. 36,929 $ 268,328 $555,245 $(53) $823,520
Comprehensive income:
Net loss for the year 1998 ............ (44,119) (44,119)
Foreign currency translation ......... 44 44
--------
Total comprehensive income ............ (44,075)
Dividends ($1.18 per share) ............. (43,800) (43,800)
Stock issued:
Acquisition of subsidiary ............. 171 5,460 5,460
Stock-based compensation plans ........ 56 3,990 3,990
Dividend reinvestment plan ............ 40 1,071 1,071
Stock repurchase program ................ (1,340) (37,747) (37,747)
--------
Net change in common stock .............. (27,226)
------ --------- -------- ---- --------
BALANCE, DECEMBER 31, 1998 ................. 35,856 241,102 467,326 (9) 708,419
Comprehensive income:
Net income for the year 1999 .......... 69,130 69,130
Foreign currency translation .......... 43 43
--------
Total comprehensive income ............ 69,173
Dividends ($1.18 per share) ............. (40,384) (40,384)
Stock issued:
Stock-based compensation plans ........ 220 6,959 6,959
Stock repurchase program ................ (3,347) (101,357) (101,357)
--------
Net change in common stock .............. (94,398)
------ --------- -------- ---- --------
BALANCE, DECEMBER 31, 1999 ................. 32,729 146,704 496,072 34 642,810
Comprehensive income:
Net income for the year 2000 .......... 106,173 106,173
Foreign currency translation .......... (27) (27)
--------
Total comprehensive income ............ 106,146
Dividends ($1.18 per share) ............. (38,490) (38,490)
Stock issued:
Stock-based compensation plans ........ 399 12,712 12,712
Stock repurchase program ................ (589) (29,483) (29,483)
--------
Net change in common stock .............. (16,771)
------ --------- -------- ---- --------
BALANCE, DECEMBER 31, 2000 ................. 32,539 $ 129,933 $563,755 $ 7 $693,695
====== ========= ======== ==== ========
- -----------------
Common shares authorized: 80,000,000 shares. Preferred shares authorized:
3,000,000 shares. There are no preferred shares issued or outstanding.
Retained earnings of $565,037,000 are available for dividends on, or purchase
of, common stock pursuant to restrictions imposed by indentures securing
long-term debt.
See notes to consolidated financial statements.
38
39
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of Equitable Resources, Inc. and all subsidiaries, ventures
and partnerships in which a controlling interest is held (Equitable or the
Company). Equitable, in most instances, utilizes the equity method of accounting
for companies where its ownership is less than or equal to 50%.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
These investments are accounted for at cost. Interest earned on cash equivalents
is included in interest charges.
Inventories: Inventories, which consist of natural gas stored
underground and materials and supplies, are stated at average cost.
Properties, Depreciation and Depletion: Plant, property and equipment is
carried at cost. Depreciation is provided on the straight-line method based on
estimated service lives, ranging from 3 to 70 years except for most natural gas
and crude oil production properties as explained below.
The Company uses the successful efforts method of accounting for
exploration and production activities. Under this method, the cost of productive
wells and development dry holes, as well as productive acreage, are capitalized
and depleted on the unit-of-production method.
Deferred Purchased Gas Cost and Other Regulatory Assets: The Company's
distribution and interstate pipelines are subject to rate regulation by state
and federal regulatory commissions. Accounting for these operations is in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation."
Where permitted by regulatory authority under purchased natural gas adjustment
clauses or similar tariff provisions, the Company defers the difference between
purchased natural gas cost, less refunds, and the billing of such cost and
amortizes the deferral over subsequent periods in which billings either recover
or repay such amounts.
Certain other costs, which will be passed through to customers under
ratemaking rules for regulated operations, are deferred by the Company as
regulatory assets when recovery through rates is expected. These amounts relate
primarily to the accounting for income taxes. The Company believes that it will
continue to be subject to rate regulation that will provide for the recovery of
deferred costs.
Derivative Commodity Instruments: The Company uses exchange-traded
natural gas and crude oil futures contracts and options and over-the-counter
(OTC) natural gas and crude oil swap agreements and options to hedge exposures
to fluctuations in oil and natural gas prices and for trading purposes.
At contract inception, the Company designates derivative commodity
instruments as hedging or trading activities. The Company uses the deferral
accounting method to account for exchange-traded derivative commodity
instruments designated and effective as hedges. Under this method, changes in
the market value of these hedge positions are deferred and included in other
current assets and other current liabilities. These deferred realized and
unrealized gains and losses are included in operating revenues when the hedged
transactions occur. In the event a hedge contract is terminated early, the
deferred gain or loss realized on early termination of the contract will be
recognized as the hedged production occurs. The Company uses the settlement
method to account for OTC swap agreements and options designated and effective
as hedges. Under this method, gains or losses associated with the
39
40
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract are recognized at the time the hedged production occurs. Premiums on
option contracts are deferred in other current assets and recognized in
operating revenues over the option term. Transactions that are not designated
and effective as hedges are marked to market. Cash flows from derivative
contracts are considered operating activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement was subsequently
amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," and by
SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of Statement 133." SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement requires the Company to recognize all derivatives as
either assets or liabilities in the balance sheet and measure the effectiveness
of the hedges, or the degree that the gain/(loss) for the hedging instrument
offsets the loss/(gain) on the hedged item, at fair value each reporting period.
The intended use of the derivatives and their designation as either a fair value
hedge or a cash flow hedge will determine when the gains or losses on the
derivatives are to be reported in earnings and when they are to be reported as a
component of other comprehensive income, until the hedged item is recognized in
earnings. The ineffective portion of the derivative's change in fair value is
required to be recognized in earnings immediately. The Company adopted SFAS 133,
as amended, effective January 1, 2001. The cumulative effect of this change will
decrease fiscal 2000 net income by approximately $0.7 million. The cumulative
effect of this change will decrease other comprehensive income by approximately
$37.0 million, net of tax.
Capitalized Interest: Interest costs for the construction of certain
long-term assets are capitalized and amortized over the related assets'
estimated useful lives. Interest costs during 2000, 1999 and 1998 of $3.3
million, $4.6 million and $2.7 million, respectively, were capitalized as a
portion of the cost of the related long-term assets.
Goodwill: Goodwill is the excess of the acquisition cost of businesses
over the fair value of the identifiable net assets acquired. Goodwill is
amortized on a straight-line basis over a period of 20 years. The Company
assesses the impairment of goodwill related to consolidated subsidiaries
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. A determination of impairment (if any) is made based on
estimates of future cash flows. In instances where goodwill has been recorded
for assets that are subject to an impairment loss, the carrying amount of the
goodwill is eliminated before any reduction is made to the carrying amounts of
impaired long-lived assets and identifiable intangibles.
Stock-Based Compensation: The Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for stock options and
awards. Accordingly, compensation cost for stock options and awards is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of grant over the exercise price of the stock option or award.
Revenue Recognition: Revenues for regulated natural gas sales to retail
customers are recognized as service is rendered, including an accrual for
unbilled revenues from the date of each meter reading to the end of the
accounting period. Revenue is recognized for exploration and production
activities when deliveries of natural gas, crude oil and natural gas liquids are
made. Revenues from natural gas transportation and storage activities are
recognized in the period service is provided. Revenues from energy marketing
activities are recognized when deliveries occur. Revenues from activities
classified as energy trading are recognized immediately.
The Company recognizes revenue from shared energy savings contracts as
energy savings are measured and verified. Revenue received from customer
contract termination payments is recognized when received. Revenue from other
long-term contracts, such as turnkey contracts, is recognized on a
percentage-of-completion basis, determined using the cost-to-cost method. Any
maintenance revenues are recognized as related services are performed.
40
41
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales of Receivables: The Company sells some amounts due from customers
to financial institutions. At the time of the transfer, the amounts due from the
customer are recognized as revenue, the transfer is accounted for as the sale of
a receivable, the receivable is no longer reflected in the financial statements
and any related deferred costs are charged to operations.
In September 2000, the Financial Accounting Standards Board issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," that replaces in its entirety, FASB
Statement No. 125. Although Statement 140 has changed many of the rules
regarding securitizations, it continues to require an entity to recognize the
financial and servicing assets it controls and the liabilities it has incurred
and to derecognize financial assets when control has been surrendered in
accordance with the criteria provided in the Statement. As required, the Company
will apply the new rules prospectively to transactions beginning in the second
quarter 2001. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on its financial
statements and footnote disclosures.
Income Taxes: The Company files a consolidated federal income tax return.
The current provision for income taxes represents amounts paid or estimated to
be payable. Deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities.
Where deferred tax liabilities will be passed through to customers in regulated
rates, the Company establishes a corresponding regulatory asset for the increase
in future revenues that will result when the temporary differences reverse.
Investment tax credits realized in prior years were deferred and are
being amortized over the estimated service lives of the related properties where
required by ratemaking rules.
Earnings Per Share (EPS): Basic EPS is computed by dividing income (loss)
from continuing operations before extraordinary loss by the weighted average
number of common shares outstanding during the period, without considering any
dilutive items. Diluted EPS is computed by dividing income (loss) from
continuing operations before extraordinary loss, adjusted for the assumed
conversion of debt, by the weighted average number of common shares and
potentially dilutive securities, net of shares assumed to be repurchased using
the treasury stock method. Purchases of treasury shares are calculated using the
average share price for the Company's common stock during the period.
Potentially dilutive securities arise from the assumed conversion of outstanding
stock options and awards.
Segment Disclosures: Operating segments are revenue-producing components
of the enterprise for which separate financial information is produced
internally and are subject to evaluation by the Company's chief executive
officer in deciding how to allocate resources. Operating segments are evaluated
on their contribution to the Company's consolidated results, based on earnings
before interest and taxes. Interest charges, income taxes and certain corporate
office expenses are managed on a consolidated basis.
Reclassification: Certain previously reported amounts have been
reclassified to conform with the 2000 presentation.
B. DERIVATIVE COMMODITY INSTRUMENTS
The Company uses exchange-traded natural gas, crude oil and propane
futures contracts, options and OTC natural gas, crude oil and propane swap
agreements and options (collectively, derivative contracts) to hedge exposures
to fluctuations in natural gas, oil and propane prices and for trading purposes.
Futures contracts obligate the Company to buy or sell a designated commodity at
a future date for a specified price and quantity at a specified location. Swap
agreements involve payments to or receipts from counterparties based on the
differential between a fixed and variable price for the commodity.
Exchange-traded instruments are generally settled with offsetting positions but
may be settled by delivery or receipt of commodities. OTC arrangements require
settlement in cash.
41
42
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
B. DERIVATIVE COMMODITY INSTRUMENTS (CONTINUED)
HEDGING ACTIVITIES
The Company is exposed to risk from fluctuations in energy prices in the
normal course of business. The Company uses derivative contracts to hedge
exposures to natural gas, oil and propane price changes.
The following table summarizes the absolute notional quantities of the
derivative contracts held for purposes other than trading at December 31, 2000
and 1999. The open futures, swaps, and options contracts at year-end 2000 have
maturities extending through December 2001. At December 31, 1999, the open
futures and options contracts had maturities extending through December 2000
while the swap agreements had maturities extending through March 2001. The
deferred gain (loss) noted in the table below is based on the commodities marked
against the New York Mercantile Exchange (NYMEX) on December 29, 2000.
ABSOLUTE NOTIONAL DEFERRED
QUANTITY GAIN (LOSS)
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(BCF EQUIVALENT) (MILLIONS)
Natural gas
Futures ....... -- 18.8 $ -- $(0.8)
Swaps ......... 15.9 71.2 (17.0) (2.9)
Options ....... 61.8 17.0 (36.8) 0.8
---- ----- ------ -----
Totals ...... 77.7 107.0 $(53.8) $(2.9)
==== ===== ====== =====
(MMBLS EQUIVALENT) (MILLIONS)
Oil
Futures ....... -- 0.2 $ -- $(0.7)
Swaps ......... 0.4 0.8 (1.6) (0.5)
Options ....... -- 0.3 -- (0.9)
---- ----- ------ -----
Totals ...... 0.4 1.3 $ (1.6) $(2.1)
==== ===== ====== =====
(MMBLS EQUIVALENT) (MILLIONS)
Propane
Futures ....... -- -- $ -- $ --
Swaps ......... 0.2 0.8 (1.5) (0.3)
Options ....... -- 0.1 -- --
---- ----- ------ -----
Totals ...... 0.2 0.9 $ (1.5) $(0.3)
==== ===== ====== =====
Deferred realized amounts from hedge transactions were a $10.8 million
loss at December 31, 2000 and a $.1 million gain at December 31, 1999. The
Company recognized net losses on its hedging activities of $77.6 million, $8.5
million and $3.0 million in 2000, 1999 and 1998, respectively. These losses are
offset when the underlying products are sold.
42
43
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
B. DERIVATIVE COMMODITY INSTRUMENTS (CONTINUED)
The Company is exposed to credit loss in the event of nonperformance by
counterparties to derivative contracts. This credit exposure is limited to
derivative contracts with a positive fair value. Futures contracts have minimal
credit risk because futures exchanges are the counterparties. The Company
manages the credit risk of the other derivative contracts by limiting dealings
to those counterparties who meet the Company's criteria for credit and liquidity
strength.
TRADING ACTIVITIES
The Company conducts trading activities through its unregulated marketing
group. The function of the Company's trading business is to contribute to the
Company's earnings by taking market positions within defined limits subject to
the Company's corporate risk management policy.
At December 31, 2000, the absolute notional quantities of the futures,
swaps and physical contracts held for trading purposes were 29.0 Bcfe, 45.3
Bcfe, and 253.1 Bcfe, respectively.
The table below sets forth the end of period fair value and average fair
value during the year for all the derivative contracts held for trading
purposes.
2000 1999
--------------------------- -------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(THOUSANDS) (THOUSANDS)
Fair value at December 31 ............. $544,485 $514,809 $2,695 $2,914
Average fair value .................... $273,590 $258,862 $2,583 $2,837
Excluding any offsetting physical activity, derivative trading activity
resulted in net losses of $8.6 million and $0.6 million for 2000 and 1999,
respectively. There was no trading activity in 1998.
C. ASSET IMPAIRMENT AND OTHER NONRECURRING ITEMS
The Company's 1998 results of operations include several significant
nonrecurring items, which are included in operating expense.
In December 1998, as a result of a sustained decrease in natural gas and
crude oil prices and a change in management's objectives in the Gulf of Mexico,
the Company recognized a write-down in the carrying value of crude oil and
natural gas production assets of $36.9 million. 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 (Kentucky West). In decertifying the pipeline, the Company
determined that not all costs would be collectible in rates and reduced
regulatory and other assets by $9.2 million, including $3.6 million in Equitable
Utilities and $5.6 million in Equitable Production. In addition, the Company
implemented a fundamental restructuring of its utility, nonregulated retail
sales and headquarters groups. This process included a voluntary work force
reduction incentive offer to reduce staff, the closing or consolidation of
several offices, reconfiguration of management information systems, the
realignment of many administrative functions to specific operating segments and
the curtailment of several auxiliary business ventures. Expenses associated with
these initiatives totaled $35.7 million including $8.1 million in the utility
group, $2.1 million in the production group, $2.7 million in energy services,
$3.0 million in the energy sales unit and $19.8 million in headquarters.
43
44
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
D. DIRECT BILLING AND OTHER SETTLEMENTS
Kentucky West received FERC approval of settlement agreements with all
customers for direct billing to recover the higher Natural Gas Policy Act (NGPA)
prices, which the FERC had denied on natural gas produced from exploration and
production properties between 1978 and 1983. The portion of the settlement with
the Equitable Gas Company division was subject to Pennsylvania Public Utility
Commission (PUC) review. The PUC approved Equitable Gas Company's collection of
$2.6 million in September 1998 related to the direct billing settlement. This
amount is recognized as other operating revenues in the production segment for
1998.
E. DISCONTINUED OPERATIONS
In April 1998, management adopted a formal plan to sell the Company's
natural gas midstream operations. The operations included an integrated natural
gas gathering, processing and storage system in Louisiana and a natural gas and
electricity trading and marketing business based in Houston. The financial
statements for all periods have been restated to classify these as discontinued
operations. In December 1998, the Company completed the sale of these operations
to various parties for $338.3 million, which included working capital
adjustments.
Net loss from discontinued operations was $(8.8) million for the year
ended December 31, 1998. The net loss in 1998 reflects an after-tax gain on the
sale of $10.1 million. The net loss was reported net of income tax benefit of
$(0.2) million.
Interest expense allocated to discontinued operations was $7.4 million
for the year ended December 31, 1998.
F. SALE OF PROPERTY
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. Equitable accounts for the
investment in Westport under the equity method of accounting. The effect of this
acquisition is not material to the results of operations or financial position
of Equitable, and therefore, pro forma financial information is not presented.
In October 2000, Westport 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
Westport. Equitable's investment 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 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.
44
45
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
G. ACQUISITIONS
On February 15, 2000, Equitable, through its subsidiary, ERI
Investments, Inc., acquired the Appalachian oil and gas properties of Statoil
for $630 million plus working capital adjustments for a total of $677 million.
The Company acquired all of the issued and outstanding shares and interests of
Eastern States Oil & Gas, Inc. and Eastern States Exploration Co., subsidiaries
of Statoil Energy, Inc. The acquisition was initially funded through commercial
paper and was replaced with transactions designed to monetize the oil and gas
properties. This acquisition has been accounted for under the purchase method of
accounting. Accordingly, the allocation of the cost of the acquired assets and
liabilities assumed has been made on the basis of the estimated fair value. The
consolidated financial statements include the operating results of these
properties from the date of acquisition.
The following summarized unaudited pro forma financial information
assumes that this acquisition occurred on January 1, 1999. Adjustments have been
made for DD&A and certain other adjustments together with related income tax
effects.
YEARS ENDED
DECEMBER 31,
2000 1999
----------------------------
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenue ........... $1,669,490 $1,166,978
========== ==========
Net income ........ $ 107,843 $ 75,430
========== ==========
Earnings per share:
Basic ............. $ 3.31 $ 2.22
========== ==========
Diluted ........... $ 3.25 $ 2.20
========== ==========
This information is not necessarily indicative of the results the Company
would have obtained had these events actually occurred on January 1, 1999, or of
the Company's actual or future results of operations of the combined companies.
In December 1999, the Company acquired Carnegie Natural Gas Company and
subsidiaries (Carnegie) for $40 million, including transaction costs. The
Carnegie operations include natural gas distribution and pipeline businesses
that were integrated into those divisions of the Company's Utilities segment, as
well as exploration and production businesses that were integrated into the
Production segment. Carnegie operates more than 1,000 natural gas wells in
Pennsylvania and West Virginia and supplies approximately 8,000 industrial,
commercial and residential customers. No goodwill was recorded in connection
with the acquisition, which was accounted for under the purchase method of
accounting. The effect of this acquisition is not material to the results of
operations or financial position of Equitable, and therefore, pro forma
financial information is not presented.
45
46
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
H. INCOME TAXES
The following table summarizes the source and tax effects of temporary
differences between financial reporting and tax bases of assets and liabilities.
DECEMBER 31,
--------------------------
2000 1999
--------- ---------
(THOUSANDS)
Deferred tax liabilities (assets):
Exploration and development costs expensed for income tax reporting $ 148,347 $ 104,628
Tax depreciation in excess of book depreciation ................... 165,229 163,755
Regulatory temporary differences .................................. 24,791 25,069
Deferred purchased gas cost ....................................... 12,163 6,710
Equity earnings in Westport ....................................... 6,960 --
Deferred revenues/expenses ........................................ (14,774) (14,507)
Alternative minimum tax ........................................... (49,540) (50,114)
Investment tax credit ............................................. (7,754) (6,565)
Uncollectible accounts ............................................ (7,407) (6,450)
Postretirement benefits ........................................... (3,905) (3,982)
Other ............................................................. (13,547) (21,836)
--------- ---------
Total (including amounts classified as current liabilities
of $12,730 for 2000 and $12,812 for 1999) ................... $ 260,563 $ 196,708
========= =========
As of December 31, 2000 and 1999, $59.2 million and $59.1 million,
respectively, of the net deferred tax liabilities are related to rate-regulated
operations and have been deferred as regulatory assets.
Income tax expense (benefit) is summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
------- -------- --------
(THOUSANDS)
Current:
Federal ...... $ 2,042 $23,758 $ 5,331
State ........ 610 916 339
Foreign ...... -- 47 --
------- ------- --------
Subtotal ... 2,652 24,721 5,670
------- ------- --------
Deferred:
Federal ...... 49,300 14,756 (22,033)
State ........ 5,219 (121) (7,504)
Foreign ...... -- -- 1,486
------- ------- --------
Subtotal ... 54,519 14,635 (28,051)
------- ------- --------
Total ...... $57,171 $39,356 $(22,381)
======= ======= ========
46
47
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
H. INCOME TAXES (CONTINUED)
Provisions for income taxes differ from amounts computed at the federal
statutory rate of 35% on pretax income. The reasons for the difference are
summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
(THOUSANDS)
Tax at statutory rate .............. $ 57,171 $ 37,970 $(17,301)
State income taxes ................. 3,789 517 (4,657)
Nonconventional fuels tax credit ... (900) (817) (1,199)
Other .............................. (2,889) 1,686 776
-------- -------- --------
Income tax expense (benefit) ..... $ 57,171 $ 39,356 $(22,381)
======== ======== ========
Effective tax rate (benefit) ....... 35.0% 36.3% (45.3)%
======== ======== ========
An income tax benefit of $1.6 million triggered by the exercise of
nonqualified employee stock options is reflected as an addition to common
stockholders' equity.
The consolidated federal income tax liability of the Company has been
settled through 1994.
The Company has not provided any U.S. tax on undistributed earnings of
foreign subsidiaries or joint ventures that are reinvested indefinitely outside
the United States. At December 31, 2000, consolidated retained earnings of the
Company included approximately $9.9 million of undistributed earnings from these
investments.
I. EQUITY IN NONCONSOLIDATED INVESTMENTS
The Company has ownership interests in various nonconsolidated
investments that are accounted for under the equity method of accounting. The
following table summarizes the equity in nonconsolidated investments.
DECEMBER 31,
-------------------------
INVESTEES LOCATION OWNERSHIP 2000 1999
- -------------------------------------- ------------- -------------- ------- ---------
(THOUSANDS)
Eastern Seven Partners, L.P. ......... USA 1% $ 26,414 $ --
Appalachian Natural Gas Trust ........ USA 1% 36,235 --
-------- -------
Total Equitable Production ......... 62,649 --
-------- -------
IGC/ERI Pan-Am Thermal .............. Panama 50% 17,719 14,863
Petroelectrica de Panama ............ Panama 45% 9,837 9,228
Capital Center Energy ............... USA 50% 4,757 12,779
Dona Julia .......................... Costa Rica 24% 3,590 3,235
Hunterdon Cogeneration LP ........... USA 50% 1,645 193
Other ............................... USA Various 352 575
-------- -------
Total NORESCO ...................... 37,900 40,873
-------- -------
Westport Resources Corporation ...... USA 36% 130,102 --
-------- -------
Total equity in nonconsolidated
investments .................... $230,651 $40,873
======== =======
47
48
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
I. EQUITY IN NONCONSOLIDATED INVESTMENTS (CONTINUED)
Equitable Production's equity in nonconsolidated investments represent
ownership interests in transactions by which natural gas producing properties
located in the Appalachian Basin region of the United States were sold. The
partnership and trust properties include assets that qualify for nonconventional
fuels tax credits. Both of these investments follow the equity method of
accounting.
The NORESCO segment, through its energy infrastructure division, has
investments in unconsolidated partnerships. These investments represent equity
ownership interests in independent power plant (IPP) projects located
domestically in the United States as well as in selected international
countries.
IPP projects which NORESCO and its partners develop, construct and
operate are the result of specific needs of private or governmental entities to
secure power that is more cost effective and reliable than the current source of
power as well as to meet the growing energy demands of many international
countries. Long-term power purchase agreements are signed with the customer
whereby they agree to purchase the energy generated by the plant. The length of
these contracts ranges from 5 to 30 years.
The Company has invested approximately $32.7 million in these operations
since January 1998, and the Company's ownership share of the earnings for this
same time period is approximately $10.6 million. All projects have been
completed within the NORESCO segment using nonrecourse financing at the
subsidiary level.
Foreign investments represent $31.1 million, or 82%, of NORESCO's equity
in nonconsolidated investments. In addition, $19.1 and $20.0 million of fixed
assets are included in NORESCO's property, plant and equipment balance at
December 31, 2000 and 1999, respectively, related to an independent power
project located in Jamaica, of which NORESCO is a majority owner. Total Company
investments located in foreign countries was $50.2 million at December 31, 2000
and $47.3 million at December 31, 1999.
On April 10, 2000, Equitable combined its Gulf of Mexico operations with
Westport Oil and Gas Company for approximately $50 million in cash and
approximately 49% minority interest in the combined company, Westport. Equitable
accounted for this investment under the equity method of accounting. In October
2000, Westport 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 Westport. Equitable's
investment in Westport was $130.1 million as of December 31, 2000 and the
aggregate market value of this investment was $305.2 million as of December 31,
2000.
J. INTANGIBLE ASSETS
Amortization of the goodwill is provided on the straight-line method over
a life of 20 years. Accumulated amortization at December 31, 2000 and 1999 was
$13,758 and $10,011, respectively. For the years ended December 31, 2000, 1999
and 1998, amortization expense, included in depreciation, depletion and
amortization, was $3,747, $3,746, and $3,858, respectively.
K. SHORT-TERM LOANS
Maximum lines of credit available to the Company at December 31, 2000
were $650 million and $500 million at December 31, 1999. The Company is not
required to maintain compensating bank balances. Commitment fees averaging
one-ninth of one percent in 2000 and one-tenth of one percent in 1999 were paid
to maintain credit availability.
48
49
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
K. SHORT-TERM LOANS (CONTINUED)
At December 31, 2000, short-term loans consisted of $302.0 million of
commercial paper at a weighted average annual interest rate of 6.59% and the
subsidiary note for project financing described below. At December 31, 1999,
short-term loans consisted of $207.2 million of commercial paper at a weighted
average annual interest rate of 5.95%. The maximum amount of outstanding
short-term loans was $900.0 million in 2000 and $208.0 million in 1999. The
average daily total of short-term loans outstanding was approximately $706.7
million during 2000 and $127.9 million during 1999; weighted average annual
interest rates applicable thereto were 6.37% in 2000 and 5.26% in 1999.
L. LONG-TERM DEBT
DECEMBER 31,
-------------------------
2000 1999
-------- --------
(THOUSANDS)
7 3/4 debentures, due July 15, 2026 ........................ $115,000 $115,000
Medium-term notes:
8.05% to 8.19% Series A, due 2001 ......................... 10,100 --
8.0% to 9.0% Series A, due 2003 thru 2021 ................. 62,750 72,850
6.5% to 7.6% Series B, due 2003 thru 2023 ................. 75,500 75,500
6.8% to 7.6% Series C, due 2007 thru 2018 ................. 18,000 18,000
-------- --------
281,350 281,350
Less debt payable within one year ............................ 10,100 --
-------- --------
Total debentures and medium-term notes .................. 271,250 281,350
Nonrecourse note for project financing ....................... 17,000 17,000
Less current portion of nonrecourse note for project financing 461 --
-------- --------
Long-term portion of nonrecourse note for
project financing ..................................... 16,539 17,000
-------- --------
Total long-term debt .................................... $287,789 $298,350
======== ========
At December 31, 2000, the Company has the ability to issue $150 million
of additional long-term debt under the provisions of shelf registrations filed
with the Securities and Exchange Commission.
During 1999, a subsidiary of the Company issued a $17 million 9.25%
nonrecourse note for project financing. The proceeds of this note were used to
fund the operations of an independent power plant located in St. Catherine,
Jamaica. Interest payments related to this note are due quarterly.
Interest expense on long-term debt amounted to $33.0 million in 2000,
$35.2 million in 1999, and $34.9 million in 1998. Aggregate maturities of
long-term debt will be $10.1 million in 2001, none in 2002, $24.3 million in
2003, $20.5 million in 2004 and $10.0 million in 2005.
49
50
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
M. PREPAID GAS FORWARD SALE
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.
N. DEFERRED REVENUE
In 1995, the Company sold an interest in certain Appalachian natural gas
properties, the production from which qualifies for nonconventional fuels tax
credit. The Company retained an interest in the properties that will increase
based on performance. As such, the proceeds of $133.5 million were recorded as
deferred revenues and are being recognized in income as financial targets are
achieved.
O. TRUST PREFERRED CAPITAL SECURITIES
In April 1998, $125 million of 7.35% trust preferred capital securities
were issued. The capital securities were issued through a subsidiary trust,
Equitable Resources Capital Trust I, established for the purpose of issuing the
capital securities and investing the proceeds in 7.35% Junior Subordinated
Debentures issued by the Company. The capital securities have a mandatory
redemption date of April 15, 2038; however, at the Company's option, the
securities may be redeemed on or after April 23, 2003. Proceeds were used to
reduce short-term debt outstanding. Interest expense for the years ended
December 31, 2000 and 1999 includes $9.2 million of preferred dividends related
to the trust preferred capital securities.
50
51
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
P. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has pension and other postretirement benefit plans covering
union members that generally provide benefits of stated amounts for each year of
service. Plans covering salaried employees use a benefit formula which is based
upon employee compensation and years of service.
The following table sets forth the pension and other benefit plans'
funded status and amounts recognized for those plans in the Company's
consolidated balance sheets:
PENSION BENEFITS OTHER BENEFITS
----------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- -------- --------
(THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of year ...... $123,237 $148,493 $ 41,930 $ 43,491
Service cost ................................. 2,634 2,294 290 297
Interest cost ................................ 9,335 9,488 3,297 3,002
Amendments ................................... 818 5,038 (2,999) 582
Actuarial (gain) loss ........................ (2,800) (9,513) 6,427 (577)
Benefits paid ................................ (8,737) (9,726) (5,112) (4,866)
Expenses paid ................................ (475) (558) -- --
Acquisitions ................................. 6,905 -- -- --
Curtailments ................................. 1,844 (12) 1,496 --
Settlements .................................. (29,451) (22,267) -- --
Special termination benefits ................. 10,629 -- 1,169 --
-------- -------- -------- --------
Benefit obligation at end of year ......... $113,939 $123,237 $ 46,498 $ 41,929
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $158,819 $177,205 $ 5,448 $ 8,454
Actual return on plan assets ................. (10,774) 13,958 (293) 407
Employer contribution ........................ 90 91 -- 219
Benefits paid ................................ (8,737) (9,726) (3,106) (3,632)
Expenses paid ................................ (475) (558) -- --
Settlements .................................. (28,402) (22,151) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year .. $110,521 $158,819 $ 2,049 $ 5,448
======== ======== ======== ========
Funded status ................................ $ (3,418) $ 35,582 $(44,449) $(36,481)
Unrecognized net actuarial (gain) loss ....... (6,833) (31,733) 21,474 14,988
Unrecognized prior service cost (credit) ..... 12,636 14,825 (2,452) 410
Unrecognized initial net (asset) obligation .. (119) (436) 10,545 12,420
-------- -------- -------- --------
Net asset (liability) recognized .......... $ 2,266 $ 18,238 $(14,882) $ (8,663)
======== ======== ======== ========
Weighted average assumptions as of December 31:
Discount rate ................................ 8.00% 7.75% 8.00% 7.75%
Expected return on plan assets ............... 10.00% 10.00% 10.00% 10.00%
Rate of compensation increase ................ 4.50% 4.50% 4.50% 4.50%
51
52
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
P. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits in 2000 for the Pre-65 managed care, Pre-65
nonmanaged care and all Post-65 medical changes are 4.75%, 5.90% and 6.10%,
respectively. The rates were assumed to decrease gradually to ultimate rates of
4.75%, 5.05% and 4.95% in 2001, 2002, and 2003, respectively. The pension asset
of $2,266 at December 31, 2000 and $18,238 at December 31, 1999 is included in
prepaid expenses and other current assets in the consolidated balance sheets.
The accrued liability for other postretirement benefits of $14,882 at December
31, 2000 and $8,663 at December 31, 1999 is included in other current
liabilities.
The Company's costs related to defined benefit pension and other benefit
plans comprised the following:
PENSION BENEFITS OTHER BENEFITS
---------------------------------------- --------------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------- ------- -------
(THOUSANDS)
Components of net periodic benefit cost:
Service cost ........................ $ 2,634 $ 2,294 $ 2,177 $ 290 $ 297 $ 334
Interest cost ....................... 9,335 9,488 9,933 3,297 3,002 2,759
Expected return on plan assets ...... (12,893) (13,048) (13,377) (545) (898) (522)
Amortization of prior service cost .. 1,783 1,823 1,579 (145) 31 (15)
Amortization of initial net
(asset) obligation ................ (265) (333) (390) 956 955 986
Recognized net actuarial (gain) loss (29) 90 3 979 921 749
Divestitures ........................ -- -- -- -- -- (1,719)
Special termination benefits ........ 10,629 -- 970 1,169 -- 1,506
Settlement (gain) loss .............. (3,143) (5,781) (2,295) -- -- --
Curtailment loss .................... 1,105 1,453 319 2,425 -- 419
-------- -------- -------- ------ ------ -------
Net periodic benefit cost ......... $ 9,156 $ (4,014) $ (1,081) $8,426 $4,308 $ 4,497
======== ======== ======== ====== ====== =======
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $113,939, $112,820, and $110,403, respectively, as
of December 31, 2000 and $1,336, $1,336 and $0, respectively, as of December 31,
1999.
Assumed health care cost trend rates have an effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
ONE-PERCENTAGE-POINT ONE-PERCENTAGE-POINT
INCREASE DECREASE
-------------------------------- ---------------------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Effect on total of service and
interest cost components .... $ 211 $ 218 $ 188 $ (201) $ (207) $ (177)
Effect on postretirement benefit
obligation .................. $2,421 $2,105 $2,316 $(2,337) $(2,815) $(2,238)
As of December 31, 2000 and 1999, approximately $2.0 million and $1.5
million, respectively, of the accrued postretirement benefits related to
rate-regulated operations have been deferred as regulatory assets.
Expense recognized by the Company related to the 401(k) employee savings
plans totaled $2.8 million in 2000, $2.3 million in 1999, and $3.5 million in
1998.
52
53
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Q. COMMON STOCK AND EARNINGS PER SHARE
At December 31, 2000, shares of Equitable's authorized and unissued
common stock were reserved as follows:
(THOUSANDS)
Possible future acquisitions ..... 6,594
Stock compensation plans ......... 4,630
------
Total ......................... 11,224
======
EARNINGS PER SHARE
The computation of basic and diluted earnings (loss) per common share
from continuing operations is shown in the table below:
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- ------- --------
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) from continuing operations, before
extraordinary item, applicable to common stock ....... $106,173 $69,130 $(27,052)
Average common shares outstanding ...................... 32,550 34,044 36,833
Basic earnings (loss) per common share from
continuing operations, before extraordinary item ..... $ 3.26 $ 2.03 $ (0.73)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) from continuing operations, before
extraordinary item, applicable to common stock ....... $106,173 $69,130 $(27,052)
Average common shares outstanding ...................... 32,550 34,044 36,833
Potentially dilutive securities:
Stock options and awards (a) ......................... 616 293 --
-------- ------- --------
Total .................................................. 33,166 34,337 36,833
Diluted earnings (loss) per common share from continuing
operations, before extraordinary item ................ $ 3.20 $ 2.01 $ (0.73)
(a) Options to purchase 21,000 and 12,000 shares of common stock were
not included in the computation of diluted earnings per common share because the
options' exercise prices were greater than the average market prices of the
common shares for 2000 and 1999, respectively.
53
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EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
R. STOCK-BASED COMPENSATION PLANS
LONG-TERM INCENTIVE PLANS
The Company's 1994 and 1999 Long-Term Incentive Plans provide for the
granting of shares of common stock to officers and key employees of the Company.
These grants may be made in the form of stock options, restricted stock, stock
appreciation rights and other types of stock-based or performance-based awards
as determined by the Compensation Committee of the Board of Directors at the
time of each grant. Stock awarded under the plan, or purchased through the
exercise of options, and the value of stock appreciation units are restricted
and subject to forfeiture should an optionee terminate employment prior to
specified vesting dates. In no case may the number of shares granted under the
plan exceed 1,725,500 and 3,000,000 shares, respectively. Options granted under
the plans expire 5 to 10 years from the date of grant and some contain vesting
provisions which are based upon the Company's performance.
Also reflected in the option tables below are options assumed in
conjunction with the NORESCO acquisition in July 1997. All outstanding options
granted under NORESCO's 1990 Incentive Stock Option Plan were converted by
Equitable to nonqualified stock options with the right to receive, upon exercise
of the option, the same Equitable stock and cash that shareholders of NORESCO
received in the acquisition. As a result of this conversion, 872,000 NORESCO
stock options were converted to 256,400 Equitable stock options with the
exercise price per share proportionately adjusted. The adjusted exercise prices
of these stock options range from $5.1012 to $5.9516 per share. The acquisition
also accelerated the vesting period of these options, the latest of which expire
in 2006. During 2000, 10,000 stock options were exercised under this plan, with
3,000 outstanding at December 31, 2000.
Pro forma information regarding net income and earnings per share for
options granted is required by SFAS No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value for these option grants was estimated at the dates of grant using a
Black-Scholes option pricing model with the following assumptions for 2000,
1999, and 1998, respectively.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
---- ---- ----
Risk-free interest rate (range) .................. 5.42% to 6.80% 4.75% to 6.41% 4.80% to 5.63%
Dividend yield ................................... 2.36% 3.35% 4.06%
Volatility factor ................................ .231 .216 0.173
Weighted average expected life of options ........ 8 years 7 years 4 years
Options granted .................................. 1,561,370 1,050,200 1,014,900
Weighted average fair market value of options
granted during the year ....................... $14.38 $7.16 $3.91
54
55
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
R. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. Had compensation
cost for these options been determined in accordance with SFAS No. 123, the
Company's net income and diluted earnings per share would have been $103.4
million, or $3.12 per share in 2000. The amounts of estimated expenses that
would have been recognized in 1999 and 1998 are not considered material to the
financial statements.
YEARS ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
Options outstanding January 1 ...... 1,689,563 1,258,185 758,534
Granted ............................ 1,561,370 1,050,200 1,014,900
Forfeitures ........................ (321,719) (452,900) (453,257)
Exercised .......................... (326,903) (165,922) (61,992)
---------- ---------- ----------
Options outstanding December 31 .... 2,602,311 1,689,563 1,258,185
========== ========== ==========
Options outstanding at December 31, 2000 include 610,542 exercisable at that
date.
2000 1999 1998
------------------- ------------------- ------------------
At December 31:
Prices of options outstanding ............. $5.10 to $63.56 $5.10 to $37.88 $5.10 to $34.63
Average option price ...................... $39.31 $29.58 $29.26
On September 5, 1997, the Company granted 106,127 stock awards from the
1994 Long-Term Incentive Plan for the Executive Retention Program. This program
was established to provide additional incentive benefits to retain senior
executive employees of the Company. The vesting of these awards was contingent
on attainment of specific stock price targets and the continued employment of
the participants until January 1, 2001. In 1998, 1999 and 2000, the Company
granted 25,000, 128,000, and 88,000 additional stock awards, respectively, to
key executives. The weighted average fair value of these restricted stock grants
is $26.97, $23.00 and $40.14, respectively, for 1998, 1999 and 2000. The shares
granted under these plans vest at the end of a three year period. Upon vesting,
shares are released to participants. Compensation expense recorded by the
Company related to stock awards was $14.1 million in 2000, $4.6 million in 1999
and $1.0 million in 1998.
NONEMPLOYEE DIRECTORS' STOCK INCENTIVE PLANS
The Company's 1994 and 1999 Nonemployee Directors' Stock Incentive Plans
provide for the granting of up to 80,000 and 300,000 shares, respectively, of
common stock in the form of stock option grants and restricted stock awards to
nonemployee directors of the Company. The exercise price for each share is equal
to market price of the common stock on the date of grant. Each option is subject
to time-based vesting provisions and expires 5 to 10 years after date of grant.
At December 31, 2000, 91,000 options were outstanding at prices ranging from
$28.38 to $48.88 per share, and 14,500 options had been exercised under these
plans.
55
56
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
S. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, as well as short-term
loans, approximates fair value due to the short maturity of the instruments.
The estimated fair value of long-term debt described in Note L at
December 31, 2000 and 1999 is $311.2 million and $294.4 million, respectively.
The fair value was estimated based on discounted values using a current discount
rate reflective of the remaining maturity.
The estimated fair value of liabilities for derivative commodity
instruments described in Note B, excluding trading activities which are
marked-to-market, was $56.9 million and $5.3 million at December 31, 2000 and
1999, respectively.
T. CONCENTRATIONS OF CREDIT RISK
Revenues and related accounts receivable from the Equitable Production
segment's operations are generated primarily from the sale of produced natural
gas to Equitable Energy, other Appalachian Basin purchasers, and utility and
industrial customers located mainly in the Appalachian area, the sale of crude
oil to refinery customers in the Appalachian area, the sale of produced natural
gas liquids to a refinery customer in Kentucky and transportation of natural gas
in Kentucky, Virginia, Ohio, Pennsylvania and West Virginia.
The Equitable Utilities Distribution operating revenues and related
accounts receivable are generated from state-regulated utility natural gas sales
and transportation to more than 278,000 residential, commercial and industrial
customers located in southwest Pennsylvania and parts of West Virginia and
Kentucky. The Transmission operations include FERC-regulated interstate pipeline
transportation and storage service for the affiliated utility, Equitable Gas, as
well as other utility and end-user customers located in the Appalachian and
mid-Atlantic regions. The unregulated Marketing operations 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 primarily in the Appalachian and
mid-Atlantic regions. Under state regulations, the utility is required to
provide continuous natural gas service to residential customers during the
winter heating season.
The NORESCO segment's operating revenues and related accounts receivable
are generated from cogeneration and power plant development facilities in
several U.S. and Latin American markets, and performance contracting for
commercial, industrial and institutional customers and various government
facilities including military facilities throughout the United States.
The Company is not aware of any significant credit risks that have not
been recognized in provisions for doubtful accounts.
U. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company reports operations in three segments which reflect its lines
of business. The Equitable Utilities segment's activities are comprised of the
operations of the Company's state-regulated local distribution company, natural
gas transportation, storage and marketing activities involving the Company's
interstate natural gas pipelines, and supply and transportation services for the
natural gas and electricity markets. The Equitable Production segment's
activities are comprised of the exploration, development, production, gathering
and sale of natural gas and oil, and the extraction and sale of natural gas
liquids. NORESCO segment's activities are comprised of cogeneration and power
plant development, the development and implementation of energy and water
efficiency programs, performance contracting and central facility plant
operations.
56
57
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
U. FINANCIAL INFORMATION BY BUSINESS SEGMENT (CONTINUED)
Operating segments are evaluated on their contribution to the Company's
consolidated results, based on earnings before interest and taxes. Interest
charges and income taxes are managed on a consolidated basis and allocated pro
forma to operating segments. Headquarters costs are billed to operating segments
based on a fixed allocation of the annual headquarters operating budget.
Differences between budget and actual headquarters expenses are not allocated to
operating segments, but included as a reconciling item to consolidated earnings
from continuing operations.
Substantially all of the Company's operating revenues, net income from
continuing operations and assets are generated or located in the United States
of America. The financial information by business segment in the following
tables excludes amounts related to discontinued operations.
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
---------- ----------- ---------
(THOUSANDS)
REVENUES FROM EXTERNAL CUSTOMERS:
Equitable Utilities .................................................. $1,235,756 $ 703,969 $580,767
Equitable Production ................................................. 281,842 168,411 161,551
NORESCO .............................................................. 134,620 169,633 109,493
---------- ---------- --------
Total .............................................................. $1,652,218 $1,042,013 $851,811
========== ========== ========
INTERSEGMENT REVENUES:
Equitable Utilities .................................................. $ 151,498 $ 107,905 $ 71,257
Equitable Production ................................................. 24,275 22,493 20,112
---------- ---------- --------
Total .............................................................. $ 175,773 $ 130,398 $ 91,369
========== ========== ========
DEPRECIATION, DEPLETION AND AMORTIZATION:
Equitable Utilities .................................................. $ 28,185 $ 35,596 $ 20,570
Equitable Production ................................................. 64,065 58,565 56,380
NORESCO .............................................................. 5,304 6,078 4,300
Headquarters ......................................................... 223 483 3,920
---------- ---------- --------
Total .............................................................. $ 97,777 $ 100,722 $ 85,170
========== ========== ========
SEGMENT PROFIT (LOSS):
Equitable Utilities .................................................. $ 92,978 $ 80,641 $ 32,174
Equitable Production ................................................. 120,336 54,616 (24,344)
NORESCO .............................................................. 10,286 13,441 5,126
---------- ---------- --------
Total segment profit ............................................... 223,600 148,698 12,956
RECONCILING ITEMS:
Headquarters earnings (loss) before interest and taxes from continuing
operations not allocated to operating segments:
Impairments of investments and other assets ...................... -- -- (19,756)
Other ............................................................ 15,405 (3,080) (2,331)
---------- ---------- --------
Earnings (loss) before interest and taxes from
continuing operations ............................................ 239,005 145,618 (9,131)
Interest expense ..................................................... 75,661 37,132 40,302
Income tax expenses (benefit) ........................................ 57,171 39,356 (22,381)
---------- ---------- --------
Net income (loss) from continuing operations,
before extraordinary item ...................................... $ 106,173 $ 69,130 $(27,052)
========== ========== ========
57
58
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
U. FINANCIAL INFORMATION BY BUSINESS SEGMENT (CONTINUED)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
---------- ----------- -------
(THOUSANDS)
OTHER SIGNIFICANT NONCASH EXPENSE ITEMS:
Equitable Utilities:
Increase (decrease) in deferred purchased natural gas cost $ 15,429 $ (10,370) $ 4,608
Noncash restructuring charges ............................ -- -- 12,009
Equitable Production:
Lease impairments ........................................ 1,960 3,518 36,908
Noncash restructuring charges ............................ -- -- 6,812
NORESCO:
Cost of contracts in excess of billings .................. 7,677 2,771 8,271
Noncash restructuring charges ............................ -- -- 1,764
---------- ---------- -------
Total .................................................. $ 25,066 $ (4,081) $70,372
========== ========== =======
SEGMENT ASSETS:
Equitable Utilities ........................................ $1,146,896 $ 914,630
Equitable Production ....................................... 975,523 670,828
NORESCO .................................................... 143,030 145,925
---------- ----------
Total operating segments ............................... 2,265,449 1,731,383
Headquarters assets, including cash and short-term
investments ................................................ 190,401 58,191
---------- ----------
Total .................................................. $2,455,850 $1,789,574
========== ==========
EXPENDITURES FOR SEGMENT ASSETS (a):
Equitable Utilities ........................................ $ 28,436 $ 43,979
Equitable Production ....................................... 770,930 92,099
NORESCO .................................................... 1,596 6,041
---------- ----------
Total ................................................ $ 800,962 $ 142,119
========== ==========
(a) 2000 expenditures include $677 million for the acquisition of Statoil
Energy, Inc. See Note G; 1999 expenditures include $40 million for the
acquisition of Carnegie Natural Gas Company, including $17.7 million in
Equitable Utilities and $22.3 million in Equitable Production. See Note G.
V. COMMITMENTS AND CONTINGENCIES
There are various claims and legal proceedings against the Company
arising from the normal course of business. Although counsel is unable to
predict with certainty the ultimate outcome, management and counsel believe the
Company has significant and meritorious defenses to any claims and intends to
pursue them vigorously.
Management believes that the ultimate outcome of any matter currently
pending against the Company will not materially affect the financial position of
the Company although they could be material to the reported results of
operations for the period in which they occur.
The Company has annual commitments of approximately $30.8 million for
demand charges under existing long-term contracts with pipeline suppliers for
periods extending up to 12 years at December 31, 2000, which relate to natural
gas distribution and production operations. However, approximately $21.5 million
of these costs are recoverable in customer rates.
58
59
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
V. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is subject to federal, state and local environmental laws and
regulations. These laws and regulations, which are constantly changing, can
require expenditures for remediation and may in certain instances result in
assessment of fines. The Company has established procedures for ongoing
evaluation of its operations to identify potential environmental exposures and
assure compliance with regulatory policies and procedures. The estimated costs
associated with identified situations that require remedial action are accrued.
However, certain of these costs are deferred as regulatory assets when
recoverable through regulated rates. Ongoing expenditures for compliance with
environmental laws and regulations, including investments in plant and
facilities to meet environmental requirements, have not been material.
Management believes that any such required expenditures will not be
significantly different in either their nature or amount in the future and does
not know of any environmental liabilities that will have a material effect on
the Company's financial position or results of operations.
W. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following quarterly summary of operating results reflects variations
due primarily to the seasonal nature of the Company's utility business and
volatility of oil and natural gas commodity prices:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
2000
Operating revenues .......................... $374,877 $332,497 $335,284 $609,560
Operating income ............................ 75,748 50,671 42,626 45,189
Net income from continuing operations before
extraordinary items ...................... 39,103 16,225 19,141 31,704
Earnings per share from continuing operations
before extraordinary items:
Basic .................................. $ 1.20 $ 0.50 $ 0.59 $ 0.98
Assuming dilution ...................... $ 1.18 $ 0.49 $ 0.58 $ 0.95
1999
Operating revenues .......................... $413,308 $185,318 $186,682 $256,705
Operating income ............................ 56,224 20,369 17,309 48,853
Net income from continuing operations before
extraordinary items ...................... 29,739 7,238 5,732 26,421
Earnings per share from continuing operations
before extraordinary items:
Basic .................................. $ 0.84 $ 0.21 $ 0.17 $ 0.80
Assuming dilution ...................... $ 0.84 $ 0.21 $ 0.17 $ 0.79
59
60
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
The supplementary information summarized below presents the results of
natural gas and oil activities for the Equitable Production segment in
accordance with SFAS No. 69, "Disclosures About Oil and Natural Gas Producing
Activities."
The Company information presented for 2000 excludes data associated with
reserves that were combined with Westport or sold in 2000 and are now included
in the Company's nonconsolidated investments. Information about the natural gas
and oil producing activities of these nonconsolidated investments is disclosed
separately in this footnote and is calculated based on the Company's
proportionate ownership interest percentage. The information presented for 1998
and 1999 excludes data associated with natural gas reserves related to
rate-regulated and other utility operations. In 1999, the exploration and
production operations conducted by Equitrans were transferred from Equitable
Utilities to Equitable Production. Accordingly, the 1999 oil and natural gas
information presented below reflects this transfer. These reserves (proved
developed) are less than 5% of total Company proved reserves for the years
presented.
PRODUCTION COSTS
The following table presents the costs incurred relating to natural gas
and oil production activities:
2000 1999 1998
-------- -------- --------
(THOUSANDS)
At December 31:
Capitalized costs .................... $954,734 $947,803 $861,035
Accumulated depreciation and depletion 332,994 410,921 355,535
-------- -------- --------
Net capitalized costs ................... $621,740 $536,882 $505,500
======== ======== ========
Costs incurred:
Property acquisition:
Proved properties .................. $604,082 $ 23,165 $ 4,799
Unproved properties ................ 9,199 722 18,069
Exploration ............................. 3,420 7,143 27,144
Development ............................. 93,695 59,647 76,762
60
61
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following table presents the results of operations related to natural
gas and oil production, including the effect in 1998 of impairment of assets as
described in Note C:
2000 1999 1998
-------- -------- --------
(THOUSANDS)
Revenues:
Affiliated ................................. $ -- $ 14,067 $39,553
Nonaffiliated .............................. 247,390 158,369 99,437
Production costs .............................. 42,450 26,206 30,390
Exploration expenses .......................... 3,420 4,001 30,982
Depreciation and depletion .................... 48,121 52,009 49,348
Impairment of assets .......................... -- 5,018 29,230
Income tax expense (benefit) .................. 56,740 32,911 (1,166)
-------- -------- -------
Results of operations from producing activities
(excluding corporate overhead) ............. $ 96,659 $ 52,291 $ 206
======== ======== =======
RESERVE INFORMATION
The information presented below represents estimates of proved natural
gas and oil reserves prepared by Company engineers. Proved developed reserves
represent only those reserves expected to be recovered from existing wells and
support equipment. In February 2000, the Company purchased reserves in
conjunction with the Statoil acquisition. The Company sold reserves in the April
2000 Westport merger, and interests in producing properties in the June 2000 and
December 2000 sale transactions. In 1999, the Company decreased its estimate of
the annual production decline from 4% to 3%, to be more representative of the
region. This revision increased 1999 proved developed natural gas and crude oil
reserves by 85,574 million cubic feet equivalent. Also during 1999, the
exploration and production operations conducted by Equitrans were transferred to
Equitable Production and reflected in the reserve information for 1999 as other
additions to proved reserves of 43,829 million cubic feet equivalent. Proved
undeveloped reserves represent proved reserves expected to be recovered from new
wells after substantial development costs are incurred. All of the Company's
proved reserves are in the United States.
61
62
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
2000 1999 1998
---------- ---------- --------
(MILLIONS OF CUBIC FEET)
NATURAL GAS
Proved developed and undeveloped reserves:
Beginning of year ........................................... 1,146,433 899,881 889,828
Revision of previous estimates .............................. 56,388 134,576 6,502
Purchase of natural gas in place ............................ 1,220,509 46,124 8,474
Sale of natural gas in place ................................ (311,770) -- --
Extensions, discoveries and other additions ................. 140,204 132,180 54,970
Production .................................................. (87,134) (66,328) (59,893)
---------- ---------- --------
End of year ................................................. 2,164,630 1,146,433 899,881
========== ========== ========
Proved developed reserves:
Beginning of year ........................................... 965,969 780,817 769,312
End of year ................................................. 1,563,076 965,969 780,817
2000 1999 1998
---------- ---------- --------
(THOUSANDS OF BARRELS)
OIL
Proved developed and undeveloped reserves:
Beginning of year ........................................... 9,932 9,826 10,100
Revision of previous estimates .............................. 134 (23) (966)
Purchase of oil in place .................................... 1,872 44 5
Sale of oil in place ........................................ (4,574) -- --
Extensions, discoveries and other additions ................. -- 1,155 1,661
Production .................................................. (497) (1,070) (974)
---------- ---------- --------
End of year ................................................. 6,867 9,932 9,826
========== ========== ========
Proved developed reserves:
Beginning of year ........................................... 7,996 8,331 8,941
End of year ................................................. 6,867 7,996 8,331
62
63
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
STANDARD MEASURE OF DISCOUNTED FUTURE CASH FLOW
Management cautions that the standard measure of discounted future cash
flows should not be viewed as an indication of the fair market value of natural
gas and oil producing properties, nor of the future cash flows expected to be
generated therefrom. The information presented does not give recognition to
future changes in estimated reserves, selling prices or costs and has been
discounted at an arbitrary rate of 10%. Estimated future net cash flows from
natural gas and oil reserves based on selling prices and costs at year-end price
levels are as follows:
2000 1999 1998
------------ ----------- -----------
(THOUSANDS)
Future cash inflows ........................................ $ 24,633,861 $ 2,877,829 $1,870,002
Future production costs .................................... (2,864,814) (808,115) (606,777)
Future development costs ................................... (327,875) (139,626) (84,454)
------------ ----------- ----------
Future net cash flow before income taxes ................... 21,441,172 1,930,088 1,178,771
10% annual discount for estimated timing of cash flows ..... (14,969,946) (1,098,185) (635,296)
------------ ----------- ----------
Discounted future net cash flows before income taxes ....... 6,471,226 831,903 543,475
Future income tax expenses, discounted at 10% annually ..... (2,394,354) (251,467) (118,602)
------------ ----------- ----------
Standardized measure of discounted future net cash flows ... $ 4,076,872 $ 580,436 $ 424,873
============ =========== ==========
Summary of changes in the standardized measure of discounted future net
cash flows:
2000 1999 1998
------------- ------------ ------------
(THOUSANDS)
Sales and transfers of natural gas and oil produced - net ........ $ (206,393) $(146,230) $(108,600)
Net changes in prices, production and development costs .......... 2,557,134 156,020 (343,061)
Extensions, discoveries, and improved recovery, less
related costs .................................................. 408,844 140,402 67,986
Development costs incurred ....................................... 61,496 30,479 32,497
Purchase (sale) of minerals in place - net ....................... 2,627,587 26,152 6,439
Revisions of previous quantity estimates ......................... 167,784 101,778 (260)
Accretion of discount ............................................ 65,230 42,487 84,463
Net change in income taxes ....................................... (2,142,887) (128,301) 158,285
Other ............................................................ (42,359) (67,224) (13,870)
----------- --------- ---------
Net increase (decrease) .......................................... 3,496,436 155,563 (116,121)
Beginning of year ................................................ 580,436 424,873 540,994
----------- --------- ---------
End of year ...................................................... $ 4,076,872 $ 580,436 $ 424,873
=========== ========= =========
63
64
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
The following tables present information about the natural gas and oil producing
activities of the Company's nonconsolidated investments.
PRODUCTION COSTS OF NONCONSOLIDATED INVESTMENTS
2000
--------
(THOUSANDS)
At December 31:
Capitalized costs ................................................................... $226,895
Accumulated depreciation and depletion .............................................. 55,915
--------
Net capitalized costs .................................................................. $170,980
========
Costs incurred:
Property acquisition:
Proved properties ................................................................. $ 71,225
Unproved properties ............................................................... 11,424
Exploration ............................................................................ 12,429
Development ............................................................................ 21,166
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES OF NONCONSOLIDATED INVESTMENTS
2000
--------
(THOUSANDS)
Revenues ............................................................................... $78,995
Production costs ....................................................................... 17,255
Exploration expenses ................................................................... 4,592
Depreciation and depletion ............................................................. 23,283
Impairment of assets ................................................................... 2,885
Income tax expense ..................................................................... 10,936
-------
Results of operations from producing activities ........................................ $20,044
=======
64
65
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
RESERVE INFORMATION OF NONCONSOLIDATED INVESTMENTS
2000
------------------------
(MILLIONS OF CUBIC FEET)
NATURAL GAS
Proved developed and undeveloped reserves:
Beginning of year ................................................. 42,842
Revision of previous estimates .................................... 3,828
Purchase of natural gas in place .................................. 41,925
Sale of natural gas in place ...................................... (160)
Extensions, discoveries and other additions ....................... 12,007
Production ........................................................ (12,319)
-------
End of year ....................................................... 88,123
=======
Proved developed reserves:
Beginning of year ................................................. 29,728
End of year ....................................................... 66,542
2000
----------------------
(THOUSANDS OF BARRELS)
OIL
Proved developed and undeveloped reserves:
Beginning of year ................................................. 11,757
Revision of previous estimates .................................... 509
Purchase of oil in place .......................................... 1,166
Sale of oil in place .............................................. (778)
Extensions, discoveries and other additions ....................... 1,125
Production ........................................................ (1,287)
-------
End of year ....................................................... 12,492
=======
Proved developed reserves:
Beginning of year ................................................. 10,587
End of year ....................................................... 10,294
65
66
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
X. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
STANDARD MEASURE OF DISCOUNTED FUTURE CASH FLOW OF NONCONSOLIDATED INVESTMENTS
Management cautions that the standard measure of discounted future cash
flows should not be viewed as an indication of the fair market value of natural
gas and oil producing properties, nor of the future cash flows expected to be
generated therefrom. The information presented does not give recognition to
future changes in estimated reserves, selling prices or costs and has been
discounted at an arbitrary rate of 10%. Estimated future net cash flows from
natural gas and oil reserves based on selling prices and costs at year-end price
levels are as follows:
2000
-----------
(THOUSANDS)
Future cash inflows ........................................ $1,074,495
Future production costs .................................... (196,143)
Future development costs ................................... (42,870)
----------
Future net cash flow before income taxes ................... 835,482
10% annual discount for estimated timing of cash flows ..... (193,070)
----------
Discounted future net cash flows before income taxes ....... 642,412
Future income tax expenses, discounted at 10% annually ..... (248,086)
----------
Standardized measure of discounted future net cash flows ... $ 394,326
==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
66
67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 with respect to directors is incorporated
herein by reference to the section describing "Election of Directors" in the
Company's definitive proxy statement relating to the annual meeting of
stockholders to be held on May 17, 2001, which will be filed with the Commission
within 120 days after the close of the Company's fiscal year ended December 31,
2000.
Information required by Item 10 with respect to compliance with Section
16(a) of the Exchange Act is incorporated by reference to the section describing
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 17, 2001.
Information required by Item 10 with respect to executive officers is
included herein after Item 4 at the end of Part I under the heading "Executive
Officers of the Registrant."
The information required by Item of Regulation S-K contained under the
caption "Compliance with Section 16(a) Reporting" on pages 4-5 of the Proxy
Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated herein by reference to
the sections describing "Executive Compensation," "Employment Contracts and
Change-In-Control Arrangements" and "Pension Plan" in the Company's definitive
proxy statement relating to the annual meeting of stockholders to be held on May
17, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated herein by reference to
the section describing "Voting Securities and Record Date" in the Company's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 17, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
67
68
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying index to
financial statements are filed as part of this Annual Report on Form
10-K.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying index to
financial statements and financial schedule is filed as part of this
Annual Report on Form 10-K.
3. Exhibits
The exhibits listed on the accompanying index to exhibits (pages 63
through 66) are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2000.
None.
EQUITABLE RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS COVERED
BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14 (a))
1. The following consolidated financial statements of Equitable Resources,
Inc. and Subsidiaries are included in Item 8:
PAGE REFERENCE
Statements of Consolidated Income for each of the three
years in the period ended December 31, 2000 34
Statements of Consolidated Cash Flows for each of the
three years in the period ended December 31, 2000 35
Consolidated Balance Sheets December 31, 2000 and 1999 36 - 37
Statements of Common Stockholders' Equity for each of the
three years in the period ended December 31, 2000 38
Notes to Consolidated Financial Statements 39 - 66
2. Schedule for the Years Ended December 31, 2000, 1999 and 1998 included in
Part IV:
II-- Valuation and Qualifying Accounts and Reserves 69
All other schedules are omitted since the subject matter thereof is either
not present or is not present in amounts sufficient to require submission
of the schedules.
68
69
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------ ------------- --------------------------------- ----------- -------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES ACQUISITIONS DEDUCTIONS PERIOD
-------------------------------------------------------------------------------------------------------------------
(THOUSANDS)
2000
Accumulated Provisions for
Doubtful Accounts $13,024 $12,129 $400(b) $(10,140)(a) $15,413
1999
Accumulated Provisions for
Doubtful Accounts $ 9,818 $11,917 $108(c) $ (8,819)(a) $13,024
1998
Accumulated Provisions for
Doubtful Accounts $10,284 $15,634 $ 21(d) $(16,121)(a) $ 9,818
Note:
(a) Customer accounts written off, less recoveries.
(b) Addition to the Provision for Doubtful Accounts relates to the acquisition
of Statoil Energy, Inc.
(c) Addition to the Provision for Doubtful Accounts relates to the acquisition
of Carnegie Distribution.
(d) Addition to the Provision for Doubtful Accounts relates to the acquisition
of LMI and Scallop.
69
70
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
--------------- --------------------------------------------------- -----------------------------------------
3.01 Restated Articles of Incorporation of the Company Filed as Exhibit 3.01 to Form 10-K for
dated May 18, 1999 the year ended December 31, 1999
3.02 Bylaws of the Company (amended through May 17, Filed as Exhibit 3.02 to Form 10-Q for
2000) the quarter ended June 30, 2000
4.01 (a) Indenture dated as of April 1, 1983 between the Filed as Exhibit 4.01 (Revised) to
Company and Pittsburgh National Bank relating to Post-Effective Amendment No. 1 to
Debt Securities Registration Statement (Registration
No. 2-80575)
4.01 (b) Instrument appointing Bankers Trust Company as Filed as Exhibit 4.01 (b) to Form 10-K
successor trustee to Pittsburgh National Bank for the year ended December 31, 1998
4.01 (c) Resolutions adopted June 22, 1987 by the Finance Filed as Exhibit 4.01 (c) to Form 10-K
Committee of the Board of Directors of the for the year ended December 31, 1998
Company establishing the terms of the 75,000
units (debentures with warrants) issued July 1,
1987
4.01 (d) Supplemental indenture dated March 15, 1991 with Filed as Exhibit 4.01 (f) to Form 10-K
Bankers Trust Company eliminating limitations on for the year ended December 31, 1996
liens and additional funded debt
4.01 (e) Resolution adopted August 19, 1991 by the Ad Hoc Filed as Exhibit 4.01 (g) to Form 10-K
Finance Committee of the Board of Directors of for the year ended December 31, 1996
the Company Addenda Nos. 1 through 27,
establishing the terms and provisions of the
Series A Medium-Term Notes
4.01 (f) Resolutions adopted July 6, 1992 and February 19, Refiled as Exhibit 4.01 (h) to Form
1993 by the Ad Hoc Finance Committee of the Board 10-K for the year ended December 31,
of Directors of the Company and Addenda Nos. 1 1997
through 8, establishing the terms and provisions
of the Series B Medium-Term Notes
4.01 (g) Resolution adopted July 14, 1994 by the Ad Hoc Filed as exhibit 4.01(i) to Form 10-K
Finance Committee of the Board of Directors of for the year ended December 31, 1995
the Company and Addenda Nos. 1 and 2,
establishing the terms and provisions of the
Series C Medium-Term Notes
4.01 (h) Resolution adopted January 18 and July 18, 1996 Filed as Exhibit 4.01 (j) to Form 10-K
by the Board of Directors of the Company and for the year ended December 31, 1996
Resolutions adopted July 18, 1996 by the
Executive Committee of the Board of Directors of
the Company, establishing the terms and
provisions of the 7.75% Debentures issued July
29, 1996
4.01 (i) Junior Subordinated Indenture Between Equitable Filed as Exhibit 4.1 to Form 10-Q for
Resources, Inc. and Bankers Trust Company the quarter ended June 30, 1998
Each management contract and compensatory arrangement in which any director or
any named executive officer participates has been marked with an asterisk (*).
70
71
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
--------------- --------------------------------------------------- -----------------------------------------
4.01 (j) Amended and Restated Trust Agreement Between Filed as Exhibit 4.2 to Form 10-Q for
Equitable Resources, Inc. and Bankers Trust the quarter ended June 30, 1998
Company
4.01 (k) Equitable Resources, Inc. 7.35% Junior Filed as Exhibit 4.3 to Form 10-Q for
Subordinated Deferrable Interest Debentures the quarter ended June 30, 1998
Certificate
4.01 (l) Rights Agreement dated as of April 1, 1996 Filed as Exhibit 1 to Registration
between the Company and Chemical Mellon Statement on Form 8-A filed April 16,
Shareholder Services, L.L.C., setting forth the 1996
terms of the Company's Preferred Stock Purchase
Rights Plan
10.01 Trust Agreement with Pittsburgh National Bank to Refiled as Exhibit 10.01 to Form 10-K
act as Trustee for Supplemental Pension Plan, for the year ended December 31, 1999
Supplemental Deferred Compensation Benefits,
Retirement Program for Board of Directors and
Supplemental Executive Retirement Plan
*10.02 Equitable Resources, Inc. Filed as Exhibit 10.4 to Form 10-Q for
Directors' Deferred Compensation Plan (Amended the quarter ended June 30, 2000
and Restated Effective May 16, 2000)
*10.03 1999 Equitable Resources, Inc. Filed as Exhibit 10.2 to Form 10-Q for
Long-Term Incentive Plan (as amended May 26, 1999) the quarter ended June 30, 1999
*10.04 1999 Equitable Resources, Inc. Filed as Exhibit 10.04 to Form 10-K for
Short-Term Incentive Plan the year ended December 31, 1999
*10.05 1999 Equitable Resources, Inc. Non-Employee Filed as Exhibit 10.1 to Form 10-Q for
Directors' Stock Incentive Plan (as amended May the quarter ended June 30, 1999
26, 1999)
*10.06 Equitable Resources, Inc. 1994 Long-Term Refiled as Exhibit 10.06 to Form 10-K for
Incentive Plan the year ended December 31, 1999
*10.07 Equitable Resources, Inc. and Subsidiaries Filed as Exhibit 10.3 to Form 10-Q for
Deferred Compensation Plan (Amended and Restated the quarter ended June 30, 2000
Effective May 16, 2000)
*10.08 Equitable Resources, Inc. Breakthrough Long-Term Filed as Exhibit 10.01 to Form 10-Q for
Incentive Plan with certain executives of the the quarter ended September 30, 2000
Company (as amended through November 30, 1999)
*10.09 (a) Employment Agreement dated as of May 4, 1998 with Filed as Exhibit 10.2 to Form 10-Q for
Murry S. Gerber the quarter ended June 30, 1998
*10.09 (b) Amendment No. 1 to Employment Agreement with Filed as Exhibit 10.09 (b) to Form 10-K
Murry S. Gerber for the year ended December 31, 1999
Each management contract and compensatory arrangement in which any director or
any named executive officer participates has been marked with an asterisk (*).
71
72
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
--------------- --------------------------------------------------- -----------------------------------------
*10.10 Change in Control Agreement dated December 1, Filed as Exhibit 10.10 to Form 10-K for
1999 with Murry S. Gerber the year ended December 31, 1999
*10.11 Supplemental Executive Retirement Agreement dated Filed as Exhibit 10.4 to Form 10-Q for
as of May 4, 1998 with Murry S. Gerber the quarter ended June 30, 1998
*10.12 Amended and Restated Post-Termination Filed as Exhibit 10.12 to Form 10-K for
Confidentiality and Non-Competition Agreement the year ended December 31, 1999
dated December 1, 1999 with Murry S. Gerber
*10.13 (a) Employment Agreement dated as of July 1, 1998 Filed as Exhibit 10.1 to Form 10-Q for
with David L. Porges the quarter ended September 30, 1998
*10.13 (b) Amendment No. 1 to Employment Agreement with Filed as Exhibit 10.13 (b) to Form 10-K
David L. Porges for the year ended December 31, 1999
*10.14 Change of Control Agreement dated July 1, 1998 Filed as Exhibit 10.14 to Form 10-K for
with David L. Porges the year ended December 31, 1999
*10.15 Amended and Restated Post-Termination Filed as Exhibit 10.15 to Form 10-K for
Confidentiality and Non-Competition Agreement the year ended December 31, 1999
dated December 1, 1999 with David L. Porges
*10.16 Change of Control Agreement dated December 1, Filed as Exhibit 10.16 to Form 10-K for
1999 with Gregory R. Spencer the year ended December 31, 1999
*10.17 Noncompete Agreement dated December 1, 1999 with Filed as Exhibit 10.17 to Form 10-K for
Gregory R. Spencer the year ended December 31, 1999
*10.18 Change of Control Agreement dated December 1, Filed as Exhibit 10.18 to Form 10-K for
1999 with Johanna G. O'Loughlin the year ended December 31, 1999
*10.19 Noncompete Agreement dated December 1, 1999 with Filed as Exhibit 10.19 to Form 10-K for
Johanna G. O'Loughlin the year ended December 31, 1999
*10.20 (a) Agreement dated May 29, 1996 with Paul Christiano Filed as Exhibit 10.04 (a) to Form 10-K
for deferred payment of 1996 director fees for the year ended December 31, 1996
beginning May 29, 1996
*10.20 (b) Agreement dated November 26, 1996 with Paul Filed as Exhibit 10.04 (b) to Form 10-K
Christiano for deferred payment of 1997 for the year ended December 31, 1996
director fees
*10.20 (c) Agreement dated December 1, 1997 with Paul Filed as Exhibit 10.04 (c) to Form 10-K
Christiano for deferred payment of 1998 for the year ended December 31, 1997
director fees
*10.20 (d) Agreement dated December 15, 1998 with Paul Filed as Exhibit 10.19 (d) to Form 10-K
Christiano for deferred payment of 1999 for the year ended December 31, 1998
director fees
*10.20 (e) Agreement dated November 29, 1999 with Paul Filed as Exhibit 10.20 (e) to Form 10-K
Christiano for deferred payment of 2000 for the year ended December 31, 1999
director fees
Each management contract and compensatory arrangement in which any director or
any named executive officer participates has been marked with an asterisk (*).
72
73
EXHIBITS DESCRIPTION METHOD OF FILING
- ------------- --------------------------------------------------- -----------------------------------------
* 10.21 (a) Agreement dated May 24, 1996 with Phyllis A. Domm Filed as Exhibit 10.14 (a) to Form 10-K
for deferred payment of 1996 director fees for the year ended December 31, 1996
beginning May 24, 1996
* 10.21 (b) Agreement dated November 27, 1996 with Phyllis A. Filed as Exhibit 10.14 (b) to Form 10-K
Domm for deferred payment of 1997 director fees for the year ended December 31, 1996
* 10.21 (c) Agreement dated November 30, 1997 with Phyllis A. Filed as Exhibit 10.14 (c) to Form 10-K
Domm for deferred payment of 1998 director fees for the year ended December 31, 1997
* 10.21 (d) Agreement dated December 5, 1998 with Phyllis A. Filed as Exhibit 10.20 (d) to Form 10-K
Domm for deferred payment of 1999 director fees for the year ended December 31, 1998
* 10.21 (e) Agreement dated November 30, 1999 with Phyllis A. Filed as Exhibit 10.21 (e) to Form 10-K
Domm for deferred payment of 2000 director fees for the year ended December 31, 1999
* 10.22 (a) Agreement dated December 31, 1987 with Malcolm M. Filed as Exhibit 10.21 (a) to Form 10-K
Prine for deferred payment of 1988 director fees for the year ended December 31, 1998
* 10.22 (b) Agreement dated December 30, 1988 with Malcolm M. Filed as Exhibit 10.21 (b) to Form 10-K
Prine for deferred payment of 1989 director fees for the year ended December 31, 1998
* 10.23 Release Agreement dated December 8, 1999 with Filed as Exhibit 10.23 to Form 10-K for
John C. Gongas, Jr. the year ended December 31, 1999
* 10.24 Change in Control Agreement dated June 12, 2000 Filed as Exhibit 10.1 to Form 10-Q for
by and between Equitable Resources, Inc. and the quarter ended June 30, 2000
James M. Funk
* 10.25 Noncompete Agreement dated June 12, 2000 by and Filed as Exhibit 10.2 to Form 10-Q for
between Equitable Resources, Inc. and James M. the quarter ended June 30, 2000
Funk
* 10.26 Change of Control Agreement dated October 30, Filed as Exhibit 10.2 to Form 10-Q for
2000 by and between Equitable Resources, Inc. and the quarter ended September 30, 2000
Philip P. Conti
* 10.27 Purchase Agreement by and among Equitable Filed as Exhibit 10.5 to Form 10-Q for
Resources Energy Company, ET Bluegrass Company, the quarter ended September 30, 1998
EREC Nevada, Inc. and ERI Services. Inc. and AEP
Resources, Inc. dated September 12, 1998 for the
purchase of midstream assets
* 10.28 Indemnification Agreement effective July 19, 2000 Filed herewith as Exhibit 10.28
by and between Equitable Resources, Inc. and
James M. Funk
Each management contract and compensatory arrangement in which any director or
any named executive officer participates has been marked with an asterisk (*).
73
74
EXHIBITS DESCRIPTION METHOD OF FILING
- ------------- --------------------------------------------------- -----------------------------------------
*10.29 Indemnification Agreement effective August 11, Filed herewith as Exhibit 10.29
2000 by and between Equitable Resources, Inc. and
Philip P. Conti
*10.30 Indemnification Agreement dated January 18, 2001 Filed herewith as Exhibit 10.30
by and between Equitable Resources, Inc. and
Joseph E. O'Brien
*10.31 Change of Control Agreement dated January 30, Filed herewith as Exhibit 10.31
2001 by and between Equitable Resources, Inc. and
Joseph E. O'Brien
*10.32 Noncompete Agreement dated January 30, 2001 by Filed herewith as Exhibit 10.32
and between Equitable Resources, Inc. and Joseph
E. O'Brien
21 Schedule of Subsidiaries Filed herewith as Exhibit 21
23.01 Consent of Independent Auditors Filed herewith as Exhibit 23.01
- ------------
The Company agrees to furnish to the Commission, upon request, copies of
instruments with respect to long-term debt which have not previously been filed.
Each management contract and compensatory arrangement in which any director or
any named executive officer participates has been marked with an asterisk (*).
74
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EQUITABLE RESOURCES, INC.
By: /s/ MURRY S. GERBER
-----------------------------------------------
Murry S. Gerber
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ MURRY S. GERBER Chairman, President and March 14, 2001
- ------------------------------------ Chief Executive Officer
Murry S. Gerber
(Principal Executive Officer)
/s/ DAVID L. PORGES Executive Vice President and March 14, 2001
- ------------------------------------ Chief Financial Officer
David L. Porges
(Principal Financial Officer)
/s/ JOHN A. BERGONZI Corporate Controller and March 14, 2001
- ------------------------------------ Assistant Treasurer
John A. Bergonzi
(Principal Accounting Officer)
/s/ PAUL CHRISTIANO Director March 14, 2001
- ------------------------------------
Paul Christiano
/s/ PHYLLIS A. DOMM Director March 14, 2001
- ------------------------------------
Phyllis A. Domm
/s/ E. LAWRENCE KEYES, JR. Director March 14, 2001
- ------------------------------------
E. Lawrence Keyes, Jr.
/s/ THOMAS A. MCCONOMY Director March 14, 2001
- ------------------------------------
Thomas A. McConomy
/s/ GEORGE L. MILES, JR. Director March 14, 2001
- ------------------------------------
George L. Miles, Jr.
/s/ DONALD I. MORITZ Director March 14, 2001
- ------------------------------------
Donald I. Moritz
/s/ MALCOLM M. PRINE Director March 14, 2001
- ------------------------------------
Malcolm M. Prine
/s/ JAMES E. ROHR Director March 14, 2001
- ------------------------------------
James E. Rohr
/s/ DAVID S. SHAPIRA Director March 14, 2001
- -------------------------------------
David S. Shapira
/s/ J. MICHAEL TALBERT Director March 14, 2001
- ------------------------------------
J. Michael Talbert
75