01—Abstract
Summary
Summary of the 10-K filed March 1, 2004. Cited figures are marked; the original filing is the authoritative source.
Equitable Resources (EQT) closed 2003 with a strong year: income from continuing operations rose 15% to $173.6 milliona, or $2.74 per basic share ($2.74 diluted per the continuing-operations line), on operating revenues of $1.047 billion.
Results were driven by higher average well-head gas prices ($3.91b/Mcfe vs. $3.47), a 5% increase in equity volumes, and a $14.0 million gain on Westport Resources stock sales. Earnings were partly offset by an $11.1 million impairment on the Panamanian Petroelectrica project, a $9.3 million charitable foundation contribution, and a $20.4 million unallocated performance incentive cost. Net income was $170.0 million after a $3.6 million accounting change charge.
The Appalachian production franchise is the core of the story. Equitable Supply generated $195.8 millionc of operating income, and the company holds 2,067 Bcfe of proved reserves, 484 Bcfe of which are undeveloped. Production growth has lagged management's expectations, mainly due to volume shortfalls in southern West Virginia, which management is addressing with organizational changes and a more conservative 2004 capital budget.
Hedging is substantial, with roughly 50 Bcf hedged for 2004 at about $4.56d/Mcf NYMEX, and a $0.10 move in gas prices shifts diluted EPS by about $0.01 for 2004. Balance sheet and capital allocation changed meaningfully. Long-term debt rose to $653 million after $200 million of 5.15% notes were issued in February 2003 and $125 million of trust preferred securities were redeemed.
The company paid $51.8 million into its pension plan and bought back $55.2 million of stock. The Westport stake, now 17.1% and classified as available-for-sale with a $344 million fair value, is a sizable non-operating asset that management intends to monetize further. Key risks include the Jamaica bankruptcy and litigation, the lapse of the nonconventional fuels tax credit, Equitrans' pending rate case, and a 2004 capital budget of about $221 million.
02—Key points
Key Highlights
- Income from continuing operations rose 15% to $173.6 million ($2.74 diluted EPS) versus $150.6 million ($2.36) in 2002, aided by higher gas prices and Westport stock gains.
- Equitable Supply (production and gathering) generated $195.8 million of operating income, up 14%, with well-head gas prices up 13% to $3.91/Mcfe.
- Proved reserves of 2,067 Bcfe (about 484 Bcfe proved undeveloped), entirely in the Appalachian Basin, with 401 gross wells drilled at a 100% success rate in 2003.
- Westport Resources stake reduced to 17.1% (11.53 million shares), reclassified to available-for-sale and carried at $344.2 million fair value; a further sale of about 3 million shares in the six months after October 2003 is planned.
- Impairments of $11.1 million on the Panama Petroelectrica investment and a 2003 $9.3 million charitable foundation contribution weighed on earnings.
- Long-term debt increased to $653.4 million after issuing $200 million of 5.15% notes due 2018; $125 million of 7.35% trust preferred securities were redeemed.
- Substantial hedging program with about 50 Bcf hedged for 2004 at roughly $4.56/Mcf NYMEX; 2004 capital budget of about $221 million, with Equitable Supply at $138 million.
03—Questions
Frequently Asked Questions
How did Equitable Resources perform financially in 2003?
Income from continuing operations before the cumulative effect of accounting change was $173.6 million, or $2.74 per diluted share, up from $150.6 million ($2.36) in 2002. Operating revenues were $1.047 billion, slightly below 2002's $1.069 billion, while operating income rose to $302.2 million from $277.6 million. Net income was $170.0 million after a $3.6 million accounting-change charge.
What is driving production growth and what are the risks?
Production growth came from new wells drilled in 2002 and 2003 and production enhancements, partly offset by natural decline and the February 2003 sale of about 500 low-producing wells. Total sales volumes rose only 2.6 Bcfe versus expectations, mainly due to shortfalls in southern West Virginia, pipeline curtailments and well performance issues. Management is responding with more engineers in the field, added firm pipeline capacity and a reduced 2004 Appalachian development budget.
How exposed is the company to natural gas prices?
The company hedges heavily. For 2004 it has about 50 Bcf hedged at an average of roughly $4.56/Mcf (NYMEX), with 47 Bcf at $4.65 for 2005 and 45 Bcf at $4.43 for 2006. A $0.10 change in the average NYMEX price moves 2004 diluted EPS by about $0.01, and a 10% price move changes the fair value of its natural gas swaps by roughly $108 million.
What is the status of the Westport investment and Jamaica litigation?
Equitable holds 11.53 million Westport shares (17.1%), valued at $344.2 million, and says it intends to sell additional shares so the total sold in the six months after October 2003 reaches about 3 million shares. Its Jamaica power project subsidiary, ERI JAM, LLC, filed Chapter 11 in April 2003, and Jamaica Broilers Group and EAL have sued Equitable in federal court in Pennsylvania for more than $8.0 million in damages, which the company calls without merit.
Are there any dividend or capital allocation changes investors should note?
Quarterly dividends rose to $0.30 per share in the second half of 2003, and the company declared $0.97 for the full year versus $0.67 in 2002. Management targets dividend growth in line with EPS growth. The company repurchased 1.4 million shares for $55.2 million in 2003, and funded a $51.8 million pension contribution partly from Westport share sales.
04—Continue