Equitable Resources, Inc. - Company Profile, Information, Business Description, History, Background Information on Equitable Resources, Inc.

One Oxford Centre, Suite 3300
Pittsburgh, Pennsylvania 15219

Company Perspectives:

We continue to focus our efforts exclusively on core business activities. We supply natural gas from the Appalachian region through Equitable Production. We deliver natural gas to customers in Pennsylvania, West Virginia and Kentucky through Equitable Utilities. We help customers improve the efficiency and reliability of their energy infrastructure through NORESCO. These are the businesses in which our confidence to make substantive operational and financial gains is rooted in our knowledge, experience, and strong competitive position.

History of Equitable Resources, Inc.

Equitable Resources, Inc. is a major natural gas utility headquartered in Pittsburgh, Pennsylvania. In addition to its extensive holdings in the Appalachian Basin, where the company owns 2.2 trillion cubic feet of proved natural gas reserves and 12,600 oil and gas wells in five states, Equitable has significant properties in other regions of the United States and Canada, notably in the Rocky Mountain states and in the Gulf of Mexico. A diversified company, Equitable Resources is organized into three primary business segments: Equitable Utilities, Equitable Production, and NORESCO.

Natural Gas Discoveries in the 19th Century: The Birth of Equitable Gas Company

Equitable's history is distinguished by the company's early association with the famed American inventor and entrepreneur George Westinghouse, who was born in 1846 in upstate New York. Westinghouse left a lasting mark in the fields of railroad brake systems and alternating current (AC) electrical generation. His interest in the natural gas business arose chiefly from the discovery in 1884 of a sizable gas field lying below the backyard of his home in east Pittsburgh. Westinghouse had not bought the property with any thought of such a bonanza, but natural gas was common in the western Pennsylvania region, and the inventor was not a man to miss an opportunity to advance his industrial holdings. The eruption of gas, which blew up the drilling derrick and chunks of Westinghouse's rear lawn, immediately set him to planning the creation of a company that would bring natural gas to every business and residence in the greater Pittsburgh area.

Gas lighting had been standard in U.S. cities for many years, but the vast majority of lighting systems used gas manufactured from coal or oil. In contrast, natural gas flowing directly from underground fields was thought to be a dangerous nuisance attending the exploration for oil. It was usually piped to the surface and burned off with the expectation that oil would soon follow; if oil failed to appear, the well was abandoned and the gas allowed to burn itself out, a waste of energy that might take years. Although it was known that natural gas contained approximately twice as much energy in the form of heat as manufactured gas and would therefore be an ideal fuel for industrial and residential heating, technology for measuring and harnessing the notoriously hazardous underground sources of the gas was slow to develop. The first natural gas company in the United States was not founded until 1858, and it would be many years before natural gas rivaled manufactured gas as a widely available form of energy.

Conditions in Pittsburgh were ideal for the use of natural gas, however. Not only was western Pennsylvania rich in gas deposits--as Westinghouse discovered--the city of Pittsburgh had already become a center for such industries as chemicals, paint, and steel, all of them in need of massive amounts of fuel for heat. Coal was the traditional source of energy, but by the early 1880s natural gas was also gaining acceptance as a viable fuel among local industries. Consequently, in his scheme for creating a natural gas utility in Pittsburgh, Westinghouse could rely on the patronage of large industrial customers, who would provide a sales base upon which to build a business in the residential sector. In the summer of 1884 Westinghouse gathered together a board of directors for the new company that included his younger brother Henry and a number of trusted associates from other Westinghouse concerns.

The venture's first obstacles were of a technical and legal nature. Natural gas was widely and justifiably feared by the public because of the danger of leakage and subsequent explosion along the miles of piping needed to transport the gas from wellhead to end user. In order to win approval from the Pittsburgh city council for his utility, Westinghouse was forced to invent a more secure type of pipe joint and a device that automatically cut the flow of gas to a home or business in which a leak had developed. These were relatively simple innovations, and Westinghouse had little trouble convincing the city council that he could deliver gas safely to the Pittsburgh area.

But the inventor also faced a thorny legal problem: according to municipal law, the first utility incorporated in Pittsburgh retained monopoly rights to the service it provided, and a local maker of manufactured gas named Fuel Gas Company challenged the right of Westinghouse to build his natural gas lines. Fuel Gas strove mightily to prevent Westinghouse from obtaining a corporate charter that would permit him to lay pipes under private property in Pittsburgh. After some legal head scratching, Westinghouse's advisors uncovered a state charter granted some years earlier to the financier Tom Scott that had never been used. The document's provisions included the broad powers needed by Westinghouse's proposed utility, and he succeeded in buying the charter for $35,000--a substantial sum at that time. The company named in the charter happened to be Philadelphia Company, and accordingly Westinghouse announced on August 4, 1884, that the Philadelphia Company was prepared to begin natural gas service to the city of Pittsburgh and surrounding communities. The confusion of city names would prove not to be an impediment to the company's success.

Philadelphia Company assets included the company's charter rights, patents on several Westinghouse inventions, and the Westinghouse gas field as well as several others that had previously been acquired. Initial capital needed was $5 million, half of it contributed by Westinghouse in assets and the other half sold as stock to the public. Interest in the stock was slow at first, since the well-publicized dangers of natural gas frightened away many investors. After the company paid out a 12 percent dividend in its first year, however, the remaining shares were quickly snapped up.

Philadelphia Company was a success from the beginning. Once the methods of transporting and storing natural gas had been mastered, the public began to appreciate the superiority of gas for heating and cooking purposes. Until the adoption of gas meters toward the end of the 1880s, Philadelphia delivered unlimited amounts of natural gas to homes for a fixed monthly fee, usually around one dollar for cook stoves and 75 cents for heating stoves. A large country estate could be heated for approximately $75 a month.

Use of natural gas increased at a prodigious rate in Pennsylvania, rising from an estimated value of $75,000 in 1882 to $7.4 million ten years later. The state was easily the leading producer of natural gas in the country. Philadelphia Company expanded its operations quickly, buying up regional gas fields and extending its pipelines to municipalities in the greater Pittsburgh area. In the meantime, the advent of electricity had forever altered the light and power industries, and George Westinghouse was soon deeply involved in the design of AC generators capable of delivering electricity over great distances.

Philadelphia Company was the natural legal vehicle for Westinghouse's electrical interests in Pittsburgh, and to distinguish the two segments of his utility business, he created a number of smaller companies to handle natural gas operations. One of these was Equitable Gas Company, incorporated in 1888 as a wholly owned subsidiary of Philadelphia Company. Equitable Gas would eventually become the sole proprietor of all of Philadelphia's gas holdings, but for many years it operated alongside a handful of other Philadelphia gas subsidiaries.

New Fuel for a New Economy: 1900-50

Despite initial enthusiasm, residential use of natural gas was limited until well into the 20th century. Coal had been used for many years in Pennsylvania as the primary source of energy for cooking and heating, and it would not be easily supplanted by the more efficient but less familiar natural gas. Like other natural gas utilities, Equitable did its best to advertise the advantages of gas over coal and oil, in some cases promoting appliances--including gas-powered irons, air conditioners, and refrigerators--that were destined to become part of electricity's domain. Of the many gas-powered inventions marketed by the industry in its early years, only the cook stove and water heater became permanent features of the American home. Sales of cook stoves were significantly boosted by a nationwide coal strike in 1902, and the modern gas water heater was perfected around the same time.

Equitable Gas was fortunate to be surrounded by the burgeoning industries of Pittsburgh, which by 1900 was the steel capital of the world. Equitable's combination of a strong industrial base with a slowly growing residential business allowed the utility to sustain its viability during the rise and fall of competing energy sources in the 20th century. Established in the age of coal, Equitable and the natural gas industry suffered the successive introductions of electricity, oil and gasoline, and, later, nuclear power, all of them taking their share of the world's energy dollar while making natural gas appear crude and out of date. As became more obvious in the second half of the century, however, natural gas would remain the fuel of choice for a number of limited but fundamental purposes requiring the generation of heat. Once the massive cost of its initial construction was taken care of, Equitable, like most government-regulated utilities, was able to glide along for decades with few changes other than the size of its dividend checks and a steady accumulation of more plants and pipelines.

In 1947 Equitable was made the sole owner of all natural gas properties held by Philadelphia Company in the state of Pennsylvania, and three years later the parent company's holdings in Kentucky and West Virginia were also transferred to Equitable. Following these moves, Philadelphia Company sold the common stock of Equitable to a group of underwriters who then offered it to the public for the first time. The newly enlarged Equitable was now considerably more than a Pittsburgh natural gas utility; its holdings included gas fields in three states and the beginnings of an interstate pipeline system. The development in the 1920s of seamless steel piping, along with the discovery of immense gas fields in the southwestern states, had encouraged gas companies throughout the United States to accelerate the construction of long pipelines and to make natural gas a more familiar product in urban areas. Equitable, located within striking distance of cities along the eastern seaboard, began investing in a network of pipelines that would eventually allow the direct or indirect sale of its gas to much of the northeast United States.

Postwar Competition and the Search for New Markets: 1950-90

Equitable's utility business remained largely industrial until the steel industry's catastrophic collapse in the early 1980s. Having relied on its steel and other heavy industrial customers for much of its history, Equitable was forced to a fundamental rethinking of its markets by the steady erosion of the American steel business brought on by Japanese competition. The Japanese challenge was evident as early as 1960, but it was not until the mid-1970s that American steel manufacturers began a major retreat from the world market. At about the same time, the oil embargo by the Organization of Petroleum Exporting Countries (OPEC) permanently altered the world's perception of energy resources, particularly oil. Once regarded as a more or less limitless fund of cheap energy, oil became overnight a far more valuable and sought after commodity.

The combination of these two developments, painful though they were in the short term, had the fortunate effect of pushing Equitable Gas toward the more profitable businesses of oil and gas production and gas transportation. While Equitable's utility division was struggling with the final decimation of its steel customers in the 1981-82 economic recession, the company was also exploiting opportunities for oil and gas production on the many thousands of acres of Appalachian land for which it held drilling rights. For years Appalachian wells had been too expensive to drill, but following the end of cheap oil in the mid-1970s, Equitable discovered that its extensive Appalachian holdings contained hundreds of small oil fields that could be developed at a handsome profit. Along with its increased oil production, Equitable stepped up development of natural gas, shifting gradually from being primarily a user to a producer and marketer of the fuel. For as the price of oil rose, so did the relative desirability of natural gas, which for heating purposes was both cheaper and cleaner than oil.

Thus, despite the collapse of its single largest market, Equitable Gas found its economic outlook brighter than ever by the early 1980s. In 1982, for example, while the utility division saw its industrial sales drop by 43 percent, it could also count on rate relief and the undeniable advantages of natural gas to assure its future recovery. At the same time, Equitable's energy division was shooting forward, contributing 77 percent--$57 million--of the company's operating income and expanding on all frontiers. Another timely development was the 1978 Natural Gas Policy Act, which allowed natural gas pipelines to charge substantially higher prices. Since Equitable was in the midst of greatly extending its pipeline system, the 1978 act was something of a windfall for the company; after a legal battle, Equitable received nearly $90 million in extra earnings for the period from 1978 to 1983.

Even in the face of weak energy prices during the 1980s, Equitable increasingly defined itself as an oil and gas company. In 1984 the company acknowledged its newly diversified profile by changing its name to Equitable Resources, Inc. Since then, it expanded its oil and gas exploration efforts to the Gulf of Mexico, the Rocky Mountains, and Colombia, and its energy division continued to climb past the utility-pipeline division in terms of revenue and net income. Equitable expected that trend to continue during the 1990s, especially in the event of a major rise in energy prices. The company's Appalachian oil and gas wells were among the most economical in the business; easy to find and easy to drill, Appalachian energy reserves were small by world standards but very profitable.

On the other side of its business, Equitable acquired a major gas pipeline network operating in the region south of Pittsburgh and connecting with other lines leading to cities of the Atlantic coast. By the late 1980s Equitable was also a provider of gas storage facilities, and, as it had done for over a century, the company continued to provide natural gas service to the greater Pittsburgh area. With the creation of its new natural gas pipeline subsidiary, Equitrans, in early 1988, Equitable hoped to develop a transmission network that extended far beyond its traditional core regions, and in the process become a major player in the rapidly expanding interstate utilities market.

New Opportunities in the Age of Deregulation: The 1990s

In the early 1990s, with government deregulation of the nation's utilities industries on the horizon, Equitable began to search for new ways to increase its natural gas production capacity. After a string of successful acquisitions during the late 1980s, which included the 1986 purchase of 33 gas and oil wells in seven western states from the High Plains Oil Corp., Equitable continued to seek expansion opportunities in the new decade. In September 1991, the company further bolstered its holdings in the Rocky Mountain region with the acquisition of 400 oil wells, in addition to nearly 400,000 acres of developed and undeveloped properties in Montana, Wyoming, Utah, and North Dakota from Maxus Energy for $64 million. The following November, the company purchased 220,000 acres of oil and gas properties in the Appalachian Basin, much of which was in close proximity to Equitable's existing holdings in Virginia and Kentucky, from ANR Production Co. Worth $75 million, the agreement marked the company's largest acquisition to date. More significantly, when taken in combination with the recent acquisition from Maxus, the ANR deal increased Equitable's overall proved energy reserves by more than 20 percent.

However, ERI's wide-ranging ambitions ultimately depleted its capital resources. Particularly damaging was the recently created ERI Services segment. Founded on more than $100 million in acquisitions, the troubled division lost $10 million in 1997 and was largely responsible for an 8 percent decline in the company's overall operating profits in early 1998. The failure of ERI Services to deliver the revenues Abrew had promised led the beleaguered CEO to announce his resignation in mid-1997. After ten months under interim president Donald Moritz, the company appointed Murry S. Gerber as its new CEO in May 1998. Gerber immediately undertook to relieve the company's sagging margins, both by implementing a workforce reduction of 20 percent and by exploring ways of divesting the company's holdings in regions outside of the Appalachian Basin. By December 1998, Gerber had also changed the company's name back to Equitable. This change in philosophy reaped instant dividends for the company, which saw its stock price rise more than 60 percent in the first half of 1999. In January 2000 Equitable expanded its gas holdings in the Appalachian Basin with the purchase of 6,500 gas wells and 1.1 trillion cubic feet of natural gas reserves from Statoil Energy Inc. Worth $630 million, the deal more than doubled Equitable's production capacity in the Northeast. This renewed focus on its core business resulted in record profits for the company, and in the early years of the new decade it seemed clear that Equitable had gotten back onto a familiar, and highly profitable, path.

Principal Operating Units: Equitable Utilities; Equitable Production; NORESCO.

Principal Competitors: Cabot Oil and Gas Corporation; Dominion Resources, Inc.; NiSource Inc.


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