10-Q 1 e10-q.txt EQUITABLE RESOURCES, INC. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 or [ ] 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 of incorporation or organization) (IRS Employer Identification No.) ONE OXFORD CENTRE, SUITE 3300, 301 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (412) 553-5700 ------------ NONE (Former name, former address and former fiscal year, if changed since last report) ------------ 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 period 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 the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 31, 2000 ----- -------------- Common stock, no par value 32,584,000 shares 2 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES INDEX
Page No. -------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements (Unaudited): Statements of Consolidated Income for the Three and Six Months Ended June 30, 2000 and 1999 1 Statements of Condensed Consolidated Cash Flows for the Three and Six Months Ended June 30, 2000 and 1999 2 Condensed Consolidated Balance Sheets, June 30, 2000, and December 31, 1999 3 - 4 Notes to Condensed Consolidated Financial Statements 5 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURE 26 INDEX TO EXHIBITS 27
3 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (Thousands except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ---------------------------------------------------------------- Operating revenues $338,436 $190,574 $717,535 $608,108 Cost of sales 203,360 82,796 418,116 373,902 -------- -------- -------- -------- Net operating revenues 135,076 107,778 299,419 234,206 -------- -------- -------- -------- OPERATING EXPENSES: Operation and maintenance 20,143 21,695 41,957 43,569 Exploration 1,929 2,518 2,940 3,020 Production 11,883 7,988 21,351 14,062 Selling, general and administrative 23,515 24,383 50,033 44,962 Depreciation, depletion and amortization 26,935 30,825 56,719 52,000 -------- -------- -------- -------- Total operating expenses 84,405 87,409 173,000 157,613 -------- -------- -------- -------- Operating income 50,671 20,369 126,419 76,593 Other loss (6,951) -- (6,951) -- Equity in nonconsolidated entities 990 577 2,424 1,250 -------- -------- -------- -------- EARNINGS BEFORE INTEREST & TAXES 44,710 20,946 121,892 77,843 Interest charges 19,239 8,965 35,034 18,228 -------- -------- -------- -------- Income before income taxes 25,471 11,981 86,858 59,615 Income taxes 9,246 4,743 31,530 22,638 -------- -------- -------- -------- NET INCOME $ 16,225 $ 7,238 $ 55,328 $ 36,977 ======== ======== ======== ======== EARNINGS PER SHARE OF COMMON STOCK: Basic: Weighted average common shares outstanding 32,637 33,960 32,637 34,692 Net income $ 0.50 $ 0.21 $ 1.70 $ 1.07 ======== ======== ======== ======== Diluted: Weighted average common shares outstanding 33,152 34,152 33,121 34,818 Net income $ 0.49 $ 0.21 $ 1.67 $ 1.06 ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1 4 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $ 16,225 $ 7,238 $ 55,328 $ 36,977 Adjustments to reconcile net income to net cash provided by operating activities: Exploration expense 1,929 2,518 2,940 3,020 Depreciation, depletion, and amortization 26,935 30,825 56,719 52,000 Deferred income taxes (benefits) 1,213 4,909 116 4,876 Changes in other assets and liabilities (14,325) 28,046 (7,965) 12,781 --------- --------- --------- --------- Net cash provided by operating activities 31,977 73,536 107,138 109,654 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (19,937) (24,794) (65,466) (46,283) Acquisition of Statoil production assets -- -- (672,022) -- Proceeds from Gulf asset merger 158,214 -- 158,214 -- Production monetization 148,526 -- 148,526 -- Increase in investment in unconsolidated entities (126,066) (3,248) (129,451) (18,788) Proceeds from sale of property -- 4,661 -- 4,661 Proceeds from sale of short-term investments -- 293,761 -- 430,091 Purchases of short-term investments -- (199,148) -- (336,621) --------- --------- --------- --------- Net cash provided by (used in) investing activities 160,737 71,232 (560,199) 33,060 --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term loans (73,369) (48,405) 562,791 9,591 Dividends paid (9,628) (10,311) (19,301) (20,855) Proceeds from issuance of long-term debt -- 17,000 -- 17,000 Proceeds from issuance of common stock -- 11 -- 11 Purchase of treasury stock (17,814) (10,815) (17,814) (55,418) Proceeds from exercises under employee compensation plans 5,006 8,966 --------- --------- --------- --------- Net cash provided by (used in) financing activities (95,805) (52,520) 534,642 (49,671) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 96,909 92,248 81,581 93,043 Cash and cash equivalents at beginning of period 2,703 9,768 18,031 8,973 --------- --------- --------- --------- Cash and cash equivalents at end of period $ 99,612 $ 102,016 $ 99,612 $ 102,016 ========= ========= ========= ========= CASH PAID DURING THE PERIOD FOR: Interest (net of amount capitalized) $ 18,353 $ 2,690 $ 39,208 $ 14,372 ========= ========= ========= ========= Income taxes $ 13,572 $ 1,233 $ 17,876 $ 517 ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 5 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS JUNE 30, DECEMBER 31, 2000 1999 ------------------------------- (THOUSANDS) CURRENT ASSETS: Cash and cash equivalents $ 99,612 $ 18,031 Accounts receivable 186,939 148,103 Unbilled revenues 32,926 46,686 Inventory 43,796 40,859 Deferred purchased gas cost 26,892 29,075 Prepaid expenses and other 41,394 44,084 ---------- ---------- Total current assets 431,559 326,838 ---------- ---------- INVESTMENT IN NONCONSOLIDATED ENTITIES 170,324 40,873 PROPERTY, PLANT AND EQUIPMENT 2,392,106 2,052,528 Less accumulated depreciation and depletion 771,101 831,097 ---------- ---------- Net property, plant and equipment 1,621,005 1,221,431 ---------- ---------- OTHER ASSETS 203,696 200,432 ---------- ---------- Total $2,426,584 $1,789,574 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 6 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30, DECEMBER 31, 2000 1999 -------------------------------- (THOUSANDS) CURRENT LIABILITIES: Short-term loans $ 770,277 $ 207,486 Accounts payable 123,164 81,444 Other current liabilities 165,457 140,600 ---------- ---------- Total current liabilities 1,058,898 429,530 ---------- ---------- LONG-TERM DEBT: Debentures and medium-term notes 281,350 281,350 Nonrecourse project financing 17,000 17,000 ---------- ---------- Total long-term debt 298,350 298,350 Deferred and other credits 274,863 293,884 Commitments and contingencies -- Preferred trust securities 125,000 125,000 CAPITALIZATION: Common stockholders' equity Common stock, no par value, authorized 80,000 shares; shares issued June 30, 2000 and December 31, 1999, 37,252 280,101 280,617 Treasury stock, shares at cost June 30, 2000, 4,603; December 31, 1999, 4,522 (142,761) (133,913) Retained earnings 532,099 496,072 Accumulated other comprehensive income 34 34 ---------- ---------- Total common stockholders' equity 669,473 642,810 ---------- ---------- Total $2,426,584 $1,789,574 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 7 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six- month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Equitable Resources' annual report on Form 10-K for the year ended December 31, 1999. B. Business Combinations/Dispositions - On February 15, 2000, Equitable Resources, Inc. (Equitable or the Company), through its subsidiary, ERI Investments, Inc., acquired the Appalachian oil and gas properties of Statoil Energy, Inc. for $630 million plus working capital adjustments. The Company acquired all of the issued and outstanding shares and interests of Eastern States Oil & Gas, Inc. and Eastern States Exploration Co. (collectively "Statoil"), subsidiaries of Statoil Energy, Inc. The acquisition was initially funded through commercial paper and is being 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 Statoil from the date of acquisition. The following summarized unaudited pro forma financial information assumes that the Statoil acquisition occurred on January 1, 1999. Adjustments have been made for DD&A and certain other adjustments together with related income tax effects.
Six Months Ended June 30, 2000 1999 ------------------------------------- (Thousands, except per share amounts) Revenue $734,807 $671,151 ======== ======== Net income $ 56,998 $ 40,560 ======== ======== Earnings per share: Basic $ 1.75 $ 1.17 ======== ======== Diluted $ 1.72 $ 1.16 ======== ========
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. 5 8 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) B. Business Combinations/Dispositions (Continued) 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. Equitable will account for this $108.2 million investment under the equity method of accounting. Westport recently filed a draft registration statement with the Securities and Exchange Commission that did not report on earnings for the second calendar quarter of 2000; therefore Equitable has not included Westport second quarter 2000 results. This transaction is not considered a significant disposition of assets, and no pro forma disclosures have been provided. 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 million pre-tax charge recorded as other loss. Equitable accounted for its retained $26.3 million investment under the equity method of accounting. Equitable will receive fees for operating the wells and gathering and marketing the gas on behalf of the purchaser. C. Segment Disclosure - 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 market. 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. The 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. During 1999, the structure of the Company's internal organization changed, causing the composition of the reportable segments to change. Segment information for prior periods has been restated to conform to this change. 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. 6 9 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) C. Segment Disclosure (Continued)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------------------------------------------------------------- (Thousands) REVENUES FROM EXTERNAL CUSTOMERS: Equitable Utilities $219,089 $104,868 $496,800 $445,200 Equitable Production 83,271 44,720 154,059 83,945 NORESCO 36,076 40,986 66,676 78,963 -------- -------- -------- -------- Total $338,436 $190,574 $717,535 $608,108 ======== ======== ======== ======== INTERSEGMENT REVENUES: Equitable Utilities $ 36,495 $ 21,823 $ 67,166 $ 40,215 Equitable Production 5,944 7,525 13,319 10,560 -------- -------- -------- -------- Total $ 42,439 $ 29,348 $ 80,485 $ 50,775 ======== ======== ======== ======== SEGMENT EARNINGS BEFORE INTEREST AND TAXES: Equitable Utilities $ 9,654 $ 8,240 $ 56,814 $ 53,495 Equitable Production 32,108 11,559 63,569 20,040 NORESCO 4,025 3,586 4,321 6,935 -------- -------- -------- -------- Total operating segments $ 45,787 $ 23,385 $124,704 $ 80,470 ======== ======== ======== ======== LESS: RECONCILING ITEMS Headquarters operating expenses $ 1,077 $ 2,439 $ 2,812 $ 2,627 Interest expense 19,239 8,965 35,034 18,228 Income tax expenses 9,246 4,743 31,530 22,638 -------- -------- -------- -------- Net income $ 16,225 $ 7,238 $ 55,328 $ 36,977 ======== ======== ======== ========
June 30, December 31, 2000 1999 ------------------------------- (Thousands) SEGMENT ASSETS: Equitable Utilities $ 999,317 $ 914,630 Equitable Production 1,274,061 670,828 NORESCO 139,981 145,925 ---------- ---------- Total operating segments 2,413,359 1,731,383 Headquarters assets, including cash and short-term investments and net intercompany accounts receivable 13,225 58,191 ---------- ---------- Total $2,426,584 $1,789,574 ========== ==========
7 10 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) D. Derivative Instruments and Hedging Activities - In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has not yet determined when it will adopt the provisions of this statement, which may be implemented at the beginning of any fiscal quarter. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." This statement delays the required implementation for the Company until 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133." This statement addresses a limited number of implementation issues. The Company has not yet determined what the effect of these pronouncements will be on the earnings and financial position of the Company. E. Reclassification - Certain previously reported amounts have been reclassified to conform with the 2000 presentation. 8 11 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Equitable's consolidated net income for the quarter ended June 30, 2000, was $16.2 million, or $0.49 per diluted share, compared with net income of $7.2 million, or $.21 per share, for the quarter ended June 30, 1999. This represents a 133% increase in earnings per share versus the same period one year ago. The earnings improvement for the June 2000 quarter is attributable to higher natural gas production and throughput derived from recent acquisitions and improved commodity prices. RESULTS OF OPERATIONS 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. On December 15, 1999, the Company acquired the distribution, transmission and production operations of Carnegie Natural Gas. The Carnegie Natural Gas 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, 670 miles of transmission and gathering pipeline and approximately 2.5 and 6.1 billion cubic feet (Bcf) of throughput for the three and six months ended June 30, 2000, respectively. This acquisition is not considered material; therefore, pro forma disclosures have not been provided. 9 12 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ----------------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Utility revenues $ 54,501 $ 52,004 $189,867 $193,033 Marketing revenues 201,083 74,687 374,099 292,382 -------- -------- -------- -------- Total operating revenues 255,584 126,691 563,966 485,415 Purchased gas costs and revenue related taxes 210,831 73,641 434,011 351,746 -------- -------- -------- -------- Net operating revenues 44,753 53,050 129,955 133,669 Operating and maintenance expense 16,363 18,562 35,020 37,331 Selling, general and administrative expense 11,029 11,487 22,738 21,930 Depreciation, depletion and amortization 7,707 14,761 15,383 20,913 -------- -------- -------- -------- Total expenses 35,099 44,810 73,141 80,174 -------- -------- -------- -------- Earnings before interest and taxes (EBIT) $ 9,654 $ 8,240 $ 56,814 $ 53,495 ======== ======== ======== ======== Capital expenditures $ 6,065 $ 4,728 $ 11,455 $ 10,111 VALUE DRIVERS Total expenses/net revenues (%) 78.43% 84.47% 56.28% 59.98% Earnings before interest and taxes Distribution $ 4,379 $ 1,848 $ 38,811 $ 36,569 Pipeline $ 3,862 $ 5,056 $ 12,879 $ 13,351 Marketing $ 1,413 $ 1,336 $ 5,124 $ 3,575
10 13 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Earnings before interest and taxes (EBIT) increased 18% to $9.7 million for the current period compared to $8.2 million for the same period in 1999. Results for the June 1999 quarter benefited from the recognition of the settlement of Equitrans' rate case which includes stranded cost recovery that had a positive net result of $1.3 million. Excluding the Equitrans' rate settlement, EBIT for the second quarter 2000 increased $2.8 million, or 41% over the $6.9 million for the same period a year ago. The increase in 2000 is a result of increased throughput and reductions in operating expenses. SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Earnings before interest and taxes increased 6% to $56.8 million for the current period compared to $53.5 million for the same period in 1999. The segment's results for the 1999 period included an $0.8 million benefit from the previously mentioned Equitrans' rate case settlement. Excluding the settlement, EBIT increased $4.1 million or 8% due principally to higher net operating revenues resulting from the acquisition of Carnegie Natural Gas and increased margins from energy marketing activities. Operating results improved despite warmer than normal weather (normal is based on the 30-year average determined by the National Oceanic and Atmospheric Administration). DISTRIBUTION OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ---------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Net operating revenues $27,599 $24,812 $88,001 $84,973 Operating costs 18,777 18,708 40,322 39,905 Depreciation and amortization 4,443 4,256 8,868 8,499 ------- ------- ------- ------- Earnings before interest and taxes $ 4,379 $ 1,848 $38,811 $36,569 ======= ======= ======= ======= OPERATING INFORMATION Degree days (normal = Qtr - 712, YTD - 3,728) 541 562 3,113 3,476 O & M per customer $ 65.29 $ 66.39 $140.29 $143.83 Volumes (MMcf) Residential 3,681 3,409 15,414 15,875 Commercial industrial 6,077 3,604 17,618 12,350 ------- ------- ------- ------- Total gas sales and transportation 9,758 7,013 33,032 28,225 ======= ======= ======= =======
11 14 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Weather in the distribution service territory during the current period was 24% warmer than normal and 4% warmer than last year. However, total system throughput actually increased 2.7 Bcf, versus the same period last year, primarily as a result of the acquisition of Carnegie Natural Gas. Net operating revenues increased $2.8 million from the same period last year. This increase is primarily due to the increased throughput mentioned above and increased natural gas transportation margins. Total operating expenses of $23.2 million for the 2000 quarter were essentially unchanged from the same period in 1999 despite the Carnegie acquisition and an increased provision for performance-related bonuses. These operating expense levels were a result of the segment's continued process improvement initiatives. SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Weather in the distribution service territory for the six months ended June 30,2000, was 16% warmer than normal and 10% warmer than last year. Despite the warmer weather, total system throughput increased 4.8 Bcf, versus the same period last year, primarily as a result of the acquisition of Carnegie Natural Gas. Net operating revenues for the six months ended June 30, 2000, increased $3.0 million from the same period last year. This increase is primarily due to the increased throughput mentioned above and increased natural gas transportation margins. Total operating expenses for the six month period increased $.8 million from the same period in 1999. As previously mentioned, the increase is due primarily to the acquisition of Carnegie Natural Gas and increased provision for performance-related bonuses offset, in part, by the benefit of the Company's continued focus on productivity improvements. 12 15 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) PIPELINE OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ---------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Net operating revenues $13,784 $25,400 $33,058 $41,857 Operating costs 6,708 9,889 13,760 16,191 Depreciation and amortization 3,214 10,455 6,419 12,315 ------- ------- ------- ------- Earnings before interest and taxes $ 3,862 $ 5,056 $12,879 $13,351 ======= ======= ======= ======= OPERATING INFORMATION TRANSPORTATION THROUGHPUT (MMBTU) 15,846 19,227 39,079 39,671
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Net operating revenues for the three months ended June 30, 2000, were $13.8 compared to $25.4 million for the same period in 1999. Second quarter 2000 and 1999 net operating revenues include $1.6 million and $12.9 respectively, for the recovery of stranded costs in rates and the previously mentioned Equitrans' rate case settlement. Excluding the impact of the rate settlement and cost recovery, net operating revenues of $12.2 million for the current period decreased $0.3 million compared to the same period a year ago. This decrease in net operating revenues was primarily due to reduced revenues from extraction services resulting from a change in contract arrangements. Total operating expenses were $9.9 million for the 2000 quarter compared with operating expenses of $20.3 million for the 1999 quarter, a decrease of $10.4. The operating expenses for 2000 include $1.3 million of amortization expense related to the recovery of stranded costs in rates. Operating expense for the 1999 include $8.7 million of amortization expense related to the recovery of stranded costs in rates and $2.6 million of process improvements. Excluding these two items in both periods, operating expenses of $8.6 million reflect a decrease of $0.4 million from $9.0 million for the same period a year ago despite the Carnegie acquisition. The decrease in operating expense for the 2000 quarter was a result of a change in contract arrangements and continued focus on productivity improvements. Excluding the impact of the rate case settlement and process improvement charges in both periods, earnings before interest and taxes of $3.6 million for the current period increased $0.1 million from 1999. This increase is due primarily to continued focus on productivity improvements. 13 16 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Net operating revenues for the six months ended June 30, 2000, were $33.1 million compared to $41.9 million for the same period in 1999. Net operating revenues for 2000 and 1999 include $3.2 million and $12.9 respectively, for the recovery of stranded costs in rates and the previously mentioned Equitrans' rate case settlement. Net operating revenues of $29.8 million for the current period, excluding the impact of the rate settlement, increased $0.8 million compared to the same period a year ago. This increase in net operating revenues was primarily due to the acquisition of Carnegie Interstate Pipeline. Total operating expenses were $20.2 million for the 2000 quarter compared with operating expenses of $28.5 million for the 1999 quarter, a decrease of $8.3 million. The operating expenses for 2000 include $2.6 million of amortization expense related to the recovery of stranded costs in rates. Operating expense for the 1999 include $8.7 million of amortization expense related to the recovery of stranded costs in rates and $2.6 million for improvement of utility segment operating processes and consolidation of facilities. Excluding the non-recurring items in both periods, operating expenses of $17.6 million increased $0.4 million from $17.2 million for the same period last year, due primarily to the acquisition of Carnegie Interstate pipeline and an increased provision for performance-related bonuses. EQUITABLE MARKETING
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------------------ FINANCIAL RESULTS (THOUSANDS) Net operating revenues $ 3,370 $ 2,838 $ 8,896 $ 6,839 Operating costs 1,907 1,452 3,676 3,165 Depreciation and amortization 50 50 96 99 ------- ------- -------- -------- Earnings before interest and taxes $ 1,413 $ 1,336 $ 5,124 $ 3,575 ======= ======= ======== ======== Marketed gas sales (MMBtu) 54,908 31,231 115,377 123,992 Net operating revenues/MMBtu $0.0614 $0.0909 $ 0.0771 $ 0.0552
14 17 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 The $.5 million increase in net operating revenues is attributable to greater sales volumes associated with asset management activities. Total operating expenses for the current period increased $.5 million from the same period in 1999. The increase is due principally to the increased investment in the segment's commercialization strategy. SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Net operating revenues for the six months ended June 30, 2000, increased $2.1 million from the same period last year. This increase is attributable to higher unit margins. The sale of gas in storage allowed the Company to benefit from the increasing natural gas prices. The decrease in throughput is a result of the expiration of low margin contracts during the first six months of 1999 related to the discontinued supply and trading group. Total operating expenses for the six-month period increased $.5 million from the same period in 1999 reflecting an increased focus on the segment's commercialization strategy. 15 18 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION Production operations comprise the production and sale of natural gas, natural gas liquids and crude oil through Equitable Production Company (Equitable Production). In 1999, the exploration and production operations conducted by Equitrans were transferred to Equitable Production-East from Equitable Utilities. The financial results of both segments have been restated to reflect the new structure for all periods presented. Effective with the quarter ended June 30, 2000, Equitable Production will no longer be classified as "East" and Gulf" with the exception of historical value driver information.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 --------------------------------------------------------------- Operating revenues $ 89,215 $52,245 $ 167,378 $94,505 Cost of energy purchased 8,220 6,037 14,038 10,964 -------- ------- --------- ------- Net operating revenues 80,995 46,208 153,340 83,541 Operating expenses: Operation and maintenance 3,778 3,133 6,936 6,237 Lease operating expense 11,883 6,710 21,351 12,785 Dry hole -- 1,247 3 1,277 Other exploration 1,929 2,548 2,937 3,019 Selling, general and administrative 6,712 6,108 13,201 11,384 Depreciation, depletion and amortization 17,634 14,903 38,392 28,799 -------- ------- --------- ------- Total operating expenses 41,936 34,649 82,820 63,501 Operating income 39,059 11,559 70,520 20,040 Other income (loss) (6,951) -- (6,951) -- -------- ------- --------- ------- Earnings before interest and taxes $ 32,108 $11,559 $ 63,569 $20,040 ======== ======= ========= ======= Capital expenditures $ 13,841 $20,347 $ 725,012 $39,952 VALUE DRIVERS Natural gas sales (MMcf) - East 21,383 10,129 37,833 20,430 Natural gas sales (MMcf) - Gulf -- 5,789 5,535 11,372 -------- ------- --------- ------- Crude oil production (000s BBls) - East 150 114 279 224 Crude oil production (000s BBls) - Gulf -- 194 75 251 -------- ------- --------- ------- Natural gas liquids production (000s Gals.) - East 9,403 15,203 18,086 31,621 Natural gas liquids production (000s Gals.) - Gulf -- 1,736 1,513 4,091 -------- ------- --------- ------- Produced natural gas and oil (MMcfe) - East 24,110 11,402 42,554 22,770 Produced natural gas and oil (MMcfe) - Gulf -- 6,955 5,984 12,881 Average selling prices: Natural gas - East (per MMBtu) $ 2.92 $ 2.05 $ 2.73 $ 1.92 Natural gas - Gulf (per MMBtu) $ -- $ 2.10 $ 2.51 $ 1.88 -------- ------- --------- ------- Crude oil - East (per barrel) $ 25.70 $ 13.97 $ 22.16 $ 11.91 Crude oil - Gulf (per barrel) $ -- $ 14.42 $ 14.74 $ 13.63 -------- ------- --------- ------- Natural gas liquids - East (per gallon) $ 0.27 $ 0.27 $ 0.35 $ 0.24 Natural gas liquids - Gulf (per gallon) $ -- $ 0.25 $ 0.49 $ 0.19 LOE/Mcfe Sales - East $ 0.533 $ 0.474 $ 0.504 $ 0.439 LOE/Mcfe Sales - Gulf $ -- $ 0.229 $ 0.243 $ 0.250 -------- ------- --------- ------- G&A/Mcfe Sales - East $ 0.301 $ 0.380 $ 0.293 $ 0.361 G&A/Mcfe Sales - Gulf $ -- $ 0.288 $ 0.275 $ 0.273 -------- ------- --------- ------- Depletion/MCFE Produced - East $ 0.495 $ 0.425 $ 0.521 $ 0.436 Depletion/MCFE Produced - Gulf $ -- $ 1.122 $ 1.128 $ 1.117
16 19 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION (CONTINUED) THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Equitable Production had earnings before interest and taxes for the June 2000 quarter of $32.1 million compared to $11.6 million for the 1999 quarter. The segment's positive results were primarily due to increased natural gas and crude oil production related to the acquisition of Statoil completed February 15, 2000, as described in Note B. The positive results also reflect higher commodity prices during the quarter. These results were partially offset by a per Mcfe increase in lease operating expense (LOE) and depletion. The increased LOE is due to higher severance and ad valorem taxes, resulting from higher commodity prices in the current year. The higher depletion rate is primarily due to the Statoil acquisition. Net operating revenues for the second quarter 2000 increased 75% to $81.0 million compared to $46.2 million in 1999. Adjusted for the Gulf operations which contributed $16.0 million in operating revenues in the 1999 quarter results, the increase in operating revenues is $50.8 million. The increase was primarily due to increased sales volumes related to the Statoil acquisition and higher effective commodity prices. The Statoil acquisition added 10.4 billion cubic feet equivalent (Bcfe) of natural gas sales in the current quarter and accounted for an increase of $39.9 million in net operating revenues. Equitable Production's average selling prices for natural gas and crude oil increased 40% and 84%, respectively, over second quarter 1999's average selling prices. The increase in average prices resulted in a $10.8 million increase in net operating revenues from prior year. Operating expenses for the second quarter of 2000 totaled $41.9 million, an increase of $7.3 million from the same period in 1999. Adjusted for the Gulf operations which contributed $14.0 million in operating expenses in the 1999 quarter results, the increase in operating expenses is $21.3 million. The 2000 operating expenses include approximately $17.7 million associated with the Statoil acquisition. Excluding the Gulf Operations, current quarter per unit depletion increased from $0.43 to $0.50 as a result of the acquisition. Adjusting for the Gulf operations, SG&A, on a per unit basis, has decreased 21% to $0.30 per thousand cubic feet equivalent (Mcfe) compared to $0.38 per Mcfe in 1999 as a result of initial synergies from the acquisition and ongoing process improvements. This decrease was offset by an increase in LOE per Mcfe of 13% to $0.53 compared to $0.47 per Mcfe in 1999, adjusted for the Gulf operations. The increase in unit LOE reflects increased severance taxes due to higher sales prices. In the second quarter 2000, Equitable monetized 65 Bcfe of production which netted $122.2 million. This volume represents seven years' production from wells acquired from Statoil that contain just under 200 Bcfe of proved reserves. The proceeds from this sale will be used to pay down acquisition-related short-term debt. Equitable Production will receive upwards of $0.50/Mcf in fees for operating the wells and gathering and marketing the gas on behalf of the purchaser. In anticipation of this transaction, the Company had previously entered into financial hedges covering the first two years of this production. Removal of these hedges upon closing of this transaction resulted in a $7 million pre-tax charge. 17 20 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Equitable Production's earnings before interest and taxes for the six months ended June 30, 2000 were $63.6 million compared to $20.0 million for same period in 1999. The segment's positive results were primarily due to increased natural gas and crude oil production related to the acquisition of Statoil. The positive results also reflect higher commodity prices during the period. These results were partially offset by a per Mcfe increase in lease operating expense (LOE) and depletion. Additionally, the second quarter 2000 excludes the results associated with the Gulf operations as described in the quarter discussion. Net operating revenues for the six months ended June 30, 2000 increased 84% to $153.3 million compared to $83.5 million in 1999. Adjusted for the Gulf operations the increase in operating revenues is $79.9 million. The increase was primarily due to increased sales volumes related to the Statoil acquisition and higher effective commodity prices. The Statoil acquisition added 15.9 billion cubic feet equivalent (Bcfe) of natural gas sales in the current quarter and accounted for an increase of $59.3 million in net operating revenues. Equitable Production's average selling prices for natural gas and crude oil increased 39% and 86%, respectively, over the same period in 1999's average selling prices. The increase in average prices resulted in a $20.1 million increase in net operating revenues from prior year. Operating expenses for the period ended June 30, 2000 totaled $82.8 million, an increase of $19.3 million from the same period in 1999. Adjusted for the Gulf operations the increase in operating expenses is $32.9 million. The 2000 operating expenses include approximately $27.2 million associated with the Statoil acquisition. Operating expense variances for the six month period are consistent with those in the current quarter described above. Equitable has combined its Gulf operations with Westport Oil and Gas Company. As part of the transaction, Equitable received approximately $50 million in cash, which was used to reduce acquisition-related short-term debt and approximately 49% interest in Westport Resources. Westport recently filed a draft registration statement with the Securities and Exchange Commission that did not report on earnings for the second calendar quarter of 2000; therefore Equitable has not included Westport second quarter 2000 results. 18 21 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. The majority of NORESCO's revenue and earnings comes from energy saving performance contracting services. NORESCO provides the following integrated energy management services: project development and engineering analysis; construction; management; financing; equipment operation and maintenance; and energy savings metering, monitoring and verification. NORESCO also manages the segment's facilities management division, which develops and operates private power, cogeneration and central plant facilities in the U.S. and selected international markets. During the first quarter of 2000, NORESCO decided to exit the international project development business. The risk profile of that market sector is changing, requiring both skills and scale that are not consistent with NORESCO's and the rest of the corporation's core strengths. This decision does not impact the existing completed projects owned by NORESCO. NORESCO is currently considering the sale of ERI Services, Inc., whose primary business is providing performance contracting and other services to numerous Federal government agencies. Because NORESCO provides competing services to the same customers, the two companies must be operated separately, limiting the overall benefit to Equitable. No actual determination has been made as to whether a sale will occur.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ------- ------- ------- ------- OPERATIONAL DATA (THOUSANDS) Construction backlog, end of period $52,075 $85,324 $52,075 $85,324 Construction completed $16,647 $40,043 $36,637 $73,555 FINANCIAL RESULTS (THOUSANDS) Total operating revenues $36,076 $40,986 $66,676 $78,963 Contract costs 26,749 32,470 50,553 61,972 ------- ------- ------- ------- Net operating revenues 9,327 8,516 16,123 16,991 ------- ------- ------- ------- Selling, general and administrative expenses 5,053 4,368 11,693 9,057 Amortization of goodwill 1,041 935 1,978 1,872 Depreciation and depletion 198 204 555 377 ------- ------- ------- ------- Total expenses 6,292 5,507 14,226 11,306 Equity earnings of non-consolidated entities 990 577 2,424 1,250 ------- ------- ------- ------- Earnings before interest and taxes $ 4,025 $ 3,586 $ 4,321 $ 6,935 ======= ======= ======= ======= Capital expenditures $ 1,041 $ 684 $ 1,382 $ 936 VALUE DRIVERS Gross profit margin 25.9% 20.8% 24.2% 21.5% SG&A as a % of revenue 14.0% 10.7% 17.5% 11.5% Development expenses as a % of revenue 3.5% 1.9% 4.4% 1.8%
19 22 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORESCO (CONTINUED) THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Construction backlog in the current year decreased to $52.1 million, a $33.2 million decline from the same period in 1999. Included in this decrease is $21.4 million related to energy infrastructure projects in the 1999 backlog for which there is no construction backlog at the end of this period. The NORESCO segment's earnings before interest and taxes increased $0.4 million to $4.0 million from the same period last year. This increase was caused primarily by an increase in gross margins on performance contracting construction projects and operational energy infrastructure power plants. The increase in operating expenses of $0.8 million, or 15%, from $5.5 million incurred during the same period last year was primarily due to an increase of $0.5 in project development costs. Equity earnings of non-consolidated entities increased by $0.4 million to $1.0 million due to the start of commercial operation for two international energy infrastructure power plants. SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 The NORESCO segment's earnings before interest and taxes decreased $2.6 million to $4.3 million from the same period last year. This decrease was caused primarily by a decrease in construction activities, an increase in project development expense, and the decision to exit the international energy infrastructure business. These were in part offset by an increase in gross margins on performance contracting construction projects and operational energy infrastructure power plants. The increase in operating expenses of $2.9 million, from $11.3 million incurred during the same period last year was primarily due to an increase of $1.7 million in project development costs and $1 million in costs to exit the international energy infrastructure business during the first quarter of 2000. Equity earnings of non-consolidated entities increased by $1.2 million to $2.4 million due to the start of commercial operation for two international energy infrastructure power plants. 20 23 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES AND LIQUIDITY WORKING CAPITAL The results of operations of Equitable is primarily impacted by the seasonal nature of Equitable Utilities' distribution operations and the volatility of oil and gas commodity prices. The distribution segment experienced a decrease in net accounts receivable at June 30, 2000 of $22 million as a result of the seasonally warmer weather. This was offset by a $25 million and $6.5 million increase in the Marketing and NORESCO segments, respectively. Accounts payable for the Marketing segment increased $50 million, offset by moderate decreases in both the Production and NORESCO segments. The significant increase in the Marketing segment is due to significant increases in the price of gas during 2000. The increase in Marketing's accounts receivable is moderated $56 million by the segment's improved collections over the prior year. Short-term debt has increased in 2000 due to the acquisition of Statoil. However, short-term debt has decreased during the second quarter as the Company continues to replace the short-term debt with a combination of financings and cash from asset sales. HEDGING The Company's overall objective in its hedging program is to protect earnings from undue exposure to the risk of changing commodity prices. Since it is primarily a natural gas company, this leads to different approaches for 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 2000 and a smaller portion for 2001. Its preference is to use derivative instruments that create a price floor, in order to provide downside protection while allowing the Company to participate in 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. Crude oil, natural gas 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 2000. CAPITAL EXPENDITURES The Company expended approximately $65 million in the six months ended June 30, 2000, compared to $46 million spent in the same period one year ago. Expenditures in both years represented growth projects in the Equitable Production and NORESCO segments, and replacements, improvements and additions to plant assets in the Equitable Utilities segment. Production expended approximately $53 million, Utilities approximately $11 million, and NORESCO $1 million. 21 24 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES AND LIQUIDITY (CONTINUED) INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES The NORESCO segment has equity ownership interests in independent power plant (IPP) projects located domestically and in selected foreign countries. Long-term power purchase agreements (PPA's) 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. These projects generally are financed on a project basis with non-recourse financings established at the foreign subsidiary level. As described in Note B, Equitable combined its Gulf of Mexico operations with Westport Oil and Gas Company during the second quarter of 2000. As part of the transaction, Equitable received approximately $50 million in cash, which was used to reduce acquisition-related short-term debt and approximately 49% interest in Westport Resources. Westport recently filed a draft registration statement with the Securities and Exchange Commission that did not report on earnings for the second calendar quarter of 2000; therefore, Equitable has not included Westport second quarter 2000 results. ACQUISITIONS AND DISPOSITIONS In February 2000, the Company acquired the Appalachian production assets of Statoil Energy Inc. for $630 million plus working capital. The Company initially funded this acquisition through short-term debt, to be replaced by a combination of financings and cash from asset sales. On April 10, 2000, the Company combined its Gulf operations with Westport Oil and Gas Company, a private oil and gas exploration company based in Denver. The Company received $50 million in cash and approximately 49% minority interest in the combined company. This minority interest will be included as an investment in non-consolidated entities. As described in Note B, on June 30, 2000, Equitable sold a substantial portion of its interest in properties qualifying for nonconventional fuel tax credit to a partnership. The Company retained a $26.3 million interest in the partnership which will be included as an investment in non-consolidated entities. 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 gas commodity prices. Short-term loans are used to support working capital requirements during the summer months and are repaid as gas is sold during the heating season. 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 6.10% during the six months ended June 30, 2000. The Company maintains a revolving credit agreement with a group of banks providing $500 million of available credit, which expires in 2001. In addition, in January 2000, the Company obtained an additional $500 million, 364-day revolving credit agreement to back the issuance of commercial paper. Effective February 1, 2000, the Company has the authority and credit backing to support a $1 billion commercial paper program. This program is being used to temporarily finance the acquisition of the Appalachian oil and gas properties of Statoil Energy described above, as well as on-going working capital and other short-term financing requirements. 22 25 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCING The Company has adequate borrowing capacity to meet its financing requirements. INFORMATION REGARDING FORWARD LOOKING STATEMENTS Disclosures in this report may include forward-looking statements related to projected Company plans and expected results of operations. The Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company business include, but are not limited to, the following: weather conditions, the pace of deregulation of retail natural gas and electricity markets, the timing and extent of changes in commodity prices for natural gas and crude oil, changes in interest rates, availability of financing, the timing and extent of the Company's success in acquiring natural gas and crude oil properties and in discovering, developing and producing reserves, delays in obtaining necessary governmental approvals, the impact of competitive factors on profit margins in various markets in which the Company competes, and the successful integration of acquired companies. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have not been any material changes regarding quantitative and qualitative disclosures about market risk regarding the volatility of future prices for natural gas, crude oil and propane from the information reported in the Company's 1999 Annual Report on Form 10-K. The Company's amount of variable rate short-term debt has increased dramatically in 2000 due to the acquisition of Statoil, as described in Note B, moderately increasing the Company's exposure to future earnings due to changes in interest rates. However, as previously disclosed, the Company plans to reduce short-term debt by alternative financing and sale of assets. 23 26 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on May 17, 2000. (c) Brief description of matters voted upon: (1) Elected the named directors to serve three-year terms as follows:
Director Shares Voted For Shares Withheld ------------------------------------------------------------------------------ E. Lawrence Keyes, Jr. 29,469,730 310,440 Thomas A. McConomy 29,481,771 298,399 Malcolm M. Prine 29,475,400 304,770
(2) Ratified appointment of Ernst & Young, LLP, as independent auditors for the year ended December 31, 2000. Vote was 28,239,003 shares for; 1,493,546 shares against and 47,621 shares abstained. Item 5. Other Information On May 17, 2000, the Board of Directors, at a regular meeting of the Board, approved resolutions amending the Company's By-Laws (Sections 1.08 and 3.07) in order 1) to clarify the procedures to be followed and provide for advance notice in connection with shareholder proposals to be presented at the annual and all special meetings of shareholders and, 2) to make the advance notice period for shareholder nominations of directors consistent with the notice period required for shareholder proposals. The amended by-laws are included in this filing as Exhibit 3.02. Shareholder Proposals for 2001: Shareholder proposals submitted for inclusion in next year's proxy materials must be received by the Company no later than November 30, 2000. As a result of the recent bylaw changes disclosed in this 10-Q, shareholder proposals submitted to be considered at the 2001 Annual Meeting without inclusion in next year's proxy materials must be received by the Company not less than 90 days, but not more than 120 days, prior to the anniversary date of the previous year's Annual Meeting. As last year's Annual Meeting was held on May 17, 2000, proposals must be received after January 16, 2001 and before February 17, 2001. If the Company is not notified of a shareholder proposal by the appropriate date, then proxies held by management of the Company may provide the discretion to vote against such shareholder proposal, even though such proposal is not discussed in the Proxy Statement. Proposals should be addressed to the Corporate Secretary, Equitable Resources, Inc., One Oxford Centre, Suite 3300, Pittsburgh, Pennsylvania 15219. Next year's annual meeting is scheduled to be held on May 17, 2001. On July 19, 2000, the Board of Directors appointed George L. Miles, Jr. to serve as a director and as a member of the Audit Committee. Also on July 19, 2000, the Board of Directors elected James M. Funk Senior Vice President of Equitable Resources. In April 2000, Equitable Production gave notice to an affiliated company, Kentucky West Virginia Gas Company (KWV), of its intention to terminate its well-tending agreement with KWV effective October 2000. KWV is currently engaged in negotiations with the union representing its field service employees under a contract that expires in mid-October. The Company is unable to predict the future impact of these events on its labor relations, earnings and financial position. 24 27 PART II. OTHER INFORMATION (CONTINUED) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.02 Equitable Resources, Inc. By-Laws (Amended through May 17, 2000). 10.1 Employment Agreement dated June 12, 2000 by and between Equitable Resources, Inc. and James M. Funk. 10.2 Change of Control Agreement dated June 12, 2000 by and between Equitable Resources, Inc. and James M. Funk. 10.3 Equitable Resources, Inc. Deferred Compensation Plan (Amended and Restated Effective May 16, 2000) 10.4 Equitable Resources, Inc. Directors' Deferred Compensation Plan (Amended And Restated Effective May 16, 2000) (b) Reports on Form 8-K during the quarter ended June 30, 2000: Form 8-K current report dated April 10, 2000, announcing completion of the combination of the Registrant's, Equitable Resources, Inc., Gulf of Mexico assets with Westport Oil and Gas Company. Form 8-K current report dated May 30, 2000, announcing the relocation of the Production segment's headquarters from Alexandria, Virginia to Pittsburgh, Pennsylvania, and revision to the capital spending plan for the year 2000. Form 8-K current report dated May 30, 2000, announcing appointment of Murry S. Gerber, President and Chief Executive Officer as Chairman of the Board of Directors. Form 8-K current report dated May 12, 2000, announcing the appointment of James M. Funk as President of Equitable Production. 25 28 SIGNATURE Pursuant to the requirements 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. --------------------------- (Registrant) /s/ David L. Porges --------------------------- David L. Porges Executive Vice President and Chief Financial Officer Date: August 11, 2000 26 29 INDEX TO EXHIBITS
Exhibit No. Document Description ----------------------------------------------------------------------------------------------------------------- 3.02 Equitable Resources, Inc. By-Laws (Amended Filed Herewith through May 17, 2000) 10.1 Employment Agreement dated June 12, 2000 Filed Herewith by and between Equitable Resources, Inc. and James M. Funk. 10.2 Change of Control Agreement dated June 12, 2000 Filed Herewith by and between Equitable Resources, Inc. and James M. Funk. 10.3 Equitable Resources, Inc. Deferred Compensation Plan Filed Herewith (Amended and Restated Effective May 16, 2000) 10.4 Equitable Resources, Inc. Directors' Deferred Filed Herewith Compensation Plan (Amended And Restated Effective May 16, 2000) 27 Financial Data Schedule for the Period Ended Filed Herewith June 30, 2000
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