10-Q 1 j8472901e10-q.txt PERIOD ENDED 9-30-2000 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 SEPTEMBER 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 October 31, 2000 ----- ---------------- Common stock, no par value 32,635,674 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 Nine Months Ended September 30, 2000 and 1999 1 Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2000 and 1999 2 Condensed Consolidated Balance Sheets, September 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 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURE 25 INDEX TO EXHIBITS 26
3 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Operating revenues $ 344,161 $ 193,181 $ 1,061,696 $ 801,289 Cost of sales 224,707 96,810 642,823 470,712 ----------- ----------- ----------- ----------- Net operating revenues 119,454 96,371 418,873 330,577 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Operation and maintenance 18,702 18,053 60,659 61,622 Exploration 260 5,321 3,200 8,341 Production 12,543 5,338 33,894 19,400 Selling, general and administrative 24,290 24,767 74,323 69,728 Depreciation, depletion and amortization 21,033 25,585 77,752 77,584 ----------- ----------- ----------- ----------- Total operating expenses 76,828 79,064 249,828 236,675 ----------- ----------- ----------- ----------- Operating income 42,626 17,307 169,045 93,902 Other loss -- -- (6,951) -- Equity in nonconsolidated entities 5,711 1,056 8,135 2,306 ----------- ----------- ----------- ----------- EARNINGS BEFORE INTEREST & TAXES 48,337 18,363 170,229 96,208 Interest charges 21,176 8,559 56,210 26,787 ----------- ----------- ----------- ----------- Income before income taxes 27,161 9,804 114,019 69,421 Income taxes 8,020 4,074 39,550 26,712 ----------- ----------- ----------- ----------- NET INCOME $ 19,141 $ 5,730 $ 74,469 $ 42,709 =========== =========== =========== =========== EARNINGS PER SHARE OF COMMON STOCK: Basic: Weighted average common shares outstanding 32,469 33,744 32,581 34,407 Net income $ 0.59 $ 0.17 $ 2.29 $ 1.24 =========== =========== =========== =========== Diluted: Weighted average common shares outstanding 33,150 34,273 33,124 34,650 Net income $ 0.58 $ 0.17 $ 2.25 $ 1.23 =========== =========== =========== ===========
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 --------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $ 19,141 $ 5,730 $ 74,469 $ 42,709 Adjustments to reconcile net income to net cash provided by operating activities: Exploration expense 260 3,005 3,200 6,024 Depreciation, depletion, and amortization 21,033 25,585 77,752 77,584 Deferred income taxes 2,986 9,239 3,102 14,115 Undistributed earnings of nonconsolidated subsidiaries (5,761) (1,223) (8,301) (2,473) Changes in other assets and liabilities (49,513) (8,377) (57,479) 7,423 -------- -------- --------- --------- Net cash provided by (used in) operating activities (11,854) 33,959 92,743 145,382 -------- -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (34,087) (28,998) (99,553) (78,300) Acquisition of Statoil production assets (5,213) -- (677,235) -- Proceeds from Gulf asset merger -- -- 158,214 -- Production monetization -- -- 148,526 -- Increase in investment in unconsolidated entities (276) (850) (127,187) (18,388) Proceeds from the sale of property -- -- -- 4,661 -------- -------- --------- --------- Net cash used in investing activities (39,576) (29,848) (597,235) (92,027) -------- -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term loans (31,617) (6,503) 531,174 3,088 Dividends paid (9,591) (10,003) (28,892) (30,858) Proceeds from issuance of long-term debt -- -- -- 17,000 Proceeds from issuance of common stock -- 2,790 -- 2,801 Retirement of long-term debt -- -- -- (75,000) Purchase of treasury stock (3,883) (10,581) (21,697) (65,999) Proceeds from exercises under employee compensation plans 2,029 -- 10,995 -- -------- -------- --------- --------- Net cash provided by (used in) financing activities (43,062) (24,297) 491,580 (148,968) -------- -------- --------- --------- Net decrease in cash and cash equivalents (94,492) (20,186) (12,912) (95,613) Cash and cash equivalents at beginning of period 99,611 (7,638) 18,031 102,444 -------- -------- --------- --------- Cash and cash equivalents at end of period $ 5,119 $(27,824) $ 5,119 $ 6,831 ======== ======== ========= ========= CASH PAID DURING THE PERIOD FOR: Interest (net of amount capitalized) $ 26,697 $ 11,430 $ 65,905 $ 25,802 ======== ======== ========= ========= Income taxes (refund) $ 1,218 $ (2,833) $ 19,094 $ (2,316) ======== ======== ========= =========
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 SEPTEMBER 30, DECEMBER 31, 2000 1999 -------------------------------- (THOUSANDS) CURRENT ASSETS: Cash and cash equivalents $ 5,119 $ 18,031 Accounts receivable (less accumulated provision for doubtful accounts: 2000, $11,516; 1999, $13,024) 157,855 148,103 Unbilled revenues 37,943 46,686 Inventory 95,556 40,859 Deferred purchased gas cost 36,980 29,075 Prepaid expenses and other 44,237 44,084 ---------- ---------- Total current assets 377,690 326,838 ---------- ---------- INVESTMENT IN NONCONSOLIDATED ENTITIES 190,744 40,873 PROPERTY, PLANT AND EQUIPMENT 2,423,717 2,052,528 Less accumulated depreciation and depletion 788,293 831,097 ---------- ---------- Net property, plant and equipment 1,635,424 1,221,431 ---------- ---------- OTHER ASSETS 210,477 200,432 ---------- ---------- Total $2,414,335 $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 SEPTEMBER 30 DECEMBER 31, 2000 2000 ----------------------------------- (THOUSANDS) CURRENT LIABILITIES: Short-term loans $ 738,660 $ 207,486 Accounts payable 137,138 81,444 Other current liabilities 137,583 140,600 ---------- ---------- Total current liabilities 1,013,381 429,530 ---------- ---------- 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 299,112 293,884 Preferred trust securities 125,000 125,000 CAPITALIZATION: Common stockholders' equity Common stock, no par value, authorized 80,000 shares; shares issued: September 30, 2000 and December 31, 1999, 37,252 281,425 280,617 Treasury stock, shares at cost: September 30, 2000, 4,620; December 31, 1999, 4,522 (144,615) (133,913) Retained earnings 541,648 496,072 Accumulated other comprehensive income 34 34 ---------- ---------- Total common stockholders' equity 678,492 642,810 ---------- ---------- Total $2,414,335 $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 nine month periods ended September 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.
Nine Months Ended September 30, 2000 1999 ------------------------------------- (Thousands, except per share amounts) Revenue $ 1,078,968 $ 894,890 =========== =========== Net income $ 76,139 $ 46,048 =========== =========== Earnings per share: Basic $ 2.34 $ 1.34 =========== =========== Diluted $ 2.30 $ 1.33 =========== ===========
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 accounted for this $108.2 million net investment under the equity method of accounting. For the third quarter of 2000, Equitable Resources reported $4.5 million of equity in earnings from its minority ownership in Westport Resources. On June 30, 2000, Equitable sold a substantial portion of its interest in properties qualifying for nonconventional fuel tax credit to a partnership, netting $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 approximately $7 million in pre-tax charges recorded as other loss. Equitable accounted for its remaining $26.3 million investment by the equity method of accounting the sales agreement provides. 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 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 Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------------------------------- (Thousands) REVENUES FROM EXTERNAL CUSTOMERS: Equitable Utilities $233,341 $ 88,540 $ 730,141 $533,740 Equitable Production 76,411 60,534 230,470 144,479 NORESCO 34,409 44,107 101,085 123,070 -------- -------- ---------- -------- Total $344,161 $193,181 $1,061,696 $801,289 ======== ======== ========== ======== INTERSEGMENT REVENUES: Equitable Utilities $ 42,992 $ 42,826 $ 110,158 $ 83,041 Equitable Production 8,564 593 21,883 11,153 -------- -------- ---------- -------- Total $ 51,556 $ 43,419 $ 132,041 $ 94,194 ======== ======== ========= ======== SEGMENT EARNINGS BEFORE INTEREST AND TAXES: Equitable Utilities $ 1,921 $ 596 $ 58,735 $ 54,091 Equitable Production 39,985 13,301 103,554 33,341 NORESCO 5,341 4,884 9,662 11,819 -------- -------- ---------- -------- Total operating segments $ 47,247 $ 18,781 $ 171,951 $ 99,251 ======== ======== ========== ======== LESS: RECONCILING ITEMS Headquarters operating expenses $ 3,478 $ 418 $ 6,290 $ 3,043 Equity in nonconsolidated entities (4,568) -- (4,568) -- Interest expense 21,176 8,559 56,210 26,787 Income tax expenses 8,020 4,074 39,550 36,712 -------- -------- ---------- -------- Net income $ 19,141 $ 5,730 $ 74,469 $ 42,709 ======== ======== ========== ========
September 30, December 31, 2000 1999 ---------------------------------- (Thousands) SEGMENT ASSETS: Equitable Utilities $1,036,163 $ 914,630 Equitable Production 1,296,485 670,828 NORESCO 141,675 145,925 ---------- ---------- Total operating segments 2,474,323 1,731,383 Headquarters assets, including cash and short-term investments and net intercompany accounts receivable 59,988 58,191 ---------- ---------- Total $2,414,335 $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." 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" delaying the required implementation for the Company until 2001. 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 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 is currently completing an analysis of the impact of these pronouncements and it has not yet determined the ultimate effect on the earnings and financial position of the Company. E. Reclassification - Certain previously reported amounts have been reclassified to conform with the 2000 presentation. F. Subsequent Event - On October 19, 2000, Westport Resources Corporation priced its IPO of 9.2 million shares of common stock and commenced trading. Of the total volume, 1.4 million shares were secondary shares that were owned by Equitable. Net of the underwriters' commission of 6.75%, Equitable's proceeds from this secondary sale were about $18.5 million pre-tax. The underwriting group associated with the IPO acquired all these shares and has the right to sell additional primary shares which if sold, will reduce Equitable's ownership from approximately 37% to approximately 36% of the 37.4 million shares outstanding. 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 September 30, 2000, was $19.1 million, or $0.58 per diluted share, compared with net income of $5.7 million, or $0.17 per diluted share, for the quarter ended September 30, 1999. This represents a 241% increase in earnings per diluted share versus the same period one year ago. Earnings per share for the third quarter 2000 include $0.09 from Westport Resources. Excluding this, the resulting Equitable earnings per share of $0.49 is 390% greater than the $0.10 of earnings per share reported for the third period 1999 excluding $0.07 associated with the Gulf of Mexico business that was merged into Westport earlier this year. The earnings improvement for the September 2000 quarter is attributable to higher natural gas production and throughput derived from recent acquisitions and increased 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 2.3 and 8.4 billion cubic feet (Bcf) of throughput for the three and nine months ended September 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 Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------------------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Utility revenues $ 39,062 $ 40,528 $228,929 $233,561 Marketing revenues 237,271 90,838 611,370 383,220 -------- -------- -------- -------- Total operating revenues 276,333 131,366 840,299 616,781 Purchased gas costs and revenue related taxes 241,762 98,337 675,773 450,083 -------- -------- -------- -------- Net operating revenues 34,571 33,029 164,526 166,698 Operating and maintenance expense 15,543 14,761 50,563 52,092 Selling, general and administrative expense 10,284 10,420 33,022 32,350 Depreciation, depletion and amortization 6,823 7,252 22,206 28,165 -------- -------- -------- -------- Total expenses 32,650 32,433 105,791 112,607 -------- -------- -------- -------- Earnings before interest and taxes (EBIT) $ 1,921 $ 596 $ 58,735 $ 54,091 ======== ======== ======== ======== Capital expenditures $ 7,468 $ 6,378 $ 18,923 $ 16,489 OPERATING INFORMATION Total expenses/net operating revenues (%) 94.44% 98.19% 64.30% 67.55% Earnings (loss) before interest and taxes Distribution $ (2,374) 4 (2,121) $ 36,437 $ 34,448 Pipeline $ 3,910 $ 2,804 $ 16,789 $ 16,155 Marketing $ 385 $ (87) $ 5,509 $ 3,488
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999 Equitable Utilities had earnings before interest and taxes (EBIT) for the September 2000 quarter of $1.9 million compared to $0.6 million for the 1999 period. Results for the September 1999 quarter benefited from the recognition of the settlement of Equitrans' rate case which included stranded cost recovery that had a positive net result of $0.3 million. Excluding the Equitrans' rate settlement, EBIT for the third quarter 2000 increased $1.6 million over the $0.3 million for the same period a year ago. The increase in 2000 is due primarily to increased throughput as a result of the Carnegie acquisition and increased margins from energy marketing activities. 10 13 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999 Equitable Utilities had earnings before interest and taxes for the nine months ended September 30, 2000 of $58.7 million compared to $54.1 million for the same period in 1999. The segment's results for the 1999 period included a $3.9 benefit from the previously mentioned Equitrans' rate case settlement, offset, in part, by $2.6 million expended for improvements in the utility segment's operating processes. Excluding the impact of the rate case settlement and process improvement charges, EBIT increased $5.9 million or 11% 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 Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---------------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Net operating revenues $19,080 $17,738 $107,149 $102,711 Operating costs 17,039 15,601 57,429 55,506 Depreciation and amortization 4,415 4,258 13,283 12,757 ------- - ------ -------- -------- Earnings (loss)before interest and taxes $(2,374) $(2,121) $ 36,437 $ 34,448 ======= ======= ======== ======== OPERATING INFORMATION Degree days (normal = Qtr - 120, YTD - 3,848) 163 113 3,276 3,589 Operations and Maintenance (O & M) per customer $ 59.25 $ 53.79 $ 200.82 $ 198.34 Volumes (MMcf) Residential 1,963 1,711 17,377 17,586 Commercial and Industrial 5,045 2,782 22,663 15,132 ------- ------- -------- -------- Total gas sales and transportation 7,008 4,493 40,040 32,718 ======= ======= ======== ========
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 SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999 Net operating revenues for the September 2000 quarter increased 8% to $19.1 million compared to $17.7 million for 1999 period. This increase is primarily due to increased throughput as a result of the acquisition of Carnegie Natural Gas. Total operating expenses for September 2000 quarter totaled $21.5 million compared to $19.9 million for the same period in 1999. The increase in operating expense levels is primarily due to increased administrative costs and the acquisition of Carnegie Natural Gas. NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999 Weather in the distribution service territory for the nine months ended September 30, 2000, was 15% warmer than normal and 9% warmer than last year. Despite the warmer weather, total system throughput increased 7.3 Bcf, versus the same period last year, primarily as a result of the acquisition of Carnegie Natural Gas. Net operating revenues for the nine months ended September 30, 2000 increased 4% to $107.1 million compared to $102.7 million for the same period in 1999. This increase is primarily due to the increased throughput mentioned above. Total operating expenses for the nine months ended September 30, 2000 were $70.7 million compared to $68.3 million for the same period in 1999. The increase is due primarily to the acquisition of Carnegie Natural Gas, increased provision for performance-related bonuses, and higher administrative costs. PIPELINE OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Net operating revenues $13,284 $13,942 $46,342 $55,798 Operating costs 7,014 8,187 20,774 24,378 Depreciation and amortization 2,360 2,951 8,779 15,265 ------- ------- ------- ------- Earnings before interest and taxes $ 3,910 $ 2,804 $16,789 $16,155 ======= ======= ======= ======= OPERATING INFORMATION Transportation throughput (Mmbtu) 18,459 18,281 57,538 57,952
12 15 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999 Net operating revenues for the three months ended September 30, 2000, were $13.3 compared to $13.9 million for the same period in 1999. Third quarter 2000 and 1999 net operating revenues include $0.5 million and $1.6 respectively, for the recovery of stranded costs in rates from the previously mentioned Equitrans' rate case settlement. Excluding the impact of the rate settlement, net operating revenues of $12.8 million for the current period increased $0.5 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, offset, in part, by reduced revenues from extraction services resulting from a change in contract arrangements. Total operating expenses were $9.4 million for the 2000 quarter compared with operating expenses of $11.1 million for the 1999 quarter, a decrease of $1.7 million. Third quarter 2000 and 1999 operating expenses include $0.4 million and $1.2 million respectively, of amortization expense related to the recovery of stranded costs in rates. Excluding the impact of the stranded cost recovery, operating expenses of $9.0 million reflect a decrease of $0.9 million from $9.9 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 continued focus on productivity improvements. NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999 Net operating revenues for the nine months ended September 30, 2000, were $46.3 million compared to $55.8 million for the same period in 1999. Net operating revenues for 2000 and 1999 include $3.7 million and $14.5 million respectively, for the recovery of stranded costs in rates from the previously mentioned Equitrans' rate case settlement. Net operating revenues of $42.6 million for the current period, excluding the impact of the rate settlement, increased $1.3 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, offset, in part, by lower extraction revenues as described above. Total operating expenses were $29.6 million for the nine months ended September 30, 2000 compared with operating expenses of $39.6 million for the 1999 period, a decrease of $10.0 million. The operating expenses for 2000 and 1999 include $3.0 million and $9.9 million, respectively, of amortization expense related to the recovery of stranded costs in rates. In addition, 1999 amounts included $2.6 million in expenses for improvement of utility segment operating processes and consolidation of facilities. Excluding the non-recurring items in both periods, operating expenses of $26.6 million decreased $0.5 million from $27.1 million for the same period last year, due primarily to the segment's continued focus on productivity improvements, despite the Carnegie acquisition. 13 16 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) MARKETING OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 --------------------------------------------------------------- FINANCIAL RESULTS (THOUSANDS) Net operating revenues $ 2,207 $ 1,351 $ 11,103 $ 8,190 Operating costs 1,774 1,391 5,450 4,557 Depreciation and amortization 48 47 144 146 ------- ------- -------- -------- Earnings (loss) before interest and taxes $ 385 $ (87) $ 5,509 $ 3,467 ======= ======= ======== ======== OPERATING INFORMATION Marketed gas sales (MMBtu) 54,831 32,875 170,208 156,867 Net operating revenues/MMBtu $0.0403 $0.0411 $ 0.0652 $ 0.0522
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999 Net operating revenues for the September 2000 quarter increased $0.8 million to $2.2 million compared to $1.4 million in 1999. The increase in net operating revenues is attributable to greater sales volumes associated with asset management activities. Operating expenses for the September 2000 quarter totaled $1.8 million, an increase of $0.4 million from the same period in 1999. The increase is due principally to the increased investment in the segment's asset management and retail marketing activities. NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999 Net operating revenues for the nine months ended September 30, 2000, were $11.1 million compared to $8.2 million in 1999, an increase of $2.9 million. This increase is attributable to greater sales volumes associated with asset management activities and higher unit margins. The sale of gas in storage during the first quarter allowed the Company to benefit from the increasing natural gas prices. Total operating expenses for the nine months ended September 30, 2000 were $5.6 million compared to $4.7 million for the same period in 1999. The $0.9 million increase in operating expense is due to the increased investment in the segment's asset management and retail marketing activities. 14 17 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, gathering, transportation and sale of natural gas 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. On October 15, 2000, the labor contract with the bargaining unit of Kentucky West Virginia Gas Company expired. See the Labor Relations disclosure in the Capital Resources and Liquidity section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------------------------------------------------------------- Operating revenues $ 84,975 $ 61,127 $252,353 $155,632 Cost of energy purchased 10,816 7,525 24,854 18,489 -------- -------- -------- -------- Net operating revenues 74,159 53,602 227,499 137,143 Operating expenses: Operation and maintenance 3,160 3,293 10,096 9,530 Lease operating expense 12,543 6,614 33,894 19,399 Dry hole -- 1,040 3 2,317 Exploration expenses 261 3,005 3,198 6,024 Selling, general and administrative 5,126 9,890 18,327 21,274 Depreciation, depletion and amortization 13,084 16,459 51,476 45,258 -------- -------- -------- -------- Total operating expenses 34,174 40,301 116,994 103,802 Operating income 39,985 13,301 110,505 33,341 Other loss -- -- (6,951) -- -------- -------- -------- -------- Earnings before interest and taxes $ 39,985 $ 13,301 $103,554 $ 33,341 ======== ======== ======== ======== Capital expenditures $ 26,462 $ 15,686 $751,474 $ 55,638 OPERATING INFORMATION Natural gas sales (MMcf) - East 18,832 10,055 56,665 30,485 Natural gas sales (MMcf) - Gulf -- 6,711 5,535 18,082 -------- -------- -------- -------- Crude oil production (000s BBls) - East 100 110 379 333 Crude oil production (000s BBls) - Gulf -- 192 75 443 -------- -------- -------- -------- Natural gas liquids production (000s Gals.) - East 9,779 15,577 27,865 47,198 Natural gas liquids production (000s Gals.) - Gulf -- 2,503 1,513 6,594 -------- -------- -------- -------- Produced natural gas and oil (MMcfe) - East 20,904 11,556 63,458 34,326 Produced natural gas and oil (MMcfe) - Gulf -- 7,861 5,984 20,742 Average selling prices: Natural gas - East (per MMBtu) $ 3.10 $ 2.31 $ 2.85 $ 2.05 Natural gas - Gulf (per MMBtu) $ -- $ 2.50 $ 2.51 $ 2.11 -------- -------- -------- -------- Crude oil - East (per barrel) $ 25.50 $ 16.41 $ 23.04 $ 13.39 Crude oil - Gulf (per barrel) $ $ 18.09 14.74 $ 15.56 -------- -------- -------- -------- Natural gas liquids - East (per gallon) $ 0.31 $ 0.31 $ 0.33 $ 0.26 Natural gas liquids - Gulf (per gallon) $ $ 0.20 $ 0.49 $ 0.19 LOE/Mcfe Sales - East $ 0.646 $ 0.447 $ 0.550 $ 0.442 LOE/Mcfe Sales - Gulf $ -- $ 0.233 $ 0.243 $ 0.243 -------- -------- -------- -------- G&A/Mcfe Sales - East $ 0.264 $ 0.771 $ 0.283 $ 0.497 G&A/Mcfe Sales - Gulf -- $ 0.157 $ 0.275 $ 0.190 -------- -------- -------- -------- Depletion/MCFE Produced - East $ 0.495 $ 0.406 $ 0.513 $ 0.426 Depletion/MCFE Produced - Gulf $ -- $ 1.082 $ 1.009 $ 1.104
15 18 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION (CONTINUED) THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999 Equitable Production had earnings before interest and taxes for the September 2000 quarter of $40 million compared to $13.3 million for the 1999 quarter. The segment's positive results were primarily due to increased natural gas 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 improvements were partially offset by a per Mcfe increase in lease operating expense (LOE), primarily due to the higher severance and ad valorem taxes resulting from higher prices, and the increased depletion as a result of the Statoil acquisition. Additionally, beginning with the second quarter 2000, the results associated with the Gulf operations are accounted for under the equity method as a result of the combination of the Gulf operations with Westport Oil and Gas Company as described in note B. Net operating revenues for the third quarter 2000 increased 38% to $74.2 million compared to $53.6 million in 1999. Adjusted for the Gulf operations, which contributed $21.4 million in operating revenues in the 1999 quarter results, the increase in operating revenues is $42 million. The increase was primarily due to increases in production and effective gas prices in Appalachia of 86% and 34%, respectively. The Statoil acquisition added 8.3 billion cubic feet equivalent (Bcfe) of production in the current quarter and accounted for an increase of $32.6 million in net operating revenues. Equitable Production's effective selling prices for natural gas and crude oil increased 34% and 46%, respectively, over third quarter 1999's average selling prices. The increase in average prices resulted in a $9.2 million increase in net operating revenues from prior year. These increases were slightly offset by a 0.9 million decrease in crude oil volumes. Operating expenses for the third quarter of 2000 totaled $34.2 million, a decrease of $6.1 million from the same period in 1999. Adjusted for the Gulf operations, which accounted for $16.5 million in operating expenses in the 1999 quarter results, and charges in 1999 totaling $4.6 million related to Appalachian office closing and pipeline deregulation, there is an increase in operating expenses of $15 million. The 2000 operating expenses include approximately $16.3 million associated with the Statoil acquisition. Production expenses in the period increased $3.7 million as a result of increased severance and ad valorem taxes, due to increased production volumes and increased prices. Excluding the impact of increased production taxes, these lease operating expenses per unit were essentially unchanged. Excluding $8.6 million of Gulf expenses and $1.0 million asset impairment recorded in 1999, current quarter depreciation, depletion and amortization (DD&A) increased $5.9 million due to increased production volumes and increased unit depletion, as a result of the Statoil acquisition. Adjusting for the Gulf operations and the 1999 charges, SG&A, on a per unit basis, decreased 24% to $0.26 per thousand cubic feet equivalent (Mcfe) compared to $0.34 per Mcfe in 1999. This is attributable to ongoing process improvements and synergies realized from the acquisition. 16 19 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999 Equitable Production had earnings before interest and taxes for the nine months ended September 30, 2000 of $103.6 million compared to $33.3 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, partially offset by higher production taxes caused by the higher commodity prices. Additionally, the nine months ended September 30, 2000 includes the results associated with the Gulf operations for only the first quarter. The 1999 earnings before interest and taxes of $33.3 million has been restated to reflect the previously announced transfer of Equitrans production from the Utilities segment. Net operating revenues for the nine months ended September 30, 2000 increased 66% to $227.5 million compared to $137.1 million in 1999. Adjusted for the Gulf operations, which contributed $48.5 million in operating revenues in the 1999 year-to-date results, and $17.0 in the current period, the increase in operating revenues is $121.9 million. The increase was primarily due to increased sales volumes related to the Statoil acquisition and higher effective commodity prices. The Statoil acquisition added 25.2 billion cubic feet equivalent (Bcfe) of production in the current year and accounted for an increase of $90.1 million in net operating revenues. Equitable Production's average selling prices for natural gas and crude oil increased 36% and 48%, respectively, over the same period in 1999. The increase in average prices resulted in a $29.5 million increase in net operating revenues from prior year. Operating expenses for the period ended September 30, 2000 totaled $117.0 million, an increase of $13.2 million from the same period in 1999. Adjusted for the Gulf operations, which accounted for $40.5 million in 1999 year-to-date results and $10.5 million in the current period, the increase in operating expenses is $43.2 million. The 2000 operating expenses include approximately $42.4 million associated with the Statoil ACQUISITION. Excluding the effect of the Gulf operations and third quarter charges in 1999 and the increase in production taxes due to commodity price increases in 2000, per unit LOE is essentially unchanged and per unit SG&A has decreased for the same reasons as described above. On April 10, 2000, Equitable completed the previously announced combination of its Gulf operations with Westport Oil and Gas Company. In the transaction, Equitable received approximately $50 million in cash and a significant minority interest in the combined company. Equitable began accounting for its interest in Westport on the equity method in the second quarter of 2000. This transaction is not considered a significant disposition of assets, and no pro forma disclosures have been provided. 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 were 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) 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. 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. The final determination as to whether a sale will occur will be made in the fourth quarter.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------------------------------------------------------------ OPERATIONAL DATA (THOUSANDS) Construction backlog, end of period $69,365 $78,714 $ 69,365 $ 78,714 Construction completed $26,949 $35,941 $ 63,586 $109,496 FINANCIAL RESULTS (THOUSANDS) Total operating revenues $34,409 $44,107 $101,085 $123,070 Contract costs 23,683 33,685 74,236 95,657 ------- ------- -------- -------- Net operating revenues 10,726 10,422 26,849 27,413 ------- ------- -------- -------- Selling, general and administrative (SG&A) expenses 5,158 4,761 16,851 13,818 Amortization of goodwill 961 937 2,939 2,810 Depreciation and depletion 409 896 964 1,272 ------- ------- -------- -------- Total expenses 6,528 6,594 20,754 17,900 Equity earnings of non-consolidated entities 1,143 1,056 3,567 2,306 ------- ------- -------- -------- Earnings before interest and taxes $ 5,341 $ 4,884 $ 9,662 $ 11,819 ======= ======= ======== ======== Capital expenditures $ 105 $ (662) $ 1,487 $ 184 OPERATING INFORMATION Gross profit margin 31.2% 23.6% 26.6% 22.3% SG&A as a % of revenue 15.0% 10.8% 16.7% 11.2% Development expenses as a % of revenue 2.4% 1.8% 3.7% 1.8%
18 21 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORESCO (CONTINUED) THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999 The NORESCO segment posted EBIT of $5.3 million compared to the $4.9 million posted in the third quarter last year. The increase in EBIT is primarily attributable to increased gross margin, increased equity in earnings and slightly reduced operating expenses. Total revenue decreased by 22% to $34.4 million compared to $44.1 million in 1999. The decrease in revenues was primarily due to a reduction in construction activity related to the performance contracting business. Despite lower revenues, NORESCO's third quarter 2000 gross margin increased to $10.7 million compared to $10.4 million during the September quarter 1999. Gross margin as a percentage of revenue increased to 31% in the September 2000 quarter compared to 24% during the same period in 1999. This positive result was primarily attributable to a gross profit increase in a few operational energy services projects and the shift towards projects with higher gross margins. Total expenses for September 2000 were $6.5 million compared to $6.6 million in the September 1999 quarter. This segment's construction backlog declined to $69.4 million compared to $78.7 million a year earlier. However, construction backlog has increased $17.3 million from $52.1 million since the second quarter 2000. NINE MONTHS ENDED SEPTEMBER, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999 The NORESCO segment's earnings before interest and taxes decreased $2.2 million to $9.7 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 development 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 $17.9 million incurred during the same period last year was primarily due to an increase of $1.6 million in project development costs and $1 million in costs to exit the international energy infrastructure development business during the first quarter of 2000. Equity earnings of non-consolidated entities increased by $1.3 million to $3.6 million due to the start of commercial operation for two international energy infrastructure power plants. 19 22 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 are primarily impacted by the seasonal nature of Equitable Utilities' distribution operations and the volatility of oil and gas commodity prices. Stored natural gas inventory for Distribution Operations and Marketing Operations increased $25.9 million and $25.8 million from December 31, 1999, respectively. These increases are a result of the increased commodity prices and the Company's seasonal injection of natural gas into storage. Accounts payable for these segments increased primarily due to the aforementioned increase in stored natural gas inventory. Marketing Operations and Equitable Production experienced an increase in net accounts receivable from December 31, 1999 to September 30, 2000 of $30.4 million and $4.2 million, respectively, as a result of the increased natural gas commodity prices and increased marketed gas sales and production volumes. This was partially offset by a $21.4 million decrease in Distribution and $3.3 million decrease in Pipeline Operations due to the seasonal nature of the Equitable Utilities Distribution and Pipeline Operations. The Production segment experienced a decrease in accrued liabilities due to the settlement of transactions related to the Statoil acquisition and the Gulf Assets merger totaling $30.4 million from December 31, 1999 to September 30, 2000. Short-term debt has increased in 2000 due to the acquisition of Statoil. However, short-term debt has decreased during the third 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 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 $100 million in the nine months ended September 30, 2000, compared to $72 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 $80 million, Utilities approximately $19 million, and NORESCO $1 million. 20 23 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 are generally financed on a project basis with non-recourse financings established at the project 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. For the third quarter of 2000, Equitable reported $4.5 million of equity in earnings from its minority ownership in Westport Resources. This minority interest is included as an investment in non-consolidated entities. These results reflect the June 2000 quarter for Westport. Equitable's fourth quarter will include at least its share of Westport's third quarter earnings and, potentially, also its share of Westport's fourth quarter earnings. In addition, as a result of the Westport IPO (refer to Subsequent Event Disclosure), Equitable's minority interest has decreased to approximately 36-37%. The transaction is not considered a significant disposition of assets, and no pro forma disclosures have been provided. 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, as stated above. 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. 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) 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 6.27% during the nine months ended September 30, 2000. The Company maintains a revolving credit agreement with a group of banks providing $500 million of available credit, which expires in 2001. The Company is in the process of obtaining new bank financing. 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. FINANCING The Company has adequate borrowing capacity to meet its financing requirements. CONSOLIDATED EFFECTIVE TAX RATE The Company reviews its estimated annual effective tax rate on a quarterly basis. The Company's effective tax rate for the nine months ended September 30, 2000 was 34.7%. The decrease in the effective tax rate reflects a lower rate on international operations and lower state taxes. LABOR RELATIONS On October 15, 2000, the labor contract with the bargaining unit at the Kentucky West Virginia Gas Company (KWV) expired. KWV, a subsidiary of the Company, operates a pipeline and performed contract well-tending for Equitable Production Company in Kentucky. Its results are reported in the Production segment. The union's negotiating committee opted to call a strike. The company presented a proposal, which included a significant early retirement incentive, with the stipulation that it would expire at midnight on November 6, 2000. The company was notified that the union did not accept the offer, which consequently expired. Therefore, no timetable for settlement exists. This labor dispute has resulted in production volume loss of approximately 900 MMcf for the 28 days from October 15, 2000 until November 12, 2000. During that same time period, the company also incurred additional net strike-related expenses of $0.4 million. Since the beginning of the strike, the company has been the target of vandalism resulting in damages of approximately $.7 million. As the length of the strike, the extent of vandalism, the company's ability to maintain production volumes, and the amount of any labor settlement are unknown at this time, no determination can be made about the impact on future periods. However, any strike of an extended duration and/or the resolution of this labor dispute are likely to have a significant adverse impact on the results of operations in future periods. 22 25 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INFORMATION REGARDING FORWARD LOOKING STATEMENTS Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements related to such matters as anticipated financial performance, earnings to be recorded in the fourth quarter for the Company's investment in Westport, future costs savings, growth, and operational matters including labor relations. 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's business and forward-looking statements include, but are not limited to, the following: weather conditions, commodity prices for natural gas and crude oil and associated hedging activities, availability of financing, changes in interest rates, changes in the status of labor negotiations, curtailments or disruptions in production, timing and availability of regulatory and governmental approvals and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary 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 Operations within the Utilities segment. Due to the increased production volumes through the acquisition of Statoil and the increased natural gas commodity prices from prior year-end, the Company re-evaluated its market risk exposure. With respect to derivatives held by the Company as of September 30, 2000, a decrease of 10% in the market price of natural gas, crude oil and propane from the September 30, 2000 levels would increase the fair value of the natural gas instruments by approximately $10.6 million and would increase the fair value of the crude oil instruments and the propane instruments by approximately $.5 million, respectively. 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 purchases and 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, a favorable 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 an unfavorable 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's amount of variable rate short-term debt has increased dramatically in 2000 due to the acquisition of Statoil, as described in Note B, increasing the Company's exposure to changes in interest rates. Based on the September 30, 2000 Short-term loans balance, the impact on interest expense of a 10% increase in average rate would be $4.8 million. However, as previously disclosed, the Company plans to significantly reduce short-term debt by alternative financing and/or sale of assets in the fourth quarter. 23 26 PART II. OTHER INFORMATION Item 5. Other Information At its meeting on July 19, 2000, the Board of Directors appointed George L. Miles, Jr. as a director and as a member of the Audit Committee until the next Annual Meeting of Shareholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Equitable Resources, Inc. Breakthrough Long Term Incentive Plan (as amended and restated) 10.2 Change of Control Agreement dated October 30, 2000 by and between Equitable Resources, Inc. and Philip P. Conti (b) Reports on Form 8-K during the quarter ended September 30, 2000: Form 8-K current report dated August 21, 2000, announcing the appointment of Philip P. Conti to the position of Vice President, Finance and Treasurer for Equitable Resources. 24 27 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: November 13, 2000 25 28 INDEX TO EXHIBITS Exhibit No. Document Description -------------------------------------------------------------------------------- 10.1 Equitable Resources, Inc. Breakthrough Filed Herewith Long Term Incentive Plan (as amended and restated) 10.2 Change of Control Agreement dated Filed Herewith October 30, 2000 by and between Equitable Resources, Inc and Philip P. Conti 27 Financial Data Schedule for the Period Filed Herewith Ended September 30, 2000 26