<PAGE> 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
<PAGE> 2
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
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
</TABLE>
<PAGE> 3
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE> 4
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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)
======== ======== ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 5
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------------------
(THOUSANDS)
<S> <C> <C>
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
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 6
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30 DECEMBER 31,
2000 2000
-----------------------------------
(THOUSANDS)
<S> <C> <C>
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
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------------------------------------
(Thousands, except per share amounts)
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE> 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
<PAGE> 9
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
C. Segment Disclosure (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C> <C>
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
======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------------------
(Thousands)
<S> <C> <C>
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
========== ==========
</TABLE>
7
<PAGE> 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
<PAGE> 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
<PAGE> 12
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
EQUITABLE UTILITIES (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------
FINANCIAL RESULTS (THOUSANDS)
<S> <C> <C> <C> <C>
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
======= ======= ======== ========
</TABLE>
11
<PAGE> 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
12
<PAGE> 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
<PAGE> 16
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
EQUITABLE UTILITIES (CONTINUED)
MARKETING OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
15
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</TABLE>
18
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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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.
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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.
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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
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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
