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, 1999 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, 1999 Common stock, no par value 33,036,000 shares
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, 1999 and 1998 1 Statements of Condensed Consolidated Cash Flows for the Nine Months Ended September 30, 1999 and 1998 2 Condensed Consolidated Balance Sheets, September 30, 1999, and December 31, 1998 3 - 4 Notes to Condensed Consolidated Financial Statements 5 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Part II. Other Information: Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 Index to Exhibits 25
<TABLE> <CAPTION> 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, 1999 1998 1999 1998 ------------------------------------ ------------------------------------ <S> <C> <C> <C> <C> Operating revenues $ 191,602 $ 156,730 $ 801,289 $ 620,943 Cost of sales 95,465 72,785 470,712 327,480 ----------------- ---------------- ----------------- ---------------- Net operating revenues 96,137 83,945 330,577 293,463 ----------------- ---------------- ----------------- ---------------- Operating expenses: Operation and maintenance 18,321 18,171 62,563 59,958 Exploration 4,045 670 8,341 3,083 Production 6,039 6,879 18,490 21,445 Selling, general and administrative 24,840 23,865 69,697 76,322 Depreciation, depletion and amortization 25,585 21,563 77,584 60,762 ----------------- ---------------- ----------------- ---------------- Total operating expenses 78,830 71,148 236,675 221,570 ----------------- ---------------- ----------------- ---------------- Operating income 17,307 12,797 93,902 71,893 Equity in nonconsolidated subsidiaries 1,056 917 2,306 1,877 ----------------- ---------------- ----------------- ---------------- Earnings from continuing operations, before interest & taxes 18,363 13,714 96,208 73,770 Interest charges 8,559 9,415 26,787 27,818 ----------------- ---------------- ----------------- ---------------- Income before income taxes 9,804 4,299 69,421 45,952 Income taxes 4,074 2,262 26,712 16,989 ----------------- ---------------- ----------------- ---------------- Net income from continuing operations 5,730 2,037 42,709 28,963 Income (loss) from discontinued operations - net of tax - - - (4,604) ----------------- ---------------- ----------------- ---------------- Net income $ 5,730 $ 2,037 $ 42,709 $ 24,359 ================= ================ ================= ================ Average common shares outstanding - assuming dilution 34,273 37,128 34,650 37,129 Earnings (loss) per share of common stock: Basic: Continuing operations $ 0.17 $ 0.06 $ 1.24 $ 0.78 Discontinued operations - - - (0.12) ----------------- ---------------- ----------------- ---------------- Net income $ 0.17 $ 0.06 $ 1.24 $ 0.66 ================= ================ ================= ================ Diluted: Continuing operations $ 0.17 $ 0.06 $ 1.23 $ 0.78 Discontinued operations - - - (0.12) ----------------- ---------------- ----------------- ---------------- Net income $ 0.17 $ 0.06 $ 1.23 $ 0.66 ================= ================ ================= ================ The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Thousands) Nine Months Ended September 30, 1999 1998 ----------------------------------- <S> <C> <C> Cash flows from operating activities: Net income from continuing operations $ 42,709 $ 28,963 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 77,584 60,762 Amortization of net contract costs (234) 2,602 Deferred income taxes 14,115 12,612 Changes in other assets and liabilities 7,657 528 ---------------- ---------------- Net cash provided by continuing operations 141,831 105,467 Net cash used in discontinued operations - (2,420) ---------------- ---------------- Net cash provided by operating activities 141,831 103,047 ---------------- ---------------- Cash flows from investing activities: Capital expenditures (72,276) (123,981) Increase in investment in nonconsolidated subsidiaries (20,861) (7,028) Proceeds from sale of property 4,661 - Increase in net noncurrent assets held for sale - (31,935) ---------------- ---------------- Net cash provided by (used in) investing activities (88,476) (162,944) ---------------- ---------------- Cash flows from financing activities: Retirement of long-term debt (75,000) (10,880) Increase (decrease) in short-term loans 3,088 (66,451) Dividends paid (30,858) (32,830) Proceeds from issuance of long-term debt 17,000 - Proceeds from preferred trust securities - 125,000 Proceeds from issuance of common stock 2,801 2,392 Purchase of treasury stock (65,999) - ---------------- ---------------- Net cash provided by (used in) financing activities (148,968) 17,231 ---------------- ---------------- Net decrease in cash and cash equivalents (95,613) (42,666) Cash and cash equivalents at beginning of period 102,444 69,442 ---------------- ---------------- Cash and cash equivalents at end of period $ 6,831 $ 26,776 ================ ================ Cash paid during the period for: Interest (net of amount capitalized) $ 25,802 $ 38,719 ================ ================ Income taxes $ (2,316) $ 10,304 ================ ================ The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) ASSETS September 30, December 31, 1999 1998 ------------------------------------------ (Thousands) ------------------------------------------ <S> <C> <C> Current assets: Cash and cash equivalents $ 6,831 $ 102,444 Accounts receivable 108,791 199,363 Unbilled revenues 26,992 41,616 Inventory 42,755 33,743 Deferred purchased gas cost 24,210 39,445 Prepaid expenses and other 45,989 34,831 ---------------- ---------------- Total current assets 255,568 451,442 ---------------- ---------------- Property, plant and equipment 1,991,843 1,956,763 Less accumulated depreciation and depletion (814,925) (762,320) ---------------- ---------------- Net property, plant and equipment 1,176,918 1,194,443 ---------------- ---------------- Other assets 232,501 214,971 ---------------- ---------------- Total $ 1,664,987 $ 1,860,856 ================ ================ The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 1999 1998 ----------------------------------------- (Thousands) ----------------------------------------- <S> <C> <C> Current liabilities: Current portion long-term debt $ - $ 74,136 Short-term loans 118,791 115,703 Accounts payable 58,420 147,951 Other current liabilities 112,057 104,170 ---------------- ---------------- Total current liabilities 289,268 441,960 ---------------- ---------------- Long-term debt 298,280 281,350 Deferred and other credits 297,889 304,127 Commitments and contingencies - - Preferred trust securities 125,000 125,000 Capitalization: Common stockholders' equity: Common stock, no par value, authorized 80,000 shares; shares issued September 30, 1999, 37,252; December 31, 1998, 37,252 276,213 280,400 Treasury stock, shares at cost September 30, 1999, 3,594; December 31, 1998, 1,396 (100,875) (39,298) Retained earnings 479,177 467,326 Accumulated other comprehensive income (loss) 35 (9) ---------------- ---------------- Total common stockholders' equity 654,550 708,419 ---------------- ---------------- Total $ 1,664,987 $ 1,860,856 ================ ================ The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
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, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998 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, 1998. B. In April 1998 management adopted a formal plan to sell the Company's natural gas midstream operations. The operations include an integrated gas gathering, processing and storage system in Louisiana and a natural gas and electricity marketing business based in Houston. In December 1998, the Company completed the sale of these operations to various parties for $338.3 million, which included working capital adjustments. The condensed consolidated financial statements include these as discontinued operations. Net loss from discontinued operations was $4.6 million for the nine months ended September 30, 1998. These results were reported net of income tax benefit of $2.3 million. Interest expense allocated to discontinued operations was $6.5 million in the first nine months of 1998. C. In April 1998, $125 million of 7.35% Trust Preferred Capital Securities were issued. The capital securities were issued through a subsidiary trust, Equitable Resources Capital Trust I, established for the purpose of issuing the capital securities and investing the proceeds in 7.35% Junior Subordinated Debentures issued by the Company. Interest expense for the three- and nine months ended September 30, 1999, includes $2.3 million and $6.9 million, respectively, of preferred dividends related to the trust preferred capital securities.
D. Segment Disclosure - The Equitable Utilities segment's activities comprise the operations of the Company's state-regulated local distribution company, in addition to gas transportation, storage and marketing activities involving the Company's interstate natural gas pipelines. The Equitable Production segment's activities comprise the exploration, development, production, gathering and sale of natural gas and oil, and extraction and sale of natural gas liquids. NORESCO's activities comprise cogeneration and power plant development, the development and implementation of energy and water efficiency programs, performance contracting and central facility plant operations. Equitable Energy provides gas operations, commodity procurement and delivery, risk management and customer services to energy consumers including large industrial, utility, commercial, institutional and residential end-users. 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 --------------------------------------------------------------------------------- (Thousands) <S> <C> <C> <C> <C> Revenues from external customers: Equitable Utilities $ 48,791 $ 39,906 $ 265,932 $ 242,884 Equitable Production 56,872 44,027 138,957 127,465 Equitable Services: NORESCO 44,107 32,867 123,070 73,309 Equitable Energy 41,832 39,930 273,330 177,285 ----------------- ----------------- ---------------- ---------------- Total $ 191,602 $ 156,730 $ 801,289 $ 620,943 ================= ================= ================ ================ Intersegment revenues: Equitable Utilities $ 2,857 $ 4,376 $ 9,644 $ 19,632 Equitable Production 2,569 2,152 13,128 18,000 Equitable Services: Equitable Energy 36,724 17,589 78,845 51,792 ----------------- ----------------- ---------------- ---------------- Total $ 42,150 $ 24,117 $ 101,617 $ 89,424 ================= ================= ================ ================ Segment profit (loss): Equitable Utilities $ 2,042 $ 2,352 $ 54,433 $ 41,463 Equitable Production 12,264 9,883 31,168 32,296 Equitable Services: NORESCO 4,884 3,320 11,819 5,018 Equitable Energy (408) (2,316) 1,832 (5,631) ----------------- ----------------- ---------------- ---------------- Total operating segments 18,782 13,239 99,252 73,146 Less: reconciling items Headquarters operating expenses (gains) not allocated to operating segments 419 (475) 3,044 (624) Interest expense 8,559 9,415 26,787 27,818 Income tax expenses 4,074 2,262 26,712 16,989 ----------------- ----------------- ---------------- ---------------- Net income from continuing operations $ 5,730 $ 2,037 $ 42,709 $ 28,963 ================= ================= ================ ================ </TABLE>
E. Derivative Instruments and Hedging Activities - In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has not yet determined when it will adopt the provisions of this statement, which may be implemented at the beginning of any fiscal quarter. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." This statement delays the required implementation for the Company until 2001. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company. F. Reclassification - Certain previously reported amounts have been reclassified to conform with the 1999 presentation.
Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Equitable's consolidated net income for the quarter ended September 30, 1999, was $5.7 million, or $0.17 per diluted share, compared with net income of $2.0 million, or $0.06 per share, for the quarter ended September 30, 1998. The earnings improvement for the 1999 quarter is primarily attributable to increased natural gas production and prices, the continuing benefit from last year's cost structure improvements, increased construction activity in the NORESCO segment and improved margins in the Equitable Energy natural gas marketing business. These earnings increases were partially offset by expenses for the implementation of process improvements in the Company's production and utility businesses, increased exploration costs in the Production segment, and an increased provision for performance-related compensation, reflecting the Company's strong year-to-date and anticipated full-year results and its continuing move to put more pay at risk for key employees throughout the Company. In the nine months ended September 30, 1999, Equitable's consolidated net income was $42.7 million, or $1.23 per diluted share, compared to $24.4 million, or $0.66 per share, for the nine months ended September 30, 1998. The 1998 period included a loss on the Company's discontinued midstream operations of $4.6 million, or $0.12 per share. These operations were sold in December 1998. The 1999 nine months net income of $1.23 per diluted share represents a 58% increase over earnings per share from continuing operations of $0.78 for same period in 1998. The 1999 improvement for the nine-month period is due to higher production volumes, increased NORESCO construction activity, improved gas marketing margins, higher first quarter weather-related sales in the distribution operations and lower selling, general and administrative expenses across all of the Company's businesses. RESULTS OF OPERATIONS EQUITABLE UTILITIES Equitable Utilities' operations comprise 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 marketing of natural gas. The pipeline operations of Equitrans, L.P. (Equitrans) and Three Rivers Pipeline Corporation are subject to rate regulation by the Federal Energy Regulatory Commission (FERC). Equitrans filed a rate case in April 1997, which addressed the recovery of certain stranded plant costs related to the implementation of Order 636. The requested rates were placed into effect in August 1997, subject to refund, pending the final FERC order. On April 29, 1999, the FERC approved, without modification, the joint stipulated settlement agreement resolving all issues in its proceeding.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) The approved settlement provides for prospective collection of increased gathering charges. In addition, the settlement provides Equitrans the opportunity to retain all revenues associated with interruptible transportation and negotiated rate agreements as well as moving its gathering charge toward a cost-based rate. In the second quarter of 1999, Equitrans recorded the final settlement of the rate case, including adjustment of the prior provisions for refund and recognition of the previously deferred revenues and costs related to the stranding of certain gathering facilities. <TABLE> <CAPTION> Three Months Ending Nine Months Ending September 30, September 30, 1999 1998 1999 1998 ------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATIONAL DATA Heating degree days 113 56 3,589 2,938 Residential sales and transportation volume (MMcf) 1,711 1,680 17,586 15,481 Commercial and industrial volume (MMcf) 2,782 2,816 15,132 13,651 --------------- --------------- ---------------- --------------- Total throughput (MMcf) - Distribution 4,493 4,496 32,718 29,132 Off-system sales - Distribution 5,005 5,147 13,273 13,285 Throughput (thousand Dths) - Pipeline - Delivered to distribution system 7,971 6,005 34,069 23,503 - Other deliveries 10,260 9,739 23,851 25,695 FINANCIAL DATA (Thousands $) Total operating revenues $ 51,648 $ 44,282 $ 275,576 $ 262,516 Purchased gas cost 17,034 9,961 104,137 112,941 Revenue related taxes 1,094 1,154 7,507 8,344 --------------- --------------- ---------------- --------------- Net operating revenues 33,520 33,167 163,932 141,231 --------------- --------------- ---------------- --------------- Operating and maintenance expense 15,029 14,723 53,033 49,658 Selling, general and administrative expense 9,215 10,914 28,131 34,484 Depreciation, depletion and amortization 7,234 5,178 28,335 15,626 --------------- --------------- ---------------- --------------- Total operating expenses 31,478 30,815 109,499 99,768 --------------- --------------- ---------------- --------------- Earnings from continuing operations, before interest and taxes $ 2,042 $ 2,352 $ 54,433 $ 41,463 =============== =============== ================ =============== Capital expenditures $ 9,062 $ 7,987 $ 19,173 $ 18,405 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998 Equitable Utilities had earnings before interest and taxes (EBIT) for the September 1999 quarter of $2.0 million compared to $2.4 million for the 1998 period. The segment's results for the 1999 quarter include charges of $0.9 million for further reorganization of utility segment operating functions and consolidation of facilities begun in the fourth quarter of 1998. EBIT, excluding these items, of $2.9 million increased $0.5 million, or 20%, attributed to lower operating expenses due to restructuring initiatives, partially offset by lower margins from distribution operations. The lower distribution margins are due primarily to a favorable settlement of a gas cost filing allowing the recognition of the sale of pipeline capacity ($1.7 million) reflected in the third quarter of 1998. Net operating revenues for the three months ended September 30, 1999, of $33.5 million include $1.6 million related to a surcharge for the collection of stranded costs under the pipeline rate settlement and $0.5 million for the pass-through of products extraction costs to customers. Net operating revenues of $31.4 million for the quarter, excluding the impact of the rate settlement and extraction revenues, decreased $1.8 million, or 5%, from the $33.2 million for the 1998 period due primarily to the lower distribution margins as described above. Total operating expenses of $31.5 million for the three months ended September 30, 1999, include $1.2 million of amortization expense related to the stranded plant, products extraction costs of $0.5 million and $0.9 million for reorganization as more fully described above. Operating expenses of $28.9 million, excluding the effect of the rate settlement, extraction charges and one-time expenses, decreased $1.9 million, or 6%, from the 1998 amount of $30.8 million due primarily to restructuring initiatives, which began in the fourth quarter of 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998 Equitable Utilities had EBIT of $54.4 million for the nine months ended September 30, 1999. The segment's results for the 1999 period include $3.9 million from recognition of the settlement of Equitrans' rate case described above. Results also include charges of $3.0 million for further reorganization of utility segment operating functions and consolidation of facilities. EBIT, excluding these items, increased $19.8 million, or 31%, over the $41.5 million for the nine months ended September 30, 1998. The increase in 1999 is a result of higher net revenues due principally to colder weather during the heating season ($7.2 million), increased revenues from nontraditional services by the distribution operations ($2.6 million) and lower operating expenses due to restructuring initiatives begun in the fourth quarter of 1998. Net operating revenues for the nine months ended September 30, 1999 of $163.9 million include $13.8 million related to recognition of the rate settlement and pass through of stranded costs described above and $1.2 million for the pass-through of products extraction costs to customers. Net operating revenues of $148.9 million for the period, excluding the impact of the rate settlement and extraction revenues, increased $7.7 million, or 5%, over the $141.2 million for the 1998 period. The increase in net revenues is due primarily to higher throughput ($7.2 million) and increased revenues from nontraditional services for distribution operations ($2.6 million). Total operating expenses of $109.5 million for the nine months ended September 30, 1999, include $9.9 million of amortization expense related to the stranded plant from recognition of the rate settlement, $1.2 million of products extraction costs and $3.0 million for reorganization as more fully described above. Excluding these items, operating expenses decreased $4.8 million from the 1998 amount of $99.8 million due primarily to the benefit of restructuring initiatives, which began in the fourth quarter of 1998, substantially offset by higher depreciation expense. EQUITABLE PRODUCTION The Production operations comprise the exploration and production of natural gas, natural gas liquids and crude oil through operations focused in the Appalachian and Gulf of Mexico regions. In 1998, the managerial responsibility for the operations conducted by two subsidiaries, Kentucky West Virginia Gas Company and Nora Transmission Company, were transferred from Equitable Utilities to Equitable Production under a services agreement. In 1999 these FERC regulated pipelines filed for decertification allowing for complete integration of these operations. The financial results for both periods are reclassified to reflect the new structure.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) <TABLE> <CAPTION> Three Months Ending Nine Months Ending September 30, September 30, 1999 1998 1999 1998 --------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATIONAL DATA Gas sales (MMcf) - East 9,488 9,427 28,901 28,689 Gas sales (MMcf) - Gulf 6,711 4,797 18,082 11,834 ---------------- ---------------- ---------------- ---------------- Total gas sales (MMcf) 16,199 14,224 46,983 40,523 Oil production (000s BBls) - East 110 127 326 371 Oil production (000s BBls) - Gulf 191 97 443 388 ---------------- ---------------- ---------------- ---------------- Total oil production (000s Bbls) 301 224 769 759 Liquids production (000s Gals.) - East 15,577 13,322 47,198 45,739 Liquids production (000s Gals.) - Gulf 2,503 1,854 6,594 3,669 ---------------- ---------------- ---------------- ---------------- Total liquids production (000s Gals.) 18,080 15,176 53,792 49,408 Produced gas and oil (MMcfe)- East 10,990 11,010 32,696 32,572 Produced gas and oil (MMcfe)- Gulf 7,861 5,382 20,742 14,160 ---------------- ---------------- ---------------- ---------------- Total produced gas & oil (MMcfe) 18,851 16,392 53,438 46,732 Transportation (MMcfe) 12,007 11,823 35,883 35,783 Effective gas price - East (per MMBtu) $ 2.32 $ 2.02 $ 2.06 $ 2.16 Effective gas price - Gulf (per MMBtu) $ 2.50 $ 2.12 $ 2.11 $ 2.20 Effective oil price - East (per Bbl) $ 16.34 $ 10.92 $ 13.41 $ 11.80 Effective oil price - Gulf (per Bbl) $ 18.09 $ 15.33 $ 15.56 $ 16.41 Effective liquids price - East (per gallon) $ 0.28 $ 0.26 $ 0.25 $ 0.23 Effective liquids price - Gulf (per gallon) $ 0.20 $ 0.15 $ 0.19 $ 0.18 FINANCIAL DATA (Thousands $) Total operating revenues $ 59,441 $ 46,179 $ 152,085 $ 145,465 Cost of energy purchased 7,525 4,211 18,489 16,311 ---------------- ---------------- ---------------- ---------------- Net operating revenue/gross margin 51,916 41,968 133,596 129,154 ---------------- ---------------- ---------------- ---------------- Operating and maintenance expense 3,293 3,449 9,530 10,300 Lease operating expense 6,039 6,879 18,490 21,445 Selling, general and administrative expenses 9,842 7,508 21,123 23,954 Dry hole cost 1,040 0 2,317 115 Exploration expenses 3,005 670 6,024 2,968 Depreciation, depletion and amortization 16,433 13,579 44,944 38,076 ---------------- ---------------- ---------------- ---------------- Total operating expenses 39,652 32,085 102,428 96,858 ---------------- ---------------- ---------------- ---------------- Earnings from continuing operations, before interest and taxes $ 12,264 $ 9,883 $ 31,168 $ 32,296 ================ ================ ================ ================ Capital expenditures $ 21,294 $ 37,094 $ 56,530 $ 95,619 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998 Equitable Production's EBIT for the September 1999 quarter was $12.3 million, which was $2.4 million higher than the September 1998 quarter. The segment's positive results were primarily due to increased natural gas and oil production and higher natural gas and oil prices offset by higher total operating expenses. Net operating revenues for the three months ended September 30, 1999, increased $9.9 million, or 24%, compared with the third quarter of 1998. Natural gas volumes increased 2.0 billion cubic feet (Bcf), which positively impacted revenues by $4.5 million. The higher gas production volumes are related to production increases in the Gulf of Mexico region from drilling activities at West Cameron 180/198 and South Marsh Island 39. Also, crude oil production increased by 77 thousand barrels (MBbls) in the current quarter compared with the same quarter last year due to the drilling activities at South Marsh Island 39. The increase in oil production contributed $1.4 million to revenues in the 1999 quarter. In addition to the production increases in the current quarter are increases of 17% and 36% in Equitable Production's average prices for natural gas and crude oil, respectively. The total impact of these price increases was $6.4 million additional revenues in the third quarter of 1999, compared to the same quarter in 1998. Included in 1998 are $2.6 million revenues from direct bill settlements, which represent the final installment of a FERC pricing settlement reached in an earlier period. Total operating expenses for the three months ended September 30, 1999 increased $7.6 million compared with the same quarter in 1998. Depreciation, depletion and amortization (DD&A) was $2.9 million higher because of increased production ($2.7 million) and a $1.0 million impairment associated with the abandonment of a processing facility, offset in part by a lower depletion rate in the Gulf region in the current year. During the third quarter of 1999, the Gulf region drilled one dry hole at Eugene Island 44, which accounted for the current quarter dry hole costs of $1.0 million. Also, other exploration costs were $2.3 million higher for the September 1999 quarter due primarily to a lease impairment and the impairment of an equity investment in an oil and gas production company. Additionally, selling, general and administrative (SG&A) expenses were $2.3 million higher for the September 1999 quarter. Current quarter SG&A includes $2.6 million related to process improvements, including the Company's decision to close its regional office in Kingsport, Tennessee, consolidate administration in Houston and realign field offices; $2.0 million of charges related to the decertification of Kentucky West Virginia Gas Company; and $0.5 million in increased provisions for performance-related compensation due to the segment's strong performance. These expenses were partially offset by a $1.6 million savings in SG&A as a result of restructuring activities in the fourth quarter of 1998. In addition, production costs decreased $0.8 million due to operating efficiencies and decreased well-tending staff.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998 For the nine months ended September 30, 1999, net operating revenues increased to $133.6 million from $129.2 million for the comparable period last year. Natural gas production increased 6.5 Bcf, or 16%, in the nine-month period. This production increase contributed $13.3 million to current year revenues. The increased production volume is related to the drilling activities in the Gulf region discussed above under third quarter results and additional Gulf wells at West Cameron 540, which commenced production in mid-1998. Partially offsetting the increase in production is a 4% decline in Equitable Production's year-to-date average sales price for natural gas. The total revenue impact of this 1999 price decline was $4.3 million. The 1998 revenues include $2.6 million of direct bill settlements described above. Total operating expenses for the nine-month period of 1999 increased by $5.6 million compared with the nine-month period 1998. DD&A is higher by $6.8 million due to increased gas production and a third quarter writedown of $1.0 million partially offset by a lower depletion rate in the Gulf region for 1999. Dry hole expense is $2.2 million higher due to the dry holes drilled in the second and third quarters of 1999. Also, other exploration costs were $3.0 million higher in 1999, as described above under third quarter results. Production costs, however, decreased $3.0 million due to current year operating efficiencies and decreased well-tending staff. Also, SG&A expenses declined $2.8 million as a result of management and staff headcount reductions and corporate restructuring activities, which occurred in the fourth quarter of 1998. The savings in SG&A are partially offset by the third quarter 1999 expenses related to the implementation of process improvements in the East region and increased performance compensation accruals. EQUITABLE SERVICES Equitable Services provides energy and energy related products and services that are designed to reduce its customers' operating costs and improve their productivity. The majority of Equitable Services' revenue and earnings is derived from energy saving performance contracting services and natural gas marketing activities. Equitable Services is comprised of two distinct business segments: NORESCO and Equitable Energy.
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 energy infrastructure division, which develops and operates private power, cogeneration and central plant facilities in the U.S. and selected international markets. <TABLE> <CAPTION> Three Months Ending Nine Months Ending September 30, September 30, 1999 1998 1999 1998 ------------------------------------------------------------------------ <S> <C> <C> <C> <C> OPERATIONAL DATA (Thousands $) Construction backlog, end of period $ 78,714 $ 100,251 Construction completed $ 35,941 $ 23,699 $ 109,496 $ 51,307 FINANCIAL DATA (Thousands $) Total revenue $ 44,107 $ 32,867 $ 123,070 $ 73,309 Contract costs 33,685 24,651 95,657 53,212 ---------------- ------------------ -------------- ---------------- Gross profit margin 10,422 8,216 27,413 20,097 ---------------- ------------------ --------------- ---------------- Equity earnings of non-consolidated subsidiaries (1,056) (917) (2,306) (1,877) Selling, general and administrative expenses 4,761 4,700 13,818 13,683 Amortization of goodwill 937 957 2,810 2,862 Depreciation and depletion 896 156 1,272 411 ---------------- ------------------ --------------- ---------------- Total expenses (net of equity earnings) 5,538 4,896 15,594 15,079 ---------------- ------------------ --------------- ---------------- Earnings from continuing operations, before interest and taxes $ 4,884 $ 3,320 $ 11,819 $ 5,018 ================ ================== =============== ================ Capital expenditures $ (662) $ 318 $ 184 $ 876 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) NORESCO (Continued) Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998 NORESCO's gross profit margin increased by 27% to $10.4 million for the quarter ended September 30, 1999, compared to $8.2 million for the same period in 1998. The increase in gross profit margin reflects the continued expansion of this segment's operations and the implementation of larger value contracts. Construction completed during the third quarter of $35.9 million was $12.2 million greater than the third quarter of 1998, an increase of 52%. The gross margin rate as a percent of sales declined to 23.6% compared to 25.0% during 1998, primarily due to the increase in revenues from the federal government market, which contributes lower gross margins than the company's other core markets. At September 30, 1999, construction backlog totaled approximately $79 million, a decrease of $22 million from backlog at September 30, 1998, due primarily to the build-out of several large energy infrastructure projects which were in backlog in 1998. Total expenses for this segment remained relatively unchanged, as increased marketing and development expenses were offset by lower direct labor costs and a reduction in allocated corporate overhead expense. Equity earnings of non-consolidated subsidiaries come primarily from power generation assets. Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998 NORESCO's gross profit margin increased by 36% to $27.4 million for the nine months ended September 30, 1999, compared to $20.1 million for the same period in 1998. The increase in gross profit margin reflects the continued expansion of this segment's operations and the implementation of larger value contracts. Construction completed during the nine months of $109.5 million was up 113% from the $51.3 million completed during the same period in 1998. The gross margin rate as a percent of sales declined to 22.3% compared to 27.2% during 1998, primarily due to the increase in revenues from the federal government market, which contributes lower gross margins than the company's other core markets. Other factors contributing to the decline in average gross margin rates are increased competition in the energy services industry and an increase in revenues from the sale of natural gas and electricity included in the segment's integrated energy management services. Total expenses for this segment remained relatively unchanged for the nine-month period, as increased marketing and project development expenses were offset by lower administrative expenses and a reduction in allocated corporate overhead expense. The increase in equity earnings of non-consolidated subsidiaries of $0.4 million for the nine-month period results from the contributions of assets which were fully operational in 1999, but which were either partially operating or in construction during the same period in 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE ENERGY Equitable Energy provides gas operations, commodity procurement and delivery, risk management and customer services to energy consumers including large industrial, utility, commercial, institutional and residential end-users. This segment's primary focus is to provide products and services in those areas where the Company has a strategic marketing advantage, usually due to geographic coverage and ownership of physical assets. <TABLE> <CAPTION> Three Months Ending Nine Months Ending September 30, September 30, 1999 1998 1999 1998 -------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> OPERATIONAL DATA Sales volume (MMbtu): Large industrial 5,181 7,058 19,499 21,085 On-system residential 19 180 2,830 344 Off-system residential 61 - 587 - Other commercial & industrial 2,087 3,541 7,244 11,423 Utilities/trading companies 19,928 15,651 109,530 63,027 ---------------- ---------------- ---------------- --------------- Total sales (MMbtu) 27,276 26,430 139,690 95,879 ================ ================ ================ =============== Total weighted average sales price ($/MMbtu) $ 2.88 $ 2.18 $ 2.52 4 2.39 FINANCIAL DATA (Thousands $) Total revenue $ 78,556 $ 57,519 $ 352,175 $ 229,077 Purchased gas cost 77,593 56,926 345,860 226,096 ---------------- ---------------- ---------------- --------------- Net operating revenue 963 593 6,315 2,981 Selling, general and administrative expenses 1,324 2,782 4,338 8,210 Depreciation, depletion and amortization 47 127 145 402 ---------------- ---------------- ---------------- --------------- Total operating expenses 1,371 2,909 4,483 8,612 ---------------- ---------------- ---------------- --------------- Earnings (loss) from continuing operations, before interest and taxes $ (408) $ (2,316) $ 1,832 $ (5,631) ================ ================ ================ =============== Capital expenditures $ 60 $ 4 $ 92 $ 42 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE ENERGY (Continued) Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998 Net operating revenues increased to $1 million for the quarter ended September 30, 1999, compared to $.6 million for the same period in 1998. Increased Company production volumes sold to utility/marketing companies contributed to higher margins for gas sales. Total operating expenses for the quarter were 53% lower than those of the third quarter of 1998, reflecting more cost control plus a significant staff reduction and office closing completed as part of the corporate-wide restructuring in the fourth quarter of 1998. Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998 Net operating revenues increased to $6.3 million for the nine-month period ended September 30, 1999, compared to $3 million for the same period in 1998. During the first nine months, Equitable Energy marketed 136 billion cubic feet (Bcf) of natural gas compared to 93 Bcf for the same period last year. The increased volume is a result of the addition of residential customer choice programs in Pennsylvania and Ohio (3 Bcf) and increased utility/marketing company volumes transported during the 1999 winter heating season (45 Bcf). Effective July 1, 1999, Equitable Energy gave its residential customers in the Pennsylvania choice program the option to transfer back to Equitable Gas Company at lower gas prices. All but approximately 3,100 have taken this option. The utility/marketing company business represents high volume, comparatively low margin transactions, which complement the higher margin, lower volume base commercial and residential sales. Many of these utility/marketing company contracts expired at the end of March 1999 and were not renewed. Total operating expenses for the nine-month period ended September 30, 1999, were 48% below those of the same period of 1998, again reflecting cost control, a significant staff reduction and office closing completed as part of the corporate-wide restructuring in the fourth quarter of 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LIQUIDITY AND CAPITAL RESOURCES Liquidity Cash required for operations is impacted primarily by the seasonal nature of Equitable Resources' natural gas distribution operations and the volatility of oil and gas commodity prices. Equitable Resources' primary source of commodity price exposure comes from the production and sale of natural gas. However, the Company does have crude oil and natural gas liquid production as well. The Company's overall objective in its hedging program is to protect earnings from undue exposure to the risk of falling commodity prices. Since it is primarily a natural gas company, this leads to different approaches to 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. Its preference is to use derivative instruments which 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. In addition to this current strategy, part of the Company's portfolio of natural gas hedges is a swap entered into in 1995 as part of a financing transaction. This swap, covering about 15% of natural gas production at a NYMEX price of $1.82/Mcf, expires near the end of the year 2000. Crude oil and natural gas liquids prices are currently at relatively high levels compared to historical averages. As a result, the Company has used swaps and other derivative instruments to lock in current prices for the majority of expected production of crude oil and of natural gas liquids for the remainder of 1999. Management is in the process of executing the same strategy for the year 2000. During the nine months ended September 30, 1999, cash provided by operating activities increased to $141.8 million, compared to $103.0 million from continuing operations for the first nine months of 1998. The $38.8 million increase is primarily a result of increased sales volumes in the Production and NORESCO segments and lower cash operating expenses throughout the Company. In addition, in 1999 the Utility segment has collected $15 million from its customers for gas costs deferred in prior periods. During the three months and nine months ended September 30, 1999, the Company repurchased 0.3 million and 2.6 million shares of common stock at average prices of $36.94 and $28.17, respectively, per share. Including shares repurchased in the fourth quarter of 1998, the Company has repurchased 4.2 million shares. In October 1999, the Company's Board of Directors increased from 5.6 million to 6.7 million the total shares authorized for repurchase.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) Liquidity (Continued) Equitable Resources' financial objectives require ongoing capital expenditures for growth projects in continuing operations of the Equitable Production segment, as well as replacements, improvements and additions to plant assets in the Equitable Utilities segment. Such capital expenditures during the first nine months of 1999 were approximately $72.3 million, including $33.7 million and $19.0 million for exploration and production projects in the Gulf of Mexico and Appalachian regions, respectively. A total of $119 million has been authorized for the 1999 capital expenditure program. The Company expects to continue to finance its 1999 capital expenditure program with cash generated from operations and with short-term loans. The energy infrastructure business of the Company's Noresco segment requires capital expenditures for capital projects accounted for as investments in nonconsolidated subsidiaries. Such projects used $21 million dollars in the nine months ended September 30, 1999. On June 1, 1999 the Company announced an agreement to purchase Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie) from USX-Marathon Group. Management anticipates the purchase will be completed during the fourth quarter 1999. The purchase of Carnegie will be funded by cash from operations or existing sources of short-term debt. The purchase will not have a material effect on the Company's financial position or results of operations. Capital Resources Equitable Resources has adequate borrowing capacity to meet its financing requirements. 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 4.68% during the first nine months of 1999. Equitable Resources maintains a revolving credit agreement with a group of banks providing $500 million of available credit. Adequate credit is expected to continue to be available in the future. In the fourth quarter of 1998, the Company completed the sale of its midstream operations for $338 million. Portions of the proceeds to the Company were used to retire a portion of the Company's outstanding long- and short-term debt and to fund the repurchase of common stock. In the quarter ended September 30, 1999 $75 million was used to retire additional long-term debt that matured on July 1, 1999. The Company has completed the evaluation of its Gulf region production operations, previously identified as a non-core business. Management is actively exploring alternatives to maximize the shareholder value from these operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CAPITAL RESOURCES AND LIQUIDITY (Continued) Year 2000 State of Readiness The Company initiated an enterprise-wide project in 1996 to address the Year 2000 issue. A management team was put in place to manage this project and a detailed project plan has been developed to address the three identified primary risk areas: process controls and facilities, business information systems applications and issues relative to third party product and service providers. This plan is continuously updated and reviewed regularly with senior management and the Board of Directors. The Company is on schedule to complete remediation and testing of all critical components as planned. To date, the Company has completed the inventory and assessment phases covering all process controls (embedded chips), facilities and systems applications. The remediation and testing of process controls, using both internal resources and contracted engineers, is well underway (99% complete) and on schedule. The testing and remediation of systems applications are on schedule with approximately 98% of the critical applications remediated and tested. Equitable anticipates that all critical systems will be Y2K compliant by December 15, 1999. Additionally, the Company has developed a formal communications process with external parties with whom it does business to determine the extent to which they have addressed their Year 2000 compliance. The Company will continue to evaluate responses as they are received. Actions to remediate potential problems (up to and including shifting business to Year 2000 compliant vendors from those with problems) will take place until the end of 1999. Costs The total cost to date of the Company's Year 2000 project is $3.5 million and the total cost estimate for the balance of the project is an additional $0.5 million. All of the costs have been or will be charged to operating expense except $0.6 million of systems upgrades, which have been capitalized and charged to expense over the estimated useful life of the associated hardware and software. Additional costs could be incurred if significant remediation activities are required with third party suppliers (see below). The estimated costs to convert remaining systems are not expected to be material to results of operations in any future period.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Year 2000 (Continued) Risks and Contingencies The Company continues to evaluate risks associated with the potential inability of outside parties to successfully complete their Year 2000 effort, and contingency plans are being developed and/or adapted as appropriate. While the Company believes it has taken the necessary steps to provide for the continued safe and reliable operation of its natural gas delivery system into the Year 2000, monitoring the progress of critical suppliers is an ongoing process. A worst-case scenario would involve the failure of one or more of the gas marketers or pipelines supplying the Company's distribution operations. If this occurs, the Company would either supply its customers from existing internal supply sources or attempt to purchase supply on the "spot" market, probably at somewhat higher prices. Unless supply shortfalls were of a long duration or occurred during a period of extreme weather conditions when spot supplies might not be as readily available, it would be unlikely that the distribution company would have to curtail deliveries to its customers. If it appears that this scenario is more than a remote possibility additional contingency plans will be put into place. INFORMATION REGARDING FORWARD LOOKING STATEMENTS Disclosures in this report may include forward-looking statements related to such matters as anticipated financial performance, business prospects, capital projects, new products and operational matters. The Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company business include, but are not limited to, the following: weather conditions, the pace of deregulation of retail natural gas and electricity markets, the timing and extent of changes in commodity prices for natural gas and crude oil, changes in interest rates, the timing and extent of the Company's success in acquiring natural gas and crude oil properties and in discovering, developing and producing reserves, the inability of the Company or others to remediate Year 2000 concerns in a timely fashion, delays in obtaining necessary governmental approvals, the impact of competitive factors on profit margins in various markets in which the Company competes and other factors detailed in the Company's filings with the Securities and Exchange Commission. Quantitative and Qualitative Disclosures About Market Risk There have not been any material changes regarding quantitative and qualitative disclosures about market risk from the information reported in the Company's 1998 Annual Report on Form 10-K.
PART II. OTHER INFORMATION Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Employment Agreement dated July 9, 1999 by and between Equitable Resources, Inc. and John C. Gongas, Jr. 10.2 Non-Competition Agreement dated July 9, 1999 by and between Equitable Resources, Inc. and John C. Gongas, Jr. 10.3 Release Agreement dated August 19, 1999 by and between Equitable Resources, Inc. and Richard D. Spencer. 10.4 Equitable Resources, Inc. Directors' Deferred Compensation Plan. (b) Reports on Form 8-K during the quarter ended September 30, 1999: None.
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 Senior Vice President and Chief Financial Officer Date: November 12, 1999
INDEX TO EXHIBITS Exhibit No. Document Description 10.1 Employment Agreement dated July 9, Filed Herewith 1999 by and between Equitable Resources, Inc. and John C. Gongas, Jr. 10.2 Non-Competition Agreement dated July 9, Filed Herewith 1999 by and between Equitable Resources, Inc. and John C. Gongas, Jr. 10.3 Release Agreement dated August 19, 1999 Filed Herewith by and between Equitable Resources, Inc. and Richard D. Spencer. 10.4 Equitable Resources, Inc. Directors' Deferred Filed Herewith Compensation Plan. 27 Financial Data Schedule for the Period Filed Herewith Ended September 30, 1999