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, 2001
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, 2001
----- ----------------
Common stock, no par value 63,955,291 shares
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited):
Statements of Consolidated Income for the Three and
Nine Months Ended September 30, 2001 and 2000 2
Statements of Condensed Consolidated Cash Flows
for the Three and Nine Months Ended September 30, 2001 and 2000 3
Condensed Consolidated Balance Sheets, September 30, 2001,
and December 31, 2000 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURE 28
INDEX TO EXHIBITS 29
1
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,
2001 2000 2001 2000
--------------------------- -------------------------
Operating revenues $ 243,768 $ 335,284 $ 1,440,469 $ 1,042,658
Cost of sales 131,073 213,889 1,013,477 617,968
----------- ----------- ----------- -----------
Net operating revenues 112,695 121,395 426,992 424,690
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Operation and maintenance 19,469 21,526 60,696 63,069
Production and exploration 7,675 11,214 26,899 34,485
Selling, general and administrative 25,554 24,996 85,817 80,339
Depreciation, depletion and amortization 18,100 21,033 52,637 77,752
----------- ----------- ----------- -----------
Total operating expenses 70,798 78,769 226,049 255,645
----------- ----------- ----------- -----------
Operating income 41,897 42,626 200,943 169,045
Other loss -- -- -- (6,951)
Equity in nonconsolidated investments:
Westport 5,465 4,568 19,932 4,568
Other 1,134 1,143 6,437 3,567
----------- ----------- ----------- -----------
6,599 5,711 26,369 8,135
EARNINGS BEFORE INTEREST & taxes (EBIT) 48,496 48,337 227,312 170,229
Interest charges 10,188 21,176 31,000 56,210
----------- ----------- ----------- -----------
Income before income taxes 38,308 27,161 196,312 114,019
Income taxes 13,508 8,020 68,809 39,550
----------- ----------- ----------- -----------
Net income $ 24,800 $ 19,141 $ 127,503 $ 74,469
=========== =========== =========== ===========
EARNINGS PER SHARE OF COMMON STOCK:
Basic:
Weighted average common shares outstanding 63,912 64,938 64,470 65,162
Net income $ 0.39 $ 0.29 $ 1.98 $ 1.14
=========== =========== =========== ===========
Diluted:
Weighted average common shares outstanding 65,562 66,300 66,233 66,322
Net income $ 0.38 $ 0.29 $ 1.93 $ 1.12
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
2
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
(THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- --------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 24,800 $ 19,141 $ 127,503 $ 74,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 1,098 860 11,328 6,397
Depreciation, depletion, and amortization 18,100 21,033 52,637 77,752
Recognition of deferred revenue (24,779) (3,559) (71,541) (9,872)
Deferred income taxes 6,353 2,986 24,646 3,102
Increase in undistributed earnings from
nonconsolidated investments (5,570) (5,761) (21,568) (8,301)
Changes in other assets and liabilities (33,092) (51,620) (7,344) (77,188)
--------- --------- --------- ---------
Net cash (used in) provided by operating activities (13,090) (16,920) 115,660 66,359
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (38,999) (34,087) (83,474) (78,732)
Acquisition of Statoil production assets -- (5,213) -- (677,235)
Proceeds from Gulf asset merger -- -- -- 158,214
Proceeds from sale of interest in producing property -- -- -- 148,526
Decrease (increase) in equity of unconsolidated entities 33 (276) (16) (127,187)
Proceeds from sale of contract receivables 15,611 5,065 46,898 5,065
Proceeds from sale of property 2,073 -- 6,598 498
--------- --------- --------- ---------
Net cash (used in) investing activities (21,282) (34,511) (29,994) (570,851)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term loans 47,295 (31,617) (58,515) 531,174
Repayments of long-term debt (151) -- (151) --
Dividends paid (10,221) (9,591) (30,178) (28,892)
Purchase of treasury stock (7,251) (3,883) (53,457) (21,697)
Proceeds from exercises under employee compensation
plans 1,461 2,029 4,813 10,995
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 31,133 (43,062) (137,488) 491,580
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,239) (94,493) (51,822) (12,912)
Cash and cash equivalents at beginning of period 3,440 99,612 52,023 18,031
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 201 $ 5,119 $ 201 $ 5,119
========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR:
Interest, net of amount capitalized $ 10,423 $ 26,697 $ 32,696 $ 65,905
========= ========= ========= =========
Income taxes paid, net of refund $ 616 $ 1,218 $ 10,896 $ 19,094
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
(THOUSANDS)
ASSETS SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 201 $ 52,023
Accounts receivable 154,191 300,399
Unbilled revenues 47,049 80,157
Inventory 106,557 85,246
Derivative commodity instruments, at fair value 189,849 31,220
Prepaid expenses and other 29,040 34,691
---------- ----------
Total current assets 526,887 583,736
---------- ----------
EQUITY IN NONCONSOLIDATED INVESTMENTS 252,235 230,651
PROPERTY, PLANT AND EQUIPMENT 2,291,698 2,226,421
Less accumulated depreciation and depletion 850,585 806,992
---------- ----------
Net property, plant and equipment 1,441,113 1,419,429
---------- ----------
OTHER ASSETS 172,347 191,098
---------- ----------
Total $2,392,582 $2,424,914
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
(THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 10,100 $ 10,100
Current portion of nonrecourse project financing 16,849 461
Short-term loans 243,752 302,267
Accounts payable 109,236 285,723
Prepaid gas forward sale 55,705 55,705
Derivative commodity instrument, at fair value 38,955 30,243
Other current liabilities 134,512 161,082
----------- -----------
Total current liabilities 609,109 845,581
----------- -----------
LONG-TERM DEBT:
Debentures and medium-term notes 271,250 271,250
Nonrecourse project financing -- 16,539
----------- -----------
Total long-term debt 271,250 287,789
DEFERRED AND OTHER CREDITS:
Deferred income taxes 336,287 247,833
Deferred investment tax credits 14,607 15,411
Prepaid gas forward sale 111,355 153,589
Deferred revenue 6,348 30,232
Other 80,181 25,784
----------- -----------
Total deferred and other credits 548,778 472,849
Preferred trust securities 125,000 125,000
CAPITALIZATION:
Common stockholders' equity
Common stock, no par value, authorized 160,000 shares; shares issued
September 30, 2001 and December 31, 2000, 74,504 280,927 281,100
Treasury stock, shares at cost September 30, 2001, 10,473;
December 31, 2000, 9,426 (197,129) (151,167)
Retained earnings 661,080 563,755
Accumulated other comprehensive income, net of taxes 93,567 7
----------- -----------
Total common stockholders' equity 838,445 693,695
----------- -----------
Total $ 2,392,582 $ 2,424,914
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
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, 2001 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2001.
The balance sheet at December 31, 2000 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, 2000 as well as the
"Information Regarding Forward Looking Statements" on page 26 of this
document.
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
for a total of $677 million. 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 was 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, 2000.
Adjustments have been made for DD&A and certain other adjustments
together with related income tax effects.
Nine Months Ended
September 30, 2000
------------------------
(Thousands, except per
share amounts)
Revenue $ 1,078,938
=============
Net income $ 76,139
=============
Earnings per share:
Basic $ 1.17
=============
Diluted $ 1.15
=============
This information is not necessarily indicative of the results the Company would
have obtained had these events actually occurred on January 1, 2000, or of the
Company's actual or future results of operations of the combined companies.
6
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
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 Company's state-regulated local
distribution operations, natural gas transportation, storage and
marketing activities involving the Company's federally-regulated
interstate natural gas pipelines, and supply and transportation
services for the natural gas and electricity markets. The Equitable
Production segment's activities are comprised of the development,
production, gathering and sale of natural gas. The NORESCO segment's
activities are comprised of distributed on-site generation, combined
heat and power, and central boiler/chiller plant development, design,
construction, ownership and operation; performance contracting; and
energy efficiency programs.
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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------------------------- -----------------------------
(THOUSANDS)
REVENUES FROM EXTERNAL CUSTOMERS:
Equitable Utilities $ 137,055 $ 233,341 $ 1,105,590 $ 730,141
Equitable Production 66,401 67,534 224,792 211,432
NORESCO 40,312 34,409 110,087 101,085
----------- ----------- ----------- -----------
Total $ 243,768 $ 335,284 $ 1,440,469 $ 1,042,658
=========== =========== =========== ===========
INTERSEGMENT REVENUES:
Equitable Utilities $ 23,989 $ 42,992 $ 115,523 $ 110,158
Equitable Production 1,922 8,364 9,574 4,928
----------- ----------- ----------- -----------
Total $ 25,911 $ 51,356 $ 125,097 $ 115,086
=========== =========== =========== ===========
SEGMENT EARNINGS BEFORE INTEREST AND TAXES:
Equitable Utilities $ 1,991 $ 1,921 $ 56,959 $ 58,735
Equitable Production 40,034 39,985 143,957 103,553
NORESCO 1,474 5,341 8,929 9,662
----------- ----------- ----------- -----------
Total operating segments $ 43,499 $ 47,247 $ 209,845 $ 171,950
=========== =========== =========== ===========
RECONCILING ITEMS:
Equity earnings in Westport $ 5,465 $ 4,568 $ 19,932 $ 4,568
Headquarters operating expenses (468) (3,478) (2,465) (6,289)
Interest expense (10,188) (21,176) (31,000) (56,210)
Income tax expenses (13,508) (8,020) (68,809) (39,550)
----------- ----------- ----------- -----------
Net income $ 24,800 $ 19,141 $ 127,503 $ 74,469
=========== =========== =========== ===========
7
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
C. Segment Disclosure (Continued)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------------------------
(THOUSANDS)
SEGMENT ASSETS:
Equitable Utilities $ 892,236 $1,115,960
Equitable Production 1,037,267 975,523
NORESCO 172,911 143,030
---------- ----------
Total operating segments 2,102,414 2,234,513
Headquarters assets, including cash and short-term
investments and net intercompany accounts receivable 290,168 190,401
---------- ----------
Total $2,392,582 $2,424,914
========== ==========
D. Accounting for Derivative Commodity Instruments
Accounting Policy for Derivative Instruments - Effective January 1,
2001, the Company adopted the Financial Accounting Standards Board's
(FASB) Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) as
amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133"
and by SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of Statement 133." SFAS 133,
as amended, establishes accounting and reporting standards for
derivative instruments and for hedging activities. This statement
requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure the effectiveness of the
hedges, or the degree that the gain/(loss) for the hedging instrument
offsets the loss/(gain) on the hedged item, at fair value each
reporting period. The intended use of the derivatives and their
designation as either a fair value hedge or a cash flow hedge will
determine when the gains or losses on the derivatives are to be
reported in earnings and when they are to be reported as a component of
other comprehensive income, until the hedged item is recognized in
earnings. The ineffective portion of the derivative's change in fair
value is required to be recognized in earnings immediately. The time
value of options, which is excluded from the assessment of hedge
effectiveness, and the amount of the hedges' ineffectiveness, increased
earnings by $0.3 million and is included in Operating Revenue in the
Statement of Consolidated Income.
Cash Flow Hedges - The derivative financial instruments that comprise
the amount recorded in other comprehensive income have been designated
and qualify as cash flow hedges. These instruments hedge the Company's
exposure to variability in expected future cash flows and relate
primarily to the Company's use of derivative financial instruments to
manage a portion of the market risk associated with the fluctuations in
the price of natural gas, oil and propane. The Company's derivative
financial instruments accounted for as cash flow hedges were recorded
as a $144.6 million asset and a $0.5 million liability at September 30,
2001, and are reflected on the Consolidated Balance Sheet as a
component of Derivative Commodity Instruments at fair value. The
difference between these derivatives and the amounts reported on the
Consolidated Balance Sheet represent the Company's derivative contracts
held for trading purposes.
8
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
D. Accounting for Derivative Commodity Instruments (Continued)
At September 30, 2001, the Company expects to recognize $36.2 million
of net gains on derivative instruments currently reflected in
Accumulated Other Comprehensive Income as earnings during the next
twelve months due to physical settlements.
The Company has derivatives with maturities that extend through
December 2008.
E. Accumulated Other Comprehensive Income - The components of Accumulated
Other Comprehensive Income are as follows shown net of tax (in
thousands):
Accumulated other comprehensive income, January 1, 2001 $ 7
Cumulative effect of SFAS 133 adoption (37,023)
Net change of current period hedging transactions 130,583
---------
Accumulated other comprehensive income, September 30, 2001 $ 93,567
=========
F. In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," that replaces in its entirety, FASB Statement No. 125.
Although Statement 140 has changed many of the rules regarding
securitizations, it continues to require an entity to recognize the
financial and servicing assets it controls and the liabilities it has
incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement.
As required, the Company began applying the new rules prospectively to
transactions beginning in the second quarter 2001. Based on the
Company's current circumstances, the application of this new statement
does not have a material impact on the financial statements and
footnote disclosures.
G. In July 2001, the FASB issued Statement No. 141, "Business
Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets," both of which are effective for fiscal year 2002. Statement
No. 141 eliminates the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001 and further
clarifies the criteria to recognize intangible assets separately from
goodwill. Under Statement No. 142, goodwill and indefinite intangible
assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The Company has recorded goodwill of $58.4 million at September 30,
2001. Application of the nonamortization provisions of Statement No.
142 is expected to result in an increase in net income of approximately
$3.7 million ($0.06 per share) per year. During 2002, the Company will
perform the first of the required impairment tests of goodwill and,
therefore, has not yet determined the effect these tests will have on
the earnings and financial position of the Company.
H. In August 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations," which will be effective for fiscal year
2003. This Statement requires asset retirement obligations to be
measured at fair value and to be recognized at the time the obligation
is incurred. During 2002, management will assess the impact, if any, of
this pronouncement on the earnings and financial position of the
Company.
I. In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which will be effective
for fiscal year 2002. Statement 144 provides a single accounting model
for long-lived assets to be disposed of and significantly changes the
criteria that would have to be met to classify an asset as
held-for-sale. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on the
earnings and financial position of the Company.
J. Reclassification - Certain previously reported amounts have been
reclassified to conform with the 2001 presentation.
K. Stock Split - On April 19, 2001, the Board of Directors of Equitable
Resources declared a two for one stock split payable on June 11, 2001
to shareholders of record on May 11, 2001. Earnings per share of common
stock and weighted average common shares outstanding have been adjusted
for the two for one stock split.
9
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,
2001 was $24.8 million or $0.38 per diluted share as compared to the $0.29 per
share earnings on net income of $19.1 million reported for the same period a
year ago. Excluding earnings from Westport Resources, Equitable reported total
earnings per diluted share of $0.32 on net income of $21.2 million.
The higher net income for the 2001 quarter was primarily attributed to
higher average sales prices realized on produced volumes coupled with a
reduction in interest expense. In addition, the Company continued to buy back
common stock, which reduced outstanding shares and increased earnings per share
for both the current quarter and nine-month periods.
10
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
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.
During the 2001 third quarter, the Company made significant progress
toward a performance-based rates framework. Equitable Gas Company received
Pennsylvania Public Utility Commission (PUC) approval on a performance-based
initiative for managing pipeline transportation costs. This is the first step in
an ongoing effort to work with the PUC to allow the Company the potential to
improve returns in exchange for accepting more risk and responsibility to reduce
costs and enhance service.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ----------- --------- ----------
OPERATIONAL DATA
Capital expenditures (thousands) $ 9,265 $ 7,468 $ 26,002 $ 18,923
Operating expenses/net revenues (%) 94.39% 94.44% 65.79% 64.30%
FINANCIAL RESULTS (Thousands)
Utility revenues $ 40,495 $ 39,062 $ 318,423 $ 228,929
Marketing revenues 120,549 237,271 902,690 611,370
---------- ---------- ---------- ----------
Total operating revenues 161,044 276,333 1,221,113 840,299
Purchased natural gas costs 125,541 241,762 1,054,610 675,773
---------- ---------- ---------- ----------
Net operating revenues 35,503 34,571 166,503 164,526
Operating and maintenance expense (O&M) 13,133 14,837 42,780 44,547
Selling, general and administrative expense (SG&A) 13,205 10,990 46,900 39,038
Depreciation, depletion and amortization 7,174 6,823 19,864 22,206
---------- ---------- ---------- ----------
Total expenses 33,512 32,650 109,544 105,791
---------- ---------- ---------- ----------
EBIT $ 1,991 $ 1,921 $ 56,959 $ 58,735
========== ========== ========== ==========
11
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, 2001
VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
Equitable Utilities achieved EBIT for the September 2001 quarter of
$2.0 million, a slight increase from the $1.9 million reported for the same
period last year. In September 2001, Equitable Utilities' Pipeline Operations
recorded $1.7 million in charges for process improvements related to compressor
automation and a lease buyout. The compressor automation effort is expected to
result in ongoing savings of about $0.7 million per year.
Net revenues for the three months ended September 30, 2001 were $35.5
million compared to $34.6 million for the same quarter in 2000. This improvement
in net operating revenues resulted in part from increased storage related
services over the prior year quarter. Revenues from industrial volumes were down
from the same quarter last year primarily due to the economic decline of the
domestic steel industry. Because large industrial customer margins are
relatively low, the impact on the quarter's results was immaterial.
Total expenses for the September 2001 quarter were $33.5 million
compared to $32.7 million reported during the same period last year. After
adjusting for the previously described charges associated with the compressor
station automation and lease buyout, total expenses at Utilities were down $0.9
million primarily as a result of process improvements within the distribution
operations.
NINE MONTHS ENDED SEPTEMBER 30, 2001
VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
Overall, Equitable Utilities had EBIT for the nine months ended
September 30, 2001 of $57.0 million compared to $58.7 million for the same
period in 2000. The segment's results for the 2001 period included the second
quarter charge of $4.3 million related to the pipeline operations workforce
reduction and the previously described third quarter 2001 charges associated
with the compressor station automation and lease buyout of $1.7 million.
Excluding these items, Equitable Utilities EBIT increased $4.3 million, or 7%,
from the same period a year ago.
Equitable Utilities net revenues for the nine months ended September
30, 2001 were $166.5 million compared to $164.5 million for the 2000 period. The
increase is related to higher distribution net operating revenues, primarily in
the first quarter due mainly to colder weather.
12
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE UTILITIES (CONTINUED)
DISTRIBUTION OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------- --------- --------- ---------
OPERATIONAL DATA
Degree days (30-year average = Qtr - 120, YTD - 3,848) 135 163 3,457 3,276
O & M and SG&A (excluding other taxes)/Customer $ 54.98 $ 59.25 $ 202.17 $ 200.82
Volumes (MMcf)
Residential 1,804 1,963 17,997 17,377
Commercial and industrial 3,385 5,045 17,991 22,663
-------- -------- -------- --------
Total gas sales and transportation 5,189 7,008 35,988 40,040
======== ======== ======== ========
FINANCIAL RESULTS (Thousands)
Net operating revenues $ 19,395 $ 19,080 $112,121 $107,149
Operating costs 15,834 17,039 57,323 57,429
Depreciation and amortization 4,980 4,415 13,569 13,283
-------- -------- -------- --------
(Loss) earnings before interest and taxes $ (1,419) $ (2,374) $ 41,229 $ 36,437
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2001
VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
Net operating revenues for the September 2001 quarter increased
slightly to $19.4 million compared to $19.1 million for 2000 period. This
increase is primarily due to increased margins from commercial customer sales.
Total operating expenses for September 2001 quarter totaled $20.8
million compared to $21.5 million for the same period in 2000. The decrease in
operating expenses of $0.7 million is primarily attributable to process
improvements within this segment.
NINE MONTHS ENDED SEPTEMBER 30, 2001
VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
Net operating revenues for the nine months ended September 30, 2001
increased 5% to $112.1 million compared to $107.1 million for the same period in
2000, which is attributed to the colder weather experienced in the 2001 first
quarter.
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-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE UTILITIES (CONTINUED)
Weather in the distribution service territory for the nine months ended
September 30, 2001 was 10% warmer than the 30-year average, but 6% colder than
last year, primarily associated with colder weather in the first quarter 2001 as
previously mentioned. Industrial volumes decreased in the current year as a
result of the economic decline in the domestic steel industry. This volume
decline did not proportionately decrease net operating revenues because of the
relatively low margins generated from industrial customer volumes.
Total operating expenses for the nine months ended September 30, 2001
were essentially flat at $70.9 million compared to $70.7 million for the same
period in 2000. The savings resulting from the process improvement initiatives
discussed above were offset by an additional $2.2 million in the provision for
doubtful accounts.
PIPELINE OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------- ------- ------- --------
OPERATIONAL DATA
Transportation throughput (MMbtu) 16,319 18,459 53,095 57,538
FINANCIAL RESULTS (THOUSANDS)
Net operating revenues $13,623 $13,284 $44,726 $46,342
Operating costs 8,351 7,014 26,579 20,774
Depreciation and amortization 2,089 2,360 6,042 8,779
------- ------- ------- -------
EBIT $ 3,183 $ 3,910 $12,105 $16,789
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2001
VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
Net operating revenues for the three months ended September 30, 2001
were $13.6 million compared to $13.3 million for the same period in 2000. Third
quarter 2000 net operating revenues included $0.5 million for the recovery of
stranded costs in rates. Excluding the impact of this rate settlement, net
operating revenues for the current period increased $0.8 million compared to the
same period a year ago. This increase in net operating revenues was primarily
due to increased storage related services over the prior year quarter.
Transportation throughput decreased 2.1 MMbtu over the prior year
quarter from 18.5 MMbtu to 16.3 MMbtu. This decrease is attributable to the
decreased volumes of gas transported to commercial and industrial customers.
Because the margins from this service are generally derived from fixed monthly
fees, the impact on net operating revenues from the reduced volumes to these
customers is minimal.
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-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE UTILITIES (CONTINUED)
Total operating expenses were $10.4 million for the 2001 quarter
compared to $9.4 million for the 2000 quarter. Third quarter 2000 operating
expenses included $0.4 million of amortization expense related to the recovery
of stranded costs in rates. Excluding the impact of this stranded cost recovery,
third quarter 2001 operating expenses reflect an increase of $1.4 million from
the same period a year ago. The increase in operating expenses is attributable
to the previously described $1.7 million charge for process improvements related
to compressor automation and a lease buyout.
NINE MONTHS ENDED SEPTEMBER 30, 2001
VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
Net operating revenues for the nine months ended September 30, 2001,
were $44.7 million compared to $46.3 million for the same period in 2000. Net
operating revenues for 2000 included $3.7 million for the recovery of stranded
costs in rates. Excluding the impact of this rate settlement, net operating
revenues for the current period increased $2.1 million compared to the same
period a year ago. This increase is primarily attributable to increased
storage related services coupled with slightly higher natural gas delivery
margins.
Transportation throughput decreased 4.4 MMbtu over the prior nine month
period from 57.5 MMbtu to 53.1 MMbtu. This decrease is a result of the decline
in gas volumes transported to commercial and industrial customers. Because the
margins from this service are generally derived from fixed monthly fees, the
impact on net operating revenues from these reduced volumes is minimal.
Total operating expenses were $32.6 million for the nine months ended
September 30, 2001 compared to $29.6 million for the same period in 2000, an
increase of $3.0 million. Excluding the $4.3 million charge for the workforce
reductions in the 2001 second quarter and the $1.7 million charge for the
compressor automation and lease buy out in this current quarter, total 2001
operating costs were $26.6 million. Excluding $2.6 million of amortization
expense related to the recovery of stranded costs in rates in 2000, operating
expenses were $27.0 million in the same period last year. Total normalized
expenses have decreased in the current year as a result of savings realized from
process improvement initiatives.
EQUITABLE MARKETING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ---------- ---------- ----------
OPERATIONAL DATA
Marketed gas sales (MMbtu) 39,645 54,831 170,052 170,208
Net operating revenues/MMbtu $ 0.0627 $ 0.0403 $ 0.0568 $ 0.0652
FINANCIAL RESULTS (Thousands)
Net operating revenues $ 2,485 $ 2,207 $ 9,656 $ 11,103
Operating costs 2,154 1,774 5,778 5,450
Depreciation and amortization 104 48 253 144
-------- -------- -------- --------
EBIT $ 227 $ 385 $ 3,625 $ 5,509
======== ======== ======== ========
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OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE UTILITIES (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2001
VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
The increase in net operating revenues of $0.3 million over the 2000
quarter is primarily attributable to increased marketing fees and a
concentration on higher unit margin/lower volume business.
Marketed gas sales decreased 28% over the prior year quarter from
54.8 MMbtu to 39.6 MMbtu. This decline is in line with the Company's strategic
decision to reduce its trading activities. These volumes generate very low
margins and, as a result, are not a significant component of the net operating
revenues of this segment.
Total operating expenses for the current quarter of $2.3 million
increased from the 2000 quarter by $0.5 million primarily due to the increased
development costs in the segment's retail marketing activities.
NINE MONTHS ENDED SEPTEMBER 30, 2001
VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
Net operating revenues for the nine months ended September 30, 2001
decreased $1.5 million from the same period last year. This decrease is
attributable to the $2.6 million loss in the 2001 first quarter on transactions
marked to market that were previously treated as hedges. The first quarter loss
has been partially offset by increased marketing fee revenue. Excluding the
marked to market loss, unit margins increased slightly due to the segment's
continued concentration on higher unit margin/lower volume business.
Total operating expenses for the nine months ended September 30, 2001
of $6.0 million increased from the same period in 2000 by $0.4 million primarily
due to the increased development costs in the segment's retail marketing
activities.
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-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE PRODUCTION
Production operations comprise the production, gathering,
transportation and sale of natural gas. In April 2000, the Company merged its
Equitable Production - Gulf business with Westport Oil and Gas Company to form
Westport Resources Corporation (Westport). The operations of Equitable
Production - Gulf through the date of the merger are presented separately after
the operations of Equitable Production (Appalachian).
EQUITABLE PRODUCTION (APPALACHIAN)
In February 2000, Equitable Production acquired the Appalachian
production assets of Statoil for $630 million plus working capital adjustments
for a total of $677 million. Statoil's operations consisted of approximately 1.2
trillion cubic feet of proven natural gas reserves and 6,500 natural gas wells
in West Virginia, Kentucky, Virginia, Pennsylvania and Ohio.
In June and December 2000, Equitable sold approximately 200 Bcfe of
reserves to a partnership and a trust for proceeds of $378 million and an
interest in the partnership and the trust. Also during 2000, the Company entered
into two natural gas advance sales contracts for 48.7 Bcf of reserves for
proceeds of $208.8 million. The Company is required to sell and deliver certain
quantities of natural gas during the term of the contracts. As such, these
contracts were recorded as prepaid gas forward sales and are being recognized in
income as deliveries occur.
The net result of the acquisition and subsequent monetizations on 2001
production and service volumes are as follows: net equity sales of natural gas
and equivalents decreased 23.1 Bcfe, due to the monetization in subsequent
months of wells produced by the Company in 2000; monetized sales increased 8.5
Bcfe, due to current year sales under the two natural gas advance sales
contracts completed in 2000; and operated and gathered volumes increased 1.3
Bcfe and 8.6 Bcfe, respectively, as the Statoil properties were operated for 90
days in the first quarter 2001 compared to 45 days in the same period of 2000.
In November 1995, the Company sold an interest in certain Appalachian
gas properties (ABP), the production from which qualifies for non-conventional
fuels tax credit, which is recorded as deferred revenue. The Company retained an
interest in the properties that increases substantially based on the attainment
of a performance target. The increase was originally anticipated to occur
sometime during 2003. However, the Company now believes that the performance
criteria will be met late in 2001 or early in 2002. The Company is in the
process of evaluating the alternatives created by the accelerated achievement of
the performance targets. After the targets are achieved, the Company will no
longer include the ABP volumes as monetized sales but instead as equity sales.
As a result, monetized volumes sold will decrease by approximately 8.9 Bcf while
equity production will increase by only 6.1 Bcf unless the Company buys those
remaining residual partnership interests. The Company will also begin receiving
a greater percentage of the non-conventional fuels tax credit based on its
increased ownership for tax purposes.
In line with management's strategic objectives to focus on core
activities, a purchase and sale agreement has been negotiated for the sale of
the Company's oil-dominated fields. The sale is likely to occur by the end of
2001.
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-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE PRODUCTION (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ----------- ---------- ---------
OPERATIONAL DATA (excluding Gulf Operations)
Production:
Net equity sales, natural gas and equivalents (MMcfe) 9,459 16,943 28,052 51,191
Average (well-head) sales price ($/Mcfe) $ 3.28 $ 3.14 $ 3.98 $ 2.93
Monetized sales (MMcfe) 5,676 2,821 17,056 8,520
Average (well-head) sales price ($/Mcfe) $ 3.55 $ 2.26 $ 3.98 $ 1.94
Company usage, line loss (MMcfe) 1,854 1,509 4,336 4,854
Lease operating expense (LOE) excluding severance tax
($/Mcfe) $ 0.29 $ 0.33 $ 0.33 $ 0.32
Severance tax ($/Mcfe) $ 0.13 $ 0.18 $ 0.18 $ 0.14
Depletion ($/Mcfe) $ 0.38 $ 0.48 $ 0.38 $ 0.49
PRODUCTION SERVICES:
Gathered volumes (MMcfe) 26,906 26,427 79,326 70,763
Average gathering fee ($/Mcfe) $ 0.56 $ 0.53 $ 0.58 $ 0.58
Gathering and compression expense ($/Mcfe) $ 0.24 $ 0.25 $ 0.23 $ 0.26
Gathering and compression depreciation ($/Mcfe) $ 0.10 $ 0.10 $ 0.10 $ 0.10
Total operated volumes (MMcfe) 23,576 24,499 69,105 67,792
Volumes handled (MMcfe) 30,955 29,042 89,978 78,599
Selling, general and administrative ($/Mcfe handled) $ 0.16 $ 0.19 $ 0.20 $ 0.21
Capital expenditures (excludes Statoil Acquisition) (thousands) $ 29,571 $ 23,767 $ 56,831 $ 46,902
FINANCIAL RESULTS (THOUSANDS)
Revenue from Production $ 51,117 $ 59,525 $ 179,639 $ 166,479
Services:
Revenue from gathering fees 15,032 13,986 45,844 41,164
Other revenues 2,174 2,387 8,883 8,717
--------- --------- --------- ---------
Total revenues 68,323 75,898 234,366 216,360
Gathering and compression expenses 6,336 6,685 17,916 18,505
Lease operating expense 4,993 7,019 16,227 20,879
Severance tax 2,154 3,738 9,042 8,952
Depreciation, depletion and amortization 9,387 13,084 28,254 44,585
Selling, general and administrative 5,006 5,126 18,000 16,684
Exploration, including dry hole expense 528 261 1,630 2,677
--------- --------- --------- ---------
Total operating expenses 28,404 35,913 91,069 112,282
Equity earnings from nonconsolidated investments 115 -- 660 --
Other income/(expense) -- -- -- (6,951)
--------- --------- --------- ---------
EBIT from operations $ 40,034 $ 39,985 $ 143,957 $ 97,127
========= ========= ========= =========
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OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE PRODUCTION (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2001
VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
Equitable Production (Appalachian) EBIT was $40.0 million for both the
three months ended September 30, 2001 and September 30, 2000. The segment's
current quarter results were favorably affected by a higher sales price realized
on produced natural gas. The favorable sales price, combined with continuing
improvements in operating efficiency, were offset by a decline in production
primarily as a result of the aforementioned December asset sale.
During the current quarter, the Company's average equity well-head
sales price realized on produced volumes was $3.28 per thousand cubic feet
equivalent (Mcfe), compared to $3.14 per Mcfe in the third quarter of 2000. The
$7.6 million decrease in revenue is due to the decline in production, primarily
a result of the December asset sale described above, offset by an increase in
commodity prices.
Operating expenses for the September 2001 quarter were $28.4 million
compared to $35.9 million for the 2000 quarter. The $7.5 million, or 21%,
decline is primarily a result of lower depletion expense and severance tax
expense, due to the sale of natural gas reserves, coupled with operating
improvements at the Kentucky West pipeline unit and overall continuing
improvements in operating efficiency.
The December 2000 asset sales (3.9 Bcfe) resulted in a decrease of
$11.4 million in production revenues, $0.9 million in LOE expenses and $3.4
million in depletion expense in the third quarter of 2001. Gathering and
compression expenses were unaffected by the monetization, as the monetized
volumes are still gathered and compressed by the Company.
NINE MONTHS ENDED SEPTEMBER 30, 2001
VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
Equitable Production (Appalachian) EBIT for the nine months ended
September 30, 2001, was $144.0 million compared to $97.1 million for the nine
months ended September 30, 2000. The segment's nine months results were
favorably affected by higher market prices for natural gas, higher gathering and
service volumes resulting primarily from the Statoil acquisition and continuing
improvements in operating efficiency.
During the nine months ended September 30, 2001, the Company's average
equity well-head sales price realized on produced volumes rose to $3.98 per
Mcfe, compared to $2.93 per Mcfe in the same period in 2000. The $56.7 million
increase in revenue due to commodity prices is partially offset by increases in
price related expenses of $2.5 million for severance taxes and $1.4 million for
an additional provision for uncollectible accounts recorded in the 2001 second
quarter.
Operating expenses for the period ended September 30, 2001 totaled
$91.1 million compared to $112.3 million for the prior year period. Operating
expenses declined despite inflationary pressures on the price of services
throughout the industry resulting from strong commodity prices. Operating
improvements in the Kentucky West pipeline unit and lower depletion expense were
partially offset by increased operating costs from the Statoil acquisition
coupled with the aforementioned second quarter provision for uncollectible
accounts.
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-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
EQUITABLE PRODUCTION (Continued)
As described above, a number of significant transactions during 2000
subsequently impacted the volumes realized in natural gas sales, gathering fees,
other revenues and various operating expenses in 2001 compared to 2000.
Increased production volumes due to a full year ownership of the Statoil assets
(4.3 Bcfe) is offset by the June and December 2000 asset sales (17 Bcfe). In
addition, wells shut in or damaged during the fourth quarter 2000 work stoppage
produced 0.6 Bcfe less in 2001 than for the comparable period in 2000. The
maintenance and repair of these facilities was completed during March and
production volumes returned to pre-work stoppage levels by April 1, 2001. The
net reduction from sale of assets resulted in a decrease of $37.1 million in
production revenues, $4.0 million in LOE expenses, $10.3 million in depletion
expense and $2.0 million in severance tax expense in 2001.
Gathering fee revenues increased $4.7 million, of which $2.6 million is
attributed to Statoil volumes and $2.1 million relates to increased gathering
rates for certain monetized volumes. Total gathering and compression expenses
declined slightly despite the $1.3 million increase in expenses due to the
additional 45 days ownership of Statoil properties in 2001 and were unaffected
by the monetizations, as the monetized volumes are still gathered and compressed
by the Company.
PRODUCTION - GULF OPERATIONS
As described above, the Equitable Production - Gulf operations were
merged into Westport effective April 1, 2000. The following includes results
prior to the merger.
THREE MONTHS ENDED MARCH 31,
2000
----------------------------
OPERATIONAL DATA
Production:
Net sales, natural gas and equivalents (Mmcfe) 6,087
Average sales price ($/Mcfe) $ 2.77
LOE ($/Mcfe) $ 0.24
SG&A ($/Mcfe) $ 0.27
Depletion ($/Mcfe) $ 1.11
Capital expenditures (Thousands) $ 9,034
FINANCIAL RESULTS (Thousands)
Revenue from Production $16,885
Other revenues 70
-------
Total revenues 16,955
Gathering and compression expense 17
Lease operating expense 1,454
Depreciation, depletion and amortization 6,891
Selling, general and administrative expense 1,643
Exploration and dry hole expense 524
-------
Total operating expenses $10,529
-------
EBIT $ 6,426
=======
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-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
NORESCO
NORESCO provides energy and energy related products and services that
are designed to reduce its customers' operating costs and to improve their
productivity. The segment's activities are comprised of distributed on-site
generation, combined heat and power and central boiler/chiller plant
development, design, construction, ownership and operation; performance
contracting; and energy efficiency programs. NORESCO's customers include
governmental, military, institutional, commercial and industrial end-users.
NORESCO's energy infrastructure group develops, constructs and operates
facilities in the U.S. and operates private power plants in selected
international countries.
NORESCO provides a range of integrated energy management services
within its projects, including: project development, design and engineering
analysis; permitting; construction; equipment procurement; project management;
project financing; project ownership; equipment operation and maintenance; and
energy savings metering, monitoring and verification.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------------------ ----------------------
OPERATIONAL DATA (Thousands)
Revenue backlog, end of period $142,383 $ 84,614 $142,383 $ 84,614
Construction completed $ 26,529 $ 26,949 $ 68,738 $ 63,586
Capital expenditures $ 2,676 $ 105 $ 3,006 $ 1,487
Gross profit margin 22.0% 31.2% 23.7% 26.6%
SG&A as a % of revenue 17.2% 15.0% 16.9% 16.7%
Project Development expenses as a % of
revenue 1.4% 2.4% 2.3% 3.7%
FINANCIAL RESULTS (Thousands)
Energy service contract revenue $ 40,312 $ 34,409 $110,087 $101,085
Energy service contract cost 31,444 23,683 83,965 74,236
-------- -------- -------- --------
Gross profit margin 8,868 10,726 26,122 26,849
Selling, general and administrative expenses 6,941 5,158 18,632 16,851
Amortization of goodwill 937 961 2,854 2,939
Depreciation and depletion 535 409 1,485 964
-------- -------- -------- --------
Total expenses 8,413 6,528 22,971 20,754
Equity earnings of nonconsolidated
investments 1,019 1,143 5,778 3,567
-------- -------- -------- --------
EBIT $ 1,474 $ 5,341 $ 8,929 $ 9,662
======== ======== ======== ========
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OF OPERATIONS (CONTINUED)
-------------------------
NORESCO (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2001
VS. THREE MONTHS ENDED SEPTEMBER 30, 2000
The NORESCO segment's EBIT was $1.5 million compared to $5.3 million
for the same period last year, a decrease of $3.8 million. The decrease in EBIT
is partially attributable to higher expenses in the 2001 quarter and higher
gross margins realized in the third quarter 2000. The higher 2000 gross margins
of approximately $2.0 million were due to the timing of margin recognition
resulting from the completion of a few energy service projects during the
quarter.
Total revenue increased by 17% to $40.3 million compared to $34.4
million in 2000, due to an increase in construction activity. Revenue backlog in
the current year increased to a record $142.4 million from $84.6 million at
September 30, 2000, an increase of $57.8 million attributed to the segment's
current focus on larger projects.
Total expenses for third quarter 2001 were $8.4 million compared to
$6.5 million in the third quarter 2000. After adjusting for an additional $1.4
million charge for office consolidation and $0.4 million for additional
provisions for doubtful accounts for a particular customer in the current
quarter, expenses increased $0.1 million over the same period last year. Annual
ongoing savings from the office consolidation are expected to be $0.8 million.
NINE MONTHS ENDED SEPTEMBER 30, 2001
VS. NINE MONTHS ENDED SEPTEMBER 30, 2000
NORESCO's EBIT was $8.9 million compared to $9.7 million in the same
period last year. The decrease is primarily attributable to the aforementioned
office consolidation charge and additional provision for doubtful accounts as
well as a reduction in gross margins that were partially offset by an increase
in equity in earnings.
NORESCO's gross margin in the first nine months of 2001 was $26.1
million compared to $26.8 million during the first nine months of 2000. Gross
margin as a percentage of revenue was 23.7% in the nine months of 2001 compared
to 26.6% during the same period in 2000. Total revenue increased 9% to $110.1
million compared to $101.1 million in 2000, which is due to additional
construction activity resulting from NORESCO's backlog increase.
Total expenses for nine months of 2001 were $23.0 million compared to
$20.8 million in the same period of 2000. Total expenses in 2000 included $1.0
million in costs to discontinue developing international energy infrastructure
projects while total expenses in 2001 include the $2.8 million office
consolidation and provision for doubtful accounts. Excluding the impact of these
costs in the respective years, total expenses increased $0.4 million primarily
due to an increase in depreciation expense.
Equity earnings of nonconsolidated investments for the nine months
ended September 30, 2001 was $5.8 million, a $2.2 million increase from the 2000
nine month period of $3.6 million. These investments represent the Company's
equity ownership in various independent power plant projects. The increase is
attributed to higher earnings from several international projects.
22
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OF OPERATIONS (CONTINUED)
-------------------------
EQUITY IN NONCONSOLIDATED INVESTMENTS
In March 2000, the Company announced the combination of its Production
- - Gulf assets with Westport Oil and Gas Company, a private oil and gas
exploration company based in Denver. The transaction was completed on April 10,
2000. The Company received $50 million in cash and approximately 49% interest in
the combined company, Westport. Equitable currently owns 13.9 million shares in
the Company.
On August 21, 2001, Westport Resources completed a merger with Belco
Oil & Gas. Equitable continues to own 13.9 million shares, which represent
approximately 27% of Westport's total shares outstanding at September 30, 2001
compared to its 36% ownership interest prior to the merger. The fair market
value of Equitable's investment in Westport was $205 million as of September 30,
2001 on a pre-tax basis.
The Production segment maintains two 1% equity ownership interests in a
partnership and trust, respectively. The partnership and the trust hold natural
gas producing properties which qualify for non-conventional fuels tax credit.
The NORESCO segment has equity ownership interests in independent power
plant (IPP) projects located domestically and in selected international
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 range from 5 to 30 years. These projects generally are
financed on a project basis with non-recourse financings established at the
foreign subsidiary level.
During the 2001 second quarter, a domestic energy infrastructure
project, included within Equity in Nonconsolidated Investments, experienced a
performance default on a creditor's agreement. The creditors have agreed to
temporarily delay enforcement of their remedies to provide an opportunity for
resolution of the default. The Company fully reserved for this project during
the second quarter. NORESCO has a preliminary agreement with the customer
and principal creditors, including the noteholder, to sell the project assets
and settle all outstanding debts. The noteholder will fully discharge the debt
upon the closing of this transaction which is currently scheduled to occur in
the fourth quarter 2001.
NORESCO indirectly owns a 50% interest in a Panamanian thermal electric
generation project. The project had previously agreed to retrofit the plant to
conform with applicable environmental noise standards by a target date of August
31, 2001. Unforeseen events have continued to extend the final completion date
of the required retrofits. The project has obtained an extension from the
creditor sponsor until February 28, 2002. The Company is in the process of
obtaining an extension from the Panamanian regulators, which currently expires
November 30, 2001.
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OF OPERATIONS (CONTINUED)
-------------------------
CAPITAL RESOURCES AND LIQUIDITY
OPERATING ACTIVITIES
The results of operations of Equitable are impacted by the seasonal
nature of Equitable Utilities' distribution operations and the volatility of oil
and gas commodity prices.
Cash flows from operating activities for the nine months ended
September 30, 2001 were $115.7 million, a $49.3 million increase over the prior
year period cash flows of $66.4 million. This increase is attributable to higher
consolidated net income, which is the result of higher commodity gas prices
throughout 2001. Items included in net income but not affecting operating cash
flows include increased undistributed earnings from the Company's minority
interest in Westport Resources and increased deferred revenue recognition
associated with the December 2000 prepaid gas forward sales.
INVESTING ACTIVITIES
Cash flows used in investing activities in the first nine months of
2001 were $30.0 million compared to $570.9 million in the prior year period,
which included the purchase of the Appalachian production assets of Statoil. The
$540.9 million decrease in cash used in investing activities is also a result of
$46.9 million of proceeds from the sale of contract receivables.
Capital expenditures of $83.5 million for the nine months ended
September 30, 2001 were $4.8 million less than the $78.7 million spent in the
prior year period. Expenditures in both years represent growth projects in the
Equitable Production segment and replacements, improvements and additions to
plant assets in the Equitable Utilities segment. Production and Utilities
accounted for $56.8 million and $26.0 million, respectively, of the expenditures
in 2001.
FINANCING ACTIVITIES
Cash flows used in financing activities during the 2001 nine-month
period were $137.5 million compared to cash provided of $491.6 million in the
prior nine month period. This fluctuation is also due to the first quarter 2000
Statoil acquisition. Throughout 2001, Equitable continued to reduce its
short-term debt and buy back shares of its outstanding common stock through the
use of cash provided by operating activities and the sale of receivables by
the NORESCO segment.
During the first quarter of 2001, a Jamaican energy infrastructure
project, which the Company consolidates, experienced defaults relating to
various loan covenants. Consequently, the Company reclassified the nonrecourse
project financing from long-term debt to current liabilities. The Company
currently intends to refinance or restructure the debt within the next twelve
months or to pursue strategic alternatives for the potential transfer or sale of
the Company's project interests.
The Company maintains a revolving credit agreement with a group of
banks providing $650 million of available credit, of which $325 million expires
in 2001 and $325 million in 2003. The Company expects to replace the portion of
the agreement expiring in the current year with a new facility, which will
expire in 2002.
The Company has adequate borrowing capacity to meet its financing
requirements.
24
Equitable Resources, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Continued)
-------------------------
CAPITAL RESOURCES AND LIQUIDITY (Continued)
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
Equitable 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 years 2001 through 2005, and over
25% of expected equity production for the years 2006 through 2008. 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. Due to the increased volatility of the market
in 2001, the Company has opted to rely more heavily on price swaps.
STOCK SPLIT
On April 19, 2001, the Board of Directors of Equitable Resources
declared a two for one stock split payable on June 11, 2001 to shareholders of
record on May 11, 2001. Earnings per share of common stock and weighted average
common shares outstanding have been adjusted for the two for one stock split.
ACQUISITIONS AND DISPOSITIONS
In February 2000, the Company acquired the Appalachian production
assets of Statoil Energy Inc. for $630 million plus working capital adjustments
for a total of $677 million. The Company initially funded this acquisition
through short-term debt, which was replaced by a combination of financings and
cash from asset sales.
In March 2000, the Company announced the combination of its Gulf
operations with Westport Oil and Gas Company, a private oil and gas exploration
company based in Denver, as described above.
In line with management's strategic objectives to focus on core
activities, a purchase and sale agreement has been negotiated for the sale of
the Company's oil-dominated fields. The sale is likely to occur by the end of
2001.
25
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (CONTINUED)
-------------------------
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Disclosures in this Quarterly Report on Form 10-Q contain certain
forward-looking statements related to such matters as anticipated financial
performance; closing of the sale of the Company's oil-dominated fields;
restructuring of the debt or sale of the Jamaican energy infrastructure project;
effects of performance-based rates; expected monetized sales volumes; savings on
office consolidations; the energy hedges and derivatives strategy and other
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 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 including future changes in the
hedging strategy, the ability to complete gas monetization transactions,
creditworthiness of counterparties, availability of financing, changes in
interest rates, changes in the status of labor negotiations, implementation and
execution of cost restructuring initiatives, curtailments or disruptions in
production, timing and availability of regulatory and governmental approvals,
timing and extent of the Company's success in acquiring utility companies and
natural gas and crude oil properties, the ability of the Company to discover,
develop and produce reserves, the ability of the Company to acquire and apply
technology to its operations, the impact of competitive factors on profit
margins in various markets in which the Company competes, the ability of the
Company to execute on the sale and/or restructuring of its oil-dominated fields
and certain energy infrastructure projects, financial results achieved by
Westport Resources, and other factors discussed in other reports (including Form
10-K) filed from time to time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market 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 group within the Equitable Utilities segment. The Company
uses simple, nonleveraged derivative instruments that are placed with major
institutions whose creditworthiness is continually monitored. The Company also
enters into energy trading contracts to leverage its assets and limit the
exposure to shifts in market prices. The Company's use of these derivative
financial instruments is implemented under a set of policies approved by the
Company's Corporate Risk Committee and Board of Directors.
With respect to energy derivatives held by the Company for purposes
other than trading, during the third quarter of 2001, the Company continued to
execute its hedging strategy by utilizing price swaps with volumes of about
148.1 Bcf of natural gas. Some of these derivatives have hedged expected equity
production through 2008. A decrease of 10% in the market price of natural gas
would increase the fair value of natural gas instruments by approximately $51.5
million at September 30, 2001. A 10% decrease would have a minimal impact on the
fair value of crude oil and propane instruments.
With respect to derivative contracts held by the Company for trading
purposes, there has not been any material changes regarding quantitative and
qualitative disclosures about market risk regarding the volatility of future
prices for natural gas, crude oil and propane from the information reported in
the Company's 2000 Annual Report on Form 10-K.
26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 1999 Equitable Resources, Inc. Long-Term Incentive
Plan As amended and restated May 17, 2001
(b) Reports on Form 8-K during the quarter ended September 30,
2001:
None.
27
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITABLE RESOURCES, INC.
----------------------------------
(Registrant)
/s/ David L. Porges
-----------------------------------
David L. Porges
Executive Vice President
and Chief Financial Officer
Date: November 9, 2001
28
INDEX TO EXHIBITS
Exhibit No. Document Description
- -------------------------------------------------------------------------------
10.1 1999 Equitable Resources, Inc. Long-Term Filed Herewith
Incentive Plan As amended and restated
May 17, 2001
29