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 MARCH 31, 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 ------------ 420 Boulevard of the Allies, Pittsburgh, Pennsylvania 15219 (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 close of the period covered by this report. Outstanding at Class March 31, 1999 Common stock, no par value 34,107,000 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 Months Ended March 31, 1999 and 1998 1 Statements of Condensed Consolidated Cash Flows for the Three Months Ended March 31, 1999 and 1998 2 Condensed Consolidated Balance Sheets, March 31, 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 - 17 Part II. Other Information 18 Signature 19
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Statements of Consolidated Income (Unaudited) (Thousands Except Per Share Amounts) Three Months Ended March 31, 1999 1998 ------------------------------------ <S> <C> <C> Operating revenues $ 420,053 $ 283,449 Cost of sales 292,945 158,981 ------------- ------------ Net operating revenues 127,108 124,468 ------------- ------------ Operating expenses: Operation and maintenance 23,003 21,552 Exploration 501 982 Production 5,913 6,864 Selling, general and administrative 20,527 27,010 Depreciation, depletion and amortization 20,940 19,739 ------------- ------------ Total operating expenses 70,884 76,147 ------------- ------------ Operating income 56,224 48,321 Equity in nonconsolidated subsidiaries 673 419 Gain/(loss) on sale of assets - (1,398) ------------- ------------ Earnings from continuing operations, before interest & taxes 56,897 47,342 Interest charges 9,263 9,166 ------------- ------------ Income before income taxes 47,634 38,176 Income taxes 17,895 13,524 ------------- ------------ Net income from continuing operations 29,739 24,652 Loss from discontinued operations - net of tax - (4,604) ------------- ------------ Net income $ 29,739 $ 20,048 ============= ============ Average common shares outstanding 35,258 36,934 Earnings (loss) per share of common stock: Basic/Diluted: Continuing operations $ 0.84 $ 0.66 Discontinued operations - (0.12) ------------- ------------ Net income $ 0.84 $ 0.54 ============= ============ 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) Three Months Ended March 31, 1999 1998 ------------------------------------ <S> <C> <C> Cash flows from operating activities: Net income/(loss) from continuing operations $ 29,739 $ 24,652 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 20,940 19,652 Amortization of net contract costs 892 2,318 Deferred income taxes (benefits) (33) 4,252 Changes in other assets and liabilities (30,960) (828) ---------------- ---------------- Net cash provided by (used in) continuing operating activities 20,578 50,046 Net cash provided by (used in) discontinued operations - (2,390) ---------------- ---------------- Net cash provided by (used in) operating activities 20,578 47,656 ---------------- ---------------- Cash flows from investing activities: Capital expenditures (21,489) (25,656) Capital expenditures on discontinued operations in year of disposal - (4,011) Proceeds from sale of short-term investments 136,330 - Purchases of short-term investments (137,473) - ---------------- ---------------- Net cash used in investing activities (22,632) (29,667) ---------------- ---------------- Cash flows from financing activities: Retirement of long-term debt - (5,000) Increase (decrease) in short-term loans 57,996 (28,790) Dividends paid (10,544) (21,878) Proceeds from issuance of common stock - 1,405 Purchase of treasury stock (44,603) - ---------------- ---------------- Net cash provided by (used in) financing activities 2,849 (54,263) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 795 (36,274) Cash and cash equivalents at beginning of period 8,973 69,442 ---------------- ---------------- Cash and cash equivalents at end of period $ 9,768 $ 33,168 ================ ================ Cash paid (received) during the period for: Interest (net of amount capitalized) $ 11,682 $ 16,850 ================ ================ Income taxes $ (716) $ 1,509 ================ ================ 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 March 30, December 31, 1999 1998 ----------------------------------------- (Thousands) ----------------------------------------- <S> <C> <C> Current assets: Cash and cash equivalents $ 9,768 $ 8,973 Short-term investments 94,614 93,471 Accounts receivable 213,616 199,363 Unbilled revenues 44,893 41,616 Inventory 14,562 33,743 Deferred purchased gas cost 16,939 39,445 Prepaid expenses and other 48,882 34,831 --------------- --------------- Total current assets 443,274 451,442 --------------- --------------- Property, plant and equipment 1,975,726 1,956,763 Less accumulated depreciation and depletion (781,718) (762,320) --------------- --------------- Net property, plant and equipment 1,194,008 1,194,443 --------------- --------------- Other assets 223,957 214,971 --------------- --------------- Total $ 1,861,239 $ 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 March 30, December 31, 1998 1998 -------------------------------------- (Thousands) -------------------------------------- <S> <C> <C> Current liabilities: Current portion long-term debt $ 74,475 $ 74,136 Short-term loans 173,699 115,703 Accounts payable 106,318 147,951 Other current liabilities 101,465 104,170 -------------- -------------- Total current liabilities 455,957 441,960 -------------- -------------- Long-term debt 281,350 281,350 Deferred and other credits 312,317 304,127 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 March 31, 1999, 37,252; December 31, 1998, 37,252 283,985 280,400 Treasury stock, shares at cost March 31, 1999, 3,145; December 31, 1998, 1,396 (83,901) (39,298) Retained earnings 486,521 467,326 Accumulated other comprehensive income (loss) 10 (9) -------------- -------------- Total common stockholders' equity 686,615 708,419 -------------- -------------- Total $ 1,861,239 $ 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 financial statements should be read in conjunction with the Company's 1998 Annual Report and Form 10-K. B. In the opinion of Company's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position as of March 31, 1999 and 1998, and the results of operations and cash flows for the three months then ended. All adjustments are of a normal, recurring nature unless otherwise indicated. C. The results of operations for the three-month period ended March 31, 1999 and 1998, are not indicative of results for a full year because of the seasonal nature of the Company's natural gas distribution and energy marketing operations. D. 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. The condensed consolidated financial statements include these as discontinued operations. In December 1998, the Company completed the sale of these operations to various parties for $338.3 million, which included working capital adjustments. Net loss from discontinued operations was $4.6 million for the three months ended March 31, 1998. These results were reported net of income tax benefit of $2.3 million. Interest expense allocated to discontinued operations was $1.8 million in the first three months of 1998. E. 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. The capital securities have a mandatory redemption date of April 15, 2038; however, at the Company's option, the securities may be redeemed on or after April 23, 2003. Proceeds were used to reduce short-term debt outstanding. Interest expense for the three-months ended March 31, 1999, includes $2.3 million of preferred dividends related to the trust preferred capital securities. F. At March 31, 1999, 8,754,000 shares of Common Stock were reserved as follows: 460,000 shares for issuance under the Key Employee Restricted Stock Option and Stock Appreciation Rights Incentive Compensation Plan, 1,715,000 shares for issuance under the Long-Term Incentive Plan, 76,000 shares for issuance under the Non-Employee Directors' Stock Incentive Plan, 9,000 shares for issuance under the Company's Dividend Reinvestment and Stock Purchase Plan and 6,494,000 shares for possible use in connection with future acquisitions.
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) G. Segment Disclosure The Company reports operations in four segments. 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. The Equitable Energy segment provides marketing, supply and transportation services for the natural gas market. 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 March 31, 1999 1998 ---------------------------------------- (Thousands) <S> <C> <C> Revenues from external customers: Equitable Utilities $ 151,332 $ 146,936 Equitable Production 38,323 39,898 NORESCO 37,977 18,285 Equitable Energy 192,421 78,330 ---------------- --------------- Total $ 420,053 $ 283,449 ================ =============== Intersegment revenues: Equitable Utilities $ 3,210 $ 5,051 Equitable Production 3,034 12,651 Equitable Energy 17,539 20,232 ---------------- --------------- Total $ 23,783 $ 37,934 ================ =============== Segment profit (loss): Equitable Utilities $ 44,224 $ 34,441 Equitable Production 8,089 14,089 NORESCO 3,349 9 Equitable Energy 1,423 (1,785) ---------------- --------------- Total operating segments 57,085 46,754 Less: reconciling items Headquarters operating expenses (gains) not allocated to operating segments 188 (588) Interest expense 9,263 9,166 Income tax expenses 17,895 13,524 ---------------- --------------- Net income from continuing operations $ 29,739 $ 24,652 ================ =============== </TABLE>
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) H. 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," which is required to be adopted in years beginning after June 15, 1999. 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. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company. I. 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 March 31, 1999, was $29.7 million, or $0.84 per share, compared with net income of $20.0 million, or $0.54 per share, for the quarter ended March 31, 1998. The 1998 quarter 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 first quarter net income of $29.7 million, or $0.84 per share, represents a 27 percent increase over net income from continuing operations of $24.7 million, or $0.66 per share, for the first quarter 1998. The earnings improvement for the 1999 period was primarily attributable to lower selling, general and administrative expenses across all of the Company's business segments. Weaker prices for produced natural gas, oil and natural gas liquids (NGLs) largely offset higher weather-related gas sales in the Company's utility service territory and increased gas production. During the three months ended March 31, 1999, the Company repurchased 1.8 million shares of common stock at an average price of $26.08 per share. Including shares repurchased in the fourth quarter of 1998, the Company has repurchased 3.1 million shares, 55 percent of the amount authorized by the Board of Directors in October 1998. 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. 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 and began collecting revenues based on rates subject to refund in August 1997. The rate case was designed to address the recovery of certain gas facility costs related to the implementation of Order 636. On April 29, 1999, the FERC approved, without modification, the joint stipulated settlement agreement resolving all issues in its proceeding. Unlike a previously rejected settlement, the approved settlement provides for prospective collection of 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. On an annualized basis, the approved settlement, which is anticipated to become final before the end of the second quarter, provides for revenues of $1 million in excess of the level recorded in the first quarter of 1999.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) Three Months Ended March 31, EQUITABLE UTILITIES 1999 1998 - -------------------------------------------------------------------------------- (Thousands, except prices & degree days) Operating revenues: Residential gas sales $ 90,524 $ 104,801 Commercial gas sales 12,449 10,650 Industrial and utility gas sales 7,389 11,612 Marketed gas sales 1,791 2,599 Transportation service 36,162 18,543 Storage service 2,461 2,445 Other 3,766 1,338 ---------- ---------- Total revenues 154,542 151,988 Cost of energy purchased 71,169 75,598 Revenue related taxes 4,872 5,380 ---------- ---------- Net operating revenues 78,501 71,010 Operating expenses: Operations and maintenance 19,340 18,617 Selling, general and administrative 8,808 12,633 Depreciation, depletion and amortization 6,129 5,319 ---------- ---------- Total operating expenses 34,277 36,569 ---------- ---------- Earnings before interest and taxes $ 44,224 $ 34,441 ========== ========== Sales quantities (Mcf): Residential gas sales 9,516 10,670 Commercial gas sales 1,322 1,112 Industrial and utility gas sales 3,575 4,618 Marketed gas sales 1,033 1,217 Transportation deliveries 18,282 10,935 Average selling prices (per Mcf): Residential gas sales $ 9.513 $ 9.822 Commercial gas sales 9.417 9.577 Industrial and gas sales 2.067 2.515 Marketed gas sales 1.734 2.136 Heating degree days (normal - 3,016) 2,914 2,310
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998 Equitable Utilities had earnings before interest and taxes (EBIT) for the March 1999 quarter of $44.2 million compared to $34.4 million for the 1998 period. The segment's results for the latest quarter benefited from higher net revenues principally due to weather 26% colder than the first quarter of 1998 and lower general and administrative costs. Net operating revenues for the three months ended March 31, 1999, increased 11% to $78.5 million, primarily as a result of a 17% increase in distribution system throughput volumes due to colder weather ($6.8 million) and higher distribution margins from new ancillary services and tariff changes ($2.1 million). These increases were partially offset by a provision for refund related to the Equitrans' rate case ($1.9 million). As noted above, the rate case is anticipated to become final in the second quarter of 1999. The decrease in operating expenses in the current period reflects lower utility and corporate overhead expenses ($3.8 million), as the benefits are realized from the fourth quarter 1998 restructuring of corporate office and utility business functions. 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. 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) Three Months Ended March 31, EQUITABLE PRODUCTION 1999 1998 - -------------------------------------------------------------------------------- (Thousands, except prices) Operating revenues: Produced natural gas $ 26,220 $ 31,766 Transportation 6,609 6,618 Natural gas liquids 4,003 5,829 Crude oil 1,672 4,166 Marketed natural gas 1,943 1,957 Other 910 2,213 ---------- --------- Total revenues 41,357 52,549 Cost of energy purchased 4,332 6,275 ---------- --------- Net operating revenues 37,025 46,274 Operating expenses: Operating and maintenance 3,663 2,935 Production 5,913 6,864 Dry hole 29 104 Other exploration 472 878 Selling, general and administration 5,224 7,807 Depreciation, depletion and amortization 13,635 12,199 ---------- --------- Total operating expenses 28,936 30,787 Gain (loss) on sale of assets - (1,398) ---------- --------- Earnings from continuing operations, before interest and taxes $ 8,089 $ 14,089 ========== ========= Sales quantities: Produced natural gas (Mcf) 15,383 12,994 Transportation deliveries (Mcf) 9,615 10,722 Natural gas liquids (gallons) 18,774 18,211 Crude oil (Bbls) 164 264 Marketed gas sales (Mcf) 1,402 987 Average selling prices: Produced natural gas (per Mcf) $ 1.704 $ 2.445 Natural gas liquids (per gallon) 0.213 0.320 Crude oil (per barrel) 10.195 15.780 Marketed gas sales (per Mcf) 1.386 1.983
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998 Equitable Production had EBIT for the March 1999 quarter of $8.1 million compared to $14.1 million for the 1998 quarter. The segment's results were adversely affected by significantly lower market prices for natural gas, crude oil and natural gas liquids, the impact of which was slightly offset by increased natural gas production and lower total operating expenses. Net operating revenues for the three months ended March 1, 1999, decreased $9.2 million compared to the first quarter of 1998 primarily due to reductions of 30%, 35% and 33% in Equitable Production's average prices for natural gas, crude oil and natural gas liquids, respectively. The price declines continue to be a reflection of the overall commodity market. The revenue impact of the 1999 decline in natural gas prices ($9.1 million) is partially offset by volume increases ($3.6 million). Overall, natural gas production increased 18% in 1999 compared with 1998 due to a 2.4 bcf increase in Gulf production. The increased production volume is related to additional Gulf wells at West Cameron 540 and West Cameron 180/198, which commenced production subsequent to March 31, 1998. The decline in crude oil production reflects the depletion of West Cameron 580 and certain West Cameron 180/198 wells. Total operating expenses for the current quarter decreased $1.9 million compared to the same quarter in 1998 despite increased depreciation, depletion and amortization, which was higher because of increased natural gas production. Administrative and overhead expenses declined $2.6 million as a result of management and staff headcount reductions and other corporate restructuring activities, which occurred in the fourth quarter of 1998. Production costs decreased $0.4 million in the Appalachian region, as a result of decreased well-tending staff and reduced severance taxes due to lower commodity prices. Production costs decreased $0.6 million in the Gulf region in 1999, as the 1998 period included high start-up costs for certain properties acquired at the end of 1997. The loss on sales of assets in 1998 included a $0.9 million reserve for loss on the sale of the Company's Colombian operations sold in 1998 and an additional $0.5 million reserve on the previously recorded sale of the Company's Western properties.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) NORESCO NORESCO provides energy and energy related products and services that are designed to reduce its customers' operating costs and improve their productivity. NORESCO's customers include commercial, governmental, institutional and industrial end-users. The majority of NORESCO's revenue and earnings comes from energy saving performance contracting services. NORESCO provides the following integrated energy management services: project development and engineering analysis; construction; management; financing; equipment operation and maintenance; and energy savings metering, monitoring and verification. NORESCO also manages the segment's facilities management division, which develops and operates private power, cogeneration and central plant facilities in the U.S. and selected international markets. Three Months Ended March 31, NORESCO 1999 1998 - -------------------------------------------------------------------------------- (Thousands) Energy service contracting revenues $ 37,977 $ 18,285 Energy service contract cost 29,501 13,030 ---------- --------- Gross margin 8,476 5,255 ---------- --------- Operating expenses: Selling, general and administrative 4,690 4,580 Depreciation, depletion and amortization 1,110 1,085 ---------- --------- Total operating expenses 5,800 5,665 Other income 673 419 ---------- --------- Earnings before interest and taxes $ 3,349 $ 9 ========== ========= Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998 NORESCO's gross margin increased to $8.5 million for the quarter ended March 31, 1999, compared to $5.3 million for the same period in 1998. This segment's energy management and performance contracting operations now hold a larger mix of commercial government and international projects. During the quarter, several significant contracts were signed. Construction completed during the quarter more than doubled compared to the first quarter of 1998. The gross margin rate as a percent of sales declined to 22% compared to 29% during 1998 due to increased competition and contract mix. At March 31, 1999, construction backlog totaled approximately $110 million. Operating expenses for this segment remained relatively unchanged, as increased marketing and development expenses were offset by reductions in administrative expenses due to office consolidations and the integration of formerly distinct facilities management divisions.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE ENERGY Equitable Energy is a nonregulated residential, commercial and industrial marketer of natural gas. Services and products offered by Equitable Energy include commodity procurement and delivery, physical gas management operations and control, and customer support services. Three Months Ended March 31, Equitable Energy 1999 1998 - -------------------------------------------------------------------------------- (Thousands) Operating revenues: Marketed natural gas (millions) $ 209,835 $ 98,561 Other 125 - ---------- --------- Total revenues 209,960 98,561 Cost of energy purchased 206,853 96,632 ---------- --------- Net operating revenues 3,107 1,929 ---------- --------- Operating expenses: Selling, general and administrative 1,635 3,417 Depreciation, depletion and amortization 49 297 ---------- --------- Total operating expenses 1,684 3,714 ---------- --------- Earnings (loss) before interest and taxes $ 1,423 $ (1,785) ========== ========= Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998 Net operating revenues increased to $210.0 million for the quarter ended March 31, 1999, compared to $98.6 million for the same period in 1998. During the latest quarter, Equitable Energy marketed 84 billion cubic feet (bcf) of natural gas compared to 36 bcf for last year's quarter. 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 (46 bcf). The marketing company sales represent high volume, comparatively low margin transactions, which complement Equitable Energy's base commercial and residential sales. Many of these trading company contracts expired at the end of March 1999 and may or may not be renewed. Equitable Energy operating expenses for the latest quarter were more than 50 percent below those of the first quarter of 1998, reflecting 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) CAPITAL RESOURCES AND LIQUIDITY Cash Flows Cash required for operations is impacted primarily by the seasonal nature of Equitable Resource's natural gas distribution operations and the volatility of oil and gas commodity prices. Cash provided by operating activities totaled $20.6 million in the three months ended March 31, 1999, compared to cash provided by operating activities of $47.7 million in the 1998 period. Cash flows from operations decreased in 1999 primarily as a result of the following: a net $10 million increase in accounts receivable at the Company's distribution operations due to increased revenues, coupled with decreased collections; a decrease of $17 million in accounts payable in production due to decreased capital expenditures for drilling in the Gulf and final payment on working capital adjustments for the December 1998 sale of the Company's midstream operations; an increase of $12 million in unbilled revenues at Noresco due to increased construction activity; and the payment of $5 million of severance accrued at December 31, 1998 under the corporate restructuring program. During the first quarter of 1999, there were no material changes in the restructuring charge accrued in prior periods. Equitable Resource's 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 1999 quarter were approximately $21.5 million, including $11.5 million and $4.3 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. 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 4.8% during the first quarter 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. A portion 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. At March 31, 1999, $95 million of proceeds is invested in short-term debt securities, of which $75 million will be used to retire additional long-term debt maturing in July 1999.
Management's Discussion and Analysis of Financial Condition and Results of Operations (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 (93% complete) and on schedule. The testing and remediation of systems applications are on schedule with approximately 90% of the critical applications remediated and tested. Equitable anticipates that all critical systems will be Y2K compliant by September 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 in 1999. Costs The total cost of the Company's Year 2000 project is still being evaluated. Until all process control systems have been tested and documented, the full cost of remediation of this part of the project will not be known. The cost to date, however, is $3.7 million and the total cost estimate for the balance of the project is an additional $1.2 million. All of the costs have been or will be charged to operating expense except $0.5 million of systems upgrades, which will be 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 is 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 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.
PART II. OTHER INFORMATION Item 5. Other Information On April 28, 1999, the Board of Directors, at a regular meeting of the Board, approved resolutions amending the Company's By-Laws (Sections 1.08 and 3.07) in order 1) to clarify the procedures to be followed and provide for an advance notice in connection with shareholder proposals to be presented at the annual and all special meetings of shareholders and, 2) to make the advance notice period for shareholder nominations of directors consistent with the notice period required for shareholder proposals. The amended by-laws are included in this filing as Exhibit 3.02. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.02 Equitable Resources, Inc. By-laws (Amended through April 28, 1999). (b) Reports on Form 8-K during the quarter ended March 31, 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: May 14, 1999