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 JUNE 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 1-3551 EQUITABLE RESOURCES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0464690 (State of incorporation or organization) (IRS Employer Identification No.) One Oxford Centre, Suite 3300, 301 Grant Street, Pittsburgh, Pennsylvania 15219 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (412) 553-5700 ------------ NONE (Former name, former address and former fiscal year, if changed since last report) ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 31, 1999 Common stock, no par value 33,889,000 shares
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Index Page No. Part I. Financial Information: Item 1. Financial Statements (Unaudited): Statements of Consolidated Income for the Three And Six Months Ended June 30, 1999 and 1998 1 Statements of Condensed Consolidated Cash Flows for the Three and Six Months Ended June 30, 1999 and 1998 2 Condensed Consolidated Balance Sheets, June 30, 1999, and December 31, 1998 3 - 4 Notes to Condensed Consolidated Financial Statements 5 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Part II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 Index to Exhibits 25
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Statements of Consolidated Income (Unaudited) (Thousands Except Per Share Amounts) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 -------------------------------- -------------------------------- <S> <C> <C> <C> <C> Operating revenues $ 189,631 $ 180,764 $ 609,686 $ 464,213 Cost of sales 82,301 96,966 375,246 254,695 -------------- --------------- --------------- -------------- Net operating revenues 107,330 83,798 234,440 209,518 -------------- --------------- --------------- -------------- Operating expenses: Operation and maintenance 21,238 18,983 44,241 41,787 Exploration 3,795 1,431 4,297 2,413 Production 6,538 7,702 12,450 14,566 Selling, general and administrative 24,330 24,049 44,857 52,457 Depreciation, depletion and amortization 31,060 19,460 52,000 39,199 -------------- --------------- --------------- -------------- Total operating expenses 86,961 71,625 157,845 150,422 -------------- --------------- --------------- -------------- Operating income 20,369 12,173 76,595 59,096 Equity in nonconsolidated subsidiaries 577 541 1,250 960 -------------- --------------- --------------- -------------- Earnings from continuing operations, before interest & taxes 20,946 12,714 77,845 60,056 Interest charges 8,965 9,236 18,228 18,403 -------------- --------------- --------------- -------------- Income before income taxes 11,981 3,478 59,617 41,653 Income taxes 4,743 1,203 22,638 14,727 -------------- --------------- --------------- -------------- Net income from continuing operations 7,238 2,275 36,979 26,926 Income (loss) from discontinued operations - net of tax - - - (4,604) -------------- --------------- --------------- -------------- Net income $ 7,238 $ 2,275 $ 36,979 $ 22,322 ============== =============== =============== ============== Average common shares outstanding 33,960 37,050 34,692 36,953 Earnings (loss) per share of common stock: Basic: Continuing operations $ 0.21 $ 0.06 $ 1.07 $ 0.72 Discontinued operations - - - (0.12) -------------- --------------- --------------- -------------- Net income $ 0.21 $ 0.06 $ 1.07 $ 0.60 ============== =============== =============== ============== Diluted: Continuing operations $ 0.21 $ 0.06 $ 1.06 $ 0.72 Discontinued operations - - - (0.12) -------------- --------------- --------------- -------------- Net income $ 0.21 $ 0.06 $ 1.06 $ 0.60 ============== =============== =============== ============== 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 ----------------------------- --------------------------- <S> <C> <C> <C> <C> Cash flows from operating activities: Net income from continuing operations $ 7,238 $ 2,275 $ 36,979 $ 26,926 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 31,060 19,460 52,000 39,199 Amortization of net contract costs 438 836 1,330 3,154 Deferred income taxes (benefits) 4,909 (1,199) 4,876 3,053 Changes in other assets and liabilities 29,891 48,456 14,469 50,356 ----------- ------------ ----------- ----------- Net cash provided by continuing operations 73,536 69,828 109,654 122,688 Net cash used in discontinued operations - (1,233) - (3,623) ----------- ------------ ----------- ----------- Net cash provided by operating activities 73,536 68,595 109,654 119,065 ----------- ------------ ----------- ----------- Cash flows from investing activities: Capital expenditures (24,794) (52,018) (46,283) (77,674) Increase in investment in unconsolidated partnerships (3,248) (1,284) (18,788) (4,098) Proceeds from sale of property 4,661 - 4,661 - Increase in net noncurrent assets held for sale - (9,730) - (13,741) Proceeds from sale of short-term investments 293,761 - 430,091 - Purchases of short-term investments (199,148) - (336,621) - ----------- ------------ ----------- ----------- Net cash provided by (used in) investing activities 71,232 (63,032) 33,060 (95,513) ----------- ------------ ----------- ----------- Cash flows from financing activities: Retirement of long-term debt - (5,880) - (10,880) Increase (decrease) in short-term loans (48,405) (118,001) 9,591 (146,791) Dividends paid (10,311) - (20,855) (21,878) Proceeds from issuance of long-term debt 17,000 - 17,000 - Proceeds from preferred trust securities - 125,000 - 125,000 Proceeds from issuance of common stock 11 350 11 1,755 Purchase of treasury stock (10,815) - (55,418) - ----------- ------------ ----------- ----------- Net cash provided by (used in) financing activities (52,520) 1,469 (49,671) (52,794) ----------- ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 92,248 7,032 93,043 (29,242) Cash and cash equivalents at beginning of period 9,768 33,168 8,973 69,442 ----------- ------------ ----------- ----------- Cash and cash equivalents at end of period $ 102,016 $ 40,200 $ 102,016 $ 40,200 =========== ============ =========== =========== Cash paid during the period for: Interest (net of amount capitalized) $ 2,690 $ 1,860 $ 14,372 $ 18,710 =========== ============ =========== =========== Income taxes $ 1,233 $ 8,345 $ 517 $ 9,854 =========== ============ =========== =========== 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 June 30, December 31, 1999 1998 ------------------------------------------------ (Thousands) ------------------------------------------------ <S> <C> <C> Current assets: Cash and short-term investments $ 102,016 $ 102,444 Accounts receivable 128,040 199,363 Unbilled revenues 27,298 41,616 Inventory 26,026 33,743 Deferred purchased gas cost 17,600 39,445 Prepaid expenses and other 40,666 34,831 ------------------ ---------------- Total current assets 341,646 451,442 ------------------ ---------------- Property, plant and equipment 1,990,988 1,956,763 Less accumulated depreciation and depletion (810,328) (762,320) ------------------ ---------------- Net property, plant and equipment 1,180,660 1,194,443 ------------------ ---------------- Other assets 222,579 214,971 ------------------ ---------------- Total $ 1,744,885 $ 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 June 30, December 31, 1999 1998 --------------------------------------------- (Thousands) --------------------------------------------- <S> <C> <C> Current liabilities: Current portion long-term debt $ 75,000 $ 74,136 Short-term loans 125,295 115,703 Accounts payable 58,334 147,951 Other current liabilities 92,307 104,170 ----------------- ---------------- Total current liabilities 350,936 441,960 ----------------- ---------------- Long-term debt 298,350 281,350 Deferred and other credits 301,435 304,127 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 June 30, 1999, 37,252; December 31, 1998, 37,252 278,995 280,400 Treasury stock, shares at cost June 30, 1999, 3,415; December 31, 1998, 1,396 (93,313) (39,298) Retained earnings 483,450 467,326 Accumulated other comprehensive income (loss) 32 (9) ----------------- ---------------- Total common stockholders' equity 669,164 708,419 ----------------- ---------------- Total $ 1,744,885 $ 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 June 30, 1999 and 1998, and the results of operations and cash flows for the three and six months then ended. All adjustments are of a normal, recurring nature unless otherwise indicated. C. The results of operations for the three- and six-month periods ended June 30, 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 six months ended June 30, 1998. These results were reported net of income tax benefit of $2.3 million. Interest expense allocated to discontinued operations was $4.0 million in the first six 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 15, 2013. Proceeds were used to reduce short-term debt outstanding. Interest expense for the three-and six months ended June 30, 1999, includes $4.6 million of preferred dividends related to the trust preferred capital securities.
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) F. In May 1999, Company shareholders approved the establishment of the 1999 Equitable Resources, Inc. Long-Term Incentive Plan and the 1999 Equitable Resources, Inc. Non-Employee Directors' Stock Incentive Plan. These plans provide for the grant of up to 3,000,000 and 300,000 shares, respectively, of common stock awards to key employees and directors. The awards can be in the form of stock options, restricted stock grants or other performance-based awards, as determined by the Compensation Committee of the Board of Directors. Under the terms of these plans and the predecessor plan, 128,000 shares of restricted stock and options to purchase 1,009,000 shares of common stock at the then current market price of approximately $30 per share were granted to employees and directors of the Company on May 26, 1999. The awards vest three years from the date of grant and expire 5 to 10 years from the grant date. G. As more fully described in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's Equitrans subsidiary settled its rate case with the Federal Energy Regulatory Commission (FERC) in April 1999. The net impact of the settlement on the three- and six-month periods ending June 30, 1999 recorded in the second quarter was an increase in earnings before interest and taxes of $3.9 million. H. Segment Disclosure - The Equitable Utilities segment's activities comprise the operations of the Company's state-regulated local distribution company, in addition to gas transportation, storage and marketing activities involving the Company's interstate natural gas pipelines. The Equitable Production segment's activities comprise the exploration, development, production, gathering and sale of natural gas and oil, and extraction and sale of natural gas liquids. NORESCO's activities comprise cogeneration and power plant development, the development and implementation of energy and water efficiency programs, performance contracting and central facility plant operations. The Equitable Energy segment provides marketing, supply and transportation services for the natural gas market.
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------------------------------ ------------------------------------ (Thousands) <S> <C> <C> <C> <C> Revenues from external customers: Equitable Utilities $ 65,806 $ 62,176 $ 217,139 $ 202,978 Equitable Production 43,761 43,540 82,085 83,438 Equitable Services: NORESCO 40,986 22,157 78,963 40,442 Equitable Energy 39,078 52,891 231,499 137,355 ---------------- ---------------- --------------- --------------- Total $ 189,631 $ 180,764 $ 609,686 $ 464,213 ================ ================ =============== =============== Intersegment revenues: Equitable Utilities $ 3,579 $ 4,069 $ 6,789 $ 15,255 Equitable Production 7,526 3,197 10,559 15,848 Equitable Services: Equitable Energy 24,582 20,106 42,121 34,203 ---------------- ---------------- --------------- --------------- Total $ 35,687 $ 27,372 $ 59,469 $ 65,306 ================ ================ =============== =============== Segment profit (loss): Equitable Utilities $ 8,168 $ 4,669 $ 52,392 $ 39,110 Equitable Production 10,814 8,323 18,903 22,412 Equitable Services: NORESCO 3,587 1,691 6,936 1,699 Equitable Energy 817 (1,530) 2,240 (3,315) ---------------- ---------------- --------------- --------------- Total operating segments 23,386 13,153 80,471 59,906 Less: reconciling items Headquarters operating expenses (gains) not allocated to operating segments 2,440 439 2,626 (150) Interest expense 8,965 9,236 18,228 18,403 Income tax expenses 4,743 1,203 22,638 14,727 ---------------- ---------------- --------------- --------------- Net income from continuing operations $ 7,238 $ 2,275 $ 36,979 $ 26,926 ================ ================ =============== =============== </TABLE>
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) I. Derivative Instruments and Hedging Activities - In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has not yet determined when it will adopt the provisions of this statement, which may be implemented at the beginning of any fiscal quarter. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." This statement delays the required implementation for the Company until 2001. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company. J. 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 June 30, 1999, was $7.2 million, or $0.21 per share, compared with net income of $2.3 million, or $0.06 per share, for the quarter ended June 30, 1998. The earnings improvement for the 1999 quarter is primarily attributable to increased natural gas production in the offshore Gulf of Mexico region, the continuing benefit from last year's cost structure improvements, a favorable rate settlement at the Company's Equitrans pipeline subsidiary, increased construction activity in the NORESCO segment and improved margins in the Equitable Energy natural gas marketing business. These improvements were partially offset by one-time expenses for the consolidation of commercial activities and streamlining administrative functions in the Company's utility businesses, increased exploration costs in the Production segment, weak natural gas prices in 1999, and an increased provision for performance-related bonuses, reflecting the Company's strong first half and anticipated full-year results. In the six months ended June 30, 1999, Equitable's consolidated net income was $37.0 million, or $1.07 per share, compared to $22.3 million, or $0.60 per share, for the six months ended June 30, 1998. The 1998 period included a loss on the Company's discontinued midstream operations of $4.6 million, or $0.12 per share. These operations were sold in December 1998. The 1999 six months net income of $1.07 per share represents a 50% increase over earnings per share from continuing operations of $0.72 for the first half of 1998. Excluding one-time items, the 1999 improvement for the six-month period is due to higher production volumes, increased NORESCO construction activity, improved gas marketing margins, higher first quarter weather-related sales in the distribution operations and lower selling, general and administrative expenses across all of the Company's businesses. These improvements were partially offset by year-to-date wellhead prices for natural gas that were 18 percent below the average for the first six months of 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, EQUITABLE UTILITIES 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands, except prices & degree days) <S> <C> <C> <C> <C> Operating revenues: Residential gas sales $ 28,309 $ 35,974 $ 118,833 $ 140,775 Commercial gas sales 4,041 3,423 16,490 14,073 Industrial and utility gas sales 10,997 10,745 18,386 22,357 Marketed gas sales 2,244 2,698 4,035 5,297 Transportation service 18,702 9,405 54,864 27,948 Storage service 2,678 2,530 5,139 4,975 Other 2,415 1,470 6,181 2,808 -------------- --------------- --------------- ------------- Total revenues 69,386 66,245 223,928 218,233 Cost of energy purchased 15,934 27,382 87,103 102,980 Revenue related taxes 1,540 1,810 6,412 7,190 -------------- --------------- --------------- ------------- Net operating revenues 51,912 37,053 130,413 108,063 Operating expenses: Operations and maintenance 18,664 16,318 38,004 34,935 Selling, general and administrative 10,108 10,937 18,916 23,570 Depreciation, depletion and amortization 14,972 5,129 21,101 10,448 -------------- --------------- --------------- ------------- Total operating expenses 43,744 32,384 78,021 68,953 -------------- --------------- --------------- ------------- Earnings before interest and taxes $ 8,168 $ 4,669 $ 52,392 $ 39,110 ============== =============== =============== ============= Sales quantities (Mcf): Residential gas sales 2,524 3,050 12,040 13,720 Commercial gas sales 365 342 1,687 1,454 Industrial and utility gas sales 4,738 4,048 8,313 8,666 Marketed gas sales 1,083 1,160 2,116 2,377 Transportation deliveries 9,282 11,808 27,564 22,743 Average selling prices (per Mcf): Residential gas sales $ 11.216 $ 11.795 $ 9.870 $ 10.261 Commercial gas sales 11.071 10.009 9.775 9.679 Industrial and gas sales 2.321 2.654 2.212 2.580 Marketed gas sales 2.072 2.326 1.907 2.228 Heating degree days (normal: QTR - 712, YTD - 3,728) 562 572 3,476 2,882 </TABLE> Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998 The pipeline operations of Equitrans, L.P. (Equitrans) and Three Rivers Pipeline Corporation are subject to rate regulation by the FERC. Equitrans filed a rate case in April 1997, which addressed the recovery of certain stranded plant costs related to the implementation of Order 636. The requested rates were placed into effect in August 1997, subject to refund, pending the final FERC order. On April 29, 1999, the FERC approved, without modification, the joint stipulated settlement agreement resolving all issues in its proceeding.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) The approved settlement provides for prospective collection of increased gathering charges. In addition, the settlement provides Equitrans the opportunity to retain all revenues associated with interruptible transportation and negotiated rate agreements as well as moving its gathering charge toward a cost-based rate. In the second quarter of 1999, Equitrans recorded the final settlement of the rate case, including adjustment of the prior provisions for refund and recognition of the previously deferred revenues and costs related to the stranding of certain gathering plant. Equitable Utilities had earnings before interest and taxes (EBIT) for the June 1999 quarter of $8.2 million compared to $4.7 million for the 1998 period. The segment's results for the 1999 quarter include income of $3.9 million from recognition of the settlement of Equitrans' rate case described above. Results also include charges of $2.6 million for further reorganization of utility segment operating functions and consolidation of facilities. EBIT, excluding these items, of $6.9 million increased $2.2 million, or 47%, attributed to lower operating expenses from restructuring initiatives, which began in the fourth quarter of 1998, and higher margins from distribution operations. The higher distribution margins are the result of increases in throughput and revenues from nontraditional services, including balancing and pooling services, and services provided to marketers on the distribution system. Net operating revenues for the three months ended June 30, 1999, of $51.9 million include $12.3 million related to recognition of the rate settlement described above and $0.5 million for the pass-through of products extraction costs to customers. Net operating revenues of $39.1 million for the quarter, excluding the impact of the rate settlement and extraction revenues, increased $2.0 million, or 5%, over the $37.1 million for the 1998 period due primarily to higher distribution throughput and increased revenues from nontraditional services for distribution operations. Operating expenses of $43.7 million for the three months ended June 30, 1999, include $8.7 million of amortization expense related to the stranded plant from recognition of the rate settlement, products extraction costs of $0.5 million and $2.6 million for reorganization as more fully described above. Operating expenses of $31.9 million, excluding the effect of the rate settlement, extraction charges and one-time expenses, decreased $0.5 million from the 1998 amount of $32.4 million due primarily to restructuring initiatives, which began in the fourth quarter of 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE UTILITIES (Continued) Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 Equitable Utilities had EBIT of $52.4 million for the six months ended June 30, 1999. The segment's results for the 1999 period of $51.1 million, excluding the impact of the Equitrans' rate case settlement and charges described above, increased $12.0 million, or 31%, over the $39.1 million for the six months ended June 30, 1999. The increase in EBIT is a result of higher net revenues due principally to colder weather during the heating season and increased revenues from nontraditional services by the distribution operations. Net operating revenues for the six months ended June 30, 1999, of $130.4 million include $12.3 million related to recognition of the rate settlement described above and $0.7 million for the pass-through of products extraction costs to customers. Net operating revenues of $117.4 million for the period, excluding the impact of the rate settlement and extraction revenues, increased $9.3 million, or 9%, over the $108.1 million for the 1998 period. The increase in net revenues is due primarily to higher throughput and increased revenues from nontraditional services for distribution operations. Operating expenses of $78.0 million for the six months ended June 30, 1999, include $8.7 million of amortization expense related to the stranded plant from recognition of the rate settlement, $0.7 million of products extraction costs and $2.6 million for reorganization as more fully described above. Operating expenses of $66.0 million, excluding the effect of the rate settlement, extraction costs and reserves, decreased $3.0 million from the 1998 amount of $69.0 million due primarily to the benefit of restructuring initiatives, which began in the fourth quarter of 1998, substantially offset by higher depreciation expense. EQUITABLE PRODUCTION The Production operations comprise the exploration and production of natural gas, natural gas liquids and crude oil through operations focused in the Appalachian and Gulf of Mexico regions. In 1998, the managerial responsibility for the operations conducted by two subsidiaries, Kentucky West Virginia Gas Company and Nora Transmission Company, were transferred from Equitable Utilities to Equitable Production under a services agreement. The financial results for both periods are reclassified to reflect the new structure.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, EQUITABLE PRODUCTION 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands, except prices) <S> <C> <C> <C> <C> Operating revenues: Produced natural gas $ 31,541 $ 28,257 $ 57,761 $ 60,023 Transportation 6,331 6,397 12,940 13,015 Natural gas liquids 4,461 4,110 8,464 9,939 Crude oil 4,336 3,690 6,008 7,856 Marketed natural gas 2,530 2,573 4,473 4,530 Other 2,088 1,709 2,998 3,922 -------------- -------------- -------------- -------------- Total revenues 51,287 46,736 92,644 99,285 Cost of energy purchased 6,632 7,078 10,964 12,100 -------------- -------------- -------------- -------------- Net operating revenues 44,655 39,658 81,680 87,185 Operating expenses: Operating and maintenance 2,574 2,665 6,237 6,852 Production 6,538 7,702 12,450 14,566 Dry hole 1,247 11 1,277 115 Other exploration 2,548 1,420 3,020 2,298 Selling, general and administration 6,057 7,240 11,281 16,446 Depreciation, depletion and amortization 14,877 12,297 28,512 24,496 -------------- -------------- -------------- -------------- Total operating expenses 33,841 31,335 62,777 64,773 Earnings from continuing operations, before interest and taxes $ 10,814 $ 8,323 $ 18,903 $ 22,412 ============== ============== ============== ============== Sales quantities: Produced natural gas (Mcf) 15,401 13,305 30,784 26,299 Transportation deliveries (Mcf) 9,056 11,439 18,671 22,161 Natural gas liquids (gallons) 16,938 16,021 35,712 34,232 Crude oil (Bbls) 304 271 468 535 Marketed gas sales (Mcf) 1,115 1,345 2,517 2,332 Average selling prices: Produced natural gas (per Mcf) $ 2.048 $ 2.124 $ 1.876 $ 2.282 Natural gas liquids (per gallon) 0.263 0.257 0.237 0.290 Crude oil (per barrel) 14.263 13.616 12.838 14.684 Marketed gas sales (per Mcf) 2.269 1.913 1.777 1.943 </TABLE> Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998 Equitable Production's EBIT for the June 1999 quarter was $10.8 million, which was $2.5 million higher than the June 1998 quarter. The segment's positive results were primarily due to increased natural gas production offset in part by lower natural gas prices and higher total operating expenses.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) Net operating revenues for the three months ended June 30, 1999, increased $5.0 million, or 13%, compared with the second quarter of 1998. Natural gas volumes increased 2.1 Bcf, which positively impacted revenues by $4.3 million. The higher gas production volumes are related to production increases in the Gulf of Mexico region from drilling activities at West Cameron 180/198, West Cameron 540 and South Marsh Island 39. Also crude oil production increased by 33 MBbls in the current quarter compared with the same quarter last year due to the drilling activities at South Marsh Island 39. The increase in oil production as well as higher sales quantities of natural gas liquids contributed $0.7 million to revenues. Partially offsetting the production increases in the current quarter was a $.076 per Mcf decline in Equitable Production's average natural gas price, which negatively impacted revenues by $1.0 million. Total operating expenses for the current quarter increased $2.5 million compared with the same quarter in 1998. Depreciation, depletion and amortization (DD&A) was $2.6 million higher because of increased natural gas production. During the second quarter of 1999, the Gulf region drilled one dry hole at West Cameron 575, which accounted for the current quarter dry hole costs of $1.2 million. Also other exploration costs were $1.1 million higher for the June 1999 quarter due to a lease impairment taken in the Appalachian region. These operating expense increases were partially offset by a $1.2 million decline in selling, general and administrative (SG&A) expenses as a result of management and staff headcount reductions and corporate restructuring activities, which occurred in the fourth quarter of 1998. Also production costs decreased $1.2 million due to operating efficiencies and decreased well-tending staff. Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 For the six months ended June 30, 1999, Equitable Production had EBIT of $18.9 million compared with $22.4 million for the first six months of 1998. The decrease in the segment's EBIT was attributable to lower average market prices for natural gas, crude oil and natural gas liquids partially offset by increased natural gas production and lower total operating expenses.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE PRODUCTION (Continued) For the first six months of 1999, net operating revenues decreased to $81.7 million from $87.2 million for the comparable period last year. This decrease was primarily due to reductions of 18%, 13% and 18% in Equitable Production's average prices for natural gas, crude oil and natural gas liquids, respectively. The total revenue impact of these 1999 price declines was $13.5 million, of which $10.7 million was due to lower gas prices. Partially mitigating the effect of lower prices, natural gas production increased 4.5 Bcf, or 17%, in the first half of 1999 compared with the same period in 1998. This production increase contributed $8.4 million to current year revenues. The increased production volume is related to the drilling activities in the Gulf region discussed above under second quarter results. The decline in crude oil production in the six-month period reflects the depletion of West Cameron 580 and certain West Cameron 180/198 wells offset in part by new production at South Marsh Island 39. Total operating expenses for the six-month period of 1999 decreased by $2.0 compared with the first half of 1998. The decline in expenses reflects lower SG&A and production costs partially offset by higher DD&A due to increased gas production and the dry hole drilled in the second quarter of 1999. The savings in SG&A as well as production costs were primarily due to the reasons noted above under second quarter results. In addition, prior year SG&A includes $1.4 million of expenses recorded in the first quarter of 1998 related to the sales of the Company's Colombian operations and Western properties. Also first quarter 1998 production costs for the Gulf region were $0.6 million higher due to initial costs for certain properties acquired at the end of 1997. EQUITABLE SERVICES Equitable Services provides energy and energy related products and services that are designed to reduce its customers' operating costs and improve their productivity. The majority of Equitable Services' revenue and earnings is derived from energy saving performance contracting services and natural gas marketing activities. Equitable Services is comprised of two distinct business segments: NORESCO and Equitable Energy. The NORESCO segment includes ERI Services, a specialized business unit providing performance contracting services exclusively to the Federal Government. The financial results of the NORESCO segment include ERI Services.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) NORESCO 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. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, NORESCO 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands) <S> <C> <C> <C> <C> Energy service contracting revenues $ 40,986 $ 22,157 $ 78,963 $ 40,442 Energy service contract cost 32,470 15,529 61,972 28,560 -------------- -------------- -------------- ----------- Gross margin 8,516 6,628 16,991 11,882 -------------- -------------- -------------- ------------- Operating expenses: Selling, general and administrative 4,368 4,403 9,057 8,983 Depreciation, depletion and amortization 1,138 1,075 2,248 2,160 -------------- -------------- -------------- ------------- Total operating expenses 5,506 5,478 11,305 11,143 Other income 577 541 1,250 960 -------------- -------------- -------------- ------------- Earnings before interest and taxes $ 3,587 $ 1,691 $ 6,936 $ 1,699 ============== ============== ============== ============= </TABLE> Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998 NORESCO's gross margin increased by 28% to $8.5 million for the quarter ended June 30, 1999, compared to $6.6 million for the same period in 1998. The increase in gross margin reflects the continued expansion of this segment's operations and the implementation of larger value contracts. Construction completed during the quarter of $40.0 million was more than double the $19.5 million completed during the second quarter of 1998. The gross margin rate as a percent of sales declined to 21% compared to 30% during 1998, primarily due to the increase in revenues from the federal government market, which contributes lower gross margins than the company's other core markets. At June 30, 1999, construction backlog totaled approximately $85 million, an increase of $13 million over backlog at June 30, 1998. Operating expenses for this segment remained relatively unchanged, as increased marketing and development expenses were offset by lower direct labor costs and a reduction in allocated corporate overhead expense. Other income represents equity-in-earnings for the company's investments in unconsolidated entities, primarily power generation assets.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) NORESCO (Continued) Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 NORESCO's gross margin increased by 43% to $17.0 million for the six months ended June 30, 1999, compared to $11.9 million for the same period in 1998. The increase in gross margin reflects the continued expansion of this segment's operations and the implementation of larger value contracts. Construction completed during the six months of $73.6 million was up 166% from the $27.6 million completed during the same period in 1998. The gross margin rate as a percent of sales declined to 22% compared to 29% during 1998, primarily due to the increase in revenues from the federal government market, which contributes lower gross margins than the company's other core markets. Increased competition in the energy services industry has also contributed to the decline in average gross margins. Operating expenses for this segment remained relatively unchanged for the six-month period, as increased marketing and project development expenses were offset by lower administrative expenses and a reduction in allocated corporate overhead expense. Other income represents equity-in-earnings for the company's investments in unconsolidated entities, primarily power generation assets. EQUITABLE ENERGY Equitable Energy is a non-regulated 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, financial risk management and customer support services. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, Equitable Energy 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- (Thousands) <S> <C> <C> <C> <C> Operating revenues: Marketed natural gas $ 61,693 $ 72,998 $ 271,528 $ 171,559 Crude oil 1,804 - 1,804 - Other 163 - 288 - -------------- -------------- -------------- ------------- Total revenues 63,660 72,998 273,620 171,559 Cost of energy purchased 61,414 72,539 268,267 169,171 -------------- -------------- -------------- ------------- Net operating revenues 2,246 459 5,353 2,388 -------------- -------------- -------------- ------------- Operating expenses: Selling, general and administrative 1,379 2,011 3,014 5,428 Depreciation, depletion and amortization 50 (22) 99 275 -------------- -------------- -------------- ------------- Total operating expenses 1,429 1,989 3,113 5,703 -------------- -------------- -------------- ------------- Earnings (loss) before interest and taxes $ 817 $ (1,530) $ 2,240 $ (3,315) ============== ============== ============== ============= </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) EQUITABLE ENERGY (Continued) Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998 Net operating revenues increased to $2.2 million for the quarter ended June 30, 1999, compared to $0.5 million for the same period in 1998. Equitable Energy recognized a $0.3 million positive transportation settlement in the second quarter of 1999. Margins on a per-unit basis for the second quarter were higher than the same period in 1998 due to an increased emphasis in the residential and industrial markets. Equitable Energy operating expenses for the quarter were 30% lower than those of the second quarter of 1998, reflecting more cost control plus a significant staff reduction and office closing completed as part of the corporate-wide restructuring in the fourth quarter of 1998. Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 Net operating revenues increased to $5.4 million for the six month period ended June 30, 1999, compared to $2.4 million for the same period in 1998. During the first six months, Equitable Energy marketed 110 billion cubic feet (bcf) of natural gas compared to 66 bcf for the same period last year. The increased volume is a result of the addition of residential customer choice programs in Pennsylvania and Ohio (3 bcf) and increased utility/marketing company volumes transported during the 1999 winter heating season (32 bcf). Effective June 1, 1999, Equitable Energy discontinued its participation in the residential customer choice program in Pennsylvania and transferred those customers back to Equitable Gas Company. The utility/marketing company business represents high volume, comparatively low margin transactions, which complement the higher margin, lower volume base commercial and residential sales. Many of these utility/marketing company contracts expired at the end of March 1999 and were not renewed. Equitable Energy operating expenses for the six month period ended June 30, 1999, were 45% below those of the same period of 1998, again reflecting cost control, a significant staff reduction and office closing completed as part of the corporate-wide restructuring in the fourth quarter of 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CAPITAL RESOURCES AND LIQUIDITY Cash Flows Cash required for operations is impacted primarily by the seasonal nature of Equitable Resources' natural gas distribution operations and the volatility of oil and gas commodity prices. Cash provided by operating activities totaled $73.5 million in the three months ended June 30, 1999, compared to cash provided by continuing operations of $68.6 million in the 1998 period. Cash flows from operations increased in 1999 primarily as a result of the increase in earnings and improved collections of accounts receivable, offset in part by an increase in gas in storage in the current year. During the six months ended June 30, 1999, cash provided by operating activities decreased to $109.7 million, compared to $119.1 million from continuing operations for the first six months of 1998. The $9.4 million decrease is primarily a result of a decrease of $16 million in accounts payable and accrued expenses 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, decreased production receipts due to lower commodity prices, and the payment of $5 million of severance accrued at December 31, 1998 under the corporate restructuring program. The 1999 decrease was partially offset by increased distribution division collections due to colder winter weather and lower gas cost, and lower expenses throughout the Company. During the first six months of 1999, there were no material changes in the restructuring charge accrued in prior periods. During the three months and six months ended June 30, 1999, the Company repurchased 0.3 million and 2.1 million shares of common stock at average prices of $34.10 and $27.17, respectively, per share. Including shares repurchased in the fourth quarter of 1998, the Company has repurchased 3.4 million shares. Equitable Resources' financial objectives require ongoing capital expenditures for growth projects in continuing operations of the Equitable Production segment, as well as replacements, improvements and additions to plant assets in the Equitable Utilities segment. Such capital expenditures during the first half of 1999 were approximately $46.3 million, including $23.5 million and $11.8 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CAPITAL RESOURCES AND LIQUIDITY (Continued) On June 1, 1999 the Company announced an agreement to purchase Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie) from USX-Marathon Group. Management anticipates the purchase will be completed during the fourth quarter 1999. The purchase of Carnegie will be funded by cash from operations or existing sources of short-term debt. The purchase will not have a material effect on the Company's financial position or results of operations. Capital Resources Equitable Resources has adequate borrowing capacity to meet its financing requirements. Bank loans and commercial paper, supported by available credit, are used to meet short-term financing requirements. Interest rates on these short-term loans averaged 4.86% during the first six months of 1999. Equitable Resources maintains a revolving credit agreement with a group of banks providing $500 million of available credit. Adequate credit is expected to continue to be available in the future. In the fourth quarter of 1998, the Company completed the sale of its midstream operations for $338 million. 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 June 30, 1999, $95 million of proceeds is included in cash and cash equivalents, of which $75 million was used to retire additional long-term debt maturing on July 1, 1999. The Company has completed the evaluation of its Gulf region production operations, previously identified as a non-core business. Management is actively exploring alternatives to maximize the shareholder value from these operations. 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CAPITAL RESOURCES AND LIQUIDITY (Continued) 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 (98% complete) and on schedule. The testing and remediation of systems applications are on schedule with approximately 96% 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 to date of the Company's Year 2000 project is $3.4 million and the total cost estimate for the balance of the project is an additional $1.6 million. All of the costs have been or will be charged to operating expense except $.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. 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have not been any material changes regarding quantitative and qualitative disclosures about market risk from the information reported in the Company's 1998 Annual Report on Form 10-K.
PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on May 26, 1999. (c) Brief description of matters voted upon: (1) Elected the named directors to serve three-year terms as follows: Shares Shares Director Voted For Withheld Phyllis A. Domm, Ed.D. 30,360,767 564,569 James E. Rohr 30,399,907 507,429 David S. Shapira 30,366,263 541,073 (2) Ratified appointment of Ernst & Young, LLP, as independent auditors for the year ended December 31, 1999. Vote was 30,696,426 shares for; 143,450 shares against and 67,460 shares abstained. (3) Approved the 1999 Equitable Resources, Inc. Non-Employee Directors' Stock Incentive Plan. Vote was 16,421,275 shares for; 11,018,155 shares against and 67,460 shares abstained. (4) Approved the 1999 Equitable Resources, Inc. Long-Term Incentive Plan. Vote was 14,728,651 shares for; 12,711,487 shares against and 297,693 shares abstained. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 The 1999 Equitable Resources, Inc. Non-Employee Directors' Stock Incentive Plan (As Amended May 26, 1999). 10.2 The 1999 Equitable Resources, Inc. Long-Term Incentive Plan (As Amended May 26, 1999). (b) Reports on Form 8-K during the quarter ended June 30, 1999: Form 8-K Current report dated June 1, 1999, announcing agreement between the Registrant, Equitable Resources, Inc., (EQT) and USX-Marathon Group (MRO) wherein EQT and/or its subsidiaries will acquire from MRO 100 percent of the stock of Carnegie Natural Gas Company and affiliated subsidiaries of USX Corporation.
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: August 13, 1999
INDEX TO EXHIBITS Exhibit No. Document Description 10.1 The 1999 Equitable Resources, Inc. Filed Herewith Non-Employee Directors' Stock Incentive Plan (As Amended May 26, 1999). 10.2 The 1999 Equitable Resources, Inc. Filed Herewith Long-Term Incentive Plan (As Amended May 26, 1999). 27 Financial Data Schedule for the Period Filed Herewith Ended June 30, 1999