1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 1-3551 EQUITABLE RESOURCES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0464690 (State of incorporation or organization) (IRS Employer Identification No.) ONE OXFORD CENTRE, SUITE 3300, 301 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (412) 553-5700 ------------ NONE (Former name, former address and former fiscal year, if changed since last report) ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 31, 2001 ----- ------------- Common stock, no par value 64,198,811 shares
2 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> <C> PART I. FINANCIAL INFORMATION: Item 1. Financial Statements (Unaudited): Statements of Consolidated Income for the Three and Six Months Ended June 30, 2001 and 2000 2 Statements of Condensed Consolidated Cash Flows for the Three and Six Months Ended June 30, 2001 and 2000 3 Condensed Consolidated Balance Sheets, June 30, 2001, and December 31, 2000 4 - 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION: Item 1. Legal Proceedings 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 SIGNATURE 28 INDEX TO EXHIBITS </TABLE>
3 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 --------------------------- ----------------------------- <S> <C> <C> <C> <C> Operating revenues $345,544 $332,497 $1,196,701 $707,374 Cost of sales 216,838 195,140 882,404 404,079 -------- -------- ---------- -------- Net operating revenues 128,706 137,357 314,297 303,295 -------- -------- ---------- -------- OPERATING EXPENSES: Operation and maintenance 20,580 21,708 41,227 41,543 Production and exploration 9,544 13,013 19,224 23,271 Selling, general and administrative 30,405 25,030 60,263 55,343 Depreciation, depletion and amortization 17,404 26,935 34,537 56,719 -------- -------- ---------- -------- Total operating expenses 77,933 86,686 155,251 176,876 -------- -------- ---------- -------- Operating income 50,773 50,671 159,046 126,419 Other loss -- (6,951) -- (6,951) Equity in nonconsolidated investments: Westport 3,477 -- 14,467 -- Other 3,362 990 5,303 2,424 -------- -------- ---------- -------- 6,839 (5,961) 19,770 (4,527) EARNINGS BEFORE INTEREST & TAXES (EBIT) 57,612 44,710 178,816 121,892 Interest charges 9,345 19,239 20,812 35,034 -------- -------- ---------- -------- Income before income taxes 48,267 25,471 158,004 86,858 Income taxes 16,830 9,246 55,301 31,530 -------- -------- ---------- -------- NET INCOME $ 31,437 $ 16,225 $ 102,703 $ 55,328 ======== ======== ========== ======== EARNINGS PER SHARE OF COMMON STOCK: Basic: Weighted average common shares outstanding 64,636 65,274 64,711 65,274 Net income $ 0.49 $ 0.25 $ 1.59 $ 0.85 ======== ======== ========== ======== Diluted: Weighted average common shares outstanding 66,677 66,304 66,538 66,242 Net income $ 0.47 $ 0.24 $ 1.54 $ 0.84 ======== ======== ========== ======== </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2
4 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------------------- -------------------------- <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations $ 31,437 $ 16,225 $ 102,703 $ 55,328 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 2,983 1,715 10,230 5,537 Depreciation, depletion, and amortization 17,404 26,935 34,537 56,719 Recognition of deferred revenue (26,912) (2,683) (46,762) (6,313) Deferred income taxes 17,506 1,213 18,293 116 Increase in undistributed earnings from nonconsolidated investments (5,663) (1,583) (15,998) (2,540) Changes in other assets and liabilities 1,099 (9,845) 25,747 (23,541) -------- --------- --------- --------- Net cash provided by operating activities 37,854 31,977 128,750 85,306 -------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (30,250) (19,937) (44,475) (44,132) Acquisition of Statoil production assets -- -- -- (672,022) Proceeds from Gulf asset merger -- 158,214 -- 158,214 Production monetization -- 148,526 -- 148,526 (Increase) decrease in equity of unconsolidated entities 662 (126,066) (49) (129,451) Proceeds from sale of contract receivables 1,323 -- 31,287 -- Proceeds from sale of property 1,620 -- 4,525 498 -------- --------- --------- --------- Net cash (used in) provided by investing activities (26,645) 160,737 (8,712) (538,367) -------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term loans (39,805) (73,369) (105,810) 562,791 Dividends paid (10,390) (9,628) (19,957) (19,301) Purchase of treasury stock (46,206) (17,814) (46,206) (17,814) Proceeds from exercises under employee compensation plans 1,778 5,006 3,352 8,966 -------- --------- --------- --------- Net cash (used in) provided by financing activities (94,623) (95,805) (168,621) 534,642 -------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents (83,414) 96,909 (48,583) 81,581 Cash and cash equivalents at beginning of period 86,854 2,703 52,023 18,031 -------- --------- --------- --------- Cash and cash equivalents at end of period $ 3,440 $ 99,612 $ 3,440 $ 99,612 ======== ========= ========= ========= CASH PAID DURING THE PERIOD FOR: Interest, net of amount capitalized $ 8,662 $ 18,353 $ 22,273 $ 39,208 ======== ========= ========= ========= Income taxes paid, net of refund $ 23,198 $ 13,572 $ 10,280 $ 17,876 ======== ========= ========= ========= </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3
5 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> ASSETS JUNE 30, DECEMBER 31, 2001 2000 ------------------------------ (THOUSANDS) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 3,440 $ 52,023 Accounts receivable 191,426 300,399 Unbilled revenues 71,055 80,157 Inventory 64,886 85,246 Derivative commodity instruments, at fair value 123,526 31,220 Prepaid expenses and other 16,643 34,691 ---------- ---------- Total current assets 470,976 583,736 ---------- ---------- EQUITY IN NONCONSOLIDATED INVESTMENTS 246,698 230,651 PROPERTY, PLANT AND EQUIPMENT 2,250,854 2,226,421 Less accumulated depreciation and depletion 824,566 806,992 ---------- ---------- Net property, plant and equipment 1,426,288 1,419,429 ---------- ---------- OTHER ASSETS 168,355 191,098 ---------- ---------- Total $2,312,317 $2,424,914 ========== ========== </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4
6 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30, DECEMBER 31, 2001 2000 --------------------------------- (THOUSANDS) <S> <C> <C> CURRENT LIABILITIES: Current portion of long-term debt $ 10,100 $ 10,100 Current portion of nonrecourse project financing 17,000 461 Short-term loans 196,457 302,267 Accounts payable 123,685 285,723 Prepaid gas forward sale 55,705 55,705 Derivative commodity instrument, at fair value 30,698 30,243 Other current liabilities 189,065 161,082 ---------- ---------- Total current liabilities 622,710 845,581 ---------- ---------- LONG-TERM DEBT: Debentures and medium-term notes 271,250 271,250 Nonrecourse project financing -- 16,539 ---------- ---------- Total long-term debt 271,250 287,789 DEFERRED AND OTHER CREDITS: Deferred income taxes 278,479 247,833 Deferred investment tax credits 14,877 15,411 Prepaid gas forward sale 125,395 153,589 Deferred revenue 9,917 30,232 Other 63,952 25,784 ---------- ---------- Total deferred and other credits 492,620 472,849 Preferred trust securities 125,000 125,000 CAPITALIZATION: Common stockholders' equity Common stock, no par value, authorized 160,000 shares; shares issued June 30, 2001 and December 31, 2000, 74,504 281,364 281,100 Treasury stock, shares at cost June 30, 2001, 10,325 December 31, 2000, 9,426 (191,668) (151,167) Retained earnings 646,501 563,755 Accumulated other comprehensive income, net of taxes 64,540 7 ---------- ---------- Total common stockholders' equity 800,737 693,695 ---------- ---------- Total $2,312,317 $2,424,914 ========== ========== </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5
7 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six- month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Equitable Resources' Annual Report on Form 10-K for the year ended December 31, 2000 as well as the "Information Regarding Forward Looking Statements" on page 26 of this document. B. Business Combinations/Dispositions - On February 15, 2000, Equitable Resources, Inc. (Equitable or the Company), through its subsidiary, ERI Investments, Inc., acquired the Appalachian oil and gas properties of Statoil Energy, Inc. for $630 million plus working capital adjustments for a total of $677 million. The Company acquired all of the issued and outstanding shares and interests of Eastern States Oil & Gas, Inc. and Eastern States Exploration Co. (collectively "Statoil"), subsidiaries of Statoil Energy, Inc. The acquisition was initially funded through commercial paper and was replaced with transactions designed to monetize the oil and gas properties. This acquisition has been accounted for under the purchase method of accounting. Accordingly, the allocation of the cost of the acquired assets and liabilities assumed has been made on the basis of the estimated fair value. The consolidated financial statements include the operating results of Statoil from the date of acquisition. The following summarized unaudited pro forma financial information assumes that the Statoil acquisition occurred on January 1, 2000. Adjustments have been made for DD&A and certain other adjustments together with related income tax effects. Six Months Ended June 30, 2000 ------------------------- (Thousands, except per share amounts) Revenue $734,807 ======== Net income $ 56,998 ======== Earnings per share: Basic $ 0.87 ======== Diluted $ 0.86 ======== This information is not necessarily indicative of the results the Company would have obtained had these events actually occurred on January 1, 2000, or of the Company's actual or future results of operations of the combined companies. 6
8 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) C. Segment Disclosure - The Company reports operations in three segments which reflect its lines of business. The Equitable Utilities segment's activities are comprised of the operations of the Company's state-regulated local distribution company, natural gas transportation, storage and marketing activities involving the Company's interstate natural gas pipelines, and supply and transportation services for the natural gas and electricity markets. The Equitable Production segment's activities are comprised of the development, production, gathering and sale of natural gas. The NORESCO segment's activities are comprised of cogeneration and power plant development, performance contracting, central facility plant operations and the development and implementation of energy and water efficiency programs. Operating segments are evaluated on their contribution to the Company's consolidated results, based on earnings before interest and taxes. Interest charges and income taxes are managed on a consolidated basis and allocated pro forma to operating segments. Headquarters costs are billed to operating segments based on a fixed allocation of the annual headquarters' operating budget. Differences between budget and actual headquarters expenses are not allocated to operating segments, but included as a reconciling item to consolidated earnings from continuing operations. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 --------------------------- ----------------------------- (THOUSANDS) <S> <C> <C> <C> <C> REVENUES FROM EXTERNAL CUSTOMERS: Equitable Utilities $236,979 $219,089 $ 968,536 $496,800 Equitable Production 73,254 77,332 158,390 143,898 NORESCO 35,311 36,076 69,775 66,676 -------- -------- ---------- -------- Total $345,544 $332,497 $1,196,701 $707,374 ======== ======== ========== ======== INTERSEGMENT REVENUES: Equitable Utilities $ 37,860 $ 36,495 $ 91,534 $ 67,166 Equitable Production 2,302 6,145 7,653 13,519 -------- -------- ---------- -------- Total $ 40,162 $ 42,640 $ 99,187 $ 80,685 ======== ======== ========== ======== SEGMENT EARNINGS BEFORE INTEREST AND TAXES: Equitable Utilities $ 5,737 $ 9,654 $ 54,968 $ 56,814 Equitable Production 44,377 32,108 103,924 63,569 NORESCO 4,644 4,025 7,456 4,321 -------- -------- ---------- -------- Total operating segments $ 54,758 $ 45,787 $ 166,348 $124,704 ======== ======== ========== ======== RECONCILING ITEMS: Equity earnings in Westport $ 3,477 $ -- $ 14,467 $ -- Headquarters operating expenses (623) (1,077) (1,999) (2,812) Interest expense (9,345) (19,239) (20,812) (35,034) Income tax expenses (16,830) (9,246) (55,301) (31,530) -------- -------- ---------- -------- Net income $ 31,437 $ 16,225 $ 102,703 $ 55,328 ======== ======== ========== ======== </TABLE> 7
9 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) C. Segment Disclosure (Continued) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 2001 2000 ------------------------------ (THOUSANDS) <S> <C> <C> SEGMENT ASSETS: Equitable Utilities $ 917,087 $1,115,960 Equitable Production 1,055,393 975,523 NORESCO 188,497 143,030 ---------- ---------- Total operating segments 2,160,977 2,234,513 Headquarters assets, including cash and short-term investments and net intercompany accounts receivable 151,340 190,401 ---------- ---------- Total $2,312,317 $2,424,914 ========== ========== </TABLE> D. Cumulative Effect of Change in Accounting Accounting Policy for Derivative Instruments - Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of Statement 133." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement requires the Company to recognize all derivatives as either assets or liabilities on the balance sheet and measure the effectiveness of the hedges, or the degree that the gain/(loss) for the hedging instrument offsets the loss/(gain) on the hedged item, at fair value each reporting period. The intended use of the derivatives and their designation as either a fair value hedge or a cash flow hedge will determine when the gains or losses on the derivatives are to be reported in earnings and when they are to be reported as a component of other comprehensive income, until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value is required to be recognized in earnings immediately. The time value of options, which is excluded from the assessment of hedge effectiveness, and the amount of the hedge's ineffectiveness, decreased earnings by $0.3 million and is included in Operating Revenue in the Statement of Consolidated Income. Cash Flow Hedges - The derivative financial instruments that comprise the cumulative effect recorded in other comprehensive income have been designated and qualify as cash flow hedges. These instruments hedge the Company's exposure to variability in expected future cash flows and relate primarily to the Company's use of derivative financial instruments to manage a portion of the market risk associated with the fluctuations in the price of natural gas, oil and propane. The asset and liability for all of the Company's derivative financial instruments was $92.6 million and $1.3 million, respectively at June 30, 2001, and is reflected on the Consolidated Balance Sheet as a component of Derivative Commodity Instruments at fair value. The difference between these derivatives and the amounts reported on the Consolidated Balance Sheet represent the Company's derivative contracts held for trading purposes. 8
10 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) D. Cumulative Effect of Change in Accounting (Continued) At June 30, 2001, the Company expects to recognize $16.0 million of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months due to physical settlements. The Company has derivatives with maturities that extend through December 2008. E. Accumulated Other Comprehensive Income (Loss) - The components of Accumulated Other Comprehensive Income (Loss) are as follows shown net of tax (in thousands): Accumulated other comprehensive income, January 1, 2001 $ 7 Cumulative effect of FAS 133 adoption (37,023) Net change of current period hedging transactions 101,556 -------- Accumulated other comprehensive loss, June 30, 2001 $ 64,540 ======== F. In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," that replaces in its entirety, FASB Statement No. 125. Although Statement 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. As required, the Company began applying the new rules prospectively to transactions beginning in the second quarter 2001. Based on the Company's current circumstances, the application of this new statement does not have a material impact on the financial statements and footnote disclosures. G. In July 2001, the FASB issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets," both of which are effective for fiscal year 2002. Statement No. 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001 and further clarifies the criteria to recognize intangible assets separately from goodwill. Under Statement No. 142, goodwill and indefinite intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Application of the nonamortization provisions of Statement No. 142 is expected to result in an increase in net income of approximately $2.9 million ($0.04 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. H. In July 2001, the FASB unanimously approved the issuance of Statement No. 143, "Accounting for Asset Retirement Obligations," which will be effective for fiscal year 2003. This Statement requires asset retirement obligations to be measured at fair value and to be recognized at the time the obligation is incurred. During 2002, management will assess the impact of this pronouncement and has not yet determined the impact, if any, on the earnings and financial position of the Company. I. Reclassification - Certain previously reported amounts have been reclassified to conform with the 2001 presentation. J. Stock Split - On April 19, 2001, the Board of Directors of Equitable Resources declared a two for one stock split payable on June 11, 2001 to shareholders of record on May 11, 2001. Earnings per share of common stock and weighted average common shares outstanding have been adjusted for the two for one stock split. 9
11 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Equitable's consolidated net income for the quarter ended June 30, 2001 totaled $31.4 million or $0.47 per diluted share as compared to the $0.24 per share earnings on net income of $16.2 million reported for the same period a year ago. Excluding earnings from Westport Resources, consolidated net income was $29.2 million, or $0.44 per diluted share. The earnings improvement for the June 2001 quarter is attributable to higher commodity prices and reduced unit operating costs within the production segment. These improvements were partially offset by a one-time charge related to a workforce reduction within the pipeline operations of the utilities segment. 10
12 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS EQUITABLE UTILITIES Equitable Utilities' operations are comprised of the sale and transportation of natural gas to retail customers at state-regulated rates, interstate transportation and storage of natural gas subject to federal regulation, and the unregulated marketing of natural gas. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 --------------------------- ----------------------------- <S> <C> <C> <C> <C> OPERATIONAL DATA Capital expenditures $ 9,170 $ 6,119 $ 16,737 $ 11,509 Total expenses/net revenues (%) 86.99% 78.43% 58.04% 56.28% FINANCIAL RESULTS (THOUSANDS) Utility revenues $ 64,285 $ 54,501 $ 277,928 $189,867 Marketing revenues 210,554 201,083 782,142 374,099 -------- -------- ---------- -------- Total operating revenues 274,839 255,584 1,060,070 563,966 Purchased gas costs and revenue related taxes 230,736 210,831 929,070 434,011 -------- -------- ---------- -------- Net operating revenues 44,103 44,753 131,000 129,955 Operating and maintenance expense 14,765 14,850 29,647 29,711 Selling, general and administrative expense 17,195 12,542 33,695 28,047 Depreciation, depletion and amortization 6,406 7,707 12,690 15,383 -------- -------- ---------- -------- Total expenses 38,366 35,099 76,032 73,141 -------- -------- ---------- -------- EBIT $ 5,737 $ 9,654 $ 54,968 $ 56,814 ======== ======== ========== ======== </TABLE> 11
13 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 Total net revenues decreased $0.7 million, or 1% for the three months ended June 30, 2001 compared to the prior year quarter due to warmer weather than the year ago quarter, which was partially offset by increased revenue from gas marketing. Earnings before interest and taxes (EBIT) decreased $4.0 million to $5.7 million for the current period compared to $9.7 million for the same period in 2000. Results for the June 2001 quarter included a one-time charge of $4.3 million related to the pipeline operations workforce reduction. This charge is expected to result in ongoing savings of approximately $2.0 million per year. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Total net revenues slightly increased to $131.0 million in 2001 compared to the prior year. The increase is related to higher distribution revenues, primarily in the first quarter due mainly to colder weather. Earnings before interest and taxes decreased 3% to $55.0 million for the current period compared to $56.8 million for the same period in 2000. Excluding the one-time charge related to the pipeline operations, EBIT increased $2.5 million or 4% due principally to higher net revenues within the distribution operations. DISTRIBUTION OPERATIONS <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------------------ ------------------------ <S> <C> <C> <C> <C> OPERATIONAL DATA Degree days (normal = Qtr - 712, YTD - 3,728) 504 541 3,322 3,113 O & M per customer $ 66.55 $ 65.29 $146.30 $140.29 Volumes (MMcf) Residential 3,077 3,681 16,193 15,414 Commercial and industrial 4,239 6,077 14,606 17,618 ------- ------- ------- ------- Total gas sales and transportation 7,316 9,758 30,799 33,032 ======= ======= ======= ======= FINANCIAL RESULTS (THOUSANDS) Net operating revenues $26,223 $27,599 $92,725 $88,001 Operating costs 19,047 18,778 41,488 40,322 Depreciation and amortization 4,315 4,443 8,589 8,868 ------- ------- ------- ------- EBIT $ 2,861 $ 4,378 $42,648 $38,811 ======= ======= ======= ======= </TABLE> 12
14 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 Heating degree days in the June 2001 quarter were 504 or 7% warmer than the 541 degree days recorded in the prior year quarter. The heating degree days were 29% warmer than the 30-year normal of 712, based on the 30-year average determined by the National Oceanic and Atmospheric Administration. The warmer weather resulted in a net revenue reduction of approximately $2.0 million compared to the prior year quarter. Residential volumes decreased by 16% due to the warmer than normal weather in April 2001. Commercial and industrial volumes were 30% lower than the same quarter last year primarily due to economic decline in the domestic steel industry. The margin from large industrial business is low, and consequently the decrease in volume had no material impact on the quarter's results. Total operating expenses of $23.4 million for the 2001 quarter slightly increased compared to the June 2000 quarter operating expenses of $23.2 million. The increase primarily relates to an increase in provisions for doubtful accounts attributable to higher gas prices. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Weather in the distribution service territory for the six months ended June 30, 2001, was 11% warmer than normal, but 7% colder than last year primarily associated with weather in the first quarter 2001. Residential volumes increased 5% from prior year, while commercial and industrial volumes decreased 17% in the current year. Despite the decrease in commercial and industrial volumes, net revenue did not proportionately decrease due to the relatively low margins on industrial customer volumes. Net operating revenues for the six months ended June 30, 2001, increased to $92.7 million from $88.0 million, or 5% from the same period last year. This increase is primarily due to the 7% colder weather than last year as well as to increased natural gas delivery margins. Total operating expenses for the six-month period increased $0.9 million, or 2%, from the same period in 2000. The increase in operating expenses is related to a $1.8 million increase in provisions for doubtful accounts attributable to higher gas prices, partially offset by the benefit of continued Utility process improvement initiatives. 13
15 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) PIPELINE OPERATIONS <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------------------- ------------------------ <S> <C> <C> <C> <C> OPERATIONAL DATA Transportation throughput (MMbtu) 18,290 15,846 36,776 39,079 FINANCIAL RESULTS (THOUSANDS) Net operating revenues $12,900 $13,784 $31,103 $33,058 Operating costs 11,270 6,708 18,229 13,760 Depreciation and amortization 1,996 3,214 3,952 6,419 ------- ------- ------- ------- (Loss before interest and taxes) EBIT $ (366) $ 3,862 $ 8,922 $12,879 ======= ======= ======= ======= </TABLE> THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 Net operating revenues for the three months ended June 30, 2001, were $12.9 million compared to $13.8 million for the same quarter in 2000. Second quarter 2000 net operating revenues included $1.6 million for the recovery of stranded costs in rates. Excluding the impact of the cost recovery, net operating revenues for the current period increased $0.7 million, or 6%, compared to the same quarter a year ago. This increase in net operating revenues was primarily due to increased short-term storage services over the prior year quarter. Total operating expenses were $13.3 million for the 2001 quarter compared to $9.9 million for the 2000 quarter, an increase of $3.4 million. As previously described, the 2001 operating expenses include a one-time $4.3 million charge related to the pipeline operations workforce reduction. The operating expenses for 2000 included $1.3 million of amortization expense related to the recovery of stranded costs in rates. Excluding these items in both periods, normalized operating expenses were $9.0 million in the 2001 quarter as compared to $8.6 million for the same quarter a year ago. Excluding the impact of the one-time charge for workforce reductions and the rate case settlement in the respective periods, earnings before interest and taxes of $3.9 million for the current quarter increased $0.3 million from 2000. This increase is due primarily to the increased short-term storage services in the June 2001 quarter. 14
16 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Net operating revenues for the six months ended June 30, 2001, were $31.1 million compared to $33.1 million for the same period in 2000. Included in the prior year net operating revenues was $3.2 million for the recovery of stranded costs in rates. Excluding the impact of this rate settlement, net operating revenues for the 2001 period increased $1.2 million compared to the same period a year ago. This increase in net operating revenues is primarily due to increased natural gas delivery margins and increased short-term storage services. Total operating expenses were $22.2 million for the six months ended June 30, 2001 compared to operating expenses of $20.2 million for the same period in 2000, an increase of $2.0 million. Excluding the $4.3 million one-time charge for the workforce reductions in 2001 and the $2.6 million of amortization expense related to the recovery of stranded costs in rates in 2000, operating expenses of $17.9 million are comparable to $17.6 million of operating expenses for the same period last year. EQUITABLE MARKETING <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------------------ -------------------------- <S> <C> <C> <C> <C> OPERATIONAL DATA Marketed gas sales (MMbtu) 44,658 54,908 130,407 115,377 Net operating revenues/MMbtu $0.1115 $0.0614 $ 0.0550 $ 0.0771 FINANCIAL RESULTS (THOUSANDS) Net operating revenues $ 4,979 $ 3,370 $ 7,171 $ 8,896 Operating costs 1,643 1,906 3,624 3,676 Depreciation and amortization 94 50 149 96 ------- ------- -------- -------- EBIT $ 3,242 $ 1,414 $ 3,398 $ 5,124 ======= ======= ======== ======== </TABLE> 15
17 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE UTILITIES (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 The $1.6 million increase in net operating revenues over the 2000 quarter is primarily attributable to increased marketing fees and a concentration on higher unit margin/lower volume business. Total operating expenses for the current quarter of $1.7 million decreased from the 2000 quarter by $0.3 million primarily due to the prior year quarter including outside consulting costs associated with the implementation of SFAS 133. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Net operating revenues for the six months ended June 30, 2001 decreased $1.7 million from the same period last year. This decrease is attributable to the $2.6 million loss on transactions marked to market that were previously treated as hedges. Excluding the marked to market loss, unit margins remained flat. Total operating expenses for the 2001 six-month period were flat compared to the same period a year ago. 16
18 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION Production operations comprise the production, gathering, transportation and sale of natural gas. In April 2000, the company merged its Equitable Production - Gulf business with Westport Oil and Gas Company to form Westport Resources Corporation (Westport). The operations of Equitable Production - Gulf through the date of the merger are presented separately after the operations of Equitable Production (Appalachian). EQUITABLE PRODUCTION (APPALACHIAN) In February 2000, Equitable Production acquired the Appalachian Production assets of Statoil for $630 million plus working capital adjustments for a total of $677 million. Statoil's operations consisted of approximately 1.2 trillion cubic feet of proven natural gas reserves and 6,500 natural gas wells in West Virginia, Kentucky, Virginia, Pennsylvania and Ohio. In June and December 2000, Equitable sold approximately 200 Bcfe of reserves to a partnership and a trust for proceeds of $378 million and an interest in the partnership and the trust. Also during 2000, the Company entered into two natural gas advance sales contracts for 48.7 MMcf of reserves for proceeds of $208.8 million. The Company is required to sell and deliver certain quantities of natural gas during the term of the contracts. As such, these contracts were recorded as prepaid gas forward sale and are being recognized in income as deliveries occur. The net result of the acquisition and subsequent monetizations on 2001 production and service volumes are as follows: net equity sales of natural gas and equivalents decreased 15.7 Bcfe, due to the monetization in subsequent months of wells produced by the Company in 2000; monetized sales increased 5.7 Bcfe, due to current year sales under the two natural gas advance sales contracts completed in 2000; and operated and gathered volumes increased 2.2 Bcfe and 8.1 Bcfe, respectively, as the Statoil properties were operated for 90 days in the first quarter 2001 compared to 45 days in the same period of 2000. 17
19 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION (CONTINUED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------------------ -------------------------- <S> <C> <C> <C> <C> OPERATIONAL DATA (EXCLUDING GULF OPERATIONS) Production: Net equity sales, natural gas and equivalents (MMcfe) 9,632 19,709 18,593 34,248 Average (well-head) sales price ($/Mcfe) $ 3.63 $ 3.01 $ 4.34 $ 2.83 Monetized sales (MMcfe) 5,699 2,845 11,380 5,699 Average (well-head) sales price ($/Mcfe) $ 4.07 $ 1.79 $ 4.20 $ 1.79 Company usage (MMcfe) 1,284 1,926 2,482 3,346 Lease operating expense excluding severance tax ($/Mcfe) $ 0.34 $ 0.33 $ 0.35 $ 0.32 Severance tax ($/Mcfe) $ 0.19 $ 0.14 $ 0.21 $ 0.12 Depletion ($/Mcfe) $ 0.38 $ 0.53 $ 0.39 $ 0.50 PRODUCTION SERVICES: Gathered volumes (MMcfe) 27,665 25,543 52,420 44,336 Average gathering fee ($/Mcfe) $ 0.52 $ 0.60 $ 0.59 $ 0.61 Gathering and compression expense ($/Mcfe) $ 0.21 $ 0.27 $ 0.22 $ 0.27 Gathering and compression depreciation ($/Mcfe) $ 0.10 $ 0.10 $ 0.10 $ 0.11 Total operated volumes (MMcfe) 23,003 24,480 45,529 43,293 Volumes handled (MMcfe) 31,166 28,241 59,023 49,558 Selling, general and administrative ($/Mcfe handled) $ 0.21 $ 0.23 $ 0.22 $ 0.23 Capital expenditures (excludes Statoil Acquisition) (thousands) $20,792 $13,841 $ 27,260 $ 23,135 FINANCIAL RESULTS (THOUSANDS) Revenue from Production $58,175 $64,482 $128,522 $106,954 Services: Revenue from gathering fees 14,310 15,204 30,812 27,178 Other revenues 3,071 3,791 6,709 6,330 ------- ------- -------- -------- Total revenues 75,556 83,477 166,043 140,462 Gathering and compression expenses 5,815 6,863 11,580 11,820 Lease operating expense 5,695 7,965 11,234 13,860 Severance tax 3,227 3,316 6,888 5,214 Depreciation, depletion and amortization 9,518 17,633 18,866 31,501 Selling, general and administrative 6,498 6,712 12,994 11,558 Exploration, including dry hole expense 622 1,929 1,102 2,415 ------- ------- -------- -------- Total operating expenses 31,375 44,418 62,664 76,368 Equity earnings from nonconsolidated investments 196 -- 545 -- Other income (expense) -- (6,951) -- (6,951) ------- ------- -------- -------- EBIT from operations $44,377 $32,108 $103,924 $ 57,143 ======= ======= ======== ======== </TABLE> 18
20 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 Equitable Production (Appalachian) earnings before interest and taxes for the three months ended June 30, 2001, were $44.4 million compared to $32.1 million for the three months ended June 30, 2000. The segment's results were favorably affected by higher market prices for natural gas and continuing improvements in operating efficiency. During the three months ended June 30, 2001, the Company's average equity well-head sales price realized on produced volumes rose to $3.63 per thousand cubic feet equivalent (Mcfe), compared to $3.01 per Mcfe in the second quarter of 2000. The $20.6 million increase in revenue due to commodity prices is partially offset by a decline in production primarily as a result of the two asset sales described above. The June and December 2000 asset sales (6.4 Bcfe) resulted in a decrease of $22.5 million in production revenues, $1.6 million in LOE expenses and $6.5 million in depletion expense in the second quarter of 2001. Gathering and compression expenses were unaffected by these monetizations, as the monetized volumes are still gathered and compressed by the Company. Operating expenses for the June 2001 quarter were $31.4 million compared to $44.4 million for the 2000 quarter. The $13.0 million, or 29%, decline is primarily a result of lower depletion expense coupled with operating improvements at the Kentucky West pipeline unit. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Equitable Production (Appalachian) earnings before interest and taxes for the six months ended June 30, 2001, were $103.9 million compared to $57.1 million for the six months ended June 30, 2000. The segment's results were favorably affected by higher market prices for natural gas, higher gathering and service volumes, resulting primarily from the Statoil acquisition and continuing improvements in operating efficiency. During the six months ended June 30, 2001, the Company's average equity well-head sales price realized on produced volumes rose to $4.34 per Mcfe, compared to $2.83 per Mcfe in the same period in 2000. The $49.2 million increase in revenue due to commodity prices is partially offset by a $1.7 million increase in severance taxes and a $1.4 million additional provision for uncollectible accounts. As described above, a number of significant transactions during 2000 subsequently impacted the volumes realized in natural gas sales, gathering fees, other revenues and various operating expenses in 2001 compared to 2000. Increased production volumes due to a full year ownership of the Statoil assets (4.3 Bcfe) is offset by the June and December 2000 asset sales (13.1 Bcfe). In addition, wells shut-in or damaged during the fourth quarter 2000 work stoppage produced 0.6 Bcfe less in 2001 than for the comparable period in 2000. The maintenance and repair of these facilities was completed during March and production volumes returned to pre-strike levels by April 1, 2001. The net reduction from sale of assets resulted in a decrease of $37.2 million in production revenues, $3.2 million in LOE expenses and $7.3 million in depletion expense in 2001. 19
21 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITABLE PRODUCTION (CONTINUED) Gathering fee revenues increased $3.6 million, of which $2.7 million is attributed to Statoil volumes and $0.9 million relates to increased gathering rates for certain monetized volumes. Gathering and compression expenses declined slightly despite the $1.3 million increase due to the additional 45 days ownership of Statoil properties in 2001 and were unaffected by the monetizations, as the monetized volumes are still gathered and compressed by the Company. Operating expenses for the period ended June 30, 2001 totaled $62.7 million compared to $76.4 million last year. Operating expenses declined despite inflationary pressures on the price of services throughout the industry, resulting from strong commodity prices. Operating improvements in the Kentucky West pipeline unit and lower depletion expense were partially offset by increased operating costs from the Statoil acquisition, in addition to the severance tax increases and additional provisions for uncollectible accounts described above. PRODUCTION - GULF OPERATIONS As described above, the Equitable Production - Gulf operations were merged into Westport effective April 1, 2000. The following includes results prior to the merger. THREE MONTHS ENDED MARCH 31, 2000 ------------------ OPERATIONAL DATA Production: Net sales, natural gas and equivalents (Mmcfe) 6,087 Average sales price ($/Mcfe) $ 2.77 LOE ($/Mcfe) $ 0.24 SG&A ($/Mcfe) $ 0.27 Depletion ($/Mcfe) $ 1.11 Capital expenditures (Thousands) $ 9,034 FINANCIAL RESULTS (THOUSANDS) Revenue from Production $16,885 Other revenues 70 ------- Total revenues 16,955 Gathering and compression expense 17 Lease operating expense 1,454 Depreciation, depletion and amortization 6,891 Selling, general and administrative expense 1,643 Exploration and dry hole expense 524 ------- Total operating expenses $10,529 ------- EBIT $ 6,426 ======= 20
22 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORESCO NORESCO provides energy and energy related products and services that are designed to reduce its customers' operating costs and improve their productivity. The segment's activities are comprised of private power, cogeneration, and central plant development, ownership, and operation; performance contracting; and the development and implementation of energy and water efficiency programs. NORESCO's customers include governmental, institutional, commercial, and industrial end-users. NORESCO's energy infrastructure group develops and operates facilities in the U.S. and operates private power plants in selected international countries. NORESCO provides a range of integrated energy management services within its projects, including: project development, design and engineering analysis; permitting; construction; equipment procurement; project management; project financing; project ownership; equipment operation and maintenance; and energy savings metering, monitoring and verification. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------------------- ------------------------- <S> <C> <C> <C> <C> OPERATIONAL DATA (THOUSANDS) Revenue backlog, end of period $90,844 $64,962 $90,844 $64,962 Construction completed $21,487 $16,647 $42,209 $36,638 Capital expenditures $ 136 $ 1,041 $ 330 $ 1,382 Gross profit margin 25.6% 25.9% 24.7% 24.2% SG&A as a % of revenue 17.4% 14.0% 16.8% 17.5% Project Development expenses as a % of revenue 2.6% 3.5% 2.9% 4.4% FINANCIAL RESULTS (THOUSANDS) Energy service contract revenues $35,311 $36,076 $69,775 $66,676 Energy service contract costs 26,263 26,749 52,521 50,553 ------- ------- ------- ------- Net operating revenues 9,048 9,327 17,254 16,123 Selling, general and administrative expenses 6,145 5,053 11,689 11,693 Amortization of goodwill 954 1,041 1,918 1,978 Depreciation and depletion 471 198 950 555 ------- ------- ------- ------- Total expenses 7,570 6,292 14,557 14,226 Equity earnings from nonconsolidated investments 3,166 990 4,759 2,424 ------- ------- ------- ------- EBIT $ 4,644 $ 4,025 $ 7,456 $ 4,321 ======= ======= ======= ======= </TABLE> 21
23 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NORESCO (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 The NORESCO segment's earnings before interest and taxes increased $0.6 million to $4.6 million from $4.0 million in the same period last year. This increase in EBIT is primarily attributable to increased equity earnings of nonconsolidated investments. Total revenue decreased by 2% to $35.3 million compared to $36.1 million in 2000, due to a decrease in performance contracting construction activity. This decrease, however, is in line with the segment's strategic focus on the energy infrastructure business. Revenue backlog in the current year increased $25.9 million from $64.9 at June 30, 2000 to $90.8 million at June 30, 2001 due to increased backlog in energy infrastructure projects. NORESCO's second quarter 2001 gross margin decreased slightly to $9.0 million compared to $9.3 million during the second quarter 2000. Gross margin as a percentage of revenue remained essentially flat in the second quarter 2001 compared to the same quarter in 2000. Total expenses for second quarter 2001 were $7.6 million compared to $6.3 million in the second quarter 2000. After adjusting for an additional $1.0 million provision for uncollectible accounts, expenses increased $0.3 million over last year's quarter, resulting from increased business development and marketing activities. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 NORESCO's earnings before interest and taxes increased $3.2 million to $7.5 million from $4.3 million in the same period last year. This increase is primarily attributable to increased equity earnings. Total revenue increased by 5% to $69.8 million compared to $66.7 million in 2000, which is due to additional construction activity resulting from NORESCO's backlog increase. NORESCO's first half 2001 gross margin increased to $17.3 million compared to $16.1 million during the first half 2000. The gross margin increase is due to the increase in construction revenue coupled with an increase in gross margin as a percentage of revenue. Gross margin as a percentage of revenue was 24.7% in the first half of 2001 compared to 24.2% during the same period in 2000, representing a 2% increase. Total expenses for first half of 2001 were $14.6 million compared to $14.2 million in the same period of 2000. Total expenses in 2000 included $1.0 million in costs to discontinue developing international energy infrastructure projects. Excluding the impact of the additional provision for uncollectible accounts in 2001 and the 2000 costs described above, total expenses increased $0.4 million due to higher depreciation expense. 22
24 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EQUITY IN NONCONSOLIDATED INVESTMENTS In March 2000, the Company announced the combination of its Production - - Gulf assets with Westport Oil and Gas Company, a private oil and gas exploration company based in Denver. The transaction was completed on April 10, 2000. The Company received $50 million in cash and approximately 49% interest in the combined company, Westport. Equitable currently owns 13.9 million shares, or approximately 36% interest in the Company. The fair market value of Equitable's investment in Westport was $292 million as of June 30, 2001 on a pre-tax basis. On June 9, 2001, Westport Resources entered into a definitive merger agreement with Belco Oil & Gas. Belco shareholders will receive 13.7 million shares of Westport Resources. The merger is expected to be completed in the third quarter of 2001, at which time the Company's ownership interest will decrease from the current 36% to approximately 27%. The NORESCO segment has equity ownership interests in independent power plant (IPP) projects located domestically and in select international countries. Long-term power purchase agreements (PPA's) are signed with the customer whereby they agree to purchase the energy generated by the plant. The length of these contracts range from 5 to 30 years. These projects generally are financed on a project basis with non-recourse financings established at the foreign subsidiary level. During the 2001 second quarter, a domestic Energy Infrastructure project, included within Equity in Nonconsolidated Investments, experienced a performance default on a Creditor's Agreement. The Creditors have agreed to temporarily delay enforcement of their remedies to provide an opportunity for resolution of the default. The Company has fully reserved for this project during the second quarter. NORESCO indirectly owns a 50% interest in a Panamanian thermal electric generation project. The project had previously agreed to retrofit the plant to conform with applicable environmental noise standards by a target date of August 31, 2001. The retrofit is not expected to be completed until October 31, 2001 due to unforeseen and unavoidable delays. The project is seeking extensions to the original agreed upon target dates from the lender and currently believes the extension will be granted. The Production segment maintains two 1% equity ownership interests in a partnership and trust, respectively. The partnership and trust hold natural gas producing properties, which qualify for nonconventional fuels tax credit. 23
25 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES The results of operations of Equitable are impacted by the seasonal nature of Equitable Utilities' distribution operations and the volatility of oil and gas commodity prices. Cash flows from operating activities in the first half of 2001 increased $43.4 million over the prior year period. This increase is largely attributable to increased consolidated net income, which is primarily the result of higher commodity gas prices. Items included in net income but not affecting operating cash flows include increased undistributed earnings from the Company's minority interest in Westport Resources and increased deferred revenue recognition associated with the December 2000 prepaid gas forward sales. INVESTING ACTIVITIES Cash flows used by investing activities in the first half of 2001 were $8.7 million compared to $538.4 million in the prior year, which included the purchase of the Appalachian Production assets of Statoil. The decrease in cash used by investing activities is also a result of $31.3 million of proceeds from the sale of contract receivables. Capital expenditures of $44.5 million for the six months ended June 30, 2001 were comparable to the $44.1 million spent in the prior year period. Expenditures in both years represent growth projects in the Equitable Production segment, and replacements, improvements and additions to plant assets in the Equitable Utilities segment. Production and Utilities accounted for $27.3 million and $16.7 million, respectively, of the expenditures in 2001. FINANCING ACTIVITIES Cash flows used in financing activities during the first six months of 2001 were $168.6 million compared to cash provided of $534.6 million in the prior year period. This fluctuation from prior year is also due to the first quarter 2000 Statoil acquisition. In 2001, Equitable continued to reduce its short-term debt through the use of cash provided by the operating activities and the sale of receivables by the NORESCO segment. During the 2001 second quarter, the Company bought back $46.2 million of its outstanding shares of common stock compared to $17.8 million purchased during the 2000 six-month period. During the first quarter of 2001, a Jamaican Energy Infrastructure project experienced defaults relating to various loan covenants. Consequently, the Company reclassified the nonrecourse project financing from long-term debt to current liabilities as the Company currently intends to refinance or restructure the debt within the next twelve months. The Company maintains a revolving credit agreement with a group of banks providing $650 million of available credit, which $325 million expires in 2001 and $325 million in 2003. In connection with the expiration of a portion of the credit limit, the Company intends to evaluate the terms of the revolver. The Company has adequate borrowing capacity to meet its financing requirements. 24
26 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES AND LIQUIDITY (CONTINUED) HEDGING The Company's overall objective in its hedging program is to protect earnings from undue exposure to the risk of changing commodity prices. Since Equitable is primarily a natural gas company, this leads to different approaches to hedging natural gas than for crude oil and natural gas liquids. With respect to hedging the Company's exposure to changes in natural gas commodity prices, management's objective is to provide price protection for the majority of expected production for the years 2001 and 2005, and over 25% of expected equity production for the years 2006 through 2008. Its preference is to use derivative instruments that create a price floor, in order to provide downside protection while allowing the Company to participate in upward price movements. This is accomplished with the use of a mix of costless collars, straight floors and some fixed price swaps. This mix allows the Company to participate in a range of prices, while protecting shareholders from significant price deterioration. Due to the increased volatility of the market in 2001, the Company has opted to rely more heavily on price swaps. STOCK SPLIT On April 19, 2001, the Board of Directors of Equitable Resources declared a two for one stock split payable on June 11, 2001 to shareholders of record on May 11, 2001. Earnings per share of common stock and weighed average common shares outstanding have been adjusted for the two for one stock split. ACQUISITIONS AND DISPOSITIONS In February 2000, the Company acquired the Appalachian production assets of Statoil Energy Inc. for $630 million plus working capital adjustments for a total of $677 million. The Company initially funded this acquisition through short-term debt, which was replaced by a combination of financings and cash from asset sales. In March 2000, the Company announced the combination of its Gulf operations with Westport Oil and Gas Company, a private oil and gas exploration company based in Denver, as described above. 25
27 EQUITABLE RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INFORMATION REGARDING FORWARD LOOKING STATEMENTS Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements related to such matters as anticipated financial performance including gains on derivative instruments and future savings from the pipeline operation workforce reduction; the energy hedges and derivative's strategy; and other operational matters. The Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance and results of the Company's business and forward-looking statements include, but are not limited to, the following: weather conditions, commodity prices for natural gas and crude oil and associated hedging activities including future changes in the hedging strategy, the ability to complete gas monetization transactions, creditworthiness of counterparties, availability of financing, changes in interest rates, changes in the status of labor negotiations, implementation and execution of cost restructuring initiatives, curtailments or disruptions in production, timing and availability of regulatory and governmental approvals, timing and extent of the Company's success in acquiring utility companies and natural gas and crude oil properties, the ability of the Company to discover, develop and produce reserves, the ability of the Company to acquire and apply technology to its operations, the impact of competitive factors on profit margins in various markets in which the Company competes, financial results achieved by Westport Resources, and other factors discussed in other reports (including Form 10-K) filed from time to time. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is the volatility of future prices for natural gas, crude oil and propane, which can affect the operating results of Equitable through the Equitable Production segment and the unregulated marketing group within the Equitable Utilities segment. The Company uses simple, nonleveraged derivative instruments that are placed with major institutions whose creditworthiness is continually monitored. The Company also enters into energy trading contracts to leverage its assets and limit the exposure to shifts in market prices. The Company's use of these derivative financial instruments is implemented under a set of policies approved by the Company's Corporate Risk Committee and Board of Directors. With respect to energy derivatives held by the Company for purposes other than trading, during the second quarter of 2001, the Company continued to execute its hedging strategy by utilizing price swaps with volumes of about 139.6 MMcf of natural gas. Some of these derivatives have hedged expected equity production through 2008. A decrease of 10% in the market of natural gas and crude oil would increase the fair value of natural gas instruments by approximately $50.1 million and would increase the fair value of crude oil instruments by approximately $0.5 million. A 10% decrease would have a minimal impact on the fair value of the propane instruments. With respect to derivative contracts held by the Company for trading purposes, there has not been any material changes regarding quantitative and qualitative disclosures about market risk regarding the volatility of future prices for natural gas, crude oil and propane from the information reported in the Company's 2000 Annual Report on Form 10-K. 26
28 PART II. OTHER INFORMATION Item 1. Legal Proceedings In May 1998, the jury in U.S. Gas Transportation, Inc. v. Equitable Resources Marketing Company, a breach of contract action filed in the judicial District Court of Dallas County, Texas, in July 1996, returned a verdict against the Company in the amount of $4.36 million. On motion by the Company, the judge subsequently reduced the award to $762,000 on which final judgment was entered, with $580,000 in attorney's fees and $446,000 in interest. After the Company's appeal was denied by the Texas Court of Appeals on May 21, 2001, a final settlement was negotiated for $1.55 million. Item 4. Submission of Matters to a Vote of Security Holders a). The Annual Meeting of Shareholders was held on May 17, 2001. c). Brief description of matters voted upon: (1) Elected the named directors to serve three-year terms as follows: <TABLE> <CAPTION> Director Shares Voted For Shares Withheld ------------------------------------------------------------------------------------- <S> <C> <C> Murry S. Gerber 28,308,410 169,511 George L. Miles, Jr. 28,282,205 195,716 Donald I. Moritz 27,371,110 1,106,811 J. Michael Talbert 28,303,075 174,846 </TABLE> The following Directors terms continue after the Annual Meeting of Shareholders: until 2002 - Phyllis A. Domm, James E. Rohr, David S. Shapira; until 2003 - E. Lawrence Keyes, Jr., Thomas A. McConomy, Malcolm M. Prine. (2) Approved the Equitable Resources, Inc. Executive Short-Term Incentive Plan. Vote was 23,307,039 shares for; 802,655 shares against and 158,176 shares abstained. (3) Ratified appointment of Ernst & Young, LLP, as independent auditors for the year ended December 31, 2001. Vote was 27,299,608 shares for; 1,148,166 shares against and 30,147 shares abstained. Item 5. Other Information On May 17, 2001, the Board of Directors, at a regular meeting of the Board, approved the issuance of up to 2,500,000 pre-split shares of Common Stock of the Company to the 1999 Stock Option Plan. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 The Equitable Resources, Inc. Executive Short-Term Incentive Plan. (b) Reports on Form 8-K during the quarter ended June 30, 2001: Form 8-K current report dated April 30, 2001 making available quarterly historical financial information reclassified to conform to year-end year 2000 presentation. 27
29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EQUITABLE RESOURCES, INC. ---------------------------------- (Registrant) /s/ DAVID L. PORGES ---------------------------------- David L. Porges Executive Vice President and Chief Financial Officer Date: August 10, 2001 28
30 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. Document Description - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 10.1 Equitable Resources, Inc. Executive Short-Term Incentive Plan Filed Herewith </TABLE>