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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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 or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Oxford Centre, Suite 3300 15219
Pittsburgh, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 553-5700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------------------- ----------------------------
Common Stock, no par value New York Stock Exchange
Philadelphia Stock Exchange
7 1/2% Debentures due July 1, 1999 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Philadelphia Stock Exchange
7.35% Capital Securities due April 15, 2038 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 periods 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 1999: $877,187,780 The number of shares
outstanding of the issuer's classes of common stock as of February 28, 1999
33,900,977
DOCUMENTS INCORPORATED BY REFERENCE
Part III, a portion of Item 10 and Items 11, 12 and 13 are incorporated by
reference to the Proxy Statement for the Annual Meeting of Stockholders on May
26, 1999, to be filed with the Commission within 120 days after the close of
the Company's fiscal year ended December 31, 1998.
Index to Exhibits - Page 79
TABLE OF CONTENTS
Part I Page
Item 1 Business 1
Item 2 Properties 6
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 10 Directors and Executive Officers of the Registrant 10
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A Qualitative and Quantitative Disclosures About Market
Risk 37
Item 8 Financial Statements and Supplementary Data 39
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 75
Part III
Item 10 Directors and Executive Officers of the Registrant 75
Item 11 Executive Compensation 75
Item 12 Security Ownership of Certain Beneficial Owners
and Management 75
Item 13 Certain Relationships and Related Transactions 75
Part IV
Item 14 Exhibits and Reports on Form 8-K 76
Index to Financial Statements
Covered by Report of Independent Auditors 77
Index to Exhibits 79
Signatures 83
PART I
Item 1. Business
Equitable Resources, Inc. (Equitable or the Company) is an
integrated energy company, with emphasis on natural gas distribution and
transmission, Appalachian area natural gas production and energy services
marketing in the northeastern section of the United States. The Company also
has exploration and production interests in the Gulf of Mexico and energy
service management projects in selected U.S. and international markets. The
Company and its subsidiaries offer energy (natural gas, natural gas liquids
and crude oil) products and services to wholesale and retail customers through
three primary businesses: Equitable Utilities, Equitable Production and
Equitable Services. The Company and its subsidiaries had 1,588 employees at
the end of 1998.
The Company was formed under the laws of Pennsylvania by the
consolidation and merger in 1925 of two constituent companies, the older of
which was organized in 1888. In 1984, the corporate name was changed to
Equitable Resources, Inc. to more appropriately reflect the Company's
transition from a regulated utility to an integrated energy company.
EQUITABLE UTILITIES
Equitable Utilities includes two integrated divisions: a regulated
natural gas distribution operation and an interstate pipeline business.
Natural Gas Distribution
Equitable Utilities' distribution operations are conducted by
Equitable Gas Company (Equitable Gas), a division of the Company. The service
territory for Equitable Gas is southwestern Pennsylvania, municipalities in
northern West Virginia and field line sales in eastern Kentucky. The
distribution company provides gas services to more than 266,000 customers,
comprising approximately 248,000 residential customers and approximately
18,000 commercial and industrial customers.
In October 1997, the Pennsylvania Public Utility Commission (PUC)
authorized a rate increase for Equitable Gas of $15.8 million annually, most
of which is recognized in customers' monthly fixed service charges. This rate
structure was designed to reduce Equitable Gas Company's percentage of
revenues affected by weather conditions. In 1998, Equitable Gas began to offer
"unbundled" service to all of its customers in Pennsylvania, allowing them to
choose their natural gas supplier beginning April 1. As of February 1999,
approximately 55,400 Pennsylvania residential customers were receiving their
gas supply from an alternate supplier. Approximately 43,000 of the customers
now purchase their gas from Equitable Energy, the Company's nonregulated
marketing subsidiary. Revenues derived from transportation charges on gas sold
by other suppliers enable Equitable Gas to avoid economic loss resulting from
the switching of residential customers to other suppliers. A material economic
loss is avoided because the margin on natural gas commodity approximates the
margin received on transportation-only volumes, making Equitable Gas neutral
to whether it provides transportation or sales to retail customers. Equitable
Gas continues to deliver gas and provide customer services to its customers.
Item 1. Business (Continued)
Significant changes in the residential transportation customer base are
considered unlikely in the near term, even in the deregulated environment, due
to the large investment in infrastructure required for residential natural gas
transportation.
Equitable Gas purchases natural gas through short-term, medium-term
and long-term contracts. Most gas is purchased from Southwest suppliers and
transported by Texas Eastern Transmission Corporation and Tennessee Gas
Pipeline Company. A smaller percentage of natural gas is purchased from
production properties in Kentucky owned by Equitable Production.
Equitable Gas' rates, terms of service, contracts with affiliates
and Equitable's issuance of securities are regulated primarily by the
Pennsylvania PUC along with the Kentucky Public Service Commission and the
West Virginia Public Service Commission.
Historically, approximately 65 percent of natural gas distribution
revenue has been recorded during the winter heating season from November
through March. Significant quantities of purchased gas are placed in
underground storage inventory during the off-peak season to accommodate higher
customer demand during the winter heating season.
Interstate Pipeline
Equitable Utilities' interstate pipeline operations include the
natural gas transmission and storage activities of Equitrans, L.P. (Equitrans)
and a smaller affiliate, Three Rivers Pipeline Corporation, which are
regulated by the Federal Energy Regulatory Commission (FERC). Equitrans
transported 72 Bcf of natural gas to both affiliated and non-affiliated
customers in 1998. A substantial portion of Equitrans' annual throughput has
been gas purchased by Equitable Gas. No revenue loss is expected as a result
of residential customers of Equitable Gas switching to other suppliers, since
gas transported to Equitable Gas by such suppliers will continue to flow
through the Equitrans system.
The changing regulatory environment intended to increase
competition in the natural gas industry has created a number of opportunities
for pipeline companies to expand services and serve new markets. The Company
has taken advantage of selected market expansion opportunities concentrating
on Equitrans' underground storage facilities and the location and nature of
its pipeline system as a link between the country's major long-line gas
pipelines.
The pipeline operations have more than 500 miles of transmission
lines and interconnections with five major interstate pipelines. Equitrans
also has 15 gas storage reservoirs with approximately 500 MMcf per day of peak
delivery capacity. Equitrans is currently involved in a rate case before the
FERC, which is described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Equitable Utilities generated approximately 46% of the Company's
net operating revenues in 1998.
Item 1. Business (Continued)
EQUITABLE PRODUCTION
Equitable Production explores for, produces and delivers natural
gas and crude oil, with operations in the Appalachian and the Louisiana
offshore Gulf of Mexico regions of the United States. It also engages in
natural gas gathering and interstate transportation and the processing and
sale of natural gas liquids. During 1998, the Company announced its decision
to discontinue, and subsequently sold, the natural gas midstream operations of
the unit that was then called ERI Supply & Logistics. With the sale of the
midstream operations and the concentration of that unit's activities on
natural gas and crude oil exploration and production, Equitable Resources
Energy Company, the principal operating company in the segment, was renamed
Equitable Production Company and the segment ERI Supply & Logistics was
renamed Equitable Production.
Natural Gas and Crude Oil Production
Equitable Production has two regional exploration and production
operations. Equitable Production - East develops natural gas reserves in
Kentucky, Virginia and West Virginia. The area in eastern Kentucky and western
Virginia contains approximately 88 percent of Equitable's natural gas and
crude oil reserves. The Company has been able to develop natural gas reserves
at very competitive costs. As a result, even in periods of surplus natural gas
supply, the Company has been able to sell all of its natural gas production.
Equitable Production also processes and markets natural gas liquids extracted
from its Kentucky production. In 1998, many of the managerial responsibilities
for the operations conducted by Kentucky West Virginia Gas Company, L.L.C.
(Kentucky West) and Nora Transmission Company (Nora) were provided by
Equitable Production under a services agreement. These businesses, including
pipeline gathering and transmission lines in eastern Kentucky and western
Virginia and well operations services throughout the area, will be integrated
into Equitable Production East upon receipt of authority from the FERC to
decertify the pipeline facilities.
Equitable Production - Gulf conducts exploration and production
activities in the U.S. Gulf of Mexico, primarily offshore the state of
Louisiana. This is a very competitive market requiring substantial ongoing
investment in federal leases, in which drilling and production activity by
producers has increased in recent years. Approximately 12 percent of the
Company's year-end natural gas and crude oil reserves are located in the Gulf
region. Equitable Production has not been successful at consistently earning
net income from its operations in the Gulf region. The Company is actively
evaluating alternatives in order to better derive shareholder value from these
operations.
Equitable Production sold its oil and gas properties in six western
states and the Canadian Rockies in the second half of 1997. The Company used a
part of the proceeds from the property sales to finance the acquisition from
Chevron USA of two producing gas and oil fields off Louisiana's Gulf Coast.
The daily gas and oil production from this acquisition more than offset the
production displaced by the western property sale.
At year-end 1998, proved developed natural gas and crude oil
reserves were 831 billion cubic feet equivalent (Bcfe) compared to 823 Bcfe
at year-end 1997.
Item 1. Business (Continued)
Equitable Production generated approximately 46% of the Company's
net operating revenue in 1998, excluding intercompany transactions.
EQUITABLE SERVICES
The Equitable Services business is comprised of two operating
segments: NORESCO and Equitable Energy. The NORESCO segment's activities are
conducted through two distinct enterprises: Northeast Energy Services, Inc.,
which is also referred to as NORESCO, and ERI Services. The financial results
for this segment are reported on a combined basis as NORESCO.
NORESCO
The enterprise NORESCO provides energy and energy related products
and services that are designed to reduce its customers' operating costs and
improve their productivity. NORESCO's customers include commercial,
governmental, institutional and industrial end-users. The business was started
in 1995 and was built through a series of acquisitions of privately held
energy performance and facility management companies. In September 1996, this
segment began marketing a complete menu of energy management services. In July
1997, Equitable significantly added to its energy performance and facilities
management capabilities with the acquisition of NORESCO, a leading energy
services company. NORESCO operates in a highly competitive industry, with a
significant number of companies, including affiliates of large energy
companies that have entered this market in recent years.
NORESCO is one of the largest and most experienced energy service
companies in the United States. It provides comprehensive energy management
and energy efficiency solutions for a wide range of customers in the
educational, institutional, governmental, commercial and industrial sectors.
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. These projects
serve a diverse clientele including hospitals, universities, commercial and
industrial customers and utilities. NORESCO's capabilities offer a "turnkey"
approach to facilities management including project development, equipment
selection, fuel procurement, environmental permitting, construction, financing
and operations and maintenance.
Item 1. Business (Continued)
At the end of 1998, NORESCO employed 259 people including
professional staff, trades-people and plant operators. Construction backlog
increased from $14.2 million at year-end 1997 to $74.1 million at the end of
1998. Significant additions to backlog at year-end 1998 included $13.0 million
for a central plant facility at a state university, $8.6 million for a central
plant facility at a New England shopping mall, $13.4 million for a
comprehensive energy program and cogeneration plant at a state-owned medical
facility, $5.0 million for an energy conservation project for a large
municipality in California, $9.8 million for an energy savings performance
contract for the U.S. Air Force and $6.8 million for a comprehensive energy
program for a school district in New York.
ERI Services is a specialized business unit within Equitable
Services in the NORESCO segment, providing energy savings performance
contracting (ESPC) services exclusively to the Federal Government.
In 1996, the Department of Defense (DOD) and the Department of
Energy (DOE) initiated a series of competitive bids for ESPC contracts. The
impetus for these programs are mandated targets to reduce energy use by 30% by
the year 2005. These contracts serve as a "master" agreement between the
DOD/DOE and an energy service company (ESCO), under which the ESCO may enter
into individual contracts with site-specific government agencies to develop
and implement ESPC projects. Under the terms of these agreements, the ESCO
incurs the cost of developing and implementing projects in exchange for a
defined share of the cost savings that result from the energy conservation
measures, over the term of the contract.
At the end of 1998, ERI Services employed 50 professional staff and
had construction backlog of $6.8 million, an increase of $5.7 million over
year-end 1997. Significant additions to backlog included the following energy
savings performance contracts: $1.7 million for the U.S. Air Force; $3.1
million for the U.S. Navy covering three individual projects and $1.8 million
for the U.S. Army.
Equitable Energy
Equitable Energy is a nonregulated residential, commercial and
industrial marketer of natural gas in western Pennsylvania, eastern Ohio and
West Virginia. The segment was started in 1995 and was built through internal
development. Services and products offered by Equitable Energy include
commodity procurement and delivery, physical gas management operations and
control, and customer support services to its energy customers. To manage the
price exposure risk of its marketing operations, Equitable Energy engages in
risk management activities including the purchase and sale of financial energy
derivative products. Because of this activity, Equitable Energy is also able
to offer energy price risk management services to its larger industrial
customers. Residential sales and marketing is through Pennsylvania and Ohio
"Choice" programs, which offer residential consumers the opportunity to select
their natural gas provider.
Equitable Services generated approximately 8% of Equitable's net
operating revenues in 1998.
Item 1. Business (Continued)
DISCONTINUED OPERATIONS
In December 1998, the Company sold its natural gas midstream
operations. The operations included an integrated gas gathering, processing
and storage system in Louisiana and a natural gas and electricity trading and
marketing business based in Houston, Texas, with an office in Calgary. The
consolidated financial statements have been restated to classify these as
discontinued operations.
Operating revenues as a percentage of total operating revenues for
each of the three businesses during the years 1996 through 1998 are as
follows:
1998 1997 1996
------- ------- --------
Equitable Utilities:
Residential gas sales 25 % 32 % 35 %
Commercial gas sales 3 3 9
Industrial and utility gas sales 3 4 8
Transportation service 6 5 3
Other 2 2 1
------ ------ -------
Total Utilities 39 46 56
------ ------ -------
Equitable Production:
Produced natural gas 13 10 10
Natural gas liquids 2 3 3
Crude oil 2 3 3
Transportation service 2 1 1
Other 2 4 5
------ ------ -------
Total Production 21 21 22
------ ------ -------
Equitable Services:
Marketed natural gas 28 27 21
Energy service contracting 12 6 1
------ ------ -------
Total Services 40 33 22
------ ------ -------
Total Revenues 100 % 100 % 100 %
====== ====== =======
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes R and S to the consolidated financial
statements in Part II for financial information by business segment and
information regarding environmental matters.
Item 2. Properties
Principal facilities are owned by the Company's business segments
with the exception of various office locations and warehouse buildings. A
limited amount of equipment is also leased. Almost all transmission, storage
and distribution pipelines are located on or under (1) public highways under
franchises or permits from various governmental authorities, or (2) private
properties owned in fee, or occupied under perpetual easements or other rights
acquired for the most part without examination of underlying land titles. The
Company's facilities have adequate capacity, are well maintained and, where
necessary, are replaced or expanded to meet operating requirements.
Item 2. Properties (Continued)
EQUITABLE UTILITIES. Equitable Gas owns and operates natural gas
distribution properties as well as other general property and equipment in
Pennsylvania, West Virginia and Kentucky. Equitrans owns and operates
production, underground storage and transmission facilities as well as other
general property and equipment in Pennsylvania and West Virginia. Three Rivers
Pipeline Corporation owns transmission properties in southwestern
Pennsylvania.
EQUITABLE PRODUCTION. This business segment, based in Houston, Texas,
owns or controls substantially all of the Company's acreage of proved
developed and undeveloped gas and oil production properties, which are
principally located in the Appalachian and U.S. Gulf of Mexico areas. In
addition, Kentucky West owns and operates gathering and transmission
properties as well as other general property and equipment in Kentucky. Nora
owns a FERC-regulated gathering system in western Virginia. Equitable
Production's properties also include hydrocarbon extraction facilities in
Kentucky with a 100-mile liquid products pipeline which extends into West
Virginia and an interest in two hydrocarbon extraction plants in Texas.
Information relating to Company estimates of natural gas and crude oil
reserves and future net cash flows is provided in Note U to the consolidated
financial statements in Part II.
Gas and Crude Oil Production:
1998 1997 1996
------------------------------
Natural Gas - MMcf produced 59,893 56,693 57,295
- Average sales price per Mcf sold $ 2.16 $ 2.20 $ 1.85
Crude Oil - Thousands of barrels produced 974 1,511 1,727
- Average sales price per barrel $ 13.67 $17.22 $14.78
Average production cost (lifting cost) of natural gas and crude oil
during 1998, 1997 and 1996 was $.478, $.499, and $.469 per Mcf equivalent,
respectively.
Gas Oil
------------ ------------
Total productive wells at December 31, 1998:
Total gross productive wells 4,579 398
Total net productive wells 4,063 353
Total acreage at December 31, 1998:
Total gross productive acres 565,555
Total net productive acres 512,372
Total gross undeveloped acres 1,475,594
Total net undeveloped acres 1,301,128
Item 2. Properties (Continued)
Number of net productive and dry exploratory wells and number of net
productive and dry development wells drilled:
1998 1997 1996
------------ ------------- ------------
Exploratory wells:
Productive 4.3 2.9 3.3
Dry 5.0 1.5 5.8
Development wells:
Productive 74.6 88.7 73.1
Dry 2.0 - 1.6
No report has been filed with any federal authority or agency
reflecting a five percent or more difference from the Company's estimated
total reserves.
EQUITABLE SERVICES. NORESCO is based in Framingham, Massachusetts, and
leases offices in 24 locations throughout the country. Equitable Energy is
headquartered in Pittsburgh and leases offices in several northeastern cities.
HEADQUARTERS. Equitable has an agreement of sale for its Pittsburgh
headquarters building. The sale of the nine-story building, owned by a
subsidiary of the Company, is expected to close by mid-1999. The headquarters
staff is now located in leased office space in Pittsburgh.
Item 3. Legal Proceedings
Two subsidiaries of the Company, ET Blue Grass Company and EQT
Capital Corporation, are among a group of defendants in a lawsuit filed by
Raytheon Engineers & Constructors, Inc. (Raytheon). The lawsuit was filed in
the Supreme Court of New York, Steuben County, in June 1997 for payment for
work done by Raytheon in connection with a natural gas storage project in
Avoca, New York. The storage project's operating partnership and partners,
including another subsidiary of the Company, have filed for bankruptcy.
Raytheon's total claim for compensatory damages against all defendants is less
than $20 million. The Company believes that its subsidiary companies have
adequate legal defenses to all of Raytheon's claims.
As previously reported 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. Final judgment has not yet been entered, pending a ruling on
attorneys' fees claimed by plaintiff. Once judgment has been entered, the case
will be appealable by either party.
Item 3. Legal Proceedings (Continued)
In INTERSTATE NATURAL GAS COMPANY V. EQUITABLE RESOURCES ENERGY
COMPANY ET AL. (including Kentucky West Virginia Gas Company), a royalty case
filed in June 1995 in the Kentucky Circuit Court in Floyd County, the judge
granted plaintiffs' motion for summary judgment against the Company for breach
of fiduciary duty and contract unconscionability. In late 1998, the court
finally entered judgment for damages totaling $1.9 million. After posting a
guarantee of $2.6 million (including estimated post-judgment interest), the
Company appealed the judgments to the Kentucky Court of Appeals.
There are no other material pending legal proceedings, other than
those which are adequately covered by insurance, to which the Company or any
of its subsidiaries is a party, or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1998.
Item 10. Executive Officers
- ------------------------------------ ----------------------------------------------------------
Name and Age Title and Business Experience
- ------------------------------------ ----------------------------------------------------------
Murry S. Gerber (46) President and Chief Executive Officer
Elected to present position June 1, 1998; Chief Executive
Officer of Coral Energy, Houston, TX, from November 1996;
Treasurer, Shell Oil Company, Houston, from October 1994;
General Manager, Strategic Planning-Exploration &
Production, Shell Oil, Houston, from February 1992.
John C. Gongas, Jr. (54) Senior Vice President
Elected to present position May 23, 1996; Vice
President-Corporate Operations from May 1995; Vice
President-Utility Group from January 1994; Vice
President-Utility Services from June 1992.
Audrey C. Moeller (63) Vice President and Corporate Secretary
Elected to present position May 22, 1986.
Johanna G. O'Loughlin (52) Vice President and General Counsel
Elected to present position December 19, 1996; Deputy
General Counsel from April 1996; Senior Vice President
and General Counsel of Fisher Scientific Company,
Pittsburgh, PA, from June 1986.
David L. Porges (41) Senior Vice President and Chief Financial Officer
Elected to present position July 1, 1998; Managing
Director, Bankers Trust Corporation,
Houston, TX, and New York, NY, from
December 1992.
George P. Sakellaris (52) Senior Vice President
Elected to present position January 27,
1999; President-Equitable Services from
February 1998 President and CEO of
NORESCO, Inc. from 1989.
Gregory R. Spencer (50) Senior Vice President and Chief Administrative Officer
Elected to present position May 23, 1996; Vice
President-Human Resources and Administration from May
1995: Vice President-Human Resources from October 1994;
Vice President of Human Resources Administration of AMSCO
International, Inc., Pittsburgh, PA, from May 1993.
Richard D. Spencer (45) Vice President and Chief Information Officer
Elected to present position July 1, 1998; Vice
President-Planning and Chief Information Officer from May
1997; Vice President and Chief Information Officer from April
1996; Manager-Technology Programs of General Electric
Corporation, Fairfield, CT, from February 1991.
Jeffrey C. Swoveland (43) Vice President - Finance and Treasurer
Elected to present position May 23, 1996; Interim Chief
Financial Officer from October 1997 to July 1998;
Treasurer from December 1995; Director of Alternative
Finance from September 1994; Vice President-Global
Corporate Banking of Mellon Bank, Pittsburgh, PA, from
June 1993.
- --------------------------------------------------------------------------------
Officers are elected annually to serve during the ensuing year or until their
successors are chosen and qualified. Except as indicated, the officers listed
above were elected on May 22, 1998.
- --------------------------------------------------------------------------------
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the New York Stock Exchange
and the Philadelphia Stock Exchange. The high and low sales prices reflected
in the New York Stock Exchange Composite Transactions as reported by The Wall
Street Journal and the dividends declared and paid per share are summarized as
follows (in U.S. dollars per share):
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------------------------------------------------
1st Quarter 35 1/4 29 5/8 $0.295 32 3/4 27 3/4 $0.295
2nd Quarter* 35 27 $0.295 31 28 1/16 $0.295
3rd Quarter 30 1/4 20 9/16 $0.295 31 3/4 27 3/8 $0.295
4th Quarter 29 15/16 25 $0.295 35 1/2 29 5/8 $0.295
- ------------------------------------------------------------------------------------------------------------------------
* Actually declared near the end of the preceding quarter.
As of December 31, 1998, there were 6,519 shareholders of record of
the Company's common stock.
The indentures under which the Company's long-term debt is
outstanding contain provisions limiting the Company's right to declare or pay
dividends and make certain other distributions on, and to purchase any shares
of, its common stock. Under the most restrictive of such provisions, $468
million of the Company's consolidated retained earnings at December 31, 1998,
was available for declarations or payments of dividends on, or purchases of,
its common stock.
The Company anticipates dividends will continue to be paid on a
regular quarterly basis.
Item 6. Selected Financial Data
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
---------------------------------------------------------------------------------
(Thousands except per share amounts)
Operating revenues $ 882,625 $ 934,034 $ 856,367 $ 624,998 $ 522,127
============ ============= ============= ============= =============
Net income (loss) from
continuing operations (a) $ (27,052) $ 74,187 $ 53,527 $ 17,812 $ 62,545
============ ============= ============= ============= =============
Net income (loss) from continuing
operations per common share:
Basic $ (0.73) $ 2.06 $ 1.52 $ 0.51 $ 1.81
============ ============= ============= ============= =============
Assuming dilution $ (0.73) $ 2.05 $ 1.52 $ 0.51 $ 1.80
============ ============= ============= ============= =============
Total assets $ 1,854,247 $ 2,328,051 $ 2,096,299 $ 1,963,313 $ 2,019,122
Long-term debt $ 281,350 $ 417,564 $ 422,112 $ 415,527 $ 398,282
Preferred trust securities $ 125,000 $ - $ - $ - $ -
Cash dividends paid per
share of common stock $ 1.18 $ 1.18 $ 1.18 $ 1.18 $ 1.15
(a) Includes nonrecurring items, as described in Management's Discussion and
Analysis of Financial Condition and Result of Operations and in Notes C,
D and G to the consolidated financial statements.
Excludes discontinued operations and extraordinary items, as described
in Management's Discussion and Analysis of Financial Condition and
Result of Operations and in Notes F and K to the consolidated financial
statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Equitable's net loss for 1998 was $44.1 million, or $1.19 per share,
compared with net income of $78.1 million, or $2.17 per share, for 1997 and
$59.4 million, or $1.69 per share, for 1996. In addition to the nonrecurring
items described below, earnings were impacted by discontinued operations and
an extraordinary loss on early extinguishment of debt, described in Notes C
and K to the consolidated financial statements. In December 1998, the Company
completed the sale of its natural gas midstream operations. Income (loss) from
these discontinued operations after taxes was $(8.8) million or $(.24) per
share in 1998; $3.9 million, or $0.11 per share, for 1997; and $5.9 million,
or $0.17 per share, for 1996. The 1998 results from discontinued operations
are recorded net of an aftertax gain on the sale of the operations of $10.1
million, or $0.28 per share. In the fourth quarter of 1998, the Company
recognized an extraordinary loss of $8.3 million after taxes, or $0.22 per
share, for early retirement of certain long-term debt, repurchased with a
portion of the proceeds of the sale of the midstream operations.
Equitable's consolidated net income (loss) from continuing operations
for 1998 was $(27.1) million, or $(0.73) per share, compared with $74.2
million, or $2.06 per share, for 1997 and $53.5 million, or $1.52 per share,
for 1996. Earnings from operations for 1998 include significant nonrecurring
items. The Company recognized $81.8 million for restructuring, impairment
charges and nonrecurring items across all segments. In addition, the
Production segment recorded $23 million of dry hole costs in exploration
expense in the fourth quarter, reflecting the Company's determination that
several wells did not find reserves in sufficient quantities to justify
additional expenditure in view of the Company's current strategic plan. The
Utility segment recorded a charge of $6.2 million primarily as a result of the
FERC rejection of a proposed rate case settlement for Equitrans, which
occurred in December 1998. These charges, which are described in Notes C and D
to the consolidated financial statements, are detailed below.
Earnings for 1997 include the following nonrecurring items: an
aftertax gain of $31.3 million, $0.87 per share, on the sale of certain crude
oil and natural gas producing properties in the western United States and
Canada and its contract drilling operations; an aftertax charge of $8.5
million, $0.24 per share, from the impairment of a proposed bedded salt
natural gas storage project; and a $6.7 million aftertax charge, $0.19 per
share, related to the evaluation and reduction of headquarters and noncore
business functions. The 1996 net income includes an aftertax gain of $2.7
million, or $.08 per share, from the curtailment of the Company's defined
benefit pension plan for certain non-utility employees.
RESULTS OF OPERATIONS (Continued)
Excluding these nonrecurring and extraordinary items, Equitable's 1998
income from continuing operations after income taxes is $43.4 million, 25%
lower than 1997 income from continuing operations after income taxes of $58.1
million, which was 16% higher than 1996 net income of $49.9 million. The
decrease in operating income in 1998 compared to 1997, excluding
restructuring, impairment charges, nonrecurring items, fourth quarter dry hole
costs and the impact of the FERC settlement rejection, is primarily due to
decreases in crude oil and natural gas liquids prices, decreased sales volumes
in the distribution division resulting from 19% warmer weather, and increased
depreciation, depletion and amortization (DD&A) expense. The increase in DD&A
is principally a result of increased production in the offshore Gulf of
Mexico, where depletion rates are substantially higher than in the Company's
other operating regions. The decrease in 1998 operating income was partially
offset by higher revenues in the Utility distribution division from increased
customer charges in tariff rates established in the fourth quarter of 1997 and
increased income from Energy Services, where the Company benefited from the
inclusion of a full year of operations at NORESCO, acquired in mid-1997.
The 1997 operating results, excluding impairments and restructuring
charges, benefited from higher natural gas prices, lower exploration expense,
higher, newly-approved residential rates in the Company's regulated utility
operations and lower start-up costs in Equitable Energy. These benefits were
partially offset by lower natural gas production volumes and lower commercial
and industrial sales in the utility operations.
1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
During 1998, management expressed its intention to focus on
fundamental strengths in its core businesses. In October 1998, the Company's
Board of Directors approved a restructuring plan. As a result of this plan,
along with its earlier decision to discontinue and sell the natural gas
midstream business, and the sustained decrease in oil and gas commodity
prices, the Company took specific actions to reduce its overall cost
structure. Certain of the actions taken by the Company resulted in pretax
impairment, restructuring and other nonrecurring charges in the fourth quarter
of 1998 amounting to $81.8 million. As a result of the specific plans
described below, the Company expects to remove approximately $20 million from
its annual cost beginning in 1999. These anticipated savings are predominately
due to reduced wage-related costs, reduced carrying cost of oil and gas and
other property, plant and equipment, reduced rent and building operation
charges (associated with office closings) and other miscellaneous savings. The
restructuring activities (shown below in tabular format) primarily relate to
the following:
1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
(Continued)
The elimination of employment positions company-wide: Early in the
fourth quarter of 1998, the Company announced that the restructuring plan
would eliminate a substantial number of positions. The Company presented a
voluntary workforce reduction incentive offer to salaried employees in almost
all areas of the Company, including distribution and pipeline operations,
production, marketing, sales and administrative areas. Related charges include
severance packages, cash payments made directly to terminated employees as
well as outplacement services and noncash charges for curtailment of certain
defined benefit pension and other post-retirement benefit plans. A total of
164 employees terminated employment, of which 38 had been paid and left the
Company as of December 31, 1998. The remaining 126 received their severance
packages in 1998 and left the Company by the end of the first quarter of 1999.
Redirection of offshore Gulf production: As a result of the decrease
in oil and gas prices and unsuccessful drilling results in several of the
Company's non-operated blocks, a total review of the strategic direction of
the Gulf operations was undertaken. The Company eliminated several layers of
management and intends to tightly focus its operations on lower risk,
company-operated exploration and development.
Taken together, the production and commodity price trends indicated
that the undiscounted cash flows from this division would be substantially
less than the carrying value of the producing properties. Producing property
write-downs were measured based on a comparison of the assets' net book value
to the net present value of the properties' estimated future net cash flows.
The writedown of undeveloped leases reflects the net realizable value for
those properties no longer intended to be developed based on estimated market
value less costs to dispose.
Proposed integration of Kentucky West Virginia Gas Company, L.L.C.
(Kentucky West) with Appalachian production operations: To improve the
efficiency of Appalachian production operations, the Company has transferred
many of the management responsibilities for Kentucky West to Equitable
Production - East under a services agreement. Historically, Kentucky West has
provided nonregulated well tending and regulated gas gathering and
transmission services to Equitable Production, its largest customer. These
businesses will be integrated into Equitable Production - East upon receipt of
authority from the FERC to decertify the pipeline facilities. In studying the
possibility of decertifying the pipeline, the Company has determined that it
is likely that not all costs will ultimately be collectible in rates and has
reduced regulatory assets accordingly. In addition, as a result of more
closely focusing the Equitable Production - East operations on the Appalachian
region, the Company has abandoned several lease prospects outside of its
geographical or geological areas of expertise.
1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
(Continued)
Decentralization of administrative functions: In the fall of 1998, in
conjunction with the decision to focus on the core distribution and
Appalachian production operations, management initiated a major
decentralization and downsizing of administrative functions previously
embodied in a centralized corporate service organization. This initiative
resulted in the reorganization of management information systems, engineering,
purchasing, accounting, treasury, communications and human resources
departments. In addition, insurance and benefit administration, travel,
payroll and internal audit functions were outsourced to third party providers.
Costs incurred, in addition to severance and other employee separation costs
described above, included one-time costs for third party processing, costs to
make assets available for sale, lease cancellations for office and computer
equipment and noncash charges for the write-down of assets no longer in use.
Such assets, which include leasehold improvements and office equipment, have
been sold or are being held for sale as of December 31, 1998. Costs incurred
also include a noncash charge for the write-down of certain enterprise-wide
information systems that will have much more limited use and purpose under the
decentralized structure.
Exiting certain noncore businesses: As a result of the continued
evaluation of profitability of the Company's nonregulated retail gas sales
business, the Company has refocused its marketing along core regional lines
and eliminated five field offices. In addition, the Company intends to curtail
its involvement in several auxiliary business ventures, such as radio dispatch
operations and residential real estate development, and has written these
investments down to net realizable value. These costs represent the write-down
of those facilities to their estimated fair value less costs to sell. The
Company is currently negotiating sales agreements for these investments. Part
of the current Equitrans rate case addresses the recovery of certain gathering
facility costs related to the implementation of Order 636. As a result, the
Company recorded an impairment related to those properties.
1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
(Continued)
Reserve
Cash/ Restructuring Balance at
1998 Noncash Charge Activity 12/31/98
-----------------------------------------------------------------------
(Millions)
Elimination of job responsibilities company-wide:
Severance and other employment packages Cash $ (8.2) $ 2.6 $ (5.6)
Pension/other benefit plan curtailments Noncash (2.1) 2.1 -
Other Cash (0.8) 0.5 (0.3)
Redirection of offshore Gulf production:
Impairment of undeveloped leases Noncash (15.9) 15.9 -
Impairment of producing properties Noncash (19.6) 19.6 -
Integration of Kentucky West Virginia Pipeline
with Appalachian production operations:
Impairment of regulatory assets Noncash (4.0) 4.0 -
Impairment of undeveloped leases Noncash (1.4) 1.4 -
Decentralization of administrative functions:
Impairment of headquarters building Noncash (5.1) 5.1 -
Impairment of enterprise-wide computer system Noncash (7.7) 7.7 -
Impairment of other assets Noncash (3.3) 3.3 -
Exiting certain noncore businesses:
Office closing/lease buyout Cash (1.7) 1.6 (0.1)
Impairment of radio system assets/buyout lease Noncash/Cash (3.3) 2.1 (1.2)
Impairment of investments Noncash (1.5) 1.5 -
Impairment of other assets Noncash (3.6) 3.6 -
Impairment of pipeline stranded costs Noncash (3.6) 3.6 -
========== =============== ===============
Total $ (81.8) $ 74.6 $ (7.2)
========== =============== ===============
In the second quarter of 1997, the Company recognized a pretax
impairment charge of $13.0 million related to its investment in a proposed
bedded-salt natural gas storage project. During the third quarter of 1997, the
Company began the restructuring of its headquarters and nonregulated energy
sales offices. These actions resulted in a pretax operating charge in that
quarter of $11.1 million. The restructuring activities (shown below in tabular
format) primarily relate to the following:
Reserve
Cash/ Restructuring Balance at
1997 Noncash Charge Activity 12/31/97
-----------------------------------------------------------------------
(Millions)
Downsize headquarters staff:
Severance packages Cash $ (3.1) $ 2.8 $ (0.3)
Terminate consulting contracts Cash (2.1) 2.1 -
Impairment of assets Noncash (1.7) 1.7 -
Impairment of investments Noncash (2.2) 2.2 -
Airplane lease exit costs Cash (1.7) 1.7 -
Other Cash (0.3) 0.3 -
Exit Avoca storage project:
Impairment of investment Noncash (12.7) 12.7 -
Other Cash (0.3) 0.3 -
========== ============ ===============
Total $ (24.1) $ 23.8 $ (0.3)
========== ============ ===============
1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
(Continued)
Future cash outlays related to the 1998 restructuring charges are
anticipated to be completed by the end of fiscal 1999. The Company will
continue to evaluate its cost structure and adjust its organization to reflect
changing business environments.
Business segment operating results are presented in the segment
discussions and financial tables on the following pages.
EQUITABLE UTILITIES
Equitable Utilities' operations comprise the sale and transportation
of natural gas to retail customers at state-regulated rates, interstate
transportation and storage of natural gas subject to federal regulation and
the marketing of natural gas.
The local distribution operations of Equitable Gas Company are subject
to rate regulation by state regulatory commissions in Pennsylvania, West
Virginia and Kentucky. In 1997, Equitable Gas received approval from the
Pennsylvania Public Utility Commission (PUC) for a $15.8 million annual
increase in base rates which was effective October 15, 1997. The new tariff
provided for the unbundling of the local distribution services to enable
customers to choose their gas supplier. Gas purchased by the customers, from
other suppliers, is transported and delivered by Equitable Gas at regulated
rates. While revenues are reduced when residential customers switch to
transportation service, due to the elimination of the pass-through of gas
costs, there is little impact on net margins. The new rate structure also
increased the portion of revenues derived from the fixed monthly customer
charge making margins for the distribution operation less sensitive to weather
fluctuations for residential sales.
The pipeline operations of Equitrans, L.P. and Three Rivers Pipeline
Corporation are subject to rate regulation by the FERC. Under present rates, a
majority of the annual costs are recovered through fixed charges to customers.
Equitrans filed a rate case with the FERC addressing the recovery of certain
gathering facility costs related to the implementation of Order 636, the
unbundling of sales and transportation services. Effective September 1, 1997,
the FERC permitted Equitrans to implement the new rates subject to refund
pending the outcome of the regulatory process. In December 1998, the FERC
rejected a proposed settlement of the rate case, which would have provided for
retroactive recovery of gathering costs. Though originally endorsed by all
parties, the withdrawal of support for retroactive recovery by one party
caused the settlement proposal to be rejected. The Company recorded a charge
associated with the rejection in December 1998 of approximately $6 million.
In January 1999, Equitrans filed a new settlement proposal, which
provides for prospective recovery of the increased gathering costs. Settlement
of the rate case is again pending before the FERC, and Equitrans expects that
most or all issues in the proceeding will be resolved through the settlement
process in 1999.
EQUITABLE UTILITIES (Continued)
Equitable Utilities has set the 1999 capital expenditure level at
$26.8 million, an 11% increase over capital expenditures of $24.2 million for
1998. The 1999 capital expenditures include $19.1 million for the distribution
operations and $7.7 million for pipeline operations, including maintenance and
improvements to existing lines and facilities, and approximately $5.5 million
for new business development opportunities.
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Operating revenues (millions):
Residential gas sales $ 223 $ 294 $ 272
Commercial gas sales 24 32 68
Industrial and utility gas sales 34 42 81
Marketed energy sales 10 13 21
Transportation services 57 47 28
Storage services 10 8 7
Other 6 8 6
------------- -------------- --------------
Total revenues 364 444 483
Cost of energy purchased 155 223 256
Revenue related taxes 12 15 17
------------- -------------- --------------
Net operating revenues 197 206 210
------------- -------------- --------------
Operating expenses:
Operation and maintenance 76 73 72
Selling, general and administrative 46 49 46
Depreciation, depletion and amortization 21 20 20
Restructuring and impairment charges 11 13 -
------------- -------------- --------------
Total operating expenses 154 155 138
------------- -------------- --------------
Operating income $ 43 $ 51 $ 72
============= ============== ==============
Sales quantities (Bcf):
Residential 21.2 28.5 30.5
Commercial 2.5 3.2 10.5
Industrial and utility 13.6 14.9 26.6
Marketed gas sales 4.5 4.7 6.7
Transportation deliveries 50.0 47.9 35.4
Average selling prices (per Mcf):
Residential $ 10.52 $ 10.33 $ 8.89
Commercial 9.54 10.08 6.51
Industrial and utility 2.50 2.76 3.15
Marketed gas sales 2.17 2.77 3.18
Heating degree days (normal - 5,564) 4,808 5,919 5,988
EQUITABLE UTILITIES (Continued)
1998 vs. 1997
Operating income for Equitable Utilities was $43.1 million in 1998
compared to $50.7 million in 1997. Results for 1998 include pretax charges
related to restructuring of $11.7 million as described above. Results for 1997
include a pretax charge of $13.0 million related to the Avoca gas storage
project as more fully described in Note C to the consolidated financial
statements. Excluding the nonrecurring items in both periods, operating income
decreased $8.9 million to $54.8 million in 1998 due primarily to warmer
weather and lower margins from marketed gas sales.
Distribution Operations
Operating revenues for the distribution operations were $328.5
million for 1998, a decrease of $77.8 million from the revenues of $406.3
million for 1997. The decrease in revenues for 1998 is due to the impact of
weather that was 19% warmer than the prior year, the effect of retail
customers switching to transportation service, lower rates for the
pass-through of gas costs to retail customers and lower throughput for
nonretail customers. These decreases were partially offset by an increase in
revenues from the fixed monthly customer charge of $12.5 million, which
reduced the earnings impact of the lower throughput.
The decrease of 7.3 Bcf in residential sales volumes is due to the
impact of weather and residential customers switching to transportation
service. Residential sales volumes were reduced by 1.4 Bcf as customers
switched to transportation service under the unbundled services program which,
beginning April 1, 1998, allowed residential customers in Pennsylvania to
choose their natural gas supplier. For those customers who choose an alternate
supplier, Equitable Gas continues to provide transportation and billing
service.
The cost of energy purchased of $194.2 million for 1998 decreased
$74.3 million, or 28%, from the cost of energy purchased of $268.5 million for
1997. The decrease reflects lower rates for pass-through of gas costs to
retail customers and decreased sales volumes as described above. Increases and
decreases in the cost of energy generally do not affect operating income for
the distribution operations as energy cost is a pass-through to customers for
all rate-regulated sales.
Operating expenses of $100.3 million for 1998, excluding
restructuring charges of $2.9 million, were substantially unchanged from the
$100.0 million for 1997.
Operating income of $34.0 million for 1998, excluding the impact of
restructuring charges, decreased $3.8 million from the operating income of
$37.8 million for 1997. The decrease was due primarily to lower throughput,
resulting from the warmer weather, partially offset by the impact of the new
rate structure.
EQUITABLE UTILITIES (Continued)
Pipeline Operations
Operating revenues for the pipeline operations were $67.9 million for
1998, a decrease of $7.6 million from the revenues of $75.5 million for 1997.
The decrease in revenues for 1998 was due primarily to lower marketed gas
prices and volumes and reduced revenues from extraction services resulting
from a change in the contract arrangements.
The cost of energy purchased of $5.1 million for 1998 decreased $2.3
million from the cost of energy purchased of $7.4 million for 1997. The
decrease results from lower marketed gas prices and volumes.
Operating expenses were $50.8 million for 1998 compared with
operating expenses of $55.2 million for 1997. The operating expenses for 1998
and 1997 include nonrecurring charges of $8.8 million and $13.0 million,
respectively, as more fully described above. Operating expenses, excluding the
nonrecurring charges in both periods, were substantially the same. The
increase in expenses for the rate case reserve was offset by lower expenses
for extraction services resulting from a change in the contract arrangements,
lower benefits costs reflecting regulatory treatment and lower corporate
overhead costs.
Excluding the impact of nonrecurring charges in both periods,
operating income of $20.8 million for 1998 decreased $5.1 from the operating
income of $25.9 million for 1997. The decrease in operating income is due
primarily to lower marketed gas sales and the impact on 1998 from the rate
case reserve.
1997 vs. 1996
Operating income for Equitable Utilities decreased by $21.5 million
to $50.7 million in 1997 compared to operating income of $72.2 million in
1996. The 1997 period includes a pretax charge of $13.0 million related to the
Avoca storage project as more fully described above. Excluding the
nonrecurring item, operating income decreased $8.5 million, or 12% to $63.7
million in 1997 due principally to reduced net revenue as a result of lower
throughput.
EQUITABLE UTILITIES (Continued)
Distribution Operations
Operating revenues for the distribution operations were $406.3
million for 1997, a decrease of $34.2 million from the revenues of $440.5
million for 1996. Revenues for 1997 benefited from the new rate structure
approved for residential retail customers as more fully described above.
Revenues decreased due to a 7% decrease in residential volumes, and the impact
of commercial and industrial customers moving from gas sales to transportation
services based on regulatory changes and the development of new pricing
structures. The commercial and industrial changes have little impact on
operating income, because the margin earned on the sale of gas approximates
the revenues from transportation. The decrease in residential volumes for 1997
is the result of warmer weather experienced during the first quarter of 1997
as compared to 1996. While the weather patterns for the two years resulted in
nearly the same number of degree days, volumes lost due to warmer weather in
the winter heating months are not recovered in a cool spring and fall.
The cost of energy purchased of $268.5 million for 1997 decreased
$29.9 million, or 10%, from the cost of energy purchased of $298.4 million for
1996. The decrease is the result of decreased sales volumes. Increases and
decreases in the cost of energy generally do not affect operating income for
the distribution operations, as energy cost is a pass-through to customers for
all rate-regulated sales.
Operating expenses of $100.0 million for 1997 increased $3.5 million
over operating expenses of $96.5 million for 1996 due to higher provision for
uncollectible accounts and increased costs for energy assistance programs.
Operating income of $37.8 million for 1997 decreased $7.8 million
from the operating income of $45.6 million for 1996. The decrease is due to
lower retail throughput and the increase in operating expenses.
Pipeline Operations
Operating revenues for the pipeline operations were $75.5 million for
1997, a decrease of $7.2 million from the revenues of $82.7 million for 1996.
The decrease in revenues for 1997 was due primarily to lower marketed gas and
selling prices.
The cost of energy purchased of $7.4 million for 1997 decreased $7.1
million from the cost of energy purchased of $14.5 million for 1996. The
decrease reflects lower marketed gas volumes and prices.
Operating expenses of $42.2 million for 1997, excluding the
nonrecurring charge, were substantially the same as the operating expenses for
1996 of $41.7 million.
Operating income of $25.9 million for 1997, excluding the
nonrecurring charge, was substantially the same as the operating income of
$26.5 million for 1996.
EQUITABLE PRODUCTION
Production operations comprise the production and sale of natural
gas, natural gas liquids and crude oil. Production operates its exploration
and production activities through Equitable Production Company (Equitable
Production), formerly known as Equitable Resources Energy Company.
In 1998, the managerial responsibility for the operations conducted
by Kentucky West and Nora were transferred to Equitable Production - East
operations under a services agreement. The financial results are reclassified
to reflect the new structure for all periods presented.
In 1997, Equitable Production made a strategic shift to concentrate
its exploration and development activities in its core Appalachian and growing
Gulf of Mexico holdings. In July 1997, Equitable Production announced that it
had entered into sales agreements for $170 million with five purchasers
covering its crude oil and natural gas properties in the western United States
and Canada, which were no longer a part of Equitable's primary geographic
focus. In October 1997, Equitable Production sold its Union Drilling division,
a contract drilling company. These asset sales in 1997 resulted in pretax
gains of $52.2 million, and more importantly, allowed management of the
segment to refocus its exploration and production resources on areas with
potential for higher return on invested capital.
Equitable Production - East
In the Appalachian Region during 1998, 123 wells were drilled at a
success rate of 98.7%. This drilling was concentrated within the core areas of
southwest Virginia and southeast Kentucky. This activity resulted in an
additional 9 million cubic feet per day of gas sales and proved reserve
additions of 30.3 Bcf. In 1999, the region will continue to focus on
development of its sizable prospect inventory.
Equitable Production - Gulf
During 1998, daily net natural gas and crude oil production in the
Gulf of Mexico increased 29 percent to 76 million cubic feet equivalent per
day. The increase is the result of successful development of the 1997
acquisition from Chevron USA of West Cameron Block 180 and 198 fields and West
Cameron Block 540 field. Equitable Production operates both fields. Equitable
Production is producing about 57 million cubic feet of gas and about 745
barrels of oil per day from these fields and has begun an analysis of
additional prospective drilling sites related to the West Cameron 180 and 198
fields.
EQUITABLE PRODUCTION (Continued)
Equitable Production also participated in other development activity
during the year, including a Eugene Island 352 well, in which Equitable
Production has a 52.6% working interest, currently producing 62 barrels of oil
per day. Also, during 1997 Equitable Production won thirteen of twenty bids on
new blocks awarded at the federal lease sale, adding 43,351 net acres,
including 100% working interests in South Marsh Island 287, Vermilion 187 and
West Cameron 179, and interests varying from 12.5% to 75% in East Cameron 97,
Eugene Island 44, Eugene Island 45, Eugene Island 179, Mississippi Canyon 773,
South Marsh Island 50, South Marsh Island 274, South Timbalier 196, Vermilion
54 and Vermilion 291. These blocks, together with those acquired since 1995,
form the basis for exploration activities planned for 1999.
In the fourth quarter, after a total review of the strategic
direction of the Gulf operations, the Company focused on a lower risk,
company-operated exploration and development program. Equitable Production
recognized approximately $35.5 million of impairments associated with its Gulf
operations. The write-down was primarily the result of the decrease in oil and
gas prices and the Company's decision that certain offshore leases would not
be developed. Additionally, Equitable Production recognized $23 million in dry
hole expense in the fourth quarter primarily as a result of unsuccessful
drilling of five exploratory prospects located offshore in the Gulf of Mexico.
Capital Expenditures
A 1999 capital expenditure budget of $81.1 million for Equitable
Production has been approved. It includes $47.7 million for exploration and
development drilling in the Gulf of Mexico and $33.4 million for development
of Appalachian holdings including $3.7 million for improvements to gathering
system pipelines. The evaluation of new prospects, market forecasts and price
trends for natural gas and oil will continue to be the principal factors for
the economic justification of drilling investments.
EQUITABLE PRODUCTION (Continued)
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Operating revenues (millions):
Produced natural gas $ 124 $ 120 $ 106
Transportation 24 27 27
Natural gas liquids 18 25 22
Crude oil 13 26 25
Marketed natural gas 8 10 6
Other 16 44 43
------------- -------------- --------------
Total revenues 203 252 229
Cost of energy purchased 5 7 2
------------- -------------- --------------
Net operating revenues 198 245 227
------------- -------------- --------------
Operating expenses:
Operation and maintenance 34 57 57
Production 30 32 31
Dry hole 23 3 9
Other exploration 4 5 6
Selling, general and administrative 33 31 34
Depreciation, depletion and amortization 55 49 47
Restructuring charges 45 2 (2)
------------- -------------- --------------
Total operating expenses 224 179 182
------------- -------------- --------------
Operating income (loss) $ (26) $ 66 $ 45
============= ============== ==============
Sales quantities:
Produced natural gas (Bcf) 57.4 54.6 57.3
Natural gas liquids (million gallons) 67.1 65.5 63.2
Crude oil (MMBls) 1.0 1.5 1.7
Average selling prices:
Produced natural gas (per Mcf) $ 2.16 $ 2.20 $ 1.85
Natural gas liquids (per gallon) 0.27 0.38 0.35
Crude oil (per barrel) 13.67 17.22 14.78
1998 vs. 1997
Operating revenues, which are derived primarily from the sale of
produced natural gas, crude oil and natural gas liquids were $202.4 million in
1998 compared with $251.7 million in 1997. Included in 1997 are $5.2 million
additional revenues from direct bill settlements as described in Note D to the
consolidated financial statements, $18.3 million in revenues from contract
drilling services associated with Union Drilling, a contract drilling
operation which the Company sold in 1997 and $22.8 million in revenues from
the western United States and Canada operations sold in 1997. The decrease in
operating revenues of $2.0 million in 1998 compared to 1997, excluding
nonrecurring amounts and sold operations, is due primarily to decreases in
natural gas, crude oil and natural gas liquids prices, partially offset by
increased production of natural gas and crude oil.
EQUITABLE PRODUCTION (Continued)
Realized prices for produced natural gas, crude oil and natural gas
liquids decreased 25%, 34% and 32%, respectively, from 1997, while production
for natural gas and crude oil, excluding production associated with the west
United States and Canada, increased 16% and 24%, respectively.
Operating expenses were $223.6 million in 1998 compared with $179.0
million in 1997. Included in the 1998 operating expenses are nonrecurring
items primarily associated with write-downs of the carrying value of assets of
approximately $44.7 million. The operating expenses also include approximately
$23 million of dry hole expense primarily associated with unsuccessful
drilling of five exploratory prospects offshore Gulf of Mexico. Included in
the 1997 amounts is approximately $34.4 million of operating expenses
associated with the assets sold in 1997. The increase in operating expenses in
1998, excluding the nonrecurring items and sold operations, is due to
increased depreciation and depletion from higher production. Additionally,
production expenses have increased $4.5 million in the Gulf operations as a
result of a full year of the 1997 acquisition of West Cameron Block 180 and
198 fields. Selling, general and administrative (SG&A) expenses have also
increased by $1.7 million due to the increased activity in the Gulf
operations.
1997 vs. 1996
Operating revenues, which are derived primarily from the sale of
produced natural gas, crude oil and natural gas liquids and contract drilling,
were $251.7 million in 1997 compared with $228.9 million in 1996. The increase
in operating revenues in 1997 compared to 1996 is due primarily to increases
in natural gas prices. Realized price for produced natural gas increased 19%
over 1996 as increases in the market, along with a more favorable overall net
hedged position, combined to increase 1997 operating revenues. The 1997
operating revenues also increased due to a 4% increase in natural gas liquids
volumes combined with a 7% increase in natural gas liquids price.
Operating expenses were $179.0 million in 1997 compared with $182.5
million in 1996. Operating expenses are slightly lower for the year as the
decrease in exploration expenses, resulting from less exploratory drilling and
a higher success rate in Gulf exploration, were partially offset by higher
depreciation and depletion expense related to increased Gulf of Mexico
production.
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.
NORESCO
Equitable Services' financial growth in 1998 was attributable to
positive business developments for both NORESCO and ERI Services.
NORESCO successfully developed three large energy performance
contracts (ESPC) for school districts in upstate New York contributing $3.6
million in margin for the year and providing significant backlog for 1999.
NORESCO continued its success in the Massachusetts municipal and school market
by developing four new projects in 1998. The market contributed another $3.8
million in margin in 1998. NORESCO also began to benefit from efforts with the
Federal Government by signing and implementing large ESPC projects for several
agencies with the Department of Defense. In 1998, NORESCO earned margins in
excess of $2.0 million from contract work with the Federal Government. NORESCO
also completed the implementation of two large contracts for utility-sponsored
demand side management services. In total, these two programs deliver 70
million kWH in annual energy savings and contributed $4.2 million to margin in
1998. In the commercial and industrial segment, NORESCO built on its existing
client relationships by developing new contracts with two large companies.
These two clients contributed more than $3.6 million in margin during 1998.
NORESCO also opened new offices in Texas, Colorado and New York and
consolidated its offices in Connecticut. NORESCO's construction backlog
increased during 1998 from $14.2 million at the beginning of the year to $74.1
million at year-end.
ERI Services continued its development of contracts with the Federal
Government. In 1998, ERI Services developed eight multimillion dollar ESPCs
including a contract at the Crane Naval Station in Indiana, three Army sites
in the southeastern regions of the U.S. and two Coast Guard bases in the
Caribbean. ERI Services' construction backlog increased during 1998 from $1.1
million at the beginning of the year to $6.8 million at year-end.
In 1998, the segment's margins were impacted by several factors: (i)
increased competition in the energy services industry, which has driven down
margins; (ii) as the industry has matured, clients have become more
sophisticated, often resulting in the "unbundling" of services, which can
result in the erosion of margins; (iii) a reduction in the weighted
contribution to the companies' business from utility sponsored demand-side
management programs, which typically yield above-average gross margins; and
(iv) a more concentrated focus on the Federal Government market segment, which
contributes significantly to the companies' revenue base but also yields lower
gross margins than those typically realized from commercial, industrial and
institutional clients.
EQUITABLE SERVICES (Continued)
NORESCO
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Operating revenues (millions):
Marketed natural gas $ - $ - $ 2
Energy service contracting 109 51 8
Other 1 2 -
-------------- -------------- ---------------
Total revenues 110 53 10
-------------- -------------- ---------------
Contract costs:
Cost of energy purchased - - 2
Energy service contract costs 81 37 5
-------------- -------------- ---------------
Total contract costs 81 37 7
-------------- -------------- ---------------
Operating expenses:
Selling, general and administrative 19 16 5
Depreciation, depletion and amortization 4 3 1
Restructuring, impairment of assets and
other nonrecurring items 3 - -
-------------- -------------- ---------------
Total operating expenses 26 19 6
-------------- -------------- ---------------
Operating income (loss) $ 3 $ (3) $ (3)
============== ============== ===============
1998 vs. 1997
Revenues increased from 1997 to 1998 by $56.7 million. On an
annualized basis, NORESCO's revenues increased by 74% from 1997 to 1998
reflecting both the continued expansion of the business and a movement toward
higher value contracts.
Gross margins from energy services contracting activities decreased to
25.7% in 1998 from 29.3% in 1997. The deterioration in gross margin is a
result of a change in the mix of contracts due to the increase in revenues
from the lower margin yield government market, increased competition and the
full year effect of the step up to fair value of NORESCO contracts for
purchase accounting.
SG&A expenses increased from 1997 to 1998 by $3.9 million. Increases
in corporate overhead expense charged to this segment ($2.0 million) and in
NORESCO's SG&A ($6.0 million, a full year in 1998 compared to 7 months in
1997) were partially offset by expense reductions in NORESCO's facilities
management division ($2.1 million). ERI Services reduced SG&A expense by $3.2
million in 1998, reflecting a shift away from a start-up enterprise focused
mainly on business and staff development and toward a focus on implementation
and construction of contract assets.
Depreciation, depletion and amortization (DD&A) expense increased
from 1997 to 1998 by $1.5 million. This increase reflects goodwill
amortization of $3.7 million in 1998 as compared to $2.2 million in 1997.
EQUITABLE SERVICES (Continued)
1997 vs. 1996
Revenues increased from 1996 to 1997 by $42.4 million primarily due
to the post-acquisition activities of NORESCO and the growth of this segment's
business, which began operations in mid-1996.
Gross margins from energy services contracting activities decreased to
29.3% in 1997 from 37.1% in 1996. This decrease is attributable to increased
competition in the energy services industry, as well as a more heavily
weighted contribution from the Federal Government market segment, which has
lower gross margins than those typically realized from commercial, industrial
and institutional clients.
SG&A expenses increased from 1996 to 1997 by $10.1 million, which
included $9.9 million from NORESCO. ERI Services' SG&A expense increased by
$0.2 million in 1997, which reflects (i) a full year of operation for this
business unit as compared to a partial year of operation in 1996 and (ii) the
continued expansion of this unit, particularly in the areas of business
development activities and professional staff building.
DD&A expense increased from 1996 to 1997 by $3.0 million, which
included $1.7 million for the amortization of goodwill from the NORESCO
acquisition. Also in 1997, amortization of goodwill from the Conogen/Pequod
acquisitions increased by $310,000 representing a full year of ownership.
Depreciation expense for PP&E also increased by $0.5 million in 1997 primarily
due to the addition of NORESCO and allocation of depreciation expense from
Equitable headquarters.
Equitable Energy
Equitable Energy provides gas operations, commodity procurement and
delivery, risk management and customer services to energy consumers including
large industrial, utility, commercial, institutional and residential
end-users. Equitable Energy entered into the residential market in 1998
providing natural gas and other related services to customers in Ohio and
Pennsylvania. In 1998, Equitable Energy went through a major restructuring,
closing unproductive sales offices and reducing sales and support staff. This
segment's primary focus is to provide products and services in those areas
where the Company has a strategic marketing advantage, usually due to
geographic coverage and ownership of physical assets.
EQUITABLE SERVICES (Continued)
Equitable Energy
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Marketed natural gas (millions) $ 320 $ 293 $ 229
Cost of energy purchased 314 284 223
-------------- -------------- ---------------
Net operating revenues 6 9 6
-------------- -------------- ---------------
Operating expenses:
Selling, general and administrative 10 14 14
Depreciation, depletion and amortization 1 1 -
Restructuring, impairment of assets and
other nonrecurring items 3 - -
-------------- -------------- ---------------
Total operating expenses 14 15 14
-------------- -------------- ---------------
Operating loss $ (8) $ (6) $ (8)
============== ============== ===============
1998 vs. 1997
Revenues increased from 1997 to 1998 by $26.3 million. The increase
in 1998 revenues was due primarily to residential market programs.
Gas margins decreased by $2.7 million in 1998 from 1997. A large group
of high margin customers were renewed at lower rates reflecting the highly
competitive nature of the business. Also in the last half of 1998, the
business yielded lower margins due to decreased throughput for large
industrial steel producing clients.
SG&A expenses decreased from 1997 to 1998 by $4.3 million. The
decreases were due primarily to decreased consulting costs and reduced
staffing and office closures.
1997 vs. 1996
The year 1997 was a year of expansion for the Equitable Energy group.
In growing the business, which was formed early in 1996, Equitable Energy
expanded its gas marketing into many regions, opened several sales offices and
added new products to its portfolio. In 1997, its first full year of
operations, Equitable Energy was able to more than double its customer base
from 1996; however, revenues and margins remained unchanged (nine months of
1996 revenues - $229 million; 1997 - $282 million; and nine months of 1996
margins - $6 million; 1997 - $8 million). Marketing and development efforts
were intentionally reduced from 1996 to better focus in areas of high growth
potential (nine months of 1996 - $9.5 million; 1997 - $7.6 million).
OTHER INCOME STATEMENT ITEMS
Other Income
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Other income (millions):
Gain (loss) on sale of assets $ (2) $ 50 $ 1
Equity in earnings of nonconsolidated subsidiaries 3 - -
-------------- -------------- ---------------
Total other income $ 1 $ 50 $ 1
============== ============== ===============
OTHER INCOME STATEMENT ITEMS (Continued)
In late 1997, NORESCO's facilities management division completed the
construction of a 50 MW power plant in Panama, in which NORESCO holds a 45%
ownership interest. This plant was operational during 1998 and yielded equity
in earnings of nonconsolidated subsidiaries of $2.6 million.
The 1997 sale of certain of the Company's crude oil and natural gas
production properties in the western United States and Canada and its contract
drilling operations is described above in "Results of Operations" and
"Equitable Production." There were no other significant changes in other
income between 1998 and 1996.
Interest Charges
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------
Interest charges (millions) $ 40 $ 35 $ 30
======= ======== ========
1998 vs. 1997
Interest costs increased in 1998 as a result of a $44 million increase
in average debt outstanding during the year and an increase in the Company's
average overall interest rate. The increase in debt outstanding was due to
increased capital spending for Gulf of Mexico and midstream projects completed
during 1998. The increased rate is due to the April 1998 issuance of 7.35%
Preferred Trust Debentures, which replaced lower rate commercial paper
borrowings.
1997 vs. 1996
Interest charges rose in 1997 as a result of a 55% increase in the
average daily total of short-term loans outstanding of $229 million in 1997
compared to $147 million in 1996. The increased 1997 borrowings were used
primarily to finance acquisitions and other capital expenditures described in
the segment discussions above.
Average annual interest rates on short-term debt remained relatively
constant, in a range of 5.0% to 5.7%, throughout the three-year period.
Income Taxes
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Income taxes (net - millions):
Income tax expense (benefit) $ (21) $ 44 $ 30
Tax credits (1) (1) (3)
-------- -------- -------
Net income tax expense (benefit) $ (22) $ 43 $ 27
======== ======== =======
1998 vs. 1997
The effective income tax rate increased from 1997 to 1998. Because
1998 resulted in a loss before income taxes, the increase in the effective tax
rate actually signifies a favorable variance from statutory rates, as a result
of lower state income taxes. The state income tax benefit is attributable to
variances in state effective rates between jurisdictions where income and
losses occurred.
OTHER INCOME STATEMENT ITEMS (Continued)
1997 vs. 1996
The effective income tax rate increased from 1996 to 1997 as a result
of decreased tax credits, nondeductible amortization of goodwill and higher
state income tax rates resulting from a change in law.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Operating Activities
Cash required for operations is affected primarily by the seasonal
nature of Equitable's natural gas distribution operations and the volatility
of oil and gas commodity prices. Short-term loans used to support working
capital requirements during the summer months are repaid as gas is sold during
the heating season.
The Company's performance contracting business requires substantial
initial working capital investments which are recovered in revenues as the
related energy savings are realized or when the contract is assigned.
Cash flows from operating activities totaled $64 million in 1998,
compared to $114 million in 1997 and $66 million in 1996.
Cash flows from operations decreased in 1998 primarily as a result of
a $45 million decrease in net operating revenues due to lower sales volumes in
the utility segment and lower natural gas, natural gas liquids and crude oil
prices in the production segment. In addition, 1998 production segment
operating expenses included $23 million of dry hole cost, the majority of
which resulted from cash expended in 1998. These cash requirements were
somewhat offset by a decrease of $25 million in net working capital
requirements in 1998, as the Company eliminated its trading operation in
connection with the sale of the discontinued natural gas midstream operations.
Cash flows from operations increased in 1997 primarily as a result of
a reduction in working capital requirements for deferred purchased gas cost
due to the increased collection of deferred costs in regulated rates, somewhat
offset by an increase in accounts receivable.
CAPITAL RESOURCES AND LIQUIDITY (Continued)
Cash flow has been affected by the Alternative Minimum Tax (AMT) since
1988. Equitable incurred an AMT liability in past years primarily as a result
of nonconventional fuels tax credits. Although AMT payments can be carried
forward indefinitely and applied to income tax liabilities in future periods,
they impact cash generated from operations. In 1998, $5.8 million of AMT
credits were utilized to reduce current year tax payments. At December 31,
1998, Equitable has available $58.5 million of AMT credit carryforwards. The
impact of AMT on future cash flow will depend on the level of taxable income.
Investing Activities
Equitable's financial objectives require ongoing capital expenditures
for growth projects in the Equitable Production and Services units, as well as
replacements, improvements and additions to plant assets in the Utilities
unit. Such capital expenditures during 1998 were $138.5 million including
$73.2 million in natural gas and crude oil production assets in the Gulf
region and $30.9 million in new coal-bed methane and conventional natural gas
production development in the East. Equitable Services' $11.1 million of 1998
capital spending included international power project development, while
Equitable Utilities' $23.3 million included $15.9 million of distribution
plant replacements and improvements.
In December 1998, the Company completed the sale of its natural gas
midstream operations for $338 million, subject to final working capital
adjustments. Proceeds from the sale were used to reduce outstanding debt,
repurchase shares of the Company's common stock and for operating purposes.
In September and October 1997, Equitable completed the sale of its
crude oil and natural gas properties in the western United States and Canada
for aggregate cash proceeds of $170 million. As part of a tax deferred
like-kind exchange, a portion of the proceeds were placed in escrow and used
to fund the purchase of Gulf properties from Chevron. The $49 million balance
in escrow at December 31, 1997 is included in cash and cash equivalents in the
consolidated balance sheets. Early in 1998 the escrow account was closed and
the balance of escrow funds and other proceeds were used to pay down
short-term debt.
A total of $119 million has been authorized for the 1999 capital
expenditure program, described in more detail in the segment discussions
above. The Company expects to finance its authorized 1999 capital expenditure
program with cash generated from operations and with short-term loans.
Financing Activities
In 1998, financing activities used $199.2 million of cash primarily as
a result of a net decrease of $166 million in short-term loans; the early
retirement of long-term debt in the amount of $68.6 million, including
premiums paid; and Company stock repurchases of $37.7 million. These uses of
cash were somewhat offset by the issuance of $125 million of Preferred Trust
Capital Securities. A portion of the stock repurchases was executed under the
terms of an Accelerated Stock Repurchase Program conducted by an investment
banker. Stock repurchased during 1998 represented 4% of outstanding shares.
CAPITAL RESOURCES AND LIQUIDITY (Continued)
In 1997, financing activities generated $12 million of cash as a
result of a net increase of $77 million in short-term loans, partially offset
by $29 million used for treasury stock purchases. The common stock was used
for a portion of the 2.1 million shares valued at $67 million issued in the
purchase of NORESCO, while the short-term loans funded the $10 million cash
portion of that purchase and other 1997 capital expenditures.
Cash generated in all years was partially offset by the payment of
the Company's dividends on common shares, which remained substantially
unchanged at $43 million.
Capital Resources
Equitable 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 5.0% during 1998. At December 31, 1998, $115 million
of commercial paper was outstanding at an average annual interest rate of
5.0%. Equitable maintains a revolving credit agreement with a group of banks
providing $500 million of available credit. The agreement requires a facility
fee of one-tenth of one percent and expires September 1, 2001. Adequate credit
is expected to continue to be available in the future.
Rate Regulation
Accounting for the operations of Equitable's Utilities segment is in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As
described in Note A to the consolidated financial statements, regulatory
assets and liabilities are recorded to reflect future collections or payments
through the regulatory process. The Company believes that it will continue to
be subject to rate regulation that will provide for the recovery of deferred
costs.
ENVIRONMENTAL MATTERS
Equitable and its subsidiaries are subject to extensive federal, state
and local environmental laws and regulations that affect their operations.
Governmental authorities may enforce these laws and regulations with a variety
of civil and criminal enforcement measures, including monetary penalties,
assessment and remediation requirements and injunctions as to future
activities.
Management does not know of any environmental liabilities that will
have a material effect on Equitable's financial position or results of
operations. The Company has identified situations that require remedial action
for which approximately $4.2 million is accrued at December 31, 1998.
Environmental matters are described in Note S to the consolidated financial
statements.
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the
past several years and has not significantly affected the profitability of the
Company. In prior periods of high general inflation, oil and gas prices
generally increased at comparable rates; however, there is no assurance that
this will be the case in the current environment or in possible future periods
of high inflation. Regulated utility operations would be required to file a
general rate case in order to recover higher costs of operations. Margins in
the energy marketing business in the Equitable Energy segment are highly
sensitive to competitive pressures and may not reflect the effects of
inflation. The results of operations in the Company's three business segments
will be affected by future changes in oil and gas prices and the
interrelationship between oil, gas and other energy prices.
YEAR 2000 COSTS
State of Readiness
The Company initiated an enterprise-wide project in 1996 to address
the Year 2000 issue. A management team was put in place to manage this project
and a detailed project plan has been developed to address the three identified
primary risk areas: process controls and facilities, business information
systems applications and issues relative to third party product and service
providers. This plan is continuously updated and reviewed regularly with
senior management and the Board of Directors. The Company is on schedule to
complete remediation and testing of all critical components as planned.
To date the Company has completed the inventory and assessment phases
covering all process controls (embedded chips), facilities and systems
applications. The remediation and testing of process controls, using both
internal resources and contracted engineers, is well underway (90% complete)
and on schedule. The testing and remediation of systems applications are on
schedule with approximately 90% of the critical applications remediated and
tested. Equitable anticipates that all critical systems will be Y2K compliant
by June 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.
YEAR 2000 COSTS
Costs
The total cost of the Company's Year 2000 project is still being
evaluated. Until all process control systems have been tested and documented,
the full cost of remediation of this part of the project will not be known.
The cost to date, however, is $3.4 million, and the total cost estimate for
the balance of the project is an additional $1.5 million. All of the costs
have been or will be charged to operating expense except $0.5 million of
systems upgrades, which will be capitalized and charged to expense over the
estimated useful life of the associated hardware and software. Additional
costs could be incurred if significant remediation activities are required
with third party suppliers (see below). The estimated costs to convert
remaining systems is not expected to be material to results of operations in
any future period.
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.
AUDIT COMMITTEE
The Audit Committee, composed entirely of outside directors, meets
periodically with Equitable's independent auditors, its internal auditor and
management to review the Company's financial statements and the results of
audit activities. The Audit Committee, in turn, reports to the Board of
Directors on the results of its review and recommends the selection of
independent auditors.
FORWARD-LOOKING STATEMENTS
Disclosures in this annual report may include forward-looking
statements related to such matters as anticipated financial performance,
business prospects, capital projects, new products and operational matters.
The Company notes that a variety of factors could cause the Company's actual
results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company business include, but are not limited to, the
following: weather conditions, the pace of deregulation of retail natural gas
and electricity markets, the timing and extent of changes in commodity prices
for natural gas and crude oil, changes in interest rates, the timing and
extent of the Company's success in acquiring natural gas and crude oil
properties and in discovering, developing and producing reserves, the
inability of the Company or others to remediate Year 2000 concerns in a timely
fashion, delays in obtaining necessary governmental approvals and the impact
of competitive factors on profit margins in various markets in which the
Company competes.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
The Company's primary market risk exposure is the volatility of future
prices for natural gas and crude oil, which can affect the operating results
of Equitable through the Equitable Production segment and the deregulated
marketing group within the Equitable Services segment. The Company's use of
derivatives to reduce the effect of this volatility is described in Note B to
the consolidated financial statements. The Company uses simple, nonleveraged
derivative instruments that are placed with major institutions whose
creditworthiness is continually monitored. The Company's use of these
derivative financial instruments is implemented under a set of policies
approved by the Board of Directors.
For commodity price derivatives used to hedge Company production,
Equitable sets policy limits relative to expected production and sales levels
which are exposed to price risk. The level of price exposure is limited by the
value at risk limits allowed by this policy. Volumes associated with future
activities, such as new drilling, recompletions and acquisitions, are not
eligible for hedging. Management monitors price and production levels on
essentially a continuous basis and will make adjustments to quantities hedged
as warranted. In general, Equitable's strategy is to become more highly hedged
at prices considered to be at the upper end of historical levels.
For commodity price derivatives used to hedge marketing physical
positions, the marketing group will engage in financial transactions also
subject to policies that limit the net positions to specific value at risk
limits. In general, this marketing group considers profit opportunities in
both physical and financial positions, and Equitable's policies apply equally
thereto.
With respect to the energy derivatives held by subsidiaries of
Equitable as of December 31, 1998, a decrease of 10% in the market price of
natural gas from the December 31, 1998 levels would decrease the fair value of
these instruments by approximately $5.6 million. The Company is in the process
of implementing, and in 1999 intends to use, the value at risk method for
determining the market risk of its energy derivatives.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk (Continued)
The above analysis of the energy derivatives utilized for risk
management purposes does not include the favorable impact that the same
hypothetical price movement would have on the Company and its subsidiaries'
physical purchases and sales of natural gas. The portfolio of energy
derivatives held for risk management purposes approximates the notional
quantity of the expected or committed transaction volume of physical
commodities with commodity price risk for the same time periods. Furthermore,
the energy derivative portfolio is managed to complement the physical
transaction portfolio, reducing overall risks within limits. Therefore, the
adverse impact to the fair value of the portfolio of energy derivatives held
for risk management purposes associated with the hypothetical changes in
commodity prices referenced above would be offset by a favorable impact on the
underlying hedged physical transactions, assuming the energy derivatives are
not closed out in advance of their expected term, the energy derivatives
continue to function effectively as hedges of the underlying risk, and as
applicable, anticipated transactions occur as expected.
The disclosure with respect to the energy derivatives relies on the
assumption that the contracts will exist parallel to the underlying physical
transactions. If the underlying transactions or positions are liquidated prior
to the maturity of the energy derivatives, a loss on the financial instruments
may occur, or the options might be worthless as determined by the prevailing
market value on their termination or maturity date, whichever comes first.
The Company has limited variable rate short-term debt. As such, there
is some limited exposure to future earnings due to changes in interest rates.
A 100 basis point increase or decrease in interest rates would not have a
significant impact on future earnings of the Company.
Item 8. Financial Statements and Supplementary Data
Page Reference
Report of Independent Auditors 40
Statements of Consolidated Income
for each of the three years in
the period ended December 31, 1998 41
Statements of Consolidated Cash Flows
for each of the three years in the
period ended December 31, 1998 42
Consolidated Balance Sheets
December 31, 1998 and 1997 43 & 44
Statements of Common Stockholders'
Equity for each of the three
years in the period ended
December 31, 1998 45
Notes to Consolidated Financial
Statements 46 - 74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Equitable Resources, Inc.
We have audited the accompanying consolidated balance sheets of
Equitable Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and
the related consolidated statements of income, common stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Equitable Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Pittsburgh, Pennsylvania
February 25, 1999
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31, 1998 1997 1996
--------------------------------------------------
(Restated) (Restated)
--------------------------------------------------
(Thousands except per share amounts)
Operating revenues $ 882,625 $ 934,034 $ 856,367
Cost of sales 453,537 460,572 410,024
--------------- ---------------- ---------------
Net operating revenues 429,088 473,462 446,343
--------------- ---------------- ---------------
Operating expenses:
Operation & maintenance 109,240 131,648 125,018
Exploration 27,211 7,260 14,785
Production 30,390 32,207 31,224
Selling, general and administrative 109,341 103,141 101,825
Depreciation, depletion and amortization 81,250 72,971 68,319
Restructuring, impairment and other nonrecurring charges 81,840 24,055 (4,385)
--------------- ---------------- ---------------
Total operating expenses 439,272 371,282 336,786
--------------- ---------------- ---------------
Operating income (loss) (10,184) 102,180 109,557
Other 2,667 - -
Gain/(loss) on sale of assets (1,614) 50,120 852
--------------- ---------------- ---------------
Earnings (loss) from continuing operations, before interest & taxes (9,131) 152,300 110,409
Interest charges 40,302 34,903 29,837
--------------- ---------------- ---------------
Income (loss) before income taxes (49,433) 117,397 80,572
Income taxes (benefits) (22,381) 43,210 27,045
--------------- ---------------- ---------------
Net income (loss) from continuing operations before extraordinary loss (27,052) 74,187 53,527
Income (loss) from discontinued operations after taxes (8,804) 3,870 5,852
Extraordinary loss after taxes - early extinguishment of debt (8,263) - -
--------------- ---------------- ---------------
Net income (loss) $ (44,119) $ 78,057 $ 59,379
=============== ================ ===============
Average common shares outstanding 36,833 36,003 35,188
=============== ================ ===============
Earnings (loss) per share of common stock:
Basic:
Continuing operations, before extraordinary loss $ (0.73) $ 2.06 $ 1.52
Discontinued operations (0.24) 0.11 0.17
Extraordinary loss - early extinguishment of debt (0.22) - -
--------------- ---------------- ---------------
Net income $ (1.19) $ 2.17 $ 1.69
=============== ================ ===============
Diluted:
Continuing operations, before extraordinary loss $ (0.73) $ 2.05 $ 1.52
Discontinued operations (0.24) 0.11 0.17
Extraordinary loss - early extinguishment of debt (0.22) - -
--------------- ---------------- ---------------
Net income $ (1.19) $ 2.16 $ 1.69
=============== ================ ===============
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997 1996
-------------------------------------------------------
(Restated) (Restated)
-------------------------------------------------------
(Thousands)
Cash flows from operating activities:
Net income (loss) from continuing operations, before
extraordinary items $ (27,052) $ 74,187 $ 53,527
----------------- ---------------- -----------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Impairment of assets 75,245 13,000 -
Depreciation, depletion and amortization 81,250 72,971 68,319
Gain on sale of property - (52,204) -
Amortization of construction contract costs - net 8,271 7,925 -
Deferred income taxes (benefits) (29,537) 31,008 24,207
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues 117,521 (59,015) (47,909)
Deferred purchased gas cost 5,646 16,026 (49,919)
Prepaid expenses and other 32,353 (12,858) (10,281)
Accounts payable (121,396) 54,254 49,784
Deferred revenue (16,529) (22,156) (22,200)
Other - net (36,800) (27,285) (21,758)
----------------- ---------------- -----------------
Total adjustments 116,024 21,666 (9,757)
----------------- ---------------- -----------------
Net cash provided by continuing operating activities 88,972 95,853 43,770
Net cash (used in) provided by discontinued operations (24,473) 18,321 21,798
----------------- ---------------- -----------------
Net cash provided by operating activities 64,499 114,174 65,568
----------------- ---------------- -----------------
Cash flows from investing activities:
Capital expenditures on continuing operations (138,520) (220,100) (88,177)
Capital expenditures on discontinued operations in year of disposal (32,004) - -
Proceeds from sale of property 338,255 181,566 4,180
Net noncurrent assets held for sale - (32,835) (22,107)
----------------- ---------------- -----------------
Net cash used in investing activities 167,731 (71,369) (106,104)
----------------- ---------------- -----------------
Cash flows from financing activities:
Issuance of common stock 2,496 6,631 2,306
Purchase of treasury stock (37,747) (28,596) (33)
Dividends paid (43,800) (42,679) (41,548)
Proceeds from issuance of long-term debt - - 144,919
Purchase of debt due 1999 through 2026 (68,556) - -
Proceeds from preferred trust securities 125,000 - -
Repayments and retirements of long-term debt (10,880) - (150,440)
Increase (decrease) in short-term loans (165,741) 76,544 69,900
----------------- ---------------- -----------------
Net cash provided (used) by financing activities (199,228) 11,900 25,104
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 33,002 54,705 (15,432)
Cash and cash equivalents at beginning of year 69,442 14,737 30,169
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 102,444 $ 69,442 $ 14,737
================= ================ =================
Cash paid during the year for:
Interest (net of amount capitalized) $ 46,973 $ 43,533 $ 43,025
================= ================ =================
Income taxes $ 15,568 $ 16,030 $ 10,456
================= ================ =================
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31,
ASSETS 1998 1997
-------------------------------------------------------
(Restated)
-------------------------------------------------------
(Thousands)
Current assets:
Cash and cash equivalents $ 102,444 $ 69,442
Accounts receivable (less accumulated provision for
doubtful accounts: 1998, $9,470; 1997, $9,985) 192,955 354,121
Unbilled revenues 41,616 32,527
Inventory 33,743 37,156
Deferred purchased gas cost 39,445 44,053
Derivative commodity instruments, at fair value - 82,912
Prepaid expenses and other 34,832 64,523
-------------------- --------------------
Total current assets 445,035 684,734
-------------------- --------------------
Property, plant and equipment 1,960,390 1,862,412
Less accumulated depreciation and depletion 762,320 675,410
-------------------- --------------------
Net property, plant and equipment 1,198,070 1,187,002
-------------------- --------------------
Net assets of discontinued operations - 238,182
-------------------- --------------------
Other assets:
Regulatory assets 65,983 69,919
Goodwill 68,128 66,823
Other 77,031 81,391
-------------------- --------------------
Total other assets 211,142 218,133
-------------------- --------------------
Total $ 1,854,247 $ 2,328,051
==================== ====================
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---------------------------------------------------
(Restated)
---------------------------------------------------
(Thousands)
Current liabilities:
Current portion long-term debt $ 74,136 $ 5,000
Short-term loans 115,703 281,444
Accounts payable 152,784 288,192
Derivative commodity instruments, at fair value - 79,012
Other current liabilities 94,382 92,053
------------------- --------------------
Total current liabilities 437,005 745,701
------------------- --------------------
Long-term debt 281,350 417,564
------------------- --------------------
Deferred and other credits:
Deferred income taxes 172,474 208,236
Deferred investment tax credits 17,695 18,792
Deferred revenue 68,989 85,518
Other 43,315 28,720
------------------- --------------------
Total deferred and other credits 302,473 341,266
------------------- --------------------
Commitments and contingencies - -
------------------- --------------------
Preferred trust securities 125,000 -
------------------- --------------------
Common stockholders' equity:
Common stock, no par value, authorized 80,000 shares;
shares issued: 1998, 37,252; 1997, 36,985 280,400 269,879
Treasury stock, shares at cost: 1998, 1,396; 1997, 56 (39,298) (1,551)
Retained earnings 467,326 555,245
Accumulated other comprehensive income (9) (53)
------------------- --------------------
Total common stockholders' equity 708,419 823,520
------------------- --------------------
Total $ 1,854,247 $ 2,328,051
=================== ====================
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Accumulated
---------------------------------- Other Common
Shares No Retained Comprehensive Stockholders'
Outstanding Par Value Earnings Income Equity
--------------------------------------------------------------------------------------
(Thousands)
Balance, December 31, 1995 35,007 $ 214,181 $502,036 $(1,138) $715,079
Comprehensive income:
Net income for the year 1996 59,379
Foreign currency translation (83)
Total comprehensive income 59,296
Dividends ($1.18 per share) (41,548) (41,548)
Stock issued:
Acquisition of subsidiary 239 7,000
Conversion of 9 1/2% debentures 16 178
Restricted stock option plan 36 855
Dividend reinvestment plan 49 1,456
Treasury stock (1) (33)
Net change in common stock 9,456
------------ --------------- --------------- -------------- ---------------
Balance, December 31, 1996 35,346 223,637 519,867 (1,221) 742,283
Comprehensive income:
Net income for the year 1997 78,057
Foreign currency translation 1,168
Total comprehensive income 79,225
Dividends ($1.18 per share) (42,679) (42,679)
Stock issued:
Acquisition of subsidiary 2,401 68,276
Conversion of 9 1/2% debentures 33 370
Restricted stock option plan 106 3,323
Dividend reinvestment plan 43 1,318
Treasury stock (1,000) (28,596)
Net change in common stock 44,691
------------ --------------- --------------- -------------- ---------------
Balance, December 31, 1997 36,929 268,328 555,245 (53) 823,520
Comprehensive income:
Net loss for the year 1998 (44,119)
Foreign currency translation 44
Total comprehensive income (44,075)
Dividends ($1.18 per share) (43,800) (43,800)
Stock issued:
Acquisition of subsidiary 171 5,460
Restricted stock option plan 56 3,990
Dividend reinvestment plan 40 1,071
Treasury stock (1,340) (37,747)
Net change in common stock (27,226)
------------ --------------- --------------- -------------- ---------------
Balance, December 31, 1998 35,856 $ 241,102 $ 467,326 $ (9) $ 708,419
============ =============== =============== ============== ===============
Common shares authorized: 80,000,000 shares. Preferred shares authorized:
3,000,000 shares. There are no preferred shares issued or outstanding.
Common shares outstanding are net of treasury stock: 1998 - 1,396,000 shares
($39,298,000); 1997 - 56,000 shares ($1,551,000); 1996 - 169,000 shares
($4,023,000).
Retained earnings of $468,074,000 are available for dividends on, or purchase
of, common stock pursuant to restrictions imposed by indentures securing
long-term debt.
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
A. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Equitable Resources, Inc. and all subsidiaries,
ventures and partnerships in which a controlling interest is held (Equitable
or the Company). Equitable also consolidates its interest in oil and gas joint
ventures. Equitable uses the equity method of accounting for companies where
its ownership is between 20% and 50%.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
These investments are accounted for at cost. Interest earned on cash
equivalents is included in interest charges.
INVENTORIES: Inventories, which consist of gas stored underground and
materials and supplies, are stated at average cost.
PROPERTIES, DEPRECIATION AND DEPLETION: Plant, property and equipment
is carried at cost. Depreciation is provided on the straight-line method based
on estimated service lives, ranging from 3 to 70 years except for most natural
gas and crude oil production properties as explained below.
The Company uses the successful efforts method of accounting for
exploration and production activities. Under this method, the cost of
productive wells and development dry holes, as well as productive acreage, are
capitalized and depleted on the unit-of-production method.
DEFERRED PURCHASED GAS COST AND OTHER REGULATORY ASSETS: The Company's
distribution and interstate pipelines are subject to rate regulation by state
and federal regulatory commissions. Accounting for these operations is in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation."
Where permitted by regulatory authority under purchased gas adjustment clauses
or similar tariff provisions, the Company defers the difference between
purchased gas cost, less refunds, and the billing of such cost and amortizes
the deferral over subsequent periods in which billings either recover or repay
such amounts.
Certain other costs, which will be passed through to customers under
ratemaking rules for regulated operations, are deferred by the Company as
regulatory assets when recovery through rates is expected. These amounts
relate primarily to the accounting for income taxes. The Company believes that
it will continue to be subject to rate regulation that will provide for the
recovery of deferred costs.
A. Summary of Significant Accounting Policies (Continued)
DERIVATIVE COMMODITY INSTRUMENTS: The Company uses exchange-traded
natural gas and crude oil futures contracts and options and over-the-counter
(OTC) natural gas and crude oil swap agreements and options to hedge exposures
to fluctuations in oil and gas prices.
The Company uses the deferral accounting method to account for
derivative commodity instruments designated and effective as hedges. Under
this method, changes in the market value of these hedge positions are deferred
and included in other current assets and other current liabilities. These
deferred realized and unrealized gains and losses are included in operating
revenues when the hedged transactions occur. It is management's intent to hold
derivative commodity instruments designated as hedges until maturity. However,
in the event a hedge contract is terminated early, the deferred gain or loss
realized on early termination of the contract will be recognized as the hedged
production occurs. If the underlying asset to a hedge contract is sold, the
deferred gain or loss associated with the contract will be recognized at the
time the oil and gas property is sold. Premiums on option contracts are
deferred in other current assets and recognized in operating revenues over the
option term. Cash flows from derivative contracts are considered operating
activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is required to be adopted in years beginning after June 15, 1999. The
Company has not yet determined when it will adopt the provisions of this
statement, which may be implemented at the beginning of any fiscal quarter.
SFAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS No. 133 will
be on the earnings and financial position of the Company.
In November 1998, the Emerging Issues Task Force (EITF) of the FASB
reached a consensus on Issue No. 98-10, "Accounting for Energy Trading and
Risk Management Activities." The EITF concluded that energy trading activities
should be recognized on a mark-to-market basis based on the fair value of the
contracts. Trading activities should be reported separately (either net or
gross) in the income statement. The consensus is effective for fiscal years
beginning after December 15, 1998 and must be adopted by a cumulative catch up
adjustment.
A. Summary of Significant Accounting Policies (Continued)
The Company has not determined what the effect of EITF Issue No. 98-10
will be on the earnings and financial position of the Company, the impact of
which is not expected to be material.
GOODWILL: Goodwill consists of costs in excess of the net assets of
businesses acquired. Goodwill is amortized on a straight-line basis over a
period of twenty years.
STOCK BASED COMPENSATION: The Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock options and
awards. Accordingly, compensation cost for stock options and awards is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the exercise price of the stock option or
award.
REVENUE RECOGNITION: Revenues for regulated gas sales to retail
customers are recognized as service is rendered, including an accrual for
unbilled revenues from the date of each meter reading to the end of the
accounting period. Revenue is recognized for exploration and production
activities when deliveries of natural gas, crude oil and natural gas liquids
are made. Revenues from natural gas transportation and storage activities are
recognized in the period service is provided. Revenues from energy marketing
activities are recognized when deliveries occur.
The Company recognizes revenue from shared energy savings contracts as
energy savings are measured and verified. Revenue received from customer
contract termination payments is recognized when received. Revenue from other
long-term contracts, such as turnkey contracts, is recognized on a
percentage-of-completion basis, determined using the cost-to-cost method. Any
maintenance revenues are recognized as related services are performed.
SALES OF RECEIVABLES: The Company finances some amounts due from
customers with financial institutions. At the time of the transfer, the
amounts due from the customer are recognized as revenue, the transfer is
accounted for as the sale of a receivable, the receivable is removed from the
books and any related deferred costs are charged to operations immediately.
INCOME TAXES: The Company files a consolidated federal income tax
return. The current provision for income taxes represents amounts paid or
estimated to be payable. Deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Where deferred tax liabilities will be passed through
to customers in regulated rates, the Company establishes a corresponding
regulatory asset for the increase in future revenues that will result when the
temporary differences reverse.
A. Summary of Significant Accounting Policies (Continued)
Investment tax credits realized in prior years were deferred and are
being amortized over the estimated service lives of the related properties
where required by ratemaking rules.
EARNINGS PER SHARE: "Basic" EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. "Diluted" EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted to common stock.
COMPREHENSIVE INCOME: In 1998, the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income includes
net income and other changes to stockholders' equity in the current period,
examples of which include foreign currency translation adjustments and certain
changes in the value of derivative financial instruments. SFAS No. 130 does not
impact amounts previously reported for net income.
Because the Company does not have material items accounted for as
other comprehensive income, the adoption of SFAS No. 130 did not have a
significant impact on the Company's financial statements.
SEGMENT DISCLOSURES: In 1998, the Company adopted the provisions of
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 requires that an enterprise disclose certain
information about operating segments. Operating segments are revenue-producing
components of the enterprise for which separate financial information is
produced internally and are subject to evaluation by the Company's chief
executive officer in deciding how to allocate resources.
Operating segments are evaluated on their contribution to the
Company's consolidated results, based on earnings before interest and taxes.
Interest charges, income taxes and certain corporate office expenses are
managed on a consolidated basis and are allocated pro forma to operating
segments.
Prior year segment information has been reclassified to conform with
the current operating structure.
RECLASSIFICATION: Certain previously reported amounts have been
reclassified to conform with the 1998 presentation.
B. Derivative Commodity Instruments
The Company uses exchange-traded natural gas and crude oil futures
contracts, options and OTC natural gas and crude oil swap agreements and
options (collectively derivative contracts) to hedge exposures to fluctuations
in oil and gas prices. Futures contracts obligate the Company to buy or sell a
designated commodity at a future date for a specified price. Swap agreements
involve payments to or receipts from counterparties based on the differential
between a fixed and variable price for the commodity. Exchange-traded
instruments are generally settled with offsetting positions but may be settled
by delivery of commodities. OTC arrangements require settlement in cash.
Hedging Activities
The Company is exposed to risk from fluctuations in energy prices in
the normal course of business. The Company uses derivative contracts to hedge
exposures to oil and gas price changes.
The following table summarizes the absolute notional quantities of the
derivative contracts held for purposes other than trading at December 31, 1998
and 1997. The open futures and options contracts at year-end 1998 have
maturities extending through October 2001, while the swap agreements have
maturities extending through May of 2001. At December 31, 1997, the remaining
terms of the open futures and options contracts were the same as those at
December 31, 1998 while the swap agreements had maturities extending through
November of 2000.
Absolute Notional Quantity Gain/(Loss)
-------------------------- ----------------------------
1998 1997 1998 1997
-------------------------- ----------------------------
(Bcf equivalent) (Millions)
Futures 8.6 4.5 $ (2.1) $ 1.0
Swaps 19.6 96.5 (15.7) (10.3)
Options 1.9 1.8 1.0 (0.1)
-------- -------- ---------- ----------
Total 30.1 102.8 $ (16.8) $ (9.4)
======== ======== ========== ==========
Deferred realized amounts from hedge transactions were a $.6 million
gain at December 31, 1998, and a $1.3 million gain and a $1.6 million loss at
December 31, 1997. The Company recognized net losses on its hedging activities
of $3.0 million, $9.8 million and $44.4 million in 1998, 1997 and 1996,
respectively. These losses are offset when the underlying products are sold.
B. Derivative Commodity Instruments (Continued)
The Company is exposed to credit loss in the event of nonperformance
by counterparties to derivative contracts. This credit exposure is limited to
derivative contracts with a positive fair value. Futures contracts have
minimal credit risk because futures exchanges are the counterparties. The
Company manages the credit risk of the other derivative contracts by limiting
dealings to those counterparties who meet the Company's criteria for credit
and liquidity strength.
Trading Activities
In 1998, the Company sold its natural gas midstream operations
eliminating the trading functions. Previously, the primary functions of the
Company's trading business were to provide price risk management services to
the Company's Utilities and Services segments and to contribute to the
Company's earnings by taking market positions within defined trading limits.
There were no outstanding derivative contracts held for trading
purposes at December 31, 1998. At December 31, 1997, the absolute notional
quantities of the futures, swaps and options contracts held for trading
purposes were 43.7 Bcfe, 149.4 Bcfe and 10.0 Bcfe, respectively.
The table below sets forth the end of period fair value and average
fair value during the year for all the derivative contracts held for trading
purposes.
1997
-----------------------------------
Assets Liabilities
-----------------------------------
(Thousands)
Fair value at December 31 $ 82,912 $ 79,012
Average fair value $ 12,161 $ 10,509
Trading activity resulted in net gains of $1.1 million for 1997 and
$0.8 million for 1996, respectively.
C. Asset Impairment and Other Nonrecurring Items
The Company's results of operations include several significant
nonrecurring items which are included in operating expense.
C. Asset Impairment and Other Nonrecurring Items (Continued)
In December 1998, as a result of a sustained decrease in natural gas
and crude oil prices and a change in management's objectives in the Gulf of
Mexico, the Company recognized a write-down in the carrying value of crude oil
and natural gas production assets of $36.9 million. To improve the efficiency
of Appalachian production operations, the Company has transferred many of the
management responsibilities for its Kentucky West Virginia Gas Company, L.L.C.
(Kentucky West) to Equitable Production - East under a services agreement. In
studying the possibility of decertifying the pipeline, the Company determined
that it is likely that not all costs will be collectible in rates and has
reduced regulatory and other assets by $9.2 million, including $3.6 million in
Equitable Utilities and $5.6 million in Equitable Production. In addition, the
Company implemented a fundamental restructuring of its utility, nonregulated
retail sales and headquarters groups. This process included a voluntary
workforce reduction incentive offer to reduce staff, the closing or
consolidation of several offices, reconfiguration of management information
systems, the realignment of many administrative functions to specific
operating segments and the curtailment of several auxiliary business ventures.
Expenses associated with these initiatives totaled $35.7 million including
$8.1 million in the utility group, $2.1 million in the production group, $2.7
million in energy services, $3.0 million in the energy sales unit and $19.8
million in headquarters.
In June 1997, an evaluation of the carrying value of long-lived assets
resulted in a write-down of the Utilities segment's investment in the Avoca
bedded salt natural gas storage project, for which the Company recognized a
$13 million pretax charge. In September 1997, the Company recorded an
additional pretax charge of $10.7 million related to evaluation and reduction
of headquarters and noncore business functions.
In December 1996, the Company recognized a pretax gain of $7.4 million
related to the curtailment of the Company's defined benefit pension plan for
non-utility employees.
D. Direct Billing and Other Settlements
Kentucky West, a subsidiary of the Company, received Federal Energy
Regulatory Commission (FERC) approval of settlement agreements with all
customers for the direct billing to recover the higher Natural Gas Policy Act
(NGPA) prices, which the FERC had denied on natural gas produced from
exploration and production properties between 1978 and 1983. The portion of
the settlement with Equitable Gas division has been subject to Pennsylvania
Public Utility Commission (PUC) review. The PUC approved Equitable Gas
Company's collection of $2.6 million in September 1998 and $7.8 million in
September 1997 and 1996 related to the direct billing settlement.
E. Deferred Revenue
In 1995, the Company sold an interest in certain Appalachian natural
gas properties, the production from which qualifies for nonconventional fuels
tax credit. The Company retained an interest in the properties that will
increase based on performance. As such, the proceeds of $133.5 million were
recorded as deferred revenues and are being recognized in income as financial
targets are met.
F. Discontinued Operations
In April 1998, management adopted a formal plan to sell the Company's
natural gas midstream operations. The operations included an integrated
natural gas gathering, processing and storage system in Louisiana and a
natural gas and electricity trading and marketing business based in Houston.
The financial statements for all periods have been restated to classify 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 income (loss) from discontinued operations was $(8.8) million,
$3.9 million and $5.9 million for the years ended December 31, 1998, 1997 and
1996, respectively. The net loss in 1998 reflects an aftertax gain on the sale
of $10.1 million. The net income (loss) for each year was reported net of
income tax expense (benefit) of $(0.2) million, $3.2 million and $3.4 million
in 1998, 1997 and 1996, respectively.
Interest expense allocated to discontinued operations was $7.4
million, $7.2 million and $6.8 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The net of assets of discontinued operations are summarized as
follows:
December 31,
------------------
1997
------------------
(millions)
Property, plant and equipment $ 319.5
Deferred credits (81.3)
-------
Total $ 238.2
=======
G. Sale Of Property
In July 1997, the Company entered into agreements with five parties
for the sale of the Company's crude oil and natural gas properties in the
western United States and Canada. The sales were completed in September and
October for an aggregate cash sales price of $170 million. In October 1997,
the Company sold its Union Drilling division, a contract drilling company, for
$7 million. These sales resulted in gains of $52 million in 1997.
H. Acquisitions
In July 1997, the Company acquired Northeast Energy Services, Inc.
(NORESCO) in exchange for a combination of 2.1 million shares of the Company's
stock valued at approximately $67 million and $10 million in cash, including
transaction costs. NORESCO is a provider of comprehensive energy efficiency
systems and services for commercial, industrial, government and institutional
customers and is included in the Services segment. NORESCO's primary assets
are accounts receivable from customers and deferred contract costs, which are
included in other assets in the consolidated balance sheets. The transaction
was treated as a purchase for accounting purposes. The Company recorded
goodwill of $57 million which is being amortized over 20 years. The $67
million noncash portion of the acquisition is excluded from capital
expenditures in the 1997 cash flows statement.
In 1997, the Services segment also acquired Scallop Thermal Industries
and Lighting Management, Inc. for a total cost of $4 million. These
acquisitions were accounted for under the purchase method of accounting.
The effect of each of these acquisitions, individually and aggregated
by year of purchase, is not material to the results of operations or financial
position of Equitable, and therefore, pro forma financial information is not
presented.
I. Income Taxes
The following table summarizes the source and tax effects of temporary
differences between financial reporting and tax bases of assets and
liabilities.
December 31,
--------------------------
1998 1997
--------------------------
(Thousands)
Deferred tax liabilities (assets):
Exploration and development costs
expensed for income tax reporting $ 86,742 $ 88,782
Tax depreciation in excess of
book depreciation 163,788 249,634
Regulatory temporary differences 26,095 28,108
Deferred purchased gas cost 13,594 16,069
Deferred revenues/expenses (14,324) (1,839)
Alternative minimum tax (58,517) (64,258)
Investment tax credit (6,998) (7,554)
Uncollectible accounts (5,583) (4,897)
Postretirement benefits (3,971) (2,489)
Other (13,750) 2,394
----------- -----------
Total (including amounts classified
as current liabilities of $14,602
for 1998 and $12,754 for 1997, and
amounts classified as net assets of
discontinued operations of $82,960 in 1997) $ 187,076 $ 303,950
=========== ===========
As of December 31, 1998 and 1997, $62.1 million and $63.8 million,
respectively, of the net deferred tax liabilities are related to
rate-regulated operations and have been deferred as regulatory assets.
I. Income Taxes (Continued)
Income tax expense (benefit) is summarized as follows:
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(Thousands)
Current:
Federal $ 5,331 $ 10,333 $ 2,602
State 339 717 226
Deferred:
Federal (22,033) 27,756 21,431
State (7,504) 3,252 2,005
Foreign 1,486 1,152 781
------------- ------------- ------------
Total $ (22,381) $ 43,210 $ 27,045
============= ============= ============
Provisions for income taxes differ from amounts computed at the
federal statutory rate of 35% on pretax income. The reasons for the difference
are summarized as follows:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(Thousands)
Tax at statutory rate $ (17,301) $ 41,089 $ 28,200
State income taxes (4,657) 2,580 1,450
Nonconventional fuels tax credit (1,199) (816) (1,299)
Other 776 357 (1,306)
---------- ----------- ------------
Income tax expense (benefit) $ (22,381) $ 43,210 $ 27,045
========== =========== ============
Effective tax rate (benefit) (45.3)% 36.8% 33.6%
========== =========== ============
The consolidated federal income tax liability of the Company has been
settled through 1994.
J. Short-Term Loans
Maximum lines of credit available to the Company were $500 million
during 1998, 1997 and 1996. The Company is not required to maintain
compensating bank balances. Commitment fees averaging one-tenth of one percent
were paid to maintain credit availability.
J. Short-Term Loans (Continued)
At December 31, 1998, short-term loans consisted of $115.7 million of
commercial paper at a weighted average annual interest of 5.02% and at
December 31, 1997, short-term loans consisted of $254.5 million of commercial
paper and $26.3 million of bank loans at a weighted average annual interest
rate of 5.71%. The maximum amount of outstanding short-term loans was $315.7
million in 1998, $302.5 million in 1997 and $295.5 million in 1996. The
average daily total of short-term loans outstanding was approximately $191.7
million during 1998, $229.6 million during 1997 and $147.4 million during
1996; weighted average annual interest rates applicable thereto were 5.0% in
1998, 5.7% in 1997 and 5.5% in 1996.
K. Long-Term Debt
December 31,
---------------------------
1998 1997
---------------------------
(Thousands)
7 1/2% debentures, due July 1, 1999
($75,000 principal amount, net of unamortized
original issue discount) $ 74,136 $ 73,184
7 3/4% debentures, due July 15, 2026 115,000 150,000
Medium-term notes:
7.2% to 9.0% Series A, due 2001 thru 2021 72,850 100,000
5.1% to 7.6% Series B, due 2003 thru 2023 75,500 75,500
6.8% to 7.6% Series C, due 2007 thru 2018 18,000 18,000
9.9% debentures, due April 15, 2013 - 5,880
----------- -----------
Total long-term debt 355,486 422,564
Less long-term debt payable within one year 74,136 5,000
----------- -----------
Total $281,350 $417,564
=========== ===========
In 1998, as a result of the sale of the Company's natural gas
midstream operations, the Company repurchased and retired $35.0 million of 7
3/4% debentures and $22.2 million of Series A Medium-Term Notes. Premiums paid
were $12.7 million, recognized net of income tax benefits, as an extraordinary
loss on early extinguishment of debt in 1998 of $8.3 million.
At December 31, 1998, the Company has the ability to issue $100
million of additional long-term debt under the provisions of shelf
registrations filed with the Securities and Exchange Commission.
K. Long-Term Debt (Continued)
Interest expense on long-term debt amounted to $34.9 million in 1998,
$35.1 million in 1997 and $34.8 million in 1996. Aggregate maturities of
long-term debt will be $75 million in 1999, none in 2000, $10 million in 2001,
none in 2002 and $24 million in 2003.
L. Trust Preferred Capital Securities
In April 1998, $125 million of 7.35% Trust Preferred Capital
Securities were issued. The capital securities were issued through a
subsidiary trust, Equitable Resources Capital Trust I, established for the
purpose of issuing the capital securities and investing the proceeds in 7.35%
Junior Subordinated Debentures issued by the Company. The capital securities
have a mandatory redemption date of April 15, 2038; however, at the Company's
option, the securities may be redeemed on or after April 23, 2003. Proceeds
were used to reduce short-term debt outstanding. Interest expense for the year
ended December 31, 1998 includes $6.3 million of preferred dividends related
to the trust preferred capital securities.
M. Pension and Other Postretirement Benefit Plans
The Company has pension and other post retirement benefit plans
covering certain Utility segment employees. Plans covering union members
generally provide benefits of stated amounts for each year of service. Plans
covering salaried utility employees use a benefit formula which is based upon
employee compensation and years of service.
The following table sets forth the pension and other benefit plans'
funded status and amounts recognized for those plans in the Company's
consolidated balance sheets:
M. Pension and Other Postretirement Benefit Plans (Continued)
Pension Benefits Other Benefits
--------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------
(Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $143,440 $137,477 $ 40,077 $ 35,694
Service cost 2,177 2,228 334 254
Interest cost 9,933 10,280 2,759 2,898
Amendments 323 5,638 - -
Actuarial (gain) loss 10,017 20,563 2,983 4,659
Benefits paid (9,319) (14,275) (4,168) (3,428)
Expenses paid (205) (185) - -
Curtailments 2,519 (436) - -
Settlements (11,362) (18,989) - -
Special termination benefits 970 1,139 1,506 -
-------------- -------------- -------------- --------------
Benefit obligation at end of year 148,493 143,440 43,491 40,077
-------------- -------------- -------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year 164,801 165,360 6,274 4,623
Actual return on plan assets 31,867 30,218 368 292
Employer contribution 1,632 1,069 1,812 1,359
Benefits paid (9,319) (14,275) - -
Expenses paid (205) (185) - -
Settlements (11,571) (17,386) - -
-------------- -------------- -------------- --------------
Fair value of plan assets at end of year 177,205 164,801 8,454 6,274
-------------- -------------- -------------- --------------
Funded status 28,712 21,361 (35,037) (33,803)
Unrecognized net actuarial (gain) loss (26,885) (23,335) 16,595 14,800
Unrecognized prior service cost (credit) 13,125 14,689 (140) (2,172)
Unrecognized initial net (asset) obligation (819) (1,295) 13,376 14,780
============== ============== ============== ==============
Net amount recognized $ 14,133 $ 11,420 $ (5,206) $ (6,395)
============== ============== ============== ==============
Weighted-average assumptions as of December 31:
Discount rate 6.75 % 7.00 % 6.75 % 7.00 %
Expected return on plan assets 10.00 10.00 7.50 7.50
Rate of compensation increase 4.50 4.50 4.50 4.50
For measurement purposes, a 5 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1999. The rate
was assumed to decrease gradually to 4 percent for 2002 and remain at that
level thereafter. The pension asset of $14,133 at December 31, 1998 and
$11,420 at December 31, 1997 is included in prepaid expenses and other current
assets in the consolidated balance sheets. The accrued liability for other
postretirement benefits of $5,206 at December 31, 1998 and $6,395 at December
31, 1997 is included in other current liabilities.
M. Pension and Other Postretirement Benefit Plans (Continued)
The Company's costs related to defined benefit pension and other
benefit plans comprised the following:
Pension Benefits Other Benefits
--------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------------------------------------------
(Thousands)
Components of net periodic benefit cost:
Service cost $ 2,177 $ 2,227 $ 4,053 $ 334 $ 254 $ 609
Interest cost 9,933 10,280 11,198 2,759 2,898 2,987
Expected return on plan assets (13,377) (13,254) (12,907) (522) (483) (197)
Amortization of prior service cost 1,579 1,441 1,193 (15) (214) (97)
Amortization of initial net (asset) obligation (390) (422) (395) 986 985 1,162
Recognized net actuarial (gain) loss 3 (30) (49) 749 617 321
Divestitures - - - (1,719) - -
Special termination benefits 970 1,139 - 1,506 - -
Settlement (gain) loss (2,295) (4,016) (1,983) - - -
Curtailment (gain) loss 319 587 (7,301) 419 - -
----------- ----------- ----------- ---------- ----------- ----------
Net periodic benefit cost $(1,081) $(2,048) $(6,191) $ 4,497 $ 4,057 $ 4,785
=========== =========== =========== ========== =========== ==========
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $31,695, $31,695 and $28,426,
respectively, as of December 31, 1998 and $49,243, $49,243 and $43,736,
respectively, as of December 31, 1997.
Assumed health care cost trend rates have an effect on the amounts
reported for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
One-Percentage Point Increase One-Percentage Point Decrease
--------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------------------------------------------
(Thousands)
Effect on total of service and interest
cost components $ 188 $ 247 $ 284 $ (177) $ - $ -
Effect on postretirement benefit obligation 2,316 2,983 2,498 (2,238) - -
As of December 31, 1998, approximately $1.0 million of the accrued
postretirement benefits related to rate-regulated operations have been
deferred as regulatory assets. Rate recovery requires the Company to place
agreed upon amounts in trust when collected in rates until such time as they
are applied to retiree benefits or returned to ratepayers. Trust assets
consist principally of equity and debt securities.
As of January 1, 1997, the Company amended its 401(k) employee savings
plan for salaried employees to provide a base Company contribution to that
plan for employees no longer eligible for defined benefit plans. In addition,
during 1997 the present value of these employees' future retirement benefits
under the defined benefit plans could be rolled over to the 401(k) plan, at
the employee's option, or used to purchase an annuity. Expense recognized by
the Company related to this and other 401(k) savings plans totaled $3.5
million in 1998, $3.9 million in 1997 and $1.4 million in 1996.
N. Common Stock and Earnings Per Share
Common Stock Reserve
At December 31, 1998, shares of Equitable's authorized and unissued
common stock were reserved as follows:
Possible future acquisitions 6,496,000
Stock compensation plans 1,792,000
Dividend reinvestment and stock purchase plan 469,000
-------------------
Total 8,757,000
===================
Earnings Per Share
Basic EPS is computed by dividing income (loss) from continuing
operations before extraordinary loss by the weighted average number of common
shares outstanding during the period, without considering any dilutive items.
Diluted EPS is computed by dividing income (loss) from continuing operations
before extraordinary loss, adjusted for the assumed conversion of debt, by the
weighted average number of common shares and potentially dilutive securities,
net of shares assumed to be repurchased using the treasury stock method.
Purchases of treasury shares are calculated using the average share price for
the Company's common stock during the period. Potentially dilutive securities
arise from the assumed conversion of outstanding stock options and awards and,
in years prior to 1998, the assumed conversion of then-outstanding convertible
debentures.
The computation of basic and diluted earnings (loss) per common share
from continuing operations is shown in the table below:
N. Common Stock and Earnings Per Share (Continued)
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
(Thousands except per share amounts)
Basic earnings (loss) per common share:
Net income (loss) from continuing operations,
before exraordinary item, applicable
to common stock $(27,052) $ 74,187 $ 53,527
Average common shares outstanding 36,833 36,003 35,188
Basic earnings (loss) per common share from
continuing operations, before
extraordinary item $ (0.73) $ 2.17 $ 1.52
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations,
before exraordinary item, applicable
to common stock (a) $(27,052) $ 74,190 $ 53,562
Average common shares outstanding 36,833 36,003 35,188
Potentially dilutive securities:
Stock options and awards (b) - 109 18
Common shares issuable upon conversion
of 9 1/2% convertible debentures - 4 53
------------- -------------- --------------
Total 36,833 36,116 35,259
============= ============== ==============
Diluted earnings (loss) per common share from
continuing operations, before
extraordinary item $ (0.73) $ 2.05 $ 1.52
(a) The aftertax benefit of interest expense on the assumed conversion of the
9 1/2% convertible debentures was $3,000 in 1997 and $35,000 in 1996.
(b) Options to purchase 284,000 shares of common stock were not included in
the computation of diluted earnings per common share because the options'
exercise prices were greater than the average market prices of the common
shares for 1997.
O. Stock-Based Compensation Plans
Long-Term Incentive Plans
The Company's Long-Term Incentive Plan provides for the granting of
shares of common stock to officers and key employees of the Company. These
grants may be made in the form of stock options, restricted stock, stock
appreciation rights and other types of stock-based or performance-based awards
as determined by the Compensation Committee of the Board of Directors at the
time of each grant. Stock awarded under the plan, or purchased through the
exercise of options, and the value of stock appreciation units are restricted
and subject to forfeiture should an optionee terminate employment prior to
specified vesting dates. In no case may the number of shares granted under the
plan exceed 1,725,500 shares. Options granted under the plan expire 5 to 10
years from the date of grant and some contain vesting provisions which are
based upon Company performance. In 1994, this plan replaced the Key Employee
Restricted Stock Option Plan, which at December 31, 1998, has 203,100 options
outstanding at an option price of $33.81 per share. These options are
reflected with the Long-Term Incentive Plan amounts presented in the tables
below.
Also reflected in the option tables below are options assumed in
conjunction with the NORESCO acquisition in July 1997. All outstanding options
granted under NORESCO's 1990 Incentive Stock Option Plan were converted by
Equitable to nonqualified stock options with the right to receive, upon
exercise of the option, the same Equitable stock and cash that shareholders of
NORESCO received in the acquisition. As a result of this conversion, 872,000
NORESCO stock options were converted to 256,400 Equitable stock options with
the exercise price per share proportionately adjusted. The adjusted exercise
prices of these stock options ranges from $5.1012 to $5.9516 per share. The
acquisition also accelerated the vesting period of these options, the latest
of which expire in 2006. During 1998, 52,000 stock options were exercised
under this plan, with 24,000 outstanding at December 31, 1998.
Pro forma information regarding net income and earnings per share for
options granted is required by SFAS No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value for these option grants was estimated at the dates of grant using a
Black-Scholes option pricing model with the following assumptions for 1998,
1997 and 1996, respectively.
O. Stock-Based Compensation Plans (Continued)
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
Risk-free interest rate (range) 4.80% 5.71% 5.82%
to to to
5.63% 5.79% 6.34%
Dividend yield 4.06% 3.96% 4.00%
Volatility factor 0.173 0.132 0.161
Weighted-average expected life of options 4 years 1.25 years 2 years
Options granted 1,014,900 339,100 125,400
Weighted-average fair market value of options
granted during the year $3.91 $1.93 $2.51
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The amount of estimated expense that would have been recognized under
SFAS No. 123 is not considered material to the financial statements in any of
the years presented.
O. Stock-Based Compensation Plans (Continued)
The following schedule summarizes the stock option activity:
Years Ended December 31,
--------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------
Options outstanding January 1 758,534 948,650 1,077,325
Granted 1,014,900 339,100 125,400
Forfeitures (453,257) (348,800) (210,650)
Exercised (61,992) (180,416) (43,425)
--------------- --------------- ---------------
Options outstanding December 31 1,258,185 758,534 948,650
=============== =============== ===============
Options outstanding at December 31, 1998 include 230,120 exercisable at that
date.
At December 31:
Prices of options outstanding $ 5.10 $ 5.10 $ 27.50
to to to
$ 34.63 $ 36.50 $ 36.50
Average option price $ 29.26 $ 28.02 $ 30.59
On September 5, 1997, the Company granted 106,127 stock awards from
the Long-Term Incentive Plan for the Key Employee Retention Program. This
program was established to provide additional incentive benefits to retain
senior executive employees of the Company. The vesting of these awards is
contingent on attainment of specific stock price targets and the continued
employment of the participants until January 1, 2001. In 1998, the Company
granted 25,000 additional stock awards from the Long-Term Incentive Program to
key executives. The fair value of these awards was estimated at the date of
grant utilizing a Black-Scholes pricing model and the same assumptions as
listed above and would result in compensation expense not materially different
from that recorded by the Company under APB Opinion No. 25.
O. Stock-Based Compensation Plans (Continued)
Non-Employee Directors' Stock Incentive Plan
The Company's Non-Employee Directors' Stock Incentive Plan provides
for the granting of up to 80,000 shares of common stock in the form of stock
option grants and restricted stock awards to non-employee directors of the
Company. The exercise price for each share is equal to market price of the
common stock on the date of grant. Each option is subject to time-based
vesting provisions and expires five years after date of grant. At December 31,
1998, 35,000 options were outstanding at prices ranging from $28.38 to $34.63
per share and no options had been exercised under this plan.
P. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, as well as short-term
loans, approximates fair value due to the short maturity of the instruments.
The estimated fair value of long-term debt at December 31, 1998 and
1997 would be $391.2 million and $436.3 million, respectively. The fair value
was estimated based on discounted values using a current discount rate
reflective of the remaining maturity. The Company's 7 1/2% debentures may not
be redeemed prior to maturity.
The estimated fair value of derivative commodity instruments described
in Note B, excluding trading activities which are marked-to-market, was
$(16.8) million and $(9.7) million at December 31, 1998 and 1997,
respectively.
Q. Concentrations of Credit Risk
Revenues and related accounts receivable from the Equitable Production
segment's operations are generated primarily from the sale of produced natural
gas to utility and industrial customers located mainly in the Appalachian
area, the sale of crude oil to refinery customers in the Appalachian area, the
sale of produced natural gas liquids to a refinery customer in Kentucky and
transportation of natural gas in Kentucky and Virginia.
The Utilities segment's operating revenues and related accounts
receivable are generated from state-regulated utility natural gas sales and
transportation to more than 266,000 residential, commercial and industrial
customers located in southwest Pennsylvania and parts of West Virginia and
Kentucky; and FERC-regulated interstate pipeline transportation and storage
service for the affiliated utility, Equitable Gas, as well as other utility
and end-user customers located in nine mid-Atlantic and northeastern states.
Under state regulations, the utility is required to provide continuous gas
service to residential customers during the winter heating season.
Q. Concentrations of Credit Risk (Continued)
The Services segment's operating revenues and related accounts
receivable are generated from the nationwide marketing of natural gas to
brokers and large volume utility and industrial customers; and cogeneration
and power plant development, performance contracting, and water efficiency and
program development for commercial, industrial and institutional customers and
various government facilities.
The Company is not aware of any significant credit risks which have
not been recognized in provisions for doubtful accounts.
R. Financial Information by Business Segment
The Company reports operations in four segments, which reflect its
lines of business. 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 and electricity markets.
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.
Substantially all of the Company's operating revenues, net income from
continuing operations and assets are generated or located in the United States
of America. The financial information by business segment in the following
tables excludes amounts related to discontinued operations.
R. Financial Information by Business Segment (Continued)
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------
(Thousands)
Revenues from external customers:
Equitable Utilities $ 342,154 $428,155 $ 474,498
Equitable Production 182,239 191,756 179,354
NORESCO 109,514 52,790 10,373
Equitable Energy 248,718 261,333 192,142
---------------- ---------------- -----------------
Total $ 882,625 $934,034 $ 856,367
================ ================ =================
Intersegment revenues:
Equitable Utilities $ 22,055 $ 16,169 $ 8,447
Equitable Production 20,111 59,923 49,500
Equitable Energy 71,114 32,179 36,651
---------------- ---------------- -----------------
Total $ 113,280 $108,271 $ 94,598
================ ================ =================
Depreciation, depletion and amortization:
Equitable Utilities $ 21,422 $ 20,502 $ 20,290
Equitable Production 55,243 49,070 47,661
4,300 2,775 287
Equitable Energy 285 624 81
---------------- ---------------- -----------------
Total $ 81,250 $ 72,971 $ 68,319
================ ================ =================
Segment profit (loss):
Equitable Utilities $ 43,145 $ 50,662 $ 72,161
Equitable Production (27,707) 118,204 45,441
NORESCO 5,126 (2,647) (2,697)
Equitable Energy (7,608) (6,397) (8,412)
---------------- ---------------- -----------------
Total operating segments 12,956 159,822 106,493
Less: reconciling items
Headquarters operating expenses (gains)
not allocated to operating segments:
Impairments of investments and other assets 19,756 8,655 -
Benefit plan curtailment applicable to headquarters - - (1,804)
Other 2,331 (1,133) (2,112)
---------------- ---------------- -----------------
Total reconciling items (9,131) 152,300 110,409
Interest expense 40,302 34,903 29,837
Income tax expenses (benefit) (22,381) 43,210 27,045
---------------- ---------------- -----------------
Net income from continuing operations,
before extraordinary item $ (27,052) $ 74,187 $ 53,527
================ ================ =================
R. Financial Information by Business Segment (Continued)
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------
(Thousands)
Other significant noncash expense items:
Equitable Utilities:
Change in deferred purchased gas cost $ 4,608 $ 16,026 $ (49,919)
Noncash restructuring charges 11,251 12,700 158
Equitable Production:
Lease impairments 36,908 - -
Noncash restructuring charges 6,812 2,200 (2,378)
NORESCO:
Cost of contracts in excess of billings 8,271 7,925 -
Noncash restructuring charges 1,764 - -
Equitable Energy:
Noncash restructuring charges 758 - -
================ ================ =================
Total $ 70,372 $ 38,851 $ (52,139)
================ ================ =================
Segment assets:
Equitable Utilities $ 848,697 $ 850,026
Equitable Production 598,252 995,143
NORESCO 169,370 148,066
Equitable Energy 149,977 37,650
---------------- ----------------
Total operating segments 1,766,296 2,030,885
Headquarters assets, including cash and
short-term investments and net intercompany
accounts receivable 87,951 58,984
---------------- ----------------
Total $1,854,247 $2,089,869
================ ================
Expenditures for segment assets:
Equitable Utilities $ 23,297 $ 39,281 $ 36,281
Equitable Production 104,121 185,558 73,167
NORESCO 11,102 28,096 (a) 836
Equitable Energy - - -
---------------- ---------------- -----------------
Total $ 138,520 $ 252,935 $ 110,284
================ ================ =================
(a) Excludes $68 million total noncash portion of the acquisitions of
NORESCO and Scallop Thermal Management. See Note H.
S. Commitments and Contingencies
There are various claims and legal proceedings against the Company
arising from the normal course of business. Although counsel is unable to
predict with certainty the ultimate outcome, management and counsel believe
the Company has significant and meritorious defenses to any claims and intend
to pursue them vigorously.
Management believes that the ultimate outcome of any matter currently
pending against the Company will not materially affect the financial position
of the Company although they could be material to the reported results of
operations for the period in which they occur.
The Company has annual commitments of approximately $27.4 million for
demand charges under existing long-term contracts with pipeline suppliers for
periods extending up to 14 years at December 31, 1998, which relate to gas
distribution operations. However, substantially all of these costs are
recoverable in customer rates.
The Company is subject to federal, state and local environmental laws
and regulations. These laws and regulations, which are constantly changing,
can require expenditures for remediation and may in certain instances result
in assessment of fines. The Company has established procedures for ongoing
evaluation of its operations to identify potential environmental exposures and
assure compliance with regulatory policies and procedures. The estimated costs
associated with identified situations that require remedial action are
accrued. However, certain of these costs are deferred as regulatory assets
when recoverable through regulated rates. Ongoing expenditures for compliance
with environmental laws and regulations, including investments in plant and
facilities to meet environmental requirements, have not been material.
Management believes that any such required expenditures will not be
significantly different in either their nature or amount in the future and
does not know of any environmental liabilities that will have a material
effect on the Company's financial position or results of operations.
T. Interim Financial Information (Unaudited)
The following quarterly summary of operating results reflects
variations due primarily to the seasonal nature of the Company's utility
business and volatility of oil and gas commodity prices:
March June September December
31 30 30 31
-----------------------------------------------------------------------------------
(Thousands except per share amounts)
1998
Operating revenues $299,367 $182,097 $159,318 $241,843
Operating income (loss) 48,842 13,365 13,512 (85,903)
Net income (loss) from continuing
operations before extraordinary items 24,652 2,274 2,037 (56,015)
Earnings (loss) per share from continuing
operations before extraordinary items:
Basic $ 0.66 $ 0.06 $ 0.06 $ (1.53)
Assuming dilution $ 0.66 $ 0.06 $ 0.06 $ (1.53)
1997 (Restated)
Operating revenues $312,481 $177,896 $165,337 $278,320
Operating income (loss) 49,337 (4,494) 8,348 48,989
Net income (loss) from continuing
operations before extraordinary items 25,238 (7,731) 16,350 40,330
Earnings (loss) per share from continuing
operations before extraordinary items:
Basic $ 0.71 $ (0.22) $ 0.45 $ 1.10
Assuming dilution $ 0.71 $ (0.22) $ 0.45 $ 1.09
U. Natural Gas and Oil Producing Activities (Unaudited)
The supplementary information summarized below presents the results of
natural gas and oil activities for the Equitable Production segment in
accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing
Activities."
The information presented excludes data associated with natural gas
reserves related to rate-regulated and other utility operations. These
reserves (proved developed) are less than 5% of total Company proved reserves
for the years presented.
U. Natural Gas and Oil Producing Activities (Unaudited) (Continued)
Production Costs
The following table presents the costs incurred relating to natural
gas and oil production activities:
1998 1997 1996
------------------------------------------------------
(Thousands)
At December 31:
Capitalized costs $861,035 $779,936 $840,136
Accumulated depreciation and depletion 355,535 293,594 342,950
-------------- -------------- ---------------
Net capitalized costs $505,500 $486,342 $497,186
============== ============== ===============
Costs incurred:
Property acquisition:
Proved properties $ 4,799 $68,334 $ 68
Unproved properties 18,069 15,813 6,411
Exploration 27,144 22,665 17,934
Development 76,762 40,982 33,298
Results of Operations for Producing Activities
The following table presents the results of operations related to
natural gas and oil production, including the effect in 1998 of impairment of
assets as described in Note C:
1998 1997 1996
------------------------------------------------------
(Thousands)
Revenues:
Affiliated $39,553 $52,956 $50,968
Nonaffiliated 99,437 97,493 86,319
Production costs 30,390 31,777 31,746
Exploration expenses 30,982 8,950 15,714
Depreciation and depletion 49,348 41,153 40,872
Impairment of assets 29,230 - -
Income tax expense (benefit) (1,166) 26,303 18,062
-------------- -------------- ---------------
Results of operations from producing
activities (excluding corporate overhead) $ 206 $42,266 $30,893
============== ============== ===============
U. Natural Gas and Oil Producing Activities (Unaudited) (Continued)
Reserve Information
The information presented below represents estimates of proved gas and
oil reserves prepared by Company engineers. Proved developed reserves
represent only those reserves expected to be recovered from existing wells and
support equipment. In 1997, the Company increased its Appalachian reserve life
from 35 to 50 years to more closely reflect actual production experience. This
revision increased 1997 proved developed natural gas and crude oil reserves by
78,607 million cubic feet equivalent. Proved undeveloped reserves represent
proved reserves expected to be recovered from new wells after substantial
development costs are incurred. As of December 31, 1998, all of the Company's
proved reserves are in the United States. During 1997, the Company sold its
Canadian properties, which accounted for less than 10% of the Company's proved
reserves.
Natural Gas 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(Millions of cubic feet)
- --------------------------------------------------------------------------------------------------------------------
Proved developed and undeveloped reserves:
Beginning of year 889,828 849,530 845,771
Revision of previous estimates 6,502 80,264 6,710
Purchase of natural gas in place 8,474 62,485 811
Sale of natural gas in place - (107,138) (368)
Extensions, discoveries and other additions 54,970 61,380 53,901
Production (59,893) (56,693) (57,295)
------------------------------------------------------
End of year 899,881 889,828 849,530
------------------------------------------------------
Proved developed reserves:
Beginning of year 769,312 732,158 739,249
End of year 780,817 769,312 732,158
Oil 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(Thousands of barrels)
- --------------------------------------------------------------------------------------------------------------------
Proved developed and undeveloped reserves:
Beginning of year 10,100 19,517 18,201
Revision of previous estimates (966) 849 1,867
Purchase of oil in place 5 2,592 67
Sale of oil in place - (12,392) (235)
Extensions, discoveries and other additions 1,661 1,045 1,344
Production (974) (1,511) (1,727)
-------------------------------------------------------
End of year 9,826 10,100 19,517
-------------------------------------------------------
Proved developed reserves:
Beginning of year 8,941 18,482 16,834
End of year 8,331 8,941 18,482
U. Natural Gas and Oil Producing Activities (Unaudited) (Continued)
Standard Measure of Discounted Future Cash Flow
1998 1997 1996
---------------------------------------------------------------
(Thousands)
Future cash inflows $ 1,870,002 $2,607,077 $ 3,610,060
Future production costs (606,777) (680,405) (790,140)
Future development costs (84,454) (80,965) (50,708)
Future income tax expenses (366,225) (671,713) (1,007,421)
------------------ ---------------- ----------------
Future net cash flow 812,546 1,173,994 1,761,791
10% annual discount for estimated
timing of cash flows (387,673) (633,000) (877,077)
------------------ ---------------- ----------------
Standardized measure of discounted
future net cash flows $ 424,873 $ 540,994 $ 884,714
================== ================ ================
Management cautions that the standard measure of discounted future
cash flows should not be viewed as an indication of the fair market value of
gas and oil producing properties, nor of the future cash flows expected to be
generated therefrom. The information presented does not give recognition to
future changes in estimated reserves, selling prices or costs and has been
discounted at an arbitrary rate of 10%. Estimated future net cash flows from
natural gas and oil reserves based on selling prices and costs at year-end
price levels are as follows:
Summary of changes in the standardized measure of discounted future
net cash flows:
1998 1997 1996
---------------------------------------------------------------
(Thousands)
Sales and transfers of gas
and oil produced - net $ (108,600) $(118,672) $(105,541)
Net changes in prices, production
and development costs (343,061) (447,251) 482,376
Extensions, discoveries, and
improved recovery, less related costs 67,986 58,205 86,306
Development costs incurred 32,497 13,634 13,543
Purchase (sale) of minerals in place - net 6,439 (73,099) 1,506
Revisions of previous quantity estimates (260) 16,913 47,545
Accretion of discount 84,463 108,935 72,375
Net change in income taxes 158,285 143,429 (232,841)
Other (13,870) (45,814) 1,584
------------------ ---------------- ----------------
Net increase (decrease) (116,121) (343,720) 366,853
Beginning of year 540,994 884,714 517,861
------------------ ---------------- ----------------
End of year $ 424,873 $ 540,994 $ 884,714
================== ================ ================
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by Item 10 with respect to directors is
incorporated herein by reference to the section describing "Election of
Directors" in the Company's definitive proxy statement relating to the annual
meeting of stockholders to be held on May 26, 1999, which will be filed with
the Commission within 120 days after the close of the Company's fiscal year
ended December 31, 1998.
Information required by Item 10 with respect to compliance with
Section 16(a) of the Exchange Act is incorporated by reference to the section
describing "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement relating to the annual meeting of
stockholders to be held on May 26, 1999.
Information required by Item 10 with respect to executive
officers is included herein after Item 4 at the end of Part I.
Item 11. Executive Compensation
Information required by Item 11 is incorporated herein by
reference to the sections describing "Executive Compensation", "Employment
Contracts and Change-In-Control Arrangements" and "Pension Plan" in the
Company's definitive proxy statement relating to the annual meeting of
stockholders to be held on May 26, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by Item 12 is incorporated herein by
reference to the section describing "Voting Securities and Record Date" in the
Company's definitive proxy statement relating to the annual meeting of
stockholders to be held on May 26, 1999.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying index
to financial statements are filed as part of this annual
report.
2. Financial Statement Schedule
The financial statement schedule listed in the
accompanying index to financial statements and financial
schedule is filed as part of this annual report.
3. Exhibits
The exhibits listed on the accompanying index to exhibits
(pages 79 through 82) are filed as part of this annual
report.
(b) Reports on Form 8-K filed during the quarter ended December 31,
1998.
Form 8-K dated October 7, 1998 announcing Board of
Director authorization to repurchase up to 5,600,000
shares of Equitable Resources, Inc. Common Stock.
Form 8-K dated December 7, 1998 announcing Purchase
Agreement with AEP Resources, Inc. and affiliates
("Buyer") and certain subsidiaries of Equitable
Resources, Inc. ("Registrant") for purchase of
substantially all of Registrant's natural gas midstream
operations.
EQUITABLE RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS COVERED
BY REPORT OF INDEPENDENT AUDITORS
(Item 14 (a))
1. The following consolidated financial statements of Equitable Resources,
Inc. and Subsidiaries are included in Item 8:
Page Reference
Statements of Consolidated Income
for each of the three years in
the period ended December 31, 1998 41
Statements of Consolidated Cash Flows
for each of the three years in the
period ended December 31, 1998 42
Consolidated Balance Sheets
December 31, 1998 and 1997 43 & 44
Statements of Common Stockholders'
Equity for each of the three years in the
period ended December 31, 1998 45
Notes to Consolidated Financial Statements 46 through 74
2. Schedule for the Years Ended December 31, 1998, 1997 and 1996 included
in Part IV:
II - Valuation and Qualifying
Accounts and Reserves 78
All other schedules are omitted since the subject matter thereof is
either not present or is not present in amounts sufficient to require
submission of the schedules.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Balance At Additions Charged Balance
Beginning To Costs At End
Description Of Period and Expenses Deductions Of Period
- ------------------------------------------------------------------------------------------------------------------------
1998
Accumulated Provisions
for Doubtful Accounts $ 9,985 $ 15,321 $15,836 (a) $ 9,470
1997
Accumulated Provisions
for Doubtful Accounts $10,714 $ 16,386 $17,115 (a) $ 9,985
1996
Accumulated Provisions
for Doubtful Accounts $10,539 $ 17,707 $17,532 (a) $10,714
Note:
(a) Customer accounts written off, less recoveries.
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
- ----------------- ------------------------------------------------------- -----------------------------------------------------
3.01 Restated Articles of Incorporation of the Company Filed as Exhibit 3(i) to Form 10-Q for the quarter
dated May 27, 1996 (effective May 28, 1996) ended March 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
3.02 By-Laws of the Company (amended through March 19, Filed as Exhibit 3(ii) to Form 10-Q for the quarter
1998) ended March 31, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (a) Indenture dated as of April 1, 1983 between the Filed as Exhibit 4.01 (Revised) to Post-Effective
Company and Pittsburgh National Bank relating to Debt Amendment No. 1 to Registration Statement
Securities (Registration No. 2-80575)
------------------------------------------------------- -----------------------------------------------------
4.01 (b) Instrument appointing Bankers Trust Company as Refiled herewith as Exhibit 4.01 (b) pursuant to
successor trustee to Pittsburgh National Bank Item 10 (d) of Regulation S-K
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (c) Resolutions adopted June 22, 1987 by the Finance Refiled herewith as Exhibit 4.01 (c) pursuant to
Committee of the Board of Directors of the Company Item 10 (d) of Regulation S-K
establishing the terms of the 75,000 units
(debentures with warrants) issued July 1, 1987
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (d) Supplemental indenture dated March 15, 1991 with Filed as Exhibit 4.01 (f) to Form 10-K for the year
Bankers Trust Company eliminating limitations on ended December 31, 1996
liens and additional funded debt
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (e) Resolution adopted August 19, 1991 by the Ad Hoc Filed as Exhibit 4.01 (g) to Form 10-K for the
Finance Committee of the Board of Directors of the year ended December 31, 1996
Company Addenda Nos. 1 through 27,
establishing the terms and provisions of the
Series A Medium-Term Notes
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (f) Resolutions adopted July 6, 1992 and February 19, Refiled as Exhibit 4.01 (h) to Form 10-K for the
1993 by the Ad Hoc Finance Committee of the Board of year ended December 31, 1997
Directors of the Company and Addenda Nos. 1 through
8, establishing the terms and provisions of the
Series B Medium-Term Notes
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (g) Resolution adopted July 14, 1994 by the Ad Hoc Filed as Exhibit 4.01 (i) to Form 10-K for the year
Finance Committee of the Board of Directors of the ended December 31, 1995
Company and Addenda Nos. 1 and 2, establishing the
terms and provisions of the Series C Medium-Term Notes
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (h) Resolution adopted January 18 and July 18, 1996 by Filed as Exhibit 4.01(j) to Form 10-K for the year
the Board of Directors of the Company and Resolutions ended December 31, 1996
adopted July 18, 1996 by the Executive Committee of the
Board of Directors of the Company, establishing the
terms and provisions of the 7.75% Debentures issued
July 29, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (i) Junior Subordinated Indenture Between Equitable Filed as Exhibit 4.1 to Form 10-Q for the quarter
Resources, Inc. and Bankers Trust Company ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (j) Amended and Restated Trust Agreement Between Filed as Exhibit 4.2 to Form 10-Q for the quarter
Equitable Resources, Inc. and Bankers Trust Company ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (k) Equitable Resources, Inc. 7.35% Junior Subordinated Filed as Exhibit 4.3 to Form 10-Q for the quarter
Deferrable Interest Debentures Certificate ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (l) Rights Agreement dated as of April 1, 1996 between Filed as Exhibit 1 to Registration Statement on
the Company and Chemical Mellon Shareholder Services, Form 8-A filed April 16, 1996
L.L.C., setting forth the terms of the Company's
Preferred Stock Purchase Rights Plan
- ----------------- ------------------------------------------------------- -----------------------------------------------------
10.01 Trust Agreement with Pittsburgh National Bank to act Filed as Exhibit 10.12 to Form 10-K for the year
as Trustee for Supplemental Pension Plan, ended December 31, 1994
Supplemental Deferred Compensation Benefits,
Retirement Program for Board of Directors and
Supplemental Executive Retirement Plan
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.02 Equitable Resources, Inc. Key Employee Restricted Filed as Exhibit 10.01 to Form 10-K for the year
Stock Option and Stock Appreciation Rights Incentive ended December 31, 1994
Compensation Plan (as amended through March 17, 1989)
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.03 Retirement Program for the Board of Directors of Filed as Exhibit 10.06 to Form 10-K for the year
Equitable Resources, Inc. (as amended through August ended December 31, 1994
1, 1989)
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.04 Supplemental Pension Plan (as amended and restated Filed as Exhibit 10.07 to Form 10-K for the year
through December 16, 1994) ended December 31, 1994
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.05 Equitable Resources, Inc. and Subsidiaries Short-Term Filed as Exhibit 10.09 to Form 10-K for the year
Incentive Compensation Plan as amended March 1997 ended December 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.06 Equitable Resources, Inc. Non-Employee Directors' Filed as Exhibit 10.13 to Form 10-K for the year
Stock Incentive Plan ended December 31, 1994
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.07 Equitable Resources, Inc. Long-Term Incentive Plan Filed as Exhibit 10.14 to Form 10-K for the year
ended December 31, 1994
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.08 Change in Control Agreement executed with certain key Filed as Exhibit 10.15 to Form 10-K for the year
employees ended December 31, 1995
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.09 Equitable Resources, Inc. and Subsidiaries Deferred Filed as Exhibit 10.16 to Form 10-K for the year
Compensation Plan ended December 31, 1995
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.10 Employment Agreement executed with certain key Filed as Exhibit 10.17 to Form 10-K for the year
employees ended December 31, 1997
- ----------------- ------------------------------------------------------- -----------------------------------------------------
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.11 Equitable Resources, Inc. Breakthrough Long-Term Filed as Exhibit 10.4 to Form 10-Q for the quarter
Incentive Plan with certain executives of the Company ended September 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.12 Employment Agreement dated as of May 4, 1998 with Filed as Exhibit 10.2 to Form 10-Q for the quarter
Murry S. Gerber ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.13 Change in Control Agreement dated May 4, 1998 with Filed as Exhibit 10.3 to Form 10-Q for the quarter
Murry S. Gerber ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.14 Supplemental Executive Retirement Agreement dated as Filed as Exhibit 10.4 to Form 10-Q for the quarter
of May 4, 1998 with Murry S. Gerber ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.15 Post-Termination Confidentiality and Non-Competition Filed as Exhibit 10.5 to Form 10-Q for the quarter
Agreement dated May 4, 1998 with Murry S. Gerber ended June 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.16 Employment Agreement dated as of July 1, 1998 with Filed as Exhibit 10.1 to Form 10-Q for the quarter
David L. Porges ended September 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.17 Change in Control Agreement dated July 1, 1998 with Filed as Exhibit 10.2 to Form 10-Q for the quarter
David L. Porges ended September 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.18 Post-Termination Confidentiality and Non-Competition Filed as Exhibit 10.3 to Form 10-Q for the quarter
Agreement dated July 1, 1998 with David L. Porges ended September 30, 1998
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.19 (a) Agreement dated May 29, 1996 with Paul Christiano for Filed as Exhibit 10.04 (a) to Form 10-K for the
deferred payment of 1996 director fees beginning May year ended December 31, 1996
29, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.19 (b) Agreement dated November 26, 1996 with Paul Christiano Filed as Exhibit 10.04 (b) to Form 10-K for the
for deferred payment of 1997 director fees year ended December 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.19 (c) Agreement dated December 1, 1997 with Paul Filed as Exhibit 10.04 (c) to Form 10-K for the
Christiano for deferred payment of 1998 director fees year ended December 31, 1997
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.19 (d) Agreement dated December 15, 1998 with Paul Filed herewith as Exhibit 10.19 (d)
Christiano for deferred payment of 1999 director fees
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.20 (a) Agreement dated May 24, 1996 with Phyllis A. Domm for Filed as Exhibit 10.14 (a) to Form 10-K for the
deferred payment of 1996 director fees beginning May year ended December 31, 1996
24, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.20 (b) Agreement dated November 27, 1996 with Phyllis A. Filed as Exhibit 10.14 (b) to Form 10-K for the
Domm for deferred payment of 1997 director fees year ended December 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.20 (c) Agreement dated November 30, 1997 with Phyllis A. Filed as Exhibit 10.14 (c) to Form 10-K for the
Domm for deferred payment of 1998 director fees year ended December 31, 1997
- ----------------- ------------------------------------------------------- -----------------------------------------------------
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.20 (d) Agreement dated December 5, 1998 with Phyllis A. Domm Filed herewith as Exhibit 10.20 (d)
for deferred payment of 1999 director fees
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.21 (a) Agreement dated December 31, 1987 with Malcolm M. Refiled herewith as Exhibit 10.21 (a) pursuant to
Prine for deferred payment of 1988 director fees Item 10 (d) of Regulation S-K
- ----------------- ------------------------------------------------------- -----------------------------------------------------
* 10.21 (b) Agreement dated December 30, 1988 with Malcolm M. Refiled herewith as Exhibit 10.21 (b) pursuant to
Prine for deferred payment of 1989 director fees Item 10 (d) of Regulation S-K
- ----------------- ------------------------------------------------------- -----------------------------------------------------
10.22 Purchase Agreement by and among Equitable Resources Filed as Exhibit 10.5 to Form 10-Q for the quarter
Energy Company, ET Bluegrass Company, EREC Nevada, ended September 30, 1998
Inc. and ERI Services. Inc. and AEP Resources, Inc.
dated September 12, 1998 for the purchase of
midstream assets
- ----------------- ------------------------------------------------------- -----------------------------------------------------
21 Schedule of Subsidiaries Filed herewith as Exhibit 21
- ----------------- ------------------------------------------------------- -----------------------------------------------------
23.01 Consent of Independent Auditors Filed herewith as Exhibit 23.01
- ----------------- ------------------------------------------------------- -----------------------------------------------------
27.01 (a) Financial Data Schedule for Year 1998 Filed electronically
- ----------------- ------------------------------------------------------- -----------------------------------------------------
27.01 (b) Restated Financial Data Schedule for Year 1997 Filed electronically
- ----------------- ------------------------------------------------------- -----------------------------------------------------
27.01 (c) Restated Financial Data Schedule for Year 1996 Filed electronically
- ---------------------------------------------------------------------------------------------------------------------------------
The Company agrees to furnish to the Commission, upon request, copies of
instruments with respect to long-term debt which have not previously been
filed.
- ---------------------------------------------------------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Murry S. Gerber
Murry S. Gerber
President and Chief Executive Officer
March 17, 1999
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
President and Chief Executive
/s/ Murry S. Gerber Officer and Director
- -------------------------------------
Murry S. Gerber
(Principal Executive Officer)
March 17, 1999
Senior Vice President and
/s/ David L. Porges Chief Financial Officer
- -------------------------------------
David L. Porges
(Principal Financial Officer)
March 17, 1999
Corporate Controller and
/s/ John A. Bergonzi Assistant Treasurer
- -------------------------------------
John A. Bergonzi
(Principal Accounting Officer)
March 17, 1999
/s/ Paul Christiano Director
- -------------------------------------
Paul Christiano
March 17, 1999
/s/ Phyllis A. Domm Director
- -------------------------------------
Phyllis A. Domm
March 17, 1999
SIGNATURES (Continued)
/s/ E. Lawrence Keyes, Jr. Director
- -------------------------------------
E. Lawrence Keyes, Jr.
March 17, 1999
/s/ Thomas A. McConomy Director
- -------------------------------------
Thomas A. McConomy
March 17, 1999
/s/ Donald I. Moritz Director
- -------------------------------------
Donald I. Moritz
March 17, 1999
/s/ Guy W. Nichols Director
- -------------------------------------
Guy W. Nichols
March 17, 1999
/s/ Malcolm M. Prine Director
- -------------------------------------
Malcolm M. Prine
March 17, 1999
/s/ James E. Rohr Director
- -------------------------------------
James E. Rohr
March 17, 1999
Director
- -------------------------------------
David S. Shapira
/s/ J. Michael Talbert Director
- -------------------------------------
J. Michael Talbert
March 17, 1999