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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