UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 1-3551 EQUITABLE RESOURCES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0464690 (State of incorporation or organization) (IRS Employer Identification No.) 420 Boulevard of the Allies, Pittsburgh, Pennsylvania 15219 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (412) 261-3000 ------------ NONE (Former name, former address and former fiscal year, if changed since last report) ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of issuer's classes of common stock, as of the close of the period covered by this report. Outstanding at Class June 30, 1998 Common stock, no par value 37,100,000 shares
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Index Page No. Part I. Financial Statements: Statements of Consolidated Income for the Three and Six Months Ended June 30, 1998 and 1997 1 Statements of Condensed Consolidated Cash Flows for the Three and Six Months Ended June 30, 1998 and 1997 2 Consolidated Balance Sheets, June 30, 1998, and December 31, 1997 3 - 4 Notes to Consolidated Financial Statements 5 - 7 Information by Business Segment 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 17 Part II. Other Information 18 - 19 Signature 20
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Statements of Consolidated Income (Unaudited) (Thousands Except Per Share Amounts) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ----------------------------- ----------------------------- Restated Restated <S> <C> <C> <C> <C> Operating revenues $ 182,097 $ 177,896 $ 475,329 $ 482,052 Cost of energy purchased 94,430 82,288 255,834 249,872 ----------- ----------- ----------- ----------- Net operating revenues 87,667 95,608 219,495 232,180 ----------- ----------- ----------- ----------- Operating expenses: Operation 43,464 54,067 89,888 103,635 Maintenance 6,566 7,915 11,810 14,587 Depreciation, depletion and amortization 19,764 17,302 39,416 34,279 Taxes other than income 4,508 7,818 16,174 21,836 Impairment of assets - 13,000 - 13,000 ----------- ----------- ----------- ----------- Total operating expenses 74,302 100,102 157,288 187,337 ----------- ----------- ----------- ----------- 13,365 (4,494) 62,207 44,843 Other income 374 530 298 687 Interest charges 10,262 9,219 20,852 18,942 ----------- ----------- ----------- ----------- Income (loss) before income taxes 3,477 (13,183) 41,653 26,588 Income taxes (benefits) 1,203 (5,452) 14,727 9,081 ----------- ----------- ----------- ----------- Net income (loss) from continuing operations 2,274 (7,731) 26,926 17,507 Income (loss) from discontinued operations after taxes - (1,532) (4,604) 1,020 ----------- ----------- ----------- ----------- Net income (loss) $ 2,274 $ (9,263) $ 22,322 $ 18,527 =========== =========== =========== =========== Average common shares outstanding 37,050 35,289 36,953 35,355 =========== =========== =========== =========== Earnings (loss) per share of common stock - basic/diluted: Continuing operations $ 0.06 $ (0.22) $ 0.72 $ 0.49 Discontinued operations - (0.04) (0.12) 0.03 ----------- ----------- ----------- ----------- Net income $ 0.06 $ 0.26 $ 0.60 $ 0.52 =========== =========== =========== =========== Dividends per share of common stock $ - $ - $ 0.59 $ 0.59 =========== =========== =========== =========== <FN> The accompanying notes are an integral part of these condensed consolidated financial statements. </FN> </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Thousands) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 -------------------------- --------------------------- Restated Restated <S> <C> <C> <C> <C> Cash flows from operating activities $ 67,311 $ 13,395 $ 114,967 $ 71,490 Cash flows from investing activities: Capital expenditures (52,018) (28,895) (77,674) (47,577) Proceeds from sale of property - 97 - 313 Additions to net assets of discontinued operations (9,730) (3,445) (13,741) (4,595) ---------- ---------- ----------- ----------- Net cash used in investing activities (61,748) (32,243) (91,415) (51,859) ---------- ---------- ----------- ----------- Cash flows from financing activities: Retirement of long-term debt (5,880) (157) (10,880) (157) Increase (decrease) in short-term loans (118,001) 35,769 (146,791) 51,201 Dividends paid - - (21,878) (20,648) Proceeds from issuance of preferred trust securities 125,000 - 125,000 - Proceeds from issuance of common stock 350 314 1,755 354 Purchase of treasury stock - (23,751) - (23,751) ---------- ---------- ----------- ----------- Net cash used in financing activities 1,469 12,175 (52,794) 6,999 ---------- ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 7,032 (6,673) (29,242) 26,630 Cash and cash equivalents at beginning of period 33,168 48,088 69,442 14,737 ---------- ---------- ----------- ----------- Cash and cash equivalents at end of period $ 40,200 $ 41,415 $ 40,200 $ 41,367 ========== ========== =========== =========== Cash paid during the period for: Interest (net of amount capitalized) $ 1,860 $ 2,358 $ 18,710 $ 15,037 ========== ========== =========== =========== Income taxes $ 8,345 $ 10,500 $ 9,854 $ 5,273 ========== ========== =========== =========== <FN> The accompanying notes are an integral part of these condensed consolidated financial statements. </FN> </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) ASSETS June 30, December 31, 1998 1997 ----------------------------------- (Thousands) ----------------------------------- Restated <S> <C> <C> Current assets: Cash and cash equivalents $ 40,200 $ 69,442 Accounts receivable 263,855 360,713 Unbilled revenues 10,197 25,935 Inventory 23,224 37,156 Deferred purchased gas cost 35,714 44,053 Derivative commodity instruments, at fair value 97,614 82,912 Prepaid expenses and other 59,402 64,523 -------------- -------------- Total current assets 530,206 684,734 -------------- -------------- Property, plant and equipment 1,928,723 1,862,412 Less accumulated depreciation and depletion 707,105 675,410 -------------- -------------- Net property, plant and equipment 1,221,618 1,187,002 -------------- -------------- Net assets of discontinued operations 250,236 238,182 -------------- -------------- Other assets 214,094 218,133 -------------- -------------- Total $ 2,216,154 $ 2,328,051 ============== ============== <FN> The accompanying notes are an integral part of these condensed consolidated financial statements. </FN> </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) LIABILITIES AND STOCKHOLDERS EQUITY June 30, December 31, 1998 1997 ----------------------------------- (Thousands) ----------------------------------- Restated <S> <C> <C> Current liabilities: Short-term loans $ 134,653 $ 286,444 Accounts payable 185,218 288,192 Derivative commodity instruments, at fair value 96,210 79,012 Other current liabilities 109,442 92,053 -------------- -------------- Total current liabilities 525,523 745,701 -------------- -------------- Long-term debt 412,174 417,564 Deferred and other credits 323,907 341,266 Commitments and contingencies - - Preferred trust securities 125,000 - Capitalization: Common stockholders' equity: Common stock, no par value, authorized 80,000 shares; shares issued June 30,1998, 37,109; December 31, 1997, 36,929 275,467 269,878 Retained earnings 555,687 555,246 Treasury stock, shares at cost June 30, 1998, 56; December 31, 1997, 56 (1,551) (1,551) Accumulated other comprehensive income (53) (53) -------------- -------------- Total common stockholders' equity 829,550 823,520 -------------- -------------- Total $ 2,216,154 $ 2,328,051 ============== ============== <FN> The accompanying notes are an integral part of these condensed consolidated financial statements. </FN> </TABLE>
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) A. The accompanying financial statements should be read in conjunction with the Company's 1997 Annual Report and Form 10-K. B. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 1998 and 1997, and the results of operations and cash flows for the three months and six months then ended. All adjustments are of a normal, recurring nature unless otherwise indicated. C. The results of operations for the three- and six-month periods ended June 30, 1998 and 1997, are not indicative of results for a full year because of the seasonal nature of the Company's natural gas distribution operations. D. In April 1998 management adopted a formal plan to sell the Company's natural gas midstream operations. The operations include an integrated gas gathering, processing and storage system in Louisiana and a natural gas and electricity marketing business based in Houston. The condensed consolidated financial statements have been restated to classify these as discontinued operations. Management believes that the operations will be sold in the fourth quarter of 1998. Net income (loss) from discontinued operations was $1.0 million for the six months ended June 30, 1997 and ($4.6) million for the six months ended June 30, 1998. These results were reported net of income tax expense (benefit) of $.06 million and $(2.3) million in 1997 and 1998, respectively. Interest expense allocated to discontinued operations was $4.0 million in the first six months of 1998 and $3.5 million in the first six months of 1997. Proceeds from the sale of the midstream operations are expected to be adequate to exceed estimated losses from operations and costs of disposal. The net assets of discontinued operations are summarized as follows: June 30, 1998 December 31, 1997 ------------------------------------------ (millions) Property, plant and equipment $ 326.8 $ 319.5 Deferred credits (86.6) (81.3) -------------- -------------- $ 250.2 $ 238.2 ============== ==============
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) E. In April 1998, $125 million of 7.35% Trust Preferred Capital Securities were issued. The capital securities were issued through a subsidiary trust, Equitable Resources Capital Trust I, established for the purpose of issuing the capital securities and investing the proceeds in 7.35% Junior Subordinated Debentures issued by the Company. The capital securities have a mandatory redemption date of April 15, 2038; however, at the Company's option, the securities may be redeemed on or after April 23, 2003. Proceeds were used to reduce short-term debt outstanding. Interest expense for the three- and six-months ended June 30, 1998, includes $1.7 million of preferred dividends related to the trust preferred capital securities. F. Comprehensive Income In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be reported as other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. During the six months ended June 30, 1998 and 1997, total comprehensive income (which includes net income) amounted to $22,322,000 and $18,803,000, respectively. G. Software Costs Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. Qualifying software costs are capitalized and amortized over the estimated useful life of the software. The adoption of SOP 98-1 did not have a material impact on the Company's financial position or results of operations. H. Segment Disclosure Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131), establishes new standards for reporting information about operating segments in interim and annual financial statements. This statement is effective for 1998 year-end financial statements. The company has not yet determined what effect SFAS No. 131 will have on the Company's reported segments.
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) I. Derivative Instruments and Hedging Activities In June 1998 the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which is required to be adopted in years beginning after June 15, 1999. The statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company has not yet decided when to adopt the statement. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what effect SFAS No. 133 will have on the earnings and financial position of the Company. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. J. At June 30, 1998, 8,963,000 shares of Common Stock were reserved as follows: 460,000 shares for issuance under the Key Employee Restricted Stock Option and Stock Appreciation Rights Incentive Compensation Plan, 1,726,000 shares for issuance under the Long-Term Incentive Plan, 76,000 shares for issuance under the Nonemployee Directors' Stock Incentive Plan, 26,000 shares for issuance under the Company's Dividend Reinvestment and Stock Purchase Plan, and 6,675,000 shares for possible use in connection with future acquisitions.
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Information by Business Segment Three Months Ended Six Months Ended June 30, June 30, ------------------------------- --------------------------------- 1998 1997 1998 1997 ------------------------------- --------------------------------- (Thousands) (Thousands) ------------------------------- --------------------------------- Restated Restated Operating revenues <S> <C> <C> <C> <C> Supply and logistics $ 38,269 $ 50,387 $ 82,811 $ 98,471 Utilities 75,234 83,426 233,904 277,522 Services 98,007 74,096 215,808 182,698 Sales between segments (29,413) (30,013) (57,194) (76,639) ------------- ------------- -------------- ------------- Total $ 182,097 $ 177,896 $ 475,329 $ 482,052 ============= ============= ============== ============= Operating income (loss) from continuing operations: Supply and logistics $ 6,551 $ 9,640 $ 19,996 $ 20,670 Utilities 7,144 (8,826) 44,317 30,447 Services (330) (5,308) (2,106) (6,274) ------------- ------------- -------------- ------------- Total $ 13,365 $ (4,494) $ 62,207 $ 44,843 ============= ============= ============== ============= Capital expenditures (continuing operations): Supply and logistics $ 41,318 $ 18,366 $ 58,525 $ 28,336 Utilities 10,556 9,920 18,569 18,303 Services 144 609 580 938 ------------- ------------- -------------- ------------- Total $ 52,018 $ 28,895 $ 77,674 $ 47,577 ============= ============= ============== ============= </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Equitable's consolidated net income for the quarter ended June 30, 1998, was $2.3 million, or $0.06 per share, compared with a net loss of $9.3 million, or $0.26 per share, for the quarter ended June 30, 1997. The 1997 loss included a one-time, after-tax charge of $8.5 million ($13 million pretax), or $0.24 per share, for an asset writedown related to the Company's investment in a natural gas storage project in Avoca, New York. In April 1998 the Company adopted a formal plan to sell its natural gas midstream operations. The operations include an integrated gas gathering, processing and storage system in Louisiana and a natural gas and electricity marketing business based in Houston. The condensed consolidated financial statements have been restated to classify these as discontinued operations. Management believes that the operations will be sold in the fourth quarter of 1998. Equitable's income from continuing operations for the three months ended June 30, 1998, was $2.3 million, or $0.06 per share, compared to a loss of $7.7 million, or $0.22 per share for the three months ended June 30, 1997. Excluding the one-time charge for the storage project, 1997 results from continuing operations would have been $0.8 million of net income or $0.02 per share for the three months ended June 30. Overall, the current period results benefited from higher net revenues from energy service operations and lower utility operating expenses. These benefits were partially offset by lower revenues from crude oil and natural gas liquids production and lower retail gas sales due to warmer weather in the Company's distribution territory. The negative impact of the weather was mitigated by a new retail rate design and base rate increase implemented by the Company's distribution division in the fourth quarter of 1997. Equitable's consolidated net income for the six months ended June 30, 1998, was $22.3 million, or $0.72 per share, compared to $18.5 million or $0.49 per share for the six months ended June 30, 1997. Excluding the 1997 storage charge, income from continuing operations was essentially unchanged at $26.9 million, or $0.72 per share, for 1998 compared to $26.0 million, or $0.73 per share for 1997. The current year benefits of higher net revenues from energy services, new utility rate design, and lower production, exploration and maintenance expenses in Supply and Logistics and Utilities were offset by the effects of lower crude oil and natural gas liquids revenues, distribution territory weather 21% warmer than 1997, increased depreciation, depletion and amortization charges, and increased interest expense.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) RESULTS OF OPERATIONS SUPPLY AND LOGISTICS Supply and Logistics' continuing operations are comprised of the exploration and production of natural gas and crude oil and the processing and sale of natural gas liquids through operations focused in the offshore Louisiana Gulf Coast and Appalachian regions. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, SUPPLY AND LOGISTICS 1998 1997 1998 1997 - ----------------------------------------------------------------------------------- ------------------------------------ (Thousands) (Thousands) ---------------------------------- ------------------------------------ Restated Restated <S> <C> <C> <C> <C> Continuing Operations Operating Revenues Produced Natural Gas $ 28,508 $ 28,658 $ 60,677 $ 57,443 Produced Natural Gas Liquids 4,110 6,216 9,939 11,763 Crude Oil 3,691 7,233 7,857 14,721 Other 1,960 8,280 4,338 14,544 -------------- --------------- --------------- --------------- Total Revenues 38,269 50,387 82,811 98,471 Cost of Energy Purchased 3,814 3,659 7,608 7,715 -------------- --------------- --------------- --------------- Net Operating Revenues 34,455 46,728 75,203 90,756 Operating Expenses: Production 7,899 8,804 14,964 17,670 Exploration 1,772 4,096 3,081 5,789 Gas Processing 1,009 1,723 2,261 3,043 Other 5,815 12,226 12,236 23,226 Depreciation, Depletion and Amortization 11,409 10,239 22,665 20,358 -------------- --------------- --------------- --------------- Total Operating Expenses 27,904 37,088 55,207 70,086 -------------- --------------- --------------- --------------- Operating Income from Continuing Operations $ 6,551 $ 9,640 $ 19,996 $ 20,670 ============== =============== =============== =============== Sales Quantities: Produced Natural Gas (MMcf) 13,305 13,584 26,299 26,312 Crude Oil (MBls) 271 421 535 832 Natural Gas Liquids (thousands of gallons) 16,021 16,979 34,232 29,131 Discontinued Operations Operating Revenues 380,787 243,669 770,134 517,532 Operating Income (loss) - (346) (5,444) 4,797 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997 Net operating revenues for the three months ended June 30, 1998, decreased $12.3 million, due to the sale of the Company's Union Drilling division in the fourth quarter of 1997 ($5.1 million), declines in crude oil prices ($1.7 million) and volumes ($1.8 million) and natural gas liquids price decline ($1.8 million). Natural gas production declined slightly in 1998 compared to 1997, as a 1.9 bcf increase in offshore Gulf production (97%) was more than offset by declines of 0.3 bcf in the Company's Appalachian region (3%) and 1.9 bcf due to the third quarter 1997 sale of the Company's western properties. The decline in crude oil production reflects the 1997 sale of the Company's western properties, which held the majority of the Company's oil reserves. The declines in crude oil (21%) and natural gas liquids (30%) prices are a reflection of the overall commodity market, where oil price indexes show a 27% decline for the three-months ended June 30, 1998, compared to the same period in 1997. Total operating expenses for the second quarter of 1998 reflect savings of $12.6 million due to the sales of the Union Drilling division and the western properties. In addition, exploration expenses are down in the Gulf by $1.7 million because the 1998 drilling program has reallocated much of its exploration budget to fund ongoing development and exploitation programs due to the decline in oil prices. These savings are partially offset by higher production costs ($1.7 million) and depreciation, depletion and amortization (DD&A) expenses ($4.0 million) in the Gulf due to increases offshore production activity and the acquisition of additional producing properties in the second half of 1997. Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997 Net operating revenues for the six months ended June 30, 1998, decreased $15.6 million due primarily to the sale of the Union Drilling division ($8.4 million) and declines in crude oil volumes ($3.9 million) and prices ($3.0 million) and natural gas liquids prices ($3.3 million). These decreases are partially offset by an increase in the Company's average effective gas price ($3.9 million) as a result of a favorable hedged position. Gas volumes for the six-month period of 1998 are comparable to 1997 as production increases in the Gulf were offset by the loss of gas volumes associated with the western property sale. The decline in oil volumes for the year-to-date period is a result of the western sale.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) SUPPLY AND LOGISTICS (Continued) Total operating expenses for the first six months of 1998 benefited from the sales of the Union Drilling division ($8.7 million) and western properties ($14.2 million) and lower exploration expenses ($1.3 million) in the Gulf. Offsetting these decreases is an increase in the Gulf's production costs ($2.6 million) and DD&A expense ($8.3 million) due to the reasons noted above in the discussion of the second quarter results. UTILITIES Utilities operations are comprised of the sale and transportation of natural gas to retail customers at state-regulated rates, interstate transportation and storage of natural gas subject to federal regulation and the marketing of natural gas. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, UTILITIES 1998 1997 1998 1997 - ------------------------------------------------------------------------------------- ------------------------------------- (Thousands) (Thousands) <S> <C> <C> <C> <C> Operating Revenues Residential Gas Sales $ 35,974 $ 48,920 $ 140,775 $ 180,529 Commercial Gas Sales 3,423 4,844 14,073 21,620 Industrial and Utility Gas Sales 10,745 10,107 22,357 27,040 Marketed Gas Sales 5,271 4,665 9,827 10,883 Transportation Service 15,173 10,806 37,790 29,291 Storage Service 2,530 1,878 4,975 3,786 Other 2,118 2,206 4,107 4,373 --------------- -------------- ---------------- --------------- Total Revenues 75,234 83,426 233,904 277,522 Cost of Energy Purchased 29,555 36,218 104,783 142,004 --------------- -------------- ---------------- --------------- Net Operating Revenues 45,679 47,208 129,121 135,518 Operating Expenses: Operations and Maintenance 31,450 36,228 70,705 78,618 Depreciation, Depletion and Amortization 7,085 6,806 14,099 13,453 Impairment of Assets 13,000 13,000 --------------- -------------- ---------------- --------------- Total Operating Expenses 38,535 56,034 84,804 105,071 --------------- -------------- ---------------- --------------- Operating Income $ 7,144 $ (8,826) $ 44,317 $ 30,447 =============== ============== ================ =============== Sales Quantities (MMcf): Residential Gas Sales 3,050 4,411 13,720 17,307 Commercial Gas Sales 342 444 1,454 2,117 Industrial and Utility Gas Sales 4,048 4,350 8,666 9,781 Marketed Gas Sales 2,506 1,417 4,710 3,382 Transportation Deliveries 22,199 21,126 40,859 41,615 Heating Degree Days 572 919 2,882 3,642 </TABLE>
Management's Discussion and Analysis of Financia Condition and Results of Operations (Continued) Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997 Net operating revenues for the quarter ended June 30, 1998, decreased 3.2% to $45.7 million, primarily as a result of weather 38% warmer than last year in the Company's western Pennsylvania area distribution operations. The effect of the weather on net operating revenues ($4.5 million) was substantially mitigated by the effect of the base rate increases for Pennsylvania residential and commercial customers and new rate design put in place by the Company in October 1997 ($2.8 million benefit). Approximately $0.8 million of the increase in transportation revenues compared to 1997 also results from a base rate increase in 1997, with the balance attributable to an increase in transportation for third parties rather than regulated affiliates. This increase had minimal impact on the Company's overall margins due to the regulatory treatment of purchased gas costs. Storage revenues also increased due to new rates in effect in 1998. Excluding the effect of the one-time storage project charge on 1997 results, operating expenses in the current period reflect the benefit of the mild weather, as lower sales revenues are offset by savings in gross receipts tax ($0.8 million), uncollectible accounts and customer assistance programs ($1.0 million, combined). The 1998 results also reflect lower utility and corporate administrative expenses ($1.9 million), as the benefits are realized from a third quarter 1997 evaluation and reduction of corporate office and noncore business functions. Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997 Net operating revenues for the six-month period ended June 30, 1998, decreased $6.4 million (4.7%) due to the warmer weather ($13.5 million), substantially offset by the new rates in effect ($9.6 million) for gas sales and transportation at the distribution company and for transportation and storage services at Equitrans' pipeline. Marketed gas revenues declined 10% in the current period, as the effects of natural gas commodity price decreases of 35% offset volume increases of 40% compared to 1997. Taken together, these factors resulted in a $0.4 million decline in net operating revenues in 1998. Net operating revenues in 1998 declined by $1.3 million at Equitrans, due to the elimination of certain processing surcharges previously passed through to customers. This decrease is also reflected in operating expenses with no net impact on the Company. Excluding the storage project charge in 1997, operating expenses decreased due to weather related factors ($4.5 million), the 1997 evaluation and reduction of corporate office and noncore business functions ($2.3 million), and the elimination of the processing surcharge ($1.3 million) described above.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) SERVICES Services' operations are comprised of two business lines: (1) marketing of natural gas and (2) comprehensive energy services provided to industrial, commercial, institutional and governmental customers. Energy services includes the development, implementation, financing and management of energy and water efficiency programs through the use of performance-based contracting activities, the development and construction of cogeneration and independent power production facilities and central plant facilities management. Beginning in 1995, this business segment was built through internal development and a series of acquisitions of private energy performance and facilities management contractors. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, SERVICES 1998 1997 1998 1997 - -------------------------------------------------------------------------------------- ------------------------------------- (Thousands) (Thousands) <S> <C> <C> <C> <C> Operating Revenues Marketed Natural Gas $ 75,476 $ 71,023 $ 174,345 $ 176,742 Energy Service Contracting 22,531 3,073 41,463 5,956 ------------- -------------- -------------- ------------- Total Revenues 98,007 74,096 215,808 182,698 Cost of Energy Purchased 75,076 68,914 172,237 171,497 Energy Service Contract Costs 14,753 2,625 26,896 3,938 ------------- -------------- -------------- ------------- Net Operating Revenues 8,178 2,557 16,675 7,263 Operating Expenses: Other 7,238 7,606 16,130 13,068 Depreciation, Depletion and Amortization 1,270 259 2,651 469 ------------- -------------- -------------- ------------- Total Operating Expenses 8,508 7,865 18,781 13,537 ------------- -------------- -------------- ------------- Operating Income (Loss) $ (330) $ (5,308) $ (2,106) $ (6,274) ============= ============== ============== ============= Sales Quantities: Marketed Natural Gas (MMcf) 32,626 27,163 68,556 57,725 </TABLE> Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997 Net operating revenues increased to $8.2 million for the quarter ended June 30, 1998, compared to $2.6 million for the same period in 1997. This segment's energy management and performance contracting operations experienced substantial growth in revenues, due to the acquisition of NORESCO and internally generated growth, as operations have moved forward from contract awards to construction projects over the past 12 months. This segment's energy marketing business experienced a $1.7 million reduction in net operating revenues in the second quarter of 1998, as energy prices remained low and competition increased for the more profitable commercial customers.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) SERVICES (Continued) Operating expenses for this group increased $.4 million due to the acquisition of NORESCO ($2.0 million), and the start-up of the energy marketing operations of Equitable Energy, a new nonregulated retail marketing group in the Company's southwestern Pennsylvania distribution area ($0.5 million). These increases were substantially offset by a decrease in operating expenses relating to the energy marketing business. Depreciation, depletion, and amortization also increased due to $0.8 million amortization of goodwill associated with NORESCO. Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997 Net operating revenues increased to $16.7 million for the six months ended June 30, 1998, compared to $7.3 million for the same period in 1997. This segment's energy management and performance contracting operations experienced substantial growth in revenues, due to the acquisition of NORESCO and internally generated growth, as operations have moved forward from contract awards to construction projects over the past 12 months. This segment's energy marketing business experienced $3.1 million reduction in net operating revenues in the six months ended 1998, as energy prices remained low and competition increased for the more profitable commercial customers. Operating expenses for this group increased $3.0 million, primarily in the energy management and performance contracting businesses, due to the acquisition of NORESCO ($5.9 million), and the start-up of the energy marketing operations of Equitable Energy, a new nonregulated retail marketing group in the Company's southwestern Pennsylvania distribution area ($0.5 million) offset somewhat by a decrease in operating expenses relating to the energy marketing business. Depreciation, depletion, and amortization also increased due to $1.5 million amortization of goodwill associated with NORESCO. CAPITAL RESOURCES AND LIQUIDITY Cash Flows Cash required for operations is impacted primarily by the seasonal nature of ERI'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. Cash flows from operating activities totaled $67.3 million in the three months ended June 30, 1998, compared to $13.4 million in the 1997 period. Cash flows from operations increased in 1998 primarily as a result of improved collections of accounts receivable.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CAPITAL RESOURCES AND LIQUIDITY (Continued) 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. The net investment in these projects during the six months ended June 30, 1998, was approximately $25.1 million. ERI's financial objectives require ongoing capital expenditures for growth projects in continuing operations of the Supply & Logistics segment, as well as replacements, improvements and additions to plant assets in the Utilities segment. Such capital expenditures during the 1998 quarter were approximately $52 million, including $37 million for exploration and production projects in the Gulf of Mexico. In addition, ongoing capital projects in the Company's discontinued operations accounted for an additional $10 million use of cash in the three months ended June 30, 1998. A total of $229 million has been authorized for the 1998 capital expenditure program. The Company expects to finance its authorized 1998 capital expenditure program with cash generated from operations and with short-term loans. In the second quarter of 1998, financing activities used $1.5 million of cash, as a result of the retirement of certain outstanding long-and short-term debt through the issuance of preferred trust capital securities described below. Capital Resources ERI 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 5.7% during the second quarter of 1998. ERI maintains a revolving credit agreement with a group of banks providing $500 million of available credit. Adequate credit is expected to continue to be available in the future. In April 1998 $125 million of 7.35% Trust Preferred Capital Securities were issued. The capital securities were issued through a subsidiary trust, Equitable Resources Capital Trust I, established for the purpose of issuing the capital securities and investing the proceeds in 7.35% Junior Subordinated Debentures issued by the Company. The capital securities have a mandatory redemption date of April 15, 2038; however, at the Company's option, the securities may be redeemed on or after April 23, 2003. Proceeds were used to reduce short-term debt outstanding.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) YEAR 2000 COSTS ERI recognizes the need to ensure the continued safe and reliable operation of its regulated utility systems and its nonregulated businesses up to, across and beyond the year 2000. To achieve this, ERI has established a program office to coordinate ongoing efforts to identify systems (and operational processes) that are not Year 2000 compliant and to take corrective actions as appropriate. The Company also has initiated discussions with its significant suppliers, large customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues when their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to remediate properly their computer systems. Within ERI, assessment of systems has been substantially completed, systems have been prioritized for remediation or replacement activities and corrective action has been completed and tested on certain systems. In addition, ERI is presently upgrading many of its financial and operating systems as part of an enterprise-wide initiative to integrate systems and enhance operational efficiencies. These systems are Year 2000 compliant. Management believes it has adequate resources, both internal and external, to complete all necessary activities. The estimated costs to convert remaining systems is not expected to be material to results of operations in any future period. INFORMATION REGARDING FORWARD LOOKING STATEMENTS Disclosures in this report may include forward-looking statements related to such matters as anticipated financial performance, business prospects, capital projects, new products and operational matters. The Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company business include, but are not limited to, the following: weather conditions, the pace of deregulation of retail natural gas and electricity markets, the timing and extent of changes in commodity prices for gas and oil, changes in interest rates, the timing and extent of the Company's success in acquiring gas and oil properties and in discovering, developing and producing reserves, delays in obtaining necessary governmental approvals and the impact of competitive factors on profit margins in various markets in which the Company competes.
PART II. OTHER INFORMATION Item 5. Other Information The Securities and Exchange Commission has amended Rule 14a-4(C) under the Securities Exchange Act of 1934 (the "1934 Act") which governs the Company's use of discretionary proxy voting authority with respect to shareholder proposals that are not being included in the Company's proxy solicitation materials pursuant to Rule 14a-8 of the 1934 Act. Therefore, in the event a shareholder does not notify the company by March 1, 1999, of an intent to present such a proposal at the Company's 1999 annual meeting, the Company's management proxies will have the right to exercise their discretionary authority in connection with the matter submitted by the shareholder, without discussion of the matter in the proxy statement. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 4.1 Junior Subordinated Indenture Between Equitable Resources, Inc. and Bankers Trust Company. 4.2 Amended and Restated Trust Agreement Between Equitable Resources, Inc. and Bankers Trust Company. 4.3 Equitable Resources, Inc. 7.35% Junior Subordinated Deferrable Interest Debentures Certificate. 10.1 Employment Agreement Addendum No. 2 to Employment Agreement dated August 1, 1997, with Donald I. Moritz. 10.2 Employment Agreement dated as of May 4, 1998, with Murry S. Gerber. 10.3 Change in Control Agreement dated May 4, 1998, with Murry S. Gerber. 10.4 Supplemental Executive Retirement Agreement dated as of May 4, 1998, with Murry S. Gerber. 10.5 Post-Termination Confidentiality and Non-Competition Agreement dated May 4, 1998, with Murry S. Gerber. (b) Reports on Form 8-K during the quarter ended June 30, 1998: Form 8-K Current Report dated May 4, 1998, announcing the appointment of Murry S. Gerber as the Company's president and chief executive officer effective June 1, 1998.
PART II. OTHER INFORMATION (Continued) Item 6. Exhibits and Reports on Form 8-K (Continued) Form 8-K Current Report dated June 2, 1998, announcing a jury verdict in the case of U.S. Gas Transportation, Inc. Form 8-K Current Report dated June 25, 1998, announcing the addition of David L. Porges as the Company's senior vice president and chief financial officer effective July 1, 1998.
Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EQUITABLE RESOURCES, INC. (Registrant) /s/ David L. Porges ________________________________ David L. Porges Senior Vice President and Chief Financial Officer Date: August 14, 1998