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 SEPTEMBER 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 September 30, 1998 Common stock, no par value 37,136,000 shares
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Index Page No. Part I. Financial Statements: Statements of Consolidated Income for the Three and Nine Months Ended September 30, 1998 and 1997 1 Statements of Condensed Consolidated Cash Flows for the Three and Nine Months Ended September 30, 1998 and 1997 2 Consolidated Balance Sheets, September 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 - 20 Part II. Other Information 21 Signature 22
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Statements of Consolidated Income (Unaudited) (Thousands Except Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---------------------------------- -------------------------------------- Restated Restated <S> <C> <C> <C> <C> Operating revenues $ 159,318 $ 165,337 $ 627,720 $ 647,389 Cost of sales 72,475 64,347 321,382 314,219 --------------- --------------- ----------------- ----------------- Net operating revenues 86,843 100,990 306,338 333,170 --------------- --------------- ----------------- ----------------- Operating expenses: Operation 40,350 49,952 130,238 153,587 Maintenance 6,683 7,669 18,493 22,256 Depreciation, depletion and amortization 21,670 18,377 61,086 52,656 Taxes other than income 4,628 5,919 20,802 27,755 Impairment of assets and nonrecurring items - 10,725 - 23,725 --------------- --------------- ----------------- ----------------- Total operating expenses 73,331 92,642 230,619 279,979 --------------- --------------- ----------------- ----------------- Operating income 13,512 8,348 75,719 53,191 Other income 645 26,139 943 26,826 --------------- --------------- ----------------- ----------------- Earnings from continuing operations, before interest & taxes 14,157 34,487 76,662 80,017 Interest charges 9,858 9,714 30,710 28,656 --------------- --------------- ----------------- ----------------- Income before income taxes 4,299 24,773 45,952 51,361 Income taxes 2,262 8,423 16,989 17,504 --------------- --------------- ----------------- ----------------- Net income from continuing operations 2,037 16,350 28,963 33,857 Income (loss) from discontinued operations after taxes - 637 (4,604) 1,657 --------------- --------------- ----------------- ----------------- Net income $ 2,037 $ 16,987 $ 24,359 $ 35,514 =============== =============== ================= ================= Average common shares outstanding 37,007 36,185 36,975 35,763 =============== =============== ================= ================= Earnings (loss) per share of common stock - - basic/diluted: Continuing operations $ 0.06 $ 0.45 $ 0.78 $ 0.94 Discontinued operations - 0.02 (0.12) 0.05 --------------- --------------- ----------------- ----------------- Net income $ 0.06 $ 0.47 $ 0.66 $ 0.99 =============== =============== ================= ================= Dividends per share of common stock $0.295 $0.295 $0.885 $0.885 =============== =============== ================= ================= The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Thousands) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ----------------------------- ----------------------------- Restated Restated <S> <C> <C> <C> <C> Cash flows from operating activities $ (18,948) $ 16,376 $ 96,019 $ 87,866 Cash flows from investing activities: Capital expenditures (46,307) (54,119) (123,981) (101,696) Proceeds from sale of property - 119,679 - 119,992 Additions to net assets of discontinued operations (18,194) (27,828) (31,935) (32,423) ------------ ------------ ------------- ------------ Net cash provided by (used in) investing activities (64,501) 37,732 (155,916) (14,127) ------------ ------------ ------------- ------------ Cash flows from financing activities: Retirement of long-term debt - - (10,880) (157) Increase (decrease) in short-term loans 80,340 51,458 (66,451) 102,659 Dividends paid (10,952) (10,838) (32,830) (31,486) Proceeds from issuance of preferred trust securities - - 125,000 - Proceeds from issuance of common stock 637 3,673 2,392 4,027 Purchase of treasury stock - (4,845) - (28,596) ------------ ------------ ------------- ------------ Net cash provided by financing activities 70,025 39,448 17,231 46,447 ------------ ------------ ------------- ------------ Net increase (decrease) in cash and cash equivalents (13,424) 93,556 (42,666) 120,186 Cash and cash equivalents at beginning of period 40,200 41,367 69,442 14,737 ------------ ------------ ------------- ------------ Cash and cash equivalents at end of period $ 26,776 $ 134,923 $ 26,776 $ 134,923 ============ ============ ============= ============ Cash paid during the period for: Interest (net of amount capitalized) $ 20,009 $ 21,695 $ 38,719 $ 36,732 ============ ============ ============= ============ Income taxes $ 450 $ 2,489 $ 10,304 $ 7,762 ============ ============ ============= ============ The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) ASSETS September 30, December 31, 1998 1997 ---------------------------------- (Thousands) ---------------------------------- Restated <S> <C> <C> Current assets: Cash and cash equivalents $ 26,776 $ 69,442 Accounts receivable 231,067 360,713 Unbilled revenues 15,585 25,935 Inventory 40,105 37,156 Deferred purchased gas cost 43,670 44,053 Derivative commodity instruments, at fair value 109,922 82,912 Prepaid expenses and other 54,563 64,523 -------------- -------------- Total current assets 521,688 684,734 -------------- -------------- Property, plant and equipment 1,971,343 1,862,412 Less accumulated depreciation and depletion 723,385 675,410 -------------- -------------- Net property, plant and equipment 1,247,958 1,187,002 -------------- -------------- Net assets of discontinued operations 267,835 238,182 -------------- -------------- Other assets 221,852 218,133 -------------- -------------- Total $ 2,259,333 $ 2,328,051 ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> EQUITABLE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) LIABILITIES AND STOCKHOLDERS EQUITY September 30, December 31, 1998 1997 ---------------------------------- (Thousands) ---------------------------------- Restated <S> <C> <C> Current liabilities: Short-term loans $ 214,993 $ 286,444 Accounts payable 152,790 288,192 Derivative commodity instruments, at fair value 108,172 79,012 Other current liabilities 101,721 92,053 -------------- -------------- Total current liabilities 577,676 745,701 -------------- -------------- Long-term debt 412,419 417,564 Deferred and other credits 323,059 341,266 Commitments and contingencies - - Preferred trust securities 125,000 - Capitalization: Common stockholders' equity: Common stock, no par value, authorized 80,000 shares; shares issued September 30,1998, 37,192; December 31, 1997, 36,929 276,092 269,878 Retained earnings 546,773 555,246 Treasury stock, shares at cost September 30, 1998, 56; December 31, 1997, 56 (1,551) (1,551) Accumulated other comprehensive income (135) (53) -------------- -------------- Total common stockholders' equity 821,179 823,520 -------------- -------------- Total $ 2,259,333 $ 2,328,051 ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE>
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) A. The accompanying financial statements should be read in conjunction with the Company's 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 September 30, 1998 and 1997, and the results of operations and cash flows for the three months and nine months then ended. All adjustments are of a normal, recurring nature unless otherwise indicated. C. The results of operations for the three- and nine-month periods ended September 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. On September 14, 1998, the Company announced an agreement to sell the operations for $320 million, subject to working capital and other adjustments at closing. Net proceeds from the sale of the midstream operations are expected to be sufficient to exceed estimated losses from operations and costs of disposal. The transaction is expected to close before the end of 1998. Net income (loss) from discontinued operations was $1.7 million for the nine months ended September 30, 1997, and $(4.6) million for the nine months ended September 30, 1998. These results were reported net of income tax expense (benefit) of $1.3 million and $(2.3) million in 1997 and 1998, respectively. Interest expense allocated to discontinued operations was $6.5 million in the first nine months of 1998 and $5.2 million in the first nine months of 1997. The net assets of discontinued operations are summarized as follows: September 30, December 31, 1998 1997 ----------------------------------- (millions) Property, plant and equipment $ 339.9 $ 319.5 Deferred credits (72.1) (81.3) ------------- ------------ $ 267.8 $ 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 nine-months ended September 30, 1998, includes $2.4 million and $4.1 million, respectively, 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. G. 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. H. Pension Disclosure Statement of Financial Accounting Standards No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits" (SFAS No. 132) revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they previously were. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company will adopt the new disclosure requirements in its annual financial statements for the year ending December 31, 1998.
Equitable Resources, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) I. Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) revises certain accounting and reporting for derivative instruments, including those designated as a hedge of another instrument or transaction. The Company already records derivatives other than hedges on the balance sheet at fair value, as required by this standard. Under SFAS No. 133, 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. SFAS No. 133 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. J. At September 30, 1998, 8,936,000 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, 1,715,000 shares for issuance under the Long-Term Incentive Plan, 76,000 shares for issuance under the Nonemployee Directors' Stock Incentive Plan, 10,000 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 Nine Months Ended September 30, September 30, --------------------------------- -------------------------------- 1998 1997 1998 1997 --------------------------------- -------------------------------- (Thousands) (Thousands) --------------------------------- -------------------------------- Restated Restated <S> <C> <C> <C> <C> Operating revenues: Production $ 39,446 $ 60,557 $ 122,257 $ 159,028 Utilities 51,887 54,551 285,791 332,073 Services 92,539 86,922 308,347 269,620 Sales between segments (24,554) (36,693) (88,675) (113,332) ------------- -------------- ------------- ------------- Total $ 159,318 $ 165,337 $ 627,720 $ 647,389 ============= ============== ============= ============= Operating income (loss) from continuing operations: Production $ 8,770 $ 20,710 $ 28,766 $ 41,380 Utilities 4,239 (10,894) 48,556 19,553 Services 503 (1,468) (1,603) (7,742) ------------- -------------- ------------- ------------- Total $ 13,512 $ 8,348 $ 75,719 $ 53,191 ============= ============== ============= ============= Capital expenditures (continuing operations): Production $ 37,094 $ 22,973 $ 95,619 $ 51,309 Utilities 8,875 16,921 27,444 35,224 Services 338 14,225 918 15,163 ------------- -------------- ------------- ------------- Total $ 46,307 $ 54,119 $ 123,981 $ 101,696 ============= ============== ============= ============= </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Equitable's consolidated net income for the quarter ended September 30, 1998, was $2.0 million, or $0.06 per share, compared with net income of $17.0 million, or $0.47 per share, for the quarter ended September 30, 1997. The 1997 period included other income of $25.6 million from the sale of oil and gas production properties, and a nonrecurring pretax charge of $10.7 million. Equitable's income from continuing operations for the three months ended September 30, 1998, was $2.0 million, or $0.06 per share, compared to income of $16.4 million, or $0.45 per share for the three months ended September 30, 1997. Excluding the $25.6 million gain and $10.7 million charge, 1997 results from continuing operations would have been $6.1 million of net income or $0.18 per share for the three months ended September 30. Overall, the current period results were adversely affected by lower revenues for crude oil and natural gas liquids, and the scheduled reduction in the direct billing settlement amount collected through the Company's annual gas cost filing. These reductions were partially offset by increased margins on retail gas sales, due to a fourth quarter 1997 rate increase, and improved margins in the Company's energy services business. Equitable's consolidated net income for the nine months ended September 30, 1998, was $24.4 million, or $0.66 per share, compared to $35.5 million or $0.99 per share for the nine months ended September 30, 1997. Excluding the 1997 gain on sale, and $23.7 million of nonrecurring charges, income from continuing operations was $29.0 million, or $0.78 per share, for 1998 compared to $32.6 million, or $0.91 per share for 1997. The current year has been affected by lower crude oil and natural gas liquids revenues, coupled with low retail volumes from year-to-date weather 22% warmer than 1997, increased depreciation, depletion and amortization charges and increased interest expense. The effects of these have been partially offset by increased rates on retail gas sales, improved margins on energy service contracts, and lower exploration and maintenance expenses. In September 1998 the Company announced an agreement to sell its discontinued natural gas midstream operations for $320 million, subject to working capital adjustments at closing. 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 transaction is expected to close before the end of 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) OVERVIEW (Continued) Also in the fourth quarter of 1998, management expects to record a pretax restructuring charge of at least $20 million, principally related to its recent initiatives to improve the Company's cost structure and increase efficiency. These initiatives, which were approved early in the fourth quarter by the Company's Board of Directors, include a "voluntary reduction program" (to be coupled with an involuntary separation program if necessary) to reduce the size of the Company's corporate and utility segment staff; the removal of three management layers and associated overhead from the Production segment; the closing of unprofitable marketing regions in ERI Services' retail marketing operation; and the proposed sale of the Company's Pittsburgh headquarters building. The Company is continuing to review other cost saving measures along with separate actions related to Equitable's focus on its core businesses, that will most likely result in a considerably larger one-time charge.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) RESULTS OF OPERATIONS PRODUCTION In anticipation of the sale of the Company's midstream operations and the concentration of Equitable's Gulf region activities on gas and oil production, the Company's Supply and Logistics segment has been renamed Equitable Production. The Production segment's 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 Appalachian and offshore Louisiana Gulf Coast regions. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, PRODUCTION 1998 1997 1998 1997 - --------------------------------------------------------------------------------------- -------------------------------------- (Thousands) (Thousands) ----------------------------------- -------------------------------------- Restated Restated <S> <C> <C> <C> <C> Continuing operations Operating revenues Produced natural gas $ 29,051 $ 29,414 $ 89,729 $ 86,857 Produced natural gas liquids 3,696 6,318 13,635 18,081 Crude oil 2,875 5,856 10,732 20,577 Other 3,824 18,969 8,161 33,513 ------------- ------------- ------------- ------------- Total revenues 39,446 60,557 122,257 159,028 Cost of energy purchased 2,692 3,713 10,300 11,428 ------------- ------------- ------------- ------------- Net operating revenues 36,754 56,844 111,957 147,600 Operating expenses: Production 7,295 7,897 22,259 25,567 Exploration 670 1,935 3,083 6,605 Gas processing 1,025 1,357 3,286 4,400 Other 6,341 13,435 19,245 37,780 Depreciation, depletion and amortization 12,653 10,310 35,318 30,668 Impairment of assets and nonrecurring items - 1,200 - 1,200 ------------- ------------- ------------- ------------- Total operating expenses 27,984 36,134 83,191 106,220 ------------- ------------- ------------- ------------- Operating income from continuing operations 8,770 20,710 28,766 41,380 Other income 41 25,957 (732) 26,511 ------------- ------------- ------------- ------------- Earnings from continuing operations, before interest and taxes $ 8,811 $ 46,667 $ 28,034 $ 67,891 ============= ============= ============= ============= Sales quantities: Produced natural gas (MMcf) 14,224 13,976 40,523 40,288 Crude oil (MBls) 224 361 759 1,193 Natural gas liquids (thousands of gallons) 15,176 18,696 49,408 47,827 Discontinued operations Operating revenues 352,935 349,022 1,123,069 866,554 Earnings before interest and taxes - 2,820 (5,087) 8,122 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three Months Ended September 30, 1998 vs. Three Months Ended September 30, 1997 Net operating revenues for the three months ended September 30, 1998, decreased $20.1 million, primarily due to the sale of the Company's Union Drilling division in the fourth quarter of 1997 ($7.8 million), declines in crude oil prices ($1.4 million) and volumes ($1.5 million), natural gas liquids price decline ($1.8 million), and the scheduled reduction in direct billing revenues ($5.2 million). Natural gas production increased slightly in 1998 compared with 1997, as a 2.0 bcf increase in offshore Gulf production (74%) offset declines of 0.2 bcf in the Company's Appalachian region (2%) and 1.6 bcf due to the third and fourth quarter 1997 sales 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 (28%) prices continue to be a reflection of the overall commodity market, where oil price indexes show a 27% decline for the three months ended September 30, 1998, compared to the same period in 1997. Total operating expenses for the third quarter of 1998 reflect reductions of $12.3 million due to the sales of the Union Drilling division and the western properties. These reductions are partially offset by higher production costs ($1.1 million) and depreciation, depletion and amortization (DD&A) expenses ($4.6 million) in the Gulf due to increased offshore production activity and the acquisition of additional producing properties in the fourth quarter of 1997. Other income in 1997 included a pretax gain of $25.6 million related to the sale of certain of the Company's western production properties. Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997 Net operating revenues for the nine months ended September 30, 1998, decreased $35.6 million due primarily to the sale of the Union Drilling division ($16.2 million), decreases in crude oil volumes ($5.4 million) and prices ($4.4 million), natural gas liquids price decline ($4.9 million), and the scheduled reduction in direct billing revenues ($5.2 million). These decreases are partially offset by an increase in the Company's average effective gas price ($3.5 million) as a result of a favorable hedged position. Gas volumes for the nine-month period of 1998 are up slightly compared to 1997 as production increases in the Gulf offset 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) PRODUCTION (Continued) Total operating expenses for the first nine months of 1998 benefited from the sales of the Union Drilling division ($15.3 million) and western properties ($19.3 million) and lower exploration expenses ($2.0 million) in the Gulf. The Company's exploration program has been reduced in the current year due to low commodity prices. Offsetting these decreases is an increase in the Gulf's production costs ($3.7 million) and DD&A expense ($12.9 million) due to the reasons noted above in the discussion of the third 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 Nine Months Ended September 30, September 30, UTILITIES 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------- --------------------------------- (Thousands) (Thousands) <S> <C> <C> <C> <C> Operating revenues Residential gas sales $ 21,365 $ 24,632 $ 162,140 $ 205,161 Commercial gas sales 2,120 2,004 16,193 23,624 Industrial and utility gas sales 5,816 8,452 28,173 35,492 Marketed gas sales 3,645 4,715 13,472 15,598 Transportation service 14,277 8,815 52,067 38,106 Storage service 2,599 2,171 7,574 5,957 Other 2,065 3,762 6,172 8,135 ------------- ------------- ------------ ---------- Total revenues 51,887 54,551 285,791 332,073 Cost of energy purchased 11,151 17,255 115,934 159,259 ------------- ------------- ------------ ---------- Net operating revenues 40,736 37,296 169,857 172,814 Operating expenses: Operations and maintenance 28,828 31,953 99,533 110,571 Depreciation, depletion and amortization 7,669 6,912 21,768 20,365 Impairment of assets - 9,325 - 22,325 ------------- ------------- ------------ ---------- Total operating expenses 36,497 48,190 121,301 153,261 ------------- ------------- ------------ ---------- Operating income 4,239 (10,894) 48,556 19,553 Other income 281 143 881 262 ------------- ------------- ------------ ---------- Earnings before interest and taxes $ 4,520 $ (10,751) $ 49,437 $ 19,815 ============= ============= ============ ========== Sales quantities (MMcf): Residential gas sales 1,512 1,941 15,232 19,248 Commercial gas sales 154 162 1,608 2,279 Industrial and utility gas sales 2,530 3,545 11,196 13,326 Marketed gas sales 1,912 2,206 6,622 6,277 Transportation deliveries 24,509 20,444 65,386 62,059 Heating degree days 56 139 2,938 3,781 </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three Months Ended September 30, 1998 vs. Three Months Ended September 30, 1997 Net operating revenues for the quarter ended September 30, 1998, increased 9.2% to $40.7 million, primarily as a result of a base rate increase and new rate design put in place by the Company's western Pennsylvania area distribution operations in October 1997. The effect of the new rates on net operating revenues ($3.7 million) was partially offset by lower gas sales ($0.4 million) to retail customers because of warmer September weather. Approximately $0.8 million of the increase in transportation revenues compared to 1997 also results from a base rate increase in October 1997, with the balance attributable to an increase in transportation for third parties rather than regulated affiliates. The $4.6 million increase in transportation revenues for third parties 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. The operating expense decline in the current period reflects lower uncollectible accounts and customer assistance programs ($0.3 million) as a result of decreased residential sales revenues, and lower utility and corporate administrative expenses ($1.6 million), as the benefits are realized from the third quarter 1997 evaluation and reduction of corporate office and noncore business functions. Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997 Net operating revenues for the nine-month period ended September 30, 1998, decreased $3.0 million (1.7%). Year-to-date effects of the warmer weather ($11.8 million) have been offset by the new rates in effect ($12.8 million) for gas sales and transportation at the distribution company and for transportation and storage services at Equitrans' pipeline. Marketed gas revenues declined 14% in the current period, as the result of natural gas commodity price decreases more than offsetting volume increases compared to the 1997 period. These factors resulted in a $0.4 million decline in net operating revenues for marketed gas in 1998. Certain surcharges are no longer passed through to customers, reducing net operating revenues in 1998 by $1.6 million, pursuant to an alternative pricing election by the liquids processor on its extraction contracts. This same decrease is also reflected in operating expenses. Excluding the one-time storage project and corporate office charges in 1997, operating expenses decreased from 1997 to 1998 due to weather related factors ($4.8 million), on-going cost savings resulting from the 1997 evaluation and reduction of corporate office and noncore business functions ($3.8 million), and the elimination of the processing surcharge ($1.6 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, SERVICES 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------- ---------------------------------- (Thousands) (Thousands) <S> <C> <C> <C> <C> Operating revenues Marketed natural gas $ 58,843 $ 64,422 $ 233,188 $ 241,164 Energy service contracting 33,696 22,500 75,159 28,456 -------------- -------------- -------------- -------------- Total revenues 92,539 86,922 308,347 269,620 Cost of energy purchased 58,534 62,982 230,771 234,479 Energy service contract costs 23,888 16,409 50,784 20,347 -------------- -------------- -------------- -------------- Net operating revenues 10,117 7,531 26,792 14,794 Operating expenses: Selling, general and administrative 8,265 7,645 24,395 20,713 Depreciation, depletion and amortization 1,349 1,154 4,000 1,623 Impairment of assets and other nonrecurring charges - 200 - 200 -------------- -------------- -------------- -------------- Total operating expenses 9,614 8,999 28,395 22,536 -------------- -------------- -------------- -------------- Operating income (loss) 503 (1,468) (1,603) (7,742) Other income 323 39 794 53 -------------- -------------- -------------- -------------- Earnings before interest and taxes $ 826 $ (1,429) $ (809) $ (7,689) ============== ============== ============== ============== Sales quantities: Marketed natural gas (MMcf) 25,274 31,233 93,830 88,958 </TABLE> Three Months Ended September 30, 1998 vs. Three Months Ended September 30, 1997 Net operating revenues increased to $10.1 million for the quarter ended September 30, 1998, compared to $7.5 million for the same period in 1997. This segment's energy management and performance contracting operations now hold a larger mix of commercial government and international projects. During the quarter, several significant contracts were signed. At September 30, 1998, construction backlog totaled approximately $90 million. This segment's energy marketing business experienced a $1.1 million reduction compared to 1997 in net operating revenues in the third 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 segment increased $0.8 million, as residential marketing programs in western Pennsylvania and southern Ohio were introduced in the current quarter. Partially offsetting increased marketing expenses was a reduction in other operating expenses. Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997 Net operating revenues increased to $26.8 million for the nine months ended September 30, 1998, compared to $14.8 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 $4.3 million reduction in net operating revenues in the nine months ended 1998, as the segment's revenue from several industrial/commercial accounts was terminated. Operating expenses for this segment increased $5.9 million, primarily in the energy management and performance contracting businesses, due to the acquisition of NORESCO ($9.2 million), offset somewhat by a decrease in operating expenses relating to the energy marketing business. Depreciation, depletion, and amortization also increased due to $2.3 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CAPITAL RESOURCES AND LIQUIDITY (Continued) Cash used by operating activities totaled $18.9 million in the three months ended September 30, 1998, compared to cash provided by operating activities of $6.3 million in the 1997 period. Cash flows from operations decreased in 1998 primarily as a result of reduced collection of accounts receivable. During the third quarter of 1998, collections of previous winter heating bills were down $10 million at the utility operations, compared to the prior year, as a result of lower gas sales to retail customers as a result of warmer weather in the winter months. In the Company's discontinued operations, cash was used during the third quarter, as payments to creditors for trade accounts payable exceeded collections on accounts receivable by $18 million. This was primarily a reversal of the second quarter 1998 when collections on accounts receivable exceeded vendor payments by a like amount. Overall sales volumes have decreased in this group as the sale of the operation approaches. 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 nine months ended September 30, 1998, was approximately $9.5 million. ERI's financial objectives require ongoing capital expenditures for growth projects in continuing operations of the Production segment, as well as replacements, improvements and additions to plant assets in the Utilities segment. Such capital expenditures during the 1998 quarter were approximately $46 million, including $25 million and $12 million for exploration and production projects in the Gulf of Mexico and Appalachian regions, respectively. In addition, ongoing capital projects in the Company's discontinued operations accounted for an additional $17 million use of cash in the three months ended September 30, 1998. In the first nine months of 1998, the Company has expended $124 million on capital projects. A total of $229 million has been authorized for the 1998 capital expenditure program. The Company has financed its 1998 capital expenditure program with cash generated from operations and with short-term loans. 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 5.62% during the third 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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. In the fourth quarter of 1998, the Company expects to close the sale of its midstream operations for $320 million. Net proceeds to the Company may be used to retire a portion of the Company's outstanding long-and short-term debt, to fund the possible repurchase, over the next several years of up to 5.6 million shares of the Company's common stock, or for new investments. Any long-term debt redeemed prior to maturity will require payment of certain premiums, resulting in an extraordinary loss in the period in which the redemption occurs. YEAR 2000 State of Readiness The Company initiated an enterprise-wide project in 1996 to address the Year 2000 issue. A management team was put in place to manage this project and a detailed project plan has been developed to address the three identified primary risk areas: process controls and facilities, business information systems applications, and issues relative to third party product and service providers. This plan is continuously updated and reviewed regularly with senior management and the Board of Directors. The Company is on schedule to complete remediation and testing of all critical components as planned. To date the Company has completed the inventory and assessment phases covering all process controls (embedded chips), facilities and systems applications. Testing has begun on process controls, using both internal resources and contracted engineers and is currently on schedule. Full testing is expected to be completed by the end of January 1999. The testing and remediation of systems applications are on schedule with approximately 60% of those deemed critical remediated and 30% into the testing phase. In addition, ERI is presently upgrading many of its financial and operating systems. These systems are Year 2000 compliant.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) YEAR 2000 (Continued) Additionally, the Company has developed a formal communications process with external parties with whom it does business to determine the extent to which they have addressed their Year 2000 compliance. The Company will continue to evaluate responses as they are received. Actions to remediate potential problems (up to and including shifting business to Year 2000 compliant vendors from those with problems) will take place in 1999. Costs As the work is in process, the total cost of the Company's Year 2000 project is still being evaluated. Until all process control systems have been tested and documented, planned for the end of January 1999, the full cost of remediation of this part of the project will not be known. The cost to date, however, is $2.5 million, and the total cost estimate for the balance of the project is an additional $2.6 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 is confident of 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 potential scenario would involve the failure of one or more of the gas marketers supplying the Company's distribution operations. If this occurs, the Company would either supply its customers from existing internal supply sources or attempt to purchase supply on the "spot" market, probably at somewhat higher prices. Unless supply shortfalls were of a long duration or occurred during a period of extreme weather conditions, when spot supplies might not be as readily available, it would be unlikely that the distribution company would have to curtail deliveries to its customers. If it appears that this scenario is more than a remote possibility additional contingency plans will be put into place.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) INFORMATION REGARDING FORWARD LOOKING STATEMENTS Disclosures in this report may include forward-looking statements related to such matters as anticipated financial performance, business prospects, capital projects, new products and operational matters. The Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company business include, but are not limited to, the following: weather conditions, the pace of deregulation of retail natural gas 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, 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.
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: 10.1 Employment Agreement dated as of July 1, 1998, with David L. Porges. 10.2 Change in Control Agreement dated July 1, 1998, with David L. Porges. 10.3 Post-Termination Confidentiality and Non-Competition Agreement dated July 1, 1998, with David L. Porges. 10.4 Equitable Resources, Inc. Breakthrough Long-Term Incentive Plan for certain executives of the Company. 10.5 Purchase Agreement by and among Equitable Resources Energy Company, ET Bluegrass Company, EREC Nevada, Inc. and ERI Services, Inc. and AEP Resources, Inc. dated September 12, 1998, for the purchase of midstream assets. (b) Reports on Form 8-K during the quarter ended September 30, 1998: Form 8-K Current Report dated September 14, 1998, announcing ERI's agreement to sell its natural gas midstream operations to AEP Resources, Inc.
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: November 13, 1998