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, 1997
[ ] 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)
420 BOULEVARD OF THE ALLIES 15219
PITTSBURGH, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 261-3000
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
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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 28, 1998: $1,167,676,996 The number of shares
outstanding of the issuer's classes of common stock as of February 28, 1998:
37,069,111
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
22, 1998, to be filed with the Commission within 120 days after the close of the
Company's fiscal year ended December 31, 1997.
Index to Exhibits - Page 67
TABLE OF CONTENTS
PART I PAGE
Item 1 Business 1
Item 2 Properties 7
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
Item 10 Directors and Executive Officers of the Registrant 9
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8 Financial Statements and Supplementary Data 28
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 62
PART III
Item 10 Directors and Executive Officers of the Registrant 63
Item 11 Executive Compensation 63
Item 12 Security Ownership of Certain Beneficial Owners
and Management 63
Item 13 Certain Relationships and Related Transactions 63
PART IV
Item 14 Exhibits and Reports on Form 8-K 64
Index to Financial Statements
Covered by Report of Independent Auditors 65
Index to Exhibits 67
Signatures 70
PART I
ITEM 1. BUSINESS
Equitable Resources, Inc. (Equitable, ERI or the Company) is a
fully-integrated energy exploration, production, transmission, distribution and
marketing company. Through its subsidiaries and a division, it offers energy
(natural gas, natural gas liquids, crude oil and electricity) products and
services to wholesale and retail customers from its three primary business
segments: ERI Supply & Logistics, ERI Utilities and ERI Services. ERI and its
subsidiary companies had 1,978 employees at the end of 1997.
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 reflect more appropriately the Company's transition from a
regulated utility to an integrated energy company.
ERI SUPPLY & LOGISTICS
Supply & Logistics explores for, produces and delivers natural gas and
oil, with operations in the Appalachian Basin and Gulf of Mexico regions of the
United States. It is also engaged in the intrastate transportation and storage
of natural gas, production of natural gas liquids and the bulk trading of
natural gas and electricity.
EXPLORATION AND PRODUCTION
Equitable Resources Energy Company (EREC) is the exploration and
production unit of the Supply & Logistics segment. EREC has been a low-cost
operator in the Appalachian Basin for more than 100 years. The operating area in
eastern Kentucky and western Virginia contains approximately 89 percent of
Equitable's natural gas and oil reserves. The Company has been able to develop
gas reserves at costs which make it very competitive in marketing its gas to
pipeline and commercial buyers. As a result, even in periods of surplus gas
supply, the Company has been able to sell all of its gas production at a profit.
EREC also extracts and markets natural gas liquids in Kentucky. EREC sold its
West Virginia-based contract drilling operations in October 1997.
Exploration and production activities are also conducted in the Gulf
Coast region of the U.S. This is a very competitive market requiring substantial
on-going investment in Federal leases, in which drilling and production activity
by producers has increased in recent years. EREC has recently begun to operate
some of the offshore drilling projects in which it has a majority working
interest. Approximately 11 percent of the Company's year-end natural gas and oil
reserves are located in the Gulf region. EREC also owns interests in two natural
gas liquids plants in Texas but is negotiating a possible sale of those
interests.
ITEM 1. BUSINESS (CONTINUED)
EREC 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 the Gulf acquisition more than offset the production
displaced by the western property sale. In 1997 the Company increased its
Appalachian reserve life from 35 years to 50 years to more closely reflect
actual production experience. This revision increased 1997 proved developed
natural gas and oil reserves by 78.6 billion cubic feet equivalent. At year-end
1997 proved developed natural gas reserves were 769 billion cubic feet compared
to 732 billion cubic feet at year-end 1996. Oil reserves declined during 1997
from 18.8 million barrels of proved developed reserves to 8.9 million barrels
of proved developed reserves. The decrease in oil reserves is the result of the
sale of the properties in the western states and Canada.
ENERGY MARKETING, STORAGE AND TRANSMISSION
In Louisiana, Louisiana Intrastate Gas Company, L.L.C. (LIG) provides
intrastate transportation of gas regulated by the Federal Energy Regulatory
Commission (FERC) and extracts and markets natural gas liquids. It has the most
extensive intrastate gas system in the state, with 1,900 miles of pipeline
serving most major producing and consuming areas of Louisiana. Liquid extraction
plant capacity utilization for the system is currently about 90 percent. Because
of recent increases in both onshore and offshore exploration and production
activity in Southern Louisiana, LIG has had increased opportunities to process
and transport natural gas. LIG markets primarily to industrial and municipal
markets and to local distribution companies. In 1997 LIG added to its
transportation services with the acquisition of the Department of Energy (DOE)
pipeline in southern Louisiana. This high-capacity pipeline was converted from
an oil pipeline and began gas transmission operations in October 1997. The
pipeline has take-away capacity of 500,000 MMBtu/day for newly developed
offshore gas from an area along the central Gulf Coast to pipelines and
industrial end-users in other parts of Louisiana. LIG is also expanding its
liquids processing capacity at its Plaquemine, Louisiana, plant to accommodate
additional processing volumes anticipated under a new agreement with Amoco
Production Company. The expansion is expected to be completed and operational by
the last quarter of 1998.
Equitable Storage Company, L.L.C. provides natural gas storage services
at its Jefferson Island Underground Gas Storage and Interchange Facility.
Jefferson Island is strategically located in both a major production and market
area, as well as providing a direct interconnection to a number of interstate
pipelines transporting gas through the Henry Hub. Work has begun on a second
storage cavern at Jefferson Island that will double the storage capacity to 7
Bcf of natural gas. This project is expected to be completed and in operation by
the fall of 1999.
The Supply & Logistics segment's operations also include nationwide
natural gas marketing, supply, peak shaving and transportation arrangements and
electricity marketing. Energy is purchased from independent brokers, marketers
and producers throughout the United States and Canada. Most marketed natural gas
is sold to local distribution companies, marketers and industrial end-users. The
natural gas marketing business is extremely competitive. The unbundling of gas
sales on local distribution systems is expected to provide increased marketing
opportunities. Currently, electricity marketing activities of this segment are
significantly less than its gas marketing activities.
ITEM 1. BUSINESS (CONTINUED)
The Supply & Logistics segment generated approximately 48% of ERI's net
operating revenue and 61% of ERI's net operating income in 1997, excluding
intercompany transactions.
ERI UTILITIES
NATURAL GAS DISTRIBUTION
The Utilities segment's distribution operations are conducted by
Equitable Gas Company, a division of the Company. The service territory for
Equitable Gas is southwestern Pennsylvania, a few municipalities in northern
West Virginia and field line sales in eastern Kentucky. The distribution company
provides gas services to more than 266,000 customers, comprised of approximately
248,000 residential customers and approximately 18,000 commercial and industrial
customers and is regulated by the state utility commissions in the three states
it serves. In October 1997, the Pennsylvania Public Utility Commission (PUC)
authorized a rate increase to Equitable Gas of $15.8 million annually, most of
which will be applied to customers' monthly fixed charges for transportation
services. Equitable Gas Company's new rate structure approved by the PUC is
expected to reduce from 64% to 54% its percentage of revenues affected by
weather conditions. The PUC concurrently authorized Equitable Gas to reduce its
gas supply rates by $37.4 million annually to reflect lower gas cost. In
December 1997 the PUC granted the Company's request to offer "unbundled" service
to all of its customers in the state, allowing them to choose their natural gas
supplier. Revenues derived from transportation charges on gas sold by other
suppliers will enable Equitable Gas to avoid economic loss resulting from the
switching of residential customers to other suppliers. This results from the
fact that the margin on natural gas commodity approximates the margin received
on transportation making Equitable Gas neutral to transportation or sales.
Equitable Gas will continue to provide other utility services to all of its
customers.
Equitable Gas Company 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 has been
purchased from production properties in Kentucky owned by EREC.
Equitable Gas Company's rates, terms of service, contracts with
affiliates and issuances of securities are regulated primarily by the 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 high customer demands during
the winter heating season.
ITEM 1. BUSINESS (CONTINUED)
NATURAL GAS GATHERING, INTERSTATE TRANSMISSION AND STORAGE
Kentucky West Virginia Gas Company, L.L.C. is a FERC-regulated,
interstate pipeline company that gathers natural gas production in eastern
Kentucky. It has more than 2,200 miles of gathering and transmission lines that
serve Equitable Gas, EREC and nonaffiliated companies. Most of the gas
transported on Kentucky West is delivered to Columbia Gas Transmission, a major
interstate pipeline. Nora Transmission Company is also a FERC-regulated,
transmission system, transporting EREC's gas production in western Virginia for
redelivery to key Southeast markets.
Another FERC-regulated interstate pipeline, Equitrans, L.P. provides
transportation, storage and transmission service for Equitable Gas, ERI
Services, and nonaffiliates in western Pennsylvania and northern West Virginia.
Although a substantial portion of Equitrans' 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. Equitrans has more than 500 miles of transmission lines and
interconnections with five major interstate pipelines. The FERC-regulated
company also has 15 gas storage reservoirs with approximately 500 MMcf per day
of peak delivery capacity. This storage service is fully subscribed. Equitrans
is currently involved in a rate case before the FERC, which is expected to
continue through 1998.
The Utilities segment generated approximately 48% of ERI's net
operating revenues and 47% of ERI's net operating income in 1997.
ERI SERVICES
ERI Services provides energy and energy related products and services
to commercial, government, institutional and industrial end-users designed to
reduce the customer's operating costs and improve their productivity. The
segment was created through internal development and a series of acquisitions of
private energy performance and facility management contractors beginning in
1995. In September 1996 ERI Services began marketing a complete menu of energy
management services to energy customers. In July 1997 ERI significantly added to
its energy performance and facilities management capabilities with the
acquisition of Northeast Energy Services, Inc. (NORESCO), a major energy
services company. ERI Services now operates through several specialized
operating groups: Performance Contracting, Government Services, Facilities
Management and Energy Services Marketing. ERI Services operates in a highly
competitive environment, with a significant number of companies, including
affiliates of existing energy companies, entering this market in recent years.
PERFORMANCE CONTRACTING
Performance Contracting provides comprehensive performance-based energy
savings solutions that offer a wide array of integrated energy management
services. Performance-based energy savings solutions include the development,
design, construction, financing, operation and maintenance of various
facilities. Since 1979, NORESCO, a major component of this group, has completed
several hundred energy savings projects for commercial, industrial,
institutional, and governmental customers. With offices in eleven states,
NORESCO is involved in energy savings and facilities management projects
throughout the U.S.
ITEM 1. BUSINESS (CONTINUED)
GOVERNMENT SERVICES
The Government Services group specializes in energy savings performance
contracting with the Federal, state and municipal governments. Beginning in
1996, the DOE initiated a series of regional energy service performance
contracts. These contracts act as a partnership between a Federal agency and an
energy service company whereby the contractor incurs the cost of implementing
new energy savings projects in exchange for a share of the energy savings
resulting from the measures taken during the term of the contract. During the
twelve month period through January 1998, the Government Services group has been
awarded the right to negotiate for $575 million of regional energy service
performance contracts.
FACILITIES MANAGEMENT
Facilities Management is a group that develops and operates private
power, cogeneration and central plant facilities in the U.S. and selected
international markets. The projects serve a variety of consumers including
hospitals, universities, commercial and industrial customers and utilities. ERI
Services' Facilities Management provides for its customers all aspects of
project development including technical feasibility, equipment selection, fuel
procurement, environmental permitting and contract negotiation.
ENERGY SERVICES MARKETING
Energy Services Marketing, which includes the former Merchant Services
division of ERI Services, Inc., 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. In 1998 a new division, Equitable Energy, began marketing natural gas
and other services to residential consumers on the Equitable Gas system in
western Pennsylvania. Equitable Energy has contracted to purchase its natural
gas supply from the natural gas marketing operations of the Supply & Logistics
segment.
ERI Services generated approximately 4% of ERI's net operating revenues
in 1997 and experienced an operating loss which lowered the Company's overall
net operating profit by approximately 8%.
ITEM 1. BUSINESS (CONTINUED)
Operating revenues as a percentage of total operating revenues for each
of the three business segments during the years 1995 through 1997 are as
follows:
1997 1996 1995
--------- --------- --------
Supply & Logistics:
Marketed natural gas 53 % 52 % 53 %
Produced natural gas 4 4 6
Natural gas liquids 5 5 5
Oil 1 1 2
Contract drilling 1 1 1
Other 2 2 4
--------- --------- --------
Total Supply & Logistics 66 65 71
--------- --------- --------
Utilities:
Residential gas sales 13 15 19
Commercial gas sales 2 4 3
Industrial and utility gas sales 1 4 1
Transportation service 3 2 4
Other - 1 2
--------- --------- --------
Total Utilities 19 26 29
--------- --------- --------
Services:
Marketed natural gas 13 9 -
Energy service contracting 2 - -
--------- --------- --------
Total Services 15 9 -
--------- --------- --------
Total Revenues 100 % 100 % 100 %
========= ========= ========
The results of operations for 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.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes Q and T to the consolidated financial statements
in Part II regarding financial information by business segment.
ITEM 2. PROPERTIES
Principal facilities are owned by the Company's business segments with
the exception of various office locations and warehouse buildings. All leases
contain renewal options for various periods. A minor portion of equipment is
also leased. With few exceptions, 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.
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. Kentucky West owns and operates
gathering and transmission properties as well as other general property and
equipment in Kentucky. Three Rivers Pipeline Corporation owns transmission
properties in southwestern Pennsylvania.
SUPPLY & LOGISTICS. This business segment owns or controls substantially
all of the Company's acreage of proved developed and undeveloped gas and oil
production properties, which are located in the Appalachian and Gulf Coast
offshore areas. Supply & Logistics' 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. This segment also owns an intrastate pipeline system and four
hydrocarbon extraction plants in Louisiana, a high-deliverability gas storage
facility in Louisiana and a 15-mile interchange system that interconnects the
storage facility to LIG. Information relating to Company estimates of natural
gas and oil reserves and future net cash flows is highlighted below and
summarized in Note T to the consolidated financial statements in Part II.
Gas and Oil Production:
1997 1996 1995
-------- ------ ------
Natural Gas - MMcf produced 56,693 57,295 64,984
- Average sales price per Mcf $2.24 $1.91 $1.61
Crude Oil - Thousands of barrels produced 1,511 1,727 1,932
- Average sales price per barrel $17.22 $14.78 $16.44
Average production cost (lifting cost) of natural gas and oil during 1997,
1996 and 1995 was $.499, $.469 and $.413 per Mcf equivalent, respectively.
ITEM 2. PROPERTIES (CONTINUED)
Gas Oil
Total productive wells at December 31, 1997:
Total gross productive wells 4,445 397
Total net productive wells 3,972 352
Total acreage at December 31, 1997:
Total gross productive acres 567,000
Total net productive acres 502,000
Total gross undeveloped acres 1,656,000
Total net undeveloped acres 1,319,000
Number of net productive and dry exploratory wells and number of net
productive and dry development wells drilled:
1997 1996 1995
-------- -------- ------
Exploratory wells:
Productive 2.9 3.3 1.6
Dry 1.5 5.8 2.8
Development wells:
Productive 88.7 73.1 39.1
Dry - 1.6 2.6
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.
ERI SERVICES. This business segment leases office facilities in
approximately twenty locations across the United States.
ITEM 3. LEGAL PROCEEDINGS
Two subsidiary companies 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) in June 1997 in connection
with a storage project in Avoca, New York, whose operating partnership and
partners 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.
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, 1997.
ITEM 10. EXECUTIVE OFFICERS
- ---------------------------------------------------------------------------------------------------------
Name and Age Title Business Experience
- ---------------------------------------------------------------------------------------------------------
Donald I. Moritz Interim President and Chief Present position since July 17, 1997; Chairman and
(70) Executive Officer Chief Executive Officer from December 17, 1993,
until retirement on December 31, 1994; President and
Chief Executive Officer from 1978.
- ---------------------------------------------------------------------------------------------------------
R. Gerald Bennett Senior Vice President First elected to present position June 1, 1996;
(56) President and Chief Executive Officer - Fuel
Resources, Inc. from February 1991.
- ---------------------------------------------------------------------------------------------------------
John C. Gongas, Jr. Senior Vice President First elected to present position May 23, 1996;
(53) Vice President-Corporate Operations from May 26,
1995; Vice President - Utility Group from January
1, 1994; Vice President - Utility Services from
June 1, 1992.
- ---------------------------------------------------------------------------------------------------------
Audrey C. Moeller Vice President and Corporate First elected to present position May 22, 1986.
(62) Secretary
- ---------------------------------------------------------------------------------------------------------
Johanna G. O'Loughlin Vice President and General First elected to present position December 19,
(51) Counsel 1996; Deputy General Counsel from April 1996;
Senior Vice President and General Counsel of Fisher
Scientific Company from June 1986.
- ---------------------------------------------------------------------------------------------------------
Gregory R. Spencer Senior Vice President and First elected to present position May 23, 1996.
(49) Chief Administrative Officer Vice President-Human Resources and Administration
from May 26, 1995; Vice President - Human
Resources from October 10, 1994; Vice President of
Human Resources Administration of AMSCO
International, Inc., Pittsburgh, PA, from May
1993; General Manager-Human Resources of U.S.
Steel Group of USX Corporation, Pittsburgh, PA,
from October 1991.
- ---------------------------------------------------------------------------------------------------------
Richard D. Spencer Vice President - Planning First elected to present position May 23, 1997;
(44) and Chief Information Vice President and Chief Information Officer from
Officer April 1, 1996; Manager - Technology Programs of
General Electric Corporation from February 1991.
- ---------------------------------------------------------------------------------------------------------
Jeffrey C. Swoveland Vice President - Finance First elected to present position May 23, 1996.
(42) and Treasurer/Interim Interim Chief Financial Officer since October 16,
Chief Financial Officer 1997; Treasurer from December 15, 1995; Director
of Alternative Finance from September 27, 1994;
Vice President - Global Corporate Banking of
Mellon Bank, Pittsburgh, PA, from June 1993;
Assistant Vice President - Global Corporate
Banking of Mellon Bank, Pittsburgh, PA, from June,
1989.
- ---------------------------------------------------------------------------------------------------------
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 23, 1997.
- ---------------------------------------------------------------------------------------------------------
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:
1997 1996
---------------------------- -----------------------------
High Low Dividend High Low Dividend
---------------------------- -----------------------------
1st Quarter 32 3/4 27 3/4 $.295 31 1/2 27 3/4 $.295
2nd Quarter 31 28 1/16 .295* 30 5/8 27 3/4 .295*
3rd Quarter 31 3/4 27 3/8 .295 29 7/8 25 1/4 .295
4th Quarter 35 1/2 29 5/8 .295 31 1/8 27 1/2 .295
* Actually declared near the end of the preceding quarter.
As of December 31, 1997, there were 7,026 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, $423 million of the
Company's consolidated retained earnings at December 31, 1997, 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.
On July 16, 1997, the Company issued 2,091,407 shares of common stock to
the shareholders of Northeast Energy Services, Inc. (NORESCO). These shares were
transferred to those shareholders (along with cash) in exchange for all of the
outstanding stock of NORESCO. The shares were deemed exempt from registration
under Section 4(2) of the Securities Act of 1933, because they were issued to
only four shareholders, all of whom were accredited investors, as defined by
Rule 501 of the Securities Act of 1933, and who acknowledged in writing the
restrictions on resale under the Securities Act of 1933 and that they were not
acquiring the shares with any plan of distribution. The shares were subsequently
registered for resale on Form S-3.
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------
(Thousands except per share amounts)
Operating revenues $ 2,151,015 $ 1,861,799 $ 1,425,990 $ 1,397,280 $ 1,094,794
============== ============== =============== ============== ===============
Net income (a) $ 78,057 $ 59,379 $ 1,548 $ 60,729 $ 73,455
============== ============== =============== ============== ===============
Earnings per share of
common stock:
Basic $2.17 $1.69 $.04 $1.76 $2.27
===== ===== ==== ===== =====
Assuming dilution $2.16 $1.69 $.04 $1.75 $2.25
===== ===== ==== ===== =====
Total assets $ 2,411,010 $ 2,096,299 $ 1,963,313 $ 2,019,122 $ 1,946,907
Long-term debt $ 417,564 $ 422,112 $ 415,527 $ 398,282 $ 378,845
Cash dividends
paid per share of
common stock $1.18 $1.18 $1.18 $1.15 $1.10
(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 F to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
ERI's consolidated net income for 1997 was $78.1 million, or $2.17 per
share, compared with $59.4 million, or $1.69 per share, for 1996 and $1.5
million, or $.04 per share, for 1995. Earnings for 1997 include the following
nonrecurring items, all of which are described in Notes C and F to the
consolidated financial statements: aftertax gain of $31.3 million, $0.87 per
share, on the sale of ERI's oil and natural gas producing properties in the
western United States and Canada and its contract drilling operations; aftertax
charge of $8.5 million, $0.24 per share, from the impairment of a proposed
bedded salt natural gas storage project; and $6.7 million aftertax charge, $0.19
per share, related to the evaluation and reduction of corporate office and
noncore business functions. The 1996 net income includes an aftertax gain of
$4.4 million, or $.13 per share, from the curtailment of ERI's defined benefit
pension plan for certain nonutility employees. Earnings for 1995 include an
aftertax charge of $74.2 million, or $2.12 per share, due to the recognition of
impairment of assets. The results for 1995 also include a nonrecurring aftertax
gain of $29.1 million, or $.83 per share, related to the Columbia Gas
Transmission (Columbia) bankruptcy settlement and an aftertax gain of $6.6
million, or $.19 per share, resulting from regulatory approval for accelerated
recovery of future gas costs as described in Note D to the consolidated
financial statements.
Excluding these items, ERI's 1997 net income of $61.9 million, or $1.73
per share, was 13% higher than 1996 net income of $55.0 million which, in turn,
was 38% higher than 1995 net income of $40.0 million. The 1997 operating results
benefited from higher natural gas prices, lower exploration expense, higher
natural gas marketing volumes, higher, newly-approved residential rates in the
Company's regulated utility operations and lower start-up costs in the Services
segment. These benefits were partially offset by lower natural gas production
volumes and lower commercial and industrial sales in the utility operations.
In 1996 operating results benefited from higher sales prices for
produced natural gas and natural gas liquids compared to 1995, and from lower
depletion rates, increased commercial and industrial sales by the utility
operations and lower interest costs. These items were partially offset by
decreased natural gas production, lower federal income tax credits related to
the production of nonconventional fuels and costs incurred for the start-up and
development of Services operations.
Business segment operating results are presented in the segment
discussions and financial tables on the following pages.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SUPPLY & LOGISTICS
Supply & Logistics' operations are comprised of the production and sale
of natural gas, natural gas liquids and crude oil, marketing of natural gas and
electricity and storage and intrastate transportation of natural gas in
Louisiana.
Supply & Logistics operates its exploration and production activities
through Equitable Resources Energy Company (EREC). In 1997 EREC made a strategic
shift to concentrate its exploration and development activities in its core
Appalachian and growing offshore Gulf Coast holdings. In July 1997 EREC
announced that it had entered into sales agreements for $170 million with five
purchasers covering its oil and natural gas properties in the western United
States and Canada, which are no longer a part of ERI's primary geographic focus.
In October 1997 EREC 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, allow management of the segment to refocus its exploration
and production resources on areas with potential for higher return on invested
capital.
During 1997 daily net natural gas and crude oil production in the Gulf
of Mexico quadrupled to 63 million cubic feet per day, partly as a result of the
acquisition in October 1997 of West Cameron Block 180 and 198 fields, two
producing oil and gas fields offshore Louisiana's Gulf Coast, for $77.6 million.
EREC operates both fields which include portions of six leases. EREC is
producing about 23 million cubic feet of gas and about 2,650 barrels of oil per
day from these fields and has begun an analysis of additional prospective
drilling sites based on the latest 3D seismic survey over the leases.
In addition, EREC's Gulf Coast Region had two new discoveries at West
Cameron Block 540 and South Marsh Island 39. Two wells have been drilled at each
site.
EREC also participated in other development activity during the year.
Successes include a Vermilion 215 well, in which EREC has a 51% working
interest, currently producing 13.5 million cubic feet of gas and 540 barrels per
day and a High Island Blocks A269/A270 well, 75% interest owned by EREC,
currently flowing 10.7 million cubic feet of gas per day. Also during 1997, EREC
won eleven of eighteen bids on new blocks awarded at the federal lease sale,
adding 33,000 net acres, including 100% working interests in Vermilion 137,
Vermilion 177 and South Marsh Island 5, and 50% interests in Vermilion 114,
Vermilion 153, Vermilion 173, South Marsh Island 25, South Marsh Island 151 -
153, and Eugene Island 180. These blocks, together with those acquired in 1996,
form the basis for exploration activities planned for 1998.
In the Appalachian Region during 1997, 138 wells were drilled. This
drilling was concentrated within the core areas of southwest Virginia and
southeast Kentucky. This activity resulted in an additional 5 million cubic feet
per day of gas sales and proved reserve additions of 44 Bcf. Additional capital
was invested in the Banner compressor station, which became operational in
mid-1997. This compressor station injects gas to be sold into El Paso's East
Tennessee system. The station has a capacity of 5 million cubic feet per day and
can be expanded to provide capacity of up to 15 million cubic feet per day. In
1998 the region will continue to focus on development of its sizable prospect
inventory.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SUPPLY & LOGISTICS (CONTINUED)
Exploration spending decreased in 1997, as exploration in the western
properties was suspended and focus shifted from those properties to exploration,
development and the evaluation of acquisition opportunities in the core Gulf
Coast and Appalachian Regions. In addition, the 97% drilling success rate on the
170 gross wells drilled has reduced the dry hole cost as compared to prior
years.
In other Supply & Logistics' operations, 1997 benefited from higher
natural gas and electricity marketing volumes and marked the initiation of two
important expansion projects, along with an acquisition in the Company's
midstream operations.
At Louisiana Intrastate Gas (LIG), the Company's intrastate pipeline
subsidiary, a $23 million, 200 million cubic feet per day, expansion of the
Plaquemine gas processing plant began. The project, scheduled for completion in
the fourth quarter of 1998, will increase the processing capacity at Plaquemine
to approximately 435 million cubic feet per day to accommodate volumes committed
under a new contract.
Work also began on a second salt-dome storage cavern at the Company's
Jefferson Island storage facility. The $13.5 million project, scheduled for
completion in August 1999, is designed to double storage capacity at the
facility and provide increased operational flexibility for our customers. Since
a major portion of the infrastructure was funded with the construction of the
first cavern, costs are substantially lower for this second cavern and thus
returns should improve markedly.
The year 1998 will mark the first full year of operation of the former
Department of Energy (DOE) pipeline, which was acquired by LIG for $22 million
in 1997 and was placed in natural gas service in the fourth quarter. The 67-mile
pipeline provides over 500 million cubic feet per day of additional capacity in
southern Louisiana and, in combination with LIG and Equitable Storage
facilities, is expected to enhance ERI's Gulf Coast capabilities in the
purchase, transport and aggregation of offshore gas and related services.
A 1998 capital expenditure budget of $110.8 million for Supply &
Logistics has been approved. It includes $81.8 million for exploration and
production activities with $56.3 million for exploration and development
drilling in the Gulf of Mexico and $25.5 million for development of Appalachian
holdings including $6.4 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. The 1998 program also includes $22.1
million for a portion of the cost of the Plaquemine plant expansion, and $6.8
million for the first phase of the Jefferson Island storage expansion project.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Operating revenues (millions):
Marketed natural gas $ 1,236 $ 1,019 $ 761
Produced natural gas 122 109 105
Natural gas liquids 101 101 74
Marketed electricity 37 15 -
Crude oil 26 26 32
Natural gas transportation 9 8 9
Direct billing settlements 8 8 33
Other 34 33 46
--------- --------- --------
Total revenues 1,573 1,319 1,060
Cost of energy purchased 1,328 1,093 801
--------- --------- --------
Net operating revenues 245 226 259
Operating expenses:
Production 32 32 32
Exploration 9 16 13
Gas processing 11 10 11
Other 65 66 63
Depreciation, depletion and
amortization 58 55 78
Impairment of assets and other
nonrecurring items 1 (5) 95
--------- --------- --------
Total operating expenses 176 174 292
--------- --------- --------
Operating income (loss) $ 69 $ 52 $ (33)
========= ========= ========
Sales quantities:
Marketed natural gas (Bcf) 500.6 446.7 466.3
Produced natural gas (Bcf) 54.6 57.3 65.0
Natural gas liquids (million gallons) 285.8 280.6 261.0
Crude oil (MMBls) 1.5 1.7 1.9
Transportation deliveries (Bcf) 113.1 120.4 122.4
Average selling prices:
Marketed natural gas (per Mcf) $ 2.47 $ 2.28 $ 1.63
Produced natural gas (per Mcf) 2.24 1.91 1.61
Natural gas liquids (per gallon) 0.35 0.36 0.28
Crude oil (per barrel) 17.22 14.78 16.44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SUPPLY & LOGISTICS (CONTINUED)
1997 VS. 1996
Absent the effect of the impairment of assets and other nonrecurring
items described above, 1997 operating income for this segment improved nearly
50% compared to 1996. Higher natural gas prices, lower exploration expenses and
growth in marketed gas volumes combined to benefit earnings in 1997.
Realized price for produced natural gas increased 17% over 1996, as
increases in the market, along with a more favorable overall net hedged
position, combined to increase 1997 operating revenues. The 1997 revenues also
increased marginally due to a full year of storage operations and increased
utilization of capacity at the Jefferson Island storage facility.
Cost of energy purchased includes natural gas and electricity purchased
for marketing activities and natural gas used in the production of natural gas
liquids. In 1997 natural gas liquids margins benefited from a positive spread
early in the year between high liquids sales prices and low cost of gas.
Marketed gas and electricity margins, as a percent of sales, were substantially
unchanged with year-end mark-to-market gains providing slight improvement over
1996. See "Market Risk Management and Financial Trading Activity" for a more
detailed discussion of trading and hedging activities.
Operating expenses were slightly lower for the year as the decrease in
exploration expense resulting from less exploratory drilling and a higher
success rate in Gulf exploration, was partially offset by higher depreciation
and depletion expense related to increased Gulf of Mexico production and
expenses of a full-year operation at Jefferson Island storage facility.
1996 VS. 1995
The increase in revenues for 1996 compared to 1995 is due to an increase
in average selling prices for marketed and produced natural gas of 40% and 19%,
respectively, an increase in average selling price and production of natural gas
liquids of 27% and 8%, respectively, and initial revenues from the marketing of
electricity. These increases were partially offset by a 12% decline in natural
gas production, lower marketed natural gas sales and lower average selling
prices and production of oil.
The increase in cost of energy purchased for 1996 is due to higher
prices for natural gas and the initial sales of electricity.
The decrease in operating expenses, excluding the charge in 1995, is due
primarily to lower depreciation and depletion expense reflecting lower depletion
rates and the decrease in natural gas production.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
The local distribution operations of Equitable Gas Company are subject
to rate regulation by state regulatory commissions in Pennsylvania, West
Virginia and Kentucky. In Pennsylvania, where approximately 95% of its revenues
are derived, Equitable Gas received approval during 1997 from the
Pennsylvania Public Utility Commission (PUC) for a $15.8 million annual increase
in base rates. The new tariff provides for the unbundling of the local
distribution services to enable customers to choose their gas supplier. Gas
purchased from other suppliers would continue to be transported and delivered by
Equitable Gas at regulated rates. Under the new rate structure, Equitable Gas
earns a greater portion of its revenues from the monthly customer charge, making
it less sensitive to weather fluctuations and margin neutral between sales and
transportation service for those customers who purchase their gas from other
suppliers. The new rates went into effect October 15, 1997.
ERI's interstate pipeline companies are subject to rate regulation by
the Federal Energy Regulatory Commission (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 requesting an increase in annual revenue of
approximately $4 million and the recovery of certain gathering facility costs
related to the implementation of Order 636. Effective September 1, 1997, the
FERC permitted Equitrans to implement the higher rates subject to refund pending
the outcome of the regulatory process.
The 1998 capital expenditure program of $40.4 million for Utilities
includes $17.5 million for the distribution operations and $9.9 million for
interstate pipeline operations, including maintenance and improvements to
existing lines and facilities, and approximately $5 million for new business
development opportunities. The capital spending plan also includes $12.8 million
for corporate and utility information systems, in the second phase of a
corporate-wide initiative to integrate systems and enhance operational
efficiencies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Operating revenues (millions):
Residential gas sales $ 294 $ 272 $ 267
Commercial gas sales 32 68 39
Industrial and utility gas sales 64 112 59
Transportation service 58 38 53
Other 20 17 24
---------- ---------- --------
Total revenues 468 507 442
Cost of energy purchased 218 246 181
---------- ---------- --------
Net operating revenues 250 261 261
Operating expenses:
Operations and maintenance 148 147 154
Depreciation, depletion and
amortization 27 27 26
Impairment of assets and other
nonrecurring items 22 (2) 26
---------- ---------- --------
Total operating expenses 197 172 206
---------- ---------- --------
Operating income $ 53 $ 89 $ 55
========== ========== ========
Sales quantities (Bcf):
Residential 28.5 30.5 29.5
Commercial 3.2 10.5 4.5
Industrial and utility 23.6 36.8 28.9
Transportation deliveries 81.9 70.3 72.3
Average selling prices (per Mcf):
Residential $ 10.33 $ 8.89 $ 9.05
Commercial 10.08 6.51 8.75
Industrial and utility 2.73 3.05 2.04
Heating degree days (normal - 5,968) 5,919 5,988 5,748
1997 VS. 1996
Operating income in the Utilities segment decreased by $36 million to
$53 million in 1997 compared to $89 million in 1996, primarily as a result of
impairment of assets and other nonrecurring items. In June 1997 the Utilities
segment recorded a pretax charge of $13 million to recognize the impairment of
the Company's 25% interest in a proposed bedded salt natural gas storage project
in Avoca, New York. The project encountered technical difficulties related to
the proper disposal of brine water. In September 1997 the Utilities segment
recorded an additional pretax charge of $9.3 million related to the evaluation
and reduction of corporate office and noncore business functions. In 1996 the
Utilities segment recorded a $2.4 million pretax gain related to the curtailment
of certain defined benefit pension plans. Excluding these nonrecurring items,
segment operating income decreased 14% to $75 million in 1997, compared to $87
million in 1996 due principally to reduced net revenue as a result of lower
throughput.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
UTILITIES (CONTINUED)
Utilities segment operating revenues for 1997 benefited from the new
rate structure approved for residential retail customers. These improvements
were more than offset by a 7% decrease in residential volumes, a 70% decrease in
commercial sales volumes and a 36% decrease in industrial and utility sales
volumes.
The decrease in residential sales resulted from mild winter weather,
followed by below-normal temperatures for the spring and fall. While this
weather pattern results in an average number of degree days, volumes lost in the
winter heating months are not recovered in a cool spring and fall.
The 1997 commercial and industrial sales volume losses reflect the
continued movement of large commercial and industrial customers between sales
and transportation arrangements for their gas delivery, based on regulatory
changes and the development of new pricing products. The effect of 1997's
significant losses in volumes were mitigated by a 55% increase in the overall
average commercial rate, as the larger customers with more competitive rates
decreased their gas purchases, and by the 17% increase in the distribution
division's transportation deliveries.
The decrease in the cost of energy purchased reflects decreased sales
volumes. Increases and decreases in the cost of energy generally do not affect
operating income for this segment, as energy cost is a pass-through to customers
for all rate-regulated sales.
Operating expenses, excluding nonrecurring items, were substantially
unchanged from 1996 to 1997.
1996 VS. 1995
Revenues for 1995 include $4.8 million related to the Columbia
bankruptcy settlement described in Note D to the consolidated financial
statements. The increase in revenues for 1996 compared to 1995, excluding the
effect of the settlement in 1995, is due to a 48% increase in sales to
industrial and utility customers, the effect of commercial customers switching
from transportation service to gas sales, and increased retail gas sales
reflecting 4% colder weather.
The increase in cost of energy purchased for 1996 compared to 1995
reflects commercial customers switching from transportation service to gas sales
and higher industrial and utility gas sales.
The decrease in operating expenses for 1996 compared to 1995 reflects
savings from reengineering efforts that began in 1995.
ITEM 7. 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. The Services
business segment was formed by combining certain of ERI's natural gas marketing
activities with the operations of Northeast Energy Services, Inc. (NORESCO) and
two smaller entities, Scallop Thermal Management, Inc. and Lighting Management,
Inc., all acquired in 1997, and the operations of Independent Energy
Corporation, Conogen, Inc. and Pequod Associates, Inc. which were acquired
during 1995 and 1996. The Company purchased the stock of NORESCO in exchange for
a combination of 2.1 million shares of ERI stock valued at $67 million and $10
million in cash, including transaction costs. The ERI Services business segment
employed approximately 300 professional staff at year-end 1997, making it one of
the largest energy services companies in the U.S.
A capital expenditure budget of $18 million has been approved for
Services for 1998. The capital spending plan includes $15 million of energy
service expenditures, principally for the development and construction of
cogeneration and independent power facilities. The balance is planned to be used
for information systems, as part of a corporate-wide initiative to integrate
systems and enhance operational efficiencies.
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Operating revenues (millions):
Marketed natural gas $ 292 $ 163 $ -
Energy service contracting 52 9 -
Other 1 - -
---------- --------- -------
Total revenues 345 172 -
Cost of energy purchased 285 160 -
Energy service contract costs 38 5 -
---------- --------- -------
Net operating revenues 22 7 -
Operating expenses:
Other 30 20 1
Depreciation, depletion and
amortization 2 - -
Impairment of assets and other
nonrecurring items - - -
---------- --------- -------
Total operating expenses 32 20 1
---------- --------- -------
Operating loss $ (10) $ (13) $ (1)
========== ========= =======
Sales quantities:
Marketed natural gas (Bcf) 94.3 55.9 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SERVICES (CONTINUED)
1997 VS. 1996
The increase in energy service revenue from 1996 to 1997 of $43.0
million represents $28.7 million from post-acquisition activities of NORESCO and
the growth of this segment's existing business, which began operations in 1996.
The increase in other operating expenses from 1996 to 1997 of $10.0 million
includes $4.2 million from post-acquisition activities of NORESCO, with the
remaining increase related to the development of ERI Services' market presence
and professional resources. As this business segment continues to grow and build
on the core infrastructure that was in place at the end of 1997, operating
expenses are expected to level off (decline in proportion to total operating
revenues) as the Company realizes the future economic benefits associated with
greater employee and resource utilization over a broader customer base.
The acquisitions of NORESCO, Scallop Thermal Management, Inc., Lighting
Management, Inc. and Conogen, Inc. were accounted for using the purchase method
and resulted in $68.0 million of goodwill, which is being amortized over 20
years. Amortization of goodwill related to energy services contracting is $2.2
million in 1997. Also included in energy service contract costs in 1997 is $5.3
million of amortization related to the valuation, at fair market value, of
certain energy contracts owned by NORESCO at the time of acquisition.
1996 VS. 1995
Operating expenses include operating, start-up and development costs for
the new segment in 1996. Operating results reflect the start-up and development
status of this segment in 1996.
OTHER INCOME STATEMENT ITEMS
Other Income
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Other income (millions):
Gain on sale of assets $ 52 $ - $ -
Other 5 3 -
---------- --------- ---------
Total other income $ 57 $ 3 $ -
========== ========= =========
The 1997 asset sale is described above in "Results of Operations" and
"Supply & Logistics." There were no other significant changes in other income
between 1997 and 1995.
Interest Charges
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest charges (millions) $ 45 $ 42 $ 50
========= ========= ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER INCOME STATEMENT ITEMS (CONTINUED)
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.
1996 VS. 1995
Interest charges decreased in 1996, as a result of the refinancing of $150
million of 8.25% and 9.9% debentures with 7.75% debentures due in 2026, and by a
30% decrease in average short-term debt outstanding of $147 million in 1996
compared to $214 million in 1995. The short-term debt balance was reduced in
late 1995 with the proceeds from the sale of certain interests in the Company's
Appalachian properties described in Note E to the consolidated financial
statements.
Average annual interest rates on short-term debt remained relatively
constant, in a range of 5.5% to 6.0%, throughout the three-year period.
Income Taxes
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Income taxes (net - millions):
Income tax expense (benefit) $ 47 $ 34 $ (16)
Tax credits (1) (3) (13)
--------- --------- ----------
Net income tax expense (benefit) $ 46 $ 31 $ (29)
========= ========= ==========
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.
1996 VS. 1995
The effective income tax rate increased from 1995 to 1996 as a result of
substantially decreased tax credits in 1996 and a change in tax status of
certain subsidiaries in 1995 that resulted in lower state income tax
liabilities. The 1995 sale of an interest in the Company's Appalachian
properties producing nonconventional fuels has significantly reduced the
generation of credits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS
OPERATING ACTIVITIES
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.
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 $114 million in 1997,
compared to $66 million in 1996 and $280 million in 1995.
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.
Cash flows from operations in 1995 included approximately $130 million of
proceeds from the sale of certain interests in the Company's Appalachian
producing acreage and $56 million in accelerated direct billing and other claim
settlements, as described in Notes D and E to the consolidated financial
statements. The 1996 cash flows decrease, excluding the effects of these items,
was due to increases in the cost of purchased gas, to be recovered from future
billings to rate-regulated customers, and increases in the value of gas stored
underground inventories, both as a result of increases in 1996 in the price of
natural gas.
Cash flow has been affected by the Alternative Minimum Tax (AMT) since
1988. ERI 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
reduce cash generated from operations. In 1997, $8.2 million of AMT credits were
utilized to reduce current year tax payments. At December 31, 1997, ERI has
available $64.3 million of AMT credit carryforwards. The impact of AMT on future
cash flow will depend on the level of taxable income.
INVESTING ACTIVITIES
ERI's financial objectives require ongoing capital expenditures for growth
projects in the Supply & Logistics and Services units, as well as replacements,
improvements and additions to plant assets in the Utilities unit. Such capital
expenditures during 1997 were $253 million, including the $10 million cash
portion of the July 1997 acquisition of NORESCO described above in "Services,"
and the $77 million October 1997 acquisition of certain Gulf of Mexico
properties and $22 million purchase of the DOE pipeline, both described above in
"Supply & Logistics."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
In September and October 1997, ERI completed the sale of its 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 $168.7 million has been authorized for the 1998 capital
expenditure program, described in more detail in the segment discussions above.
The Company expects to finance its authorized 1998 capital expenditure program
with cash generated from operations and with short-term loans.
FINANCING ACTIVITIES
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.
In 1996 financing activities generated $25 million of cash, as $150
million of 7.75% debentures were issued, and used to retire $75 million each of
8.25% and 9.9% debentures. In addition, short-term loans increased $70 million
and were used to fund a portion of the Company's capital expenditure program.
Cash generated in all years was partially offset by the payment of the
Company's dividends on common shares, which remained substantially unchanged at
$42 million.
In March 1998 ERI's Board of Directors authorized management to develop a
plan to sell its natural gas midstream operations located in Louisiana and
Texas. These operations include a fully-integrated gas gathering, processing
and storage system onshore Louisiana and a natural gas and electric marketing
business based in Houston. A transaction resulting in the sale of the midstream
assets could take place as early as the third quarter of 1998.
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 1997. At December 31, 1997, $255 million of commercial
paper and $26 million of bank loans were outstanding at an average annual
interest rate of 5.4%. ERI 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.
ERI has filed a registration statement with the Securities and Exchange
Commission to issue $125 million of Trust Preferred Capital Securities during
1998 to take advantage of the financial flexibility as well as the favorable tax
attributes of the instrument. The proceeds of this offering will be used for
general corporate purposes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
RATE REGULATION
Accounting for the operations of ERI'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
ERI 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 ERI's financial position or results of operations. The
Company has identified situations that require remedial action for which
approximately $3 million is accrued at December 31, 1997. Environmental matters
are described in Note R to the consolidated financial statements.
MARKET RISK MANAGEMENT AND FINANCIAL TRADING ACTIVITY
The Company's primary market risk exposure is the volatility of
spot-market natural gas and oil prices, which affects the operating results of
Supply & Logistics and Services segments. The Company's use of derivatives to
reduce the effect of this volatility is described in Note B to the consolidated
financial statements. The Company uses simple, nonleveraged derivative
instruments that are placed with major institutions whose creditworthiness is
continually monitored. The Company's use of these derivative financial
instruments is implemented under a set of policies approved by the Board of
Directors.
For commodity price derivatives used to hedge Company production, ERI
policies set limits regarding volumes relative to expected production or sales
levels. The level of hedges which can be consummated is limited to a percent of
production or sales levels the Company believes is highly probable of occurring.
Volumes associated with future activities, such as new drilling, recompletions
and acquisitions, are not eligible for hedging. Management monitors price and
production levels on essentially a continuous basis and will make adjustments to
quantities hedged as warranted. In general, ERI's strategy is to become more
highly hedged at prices considered to be at the upper end of historical levels.
The Company's natural gas trading group uses derivatives to hedge physical
positions and to engage in financial transactions subject to policies that limit
the net positions to specific value at risk limits. In general, the trading
group considers profit opportunities in both physical and financial positions,
and ERI's policies apply equally thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 Supply & Logistics 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
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 where 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.
AUDIT COMMITTEE
The Audit Committee, composed entirely of outside directors, meets
periodically with ERI'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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
Disclosures in this annual report 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE REFERENCE
Report of Independent Auditors 29
Statements of Consolidated Income
for each of the three years in
the period ended December 31, 1997 30
Statements of Consolidated Cash Flows
for each of the three years in the
period ended December 31, 1997 31
Consolidated Balance Sheets
December 31, 1997 and 1996 32 - 33
Statements of Common Stockholders'
Equity for each of the three
years in the period ended
December 31, 1997 34
Notes to Consolidated Financial
Statements 35 - 61
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Equitable Resources, Inc.
We have audited the accompanying consolidated balance sheets of Equitable
Resources, Inc., and Subsidiaries at December 31, 1997 and 1996, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Equitable
Resources, Inc., and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note C to the consolidated financial statements, in 1995
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets. "
s/ Ernst & Young LLP
-------------------------------
Ernst & Young LLP
Pittsburgh, Pennsylvania
February 24, 1998
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31,
1997 1996 1995
---------------------------------------------------
(Thousands except per share amounts)
Operating revenues $2,151,015 $1,861,799 $1,425,990
Cost of sales 1,636,332 1,373,406 911,357
--------------- --------------- ---------------
Net operating revenues 514,683 488,393 514,633
--------------- --------------- ---------------
Operating expenses:
Operation 225,022 215,893 198,502
Maintenance 27,952 26,544 26,635
Depreciation, depletion and
amortization 87,142 82,381 104,625
Impairment of assets and
other nonrecurring items 23,725 (7,370) 121,081
Taxes other than income 38,404 42,157 41,838
--------------- --------------- ---------------
Total operating expenses 402,245 359,605 492,681
--------------- --------------- ---------------
Operating income 112,438 128,788 21,952
Other income 57,442 2,998 387
Interest charges 45,678 41,825 50,098
--------------- --------------- ---------------
Income (loss) before income taxes 124,202 89,961 (27,759)
Income taxes (benefit) 46,145 30,582 (29,307)
--------------- --------------- ---------------
Net income $ 78,057 $ 59,379 $ 1,548
=============== =============== ===============
Average common shares outstanding 36,003 35,188 34,793
=============== =============== ===============
Earnings per share of common stock:
Basic $ 2.17 $ 1.69 $ 0.04
=============== =============== ===============
Assuming dilution $ 2.16 $ 1.69 $ 0.04
=============== =============== ===============
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------------
(Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78,057 $ 59,379 $ 1,548
---------------- ---------------- ----------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Impairment of assets 13,000 - 121,081
Depreciation, depletion and amortization 87,142 82,381 104,625
Gain on sale of property (52,204) - -
Amortization of construction contract
costs - net 7,925 - -
Deferred income taxes (benefits) 25,268 26,091 (74,348)
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues (59,015) (47,909) (74,275)
Deferred purchased gas cost 16,026 (49,919) 14,730
Prepaid expenses and other (12,858) (10,281) (8,754)
Accounts payable 54,254 49,784 58,791
Deferred revenue (22,156) (22,200) 129,874
Other - net (21,265) (21,758) 6,530
---------------- ---------------- ----------------
Total adjustments 36,117 6,189 278,254
---------------- ---------------- ----------------
Net cash provided by
operating activities 114,174 65,568 279,802
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (252,935) (110,284) (118,112)
Proceeds from sale of property 181,566 4,180 24,610
---------------- ---------------- ----------------
Net cash used in
investing activities (71,369) (106,104) (93,502)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 6,631 2,306 2,756
Purchase of treasury stock (28,596) (33) (240)
Dividends paid (42,679) (41,548) (41,098)
Proceeds from issuance of long-term debt - 144,919 17,836
Repayments and retirements of long-term debt - (150,440) (24,500)
Increase (decrease) in short-term loans 76,544 69,900 (134,300)
---------------- ---------------- ----------------
Net cash provided (used) by
financing activities 11,900 25,104 (179,546)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 54,705 (15,432) 6,754
Cash and cash equivalents at beginning of year 14,737 30,169 23,415
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 69,442 $ 14,737 $ 30,169
================ ================ ================
CASH PAID DURING THE YEAR FOR:
Interest (net of amount capitalized) $ 43,533 $ 43,025 $ 46,359
================ ================ ================
Income taxes $ 16,030 $ 10,456 $ 41,272
================ ================ ================
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31,
ASSETS
1997 1996
--------------------------------
(Thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 69,442 $ 14,737
Accounts receivable (less accumulated provision for
doubtful accounts: 1997, $9,985; 1996, $10,714) 360,713 296,175
Unbilled revenues 25,935 24,157
Inventory 37,156 38,009
Deferred purchased gas cost 44,053 60,079
Derivative commodity instruments, at fair value 82,912 -
Prepaid expenses and other 64,523 52,604
------------ ------------
Total current assets 684,734 485,761
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Supply & Logistics (successful efforts method) 1,182,253 1,220,756
Utilities 1,018,650 988,425
Services 9,886 1,810
------------ ------------
Total property, plant and equipment 2,210,789 2,210,991
Less accumulated depreciation and depletion 704,294 731,306
------------ ------------
Net property, plant and equipment 1,506,495 1,479,685
------------ ------------
OTHER ASSETS:
Regulatory assets 69,919 73,150
Goodwill 66,823 8,396
Other 83,039 49,307
------------ ------------
Total other assets 219,781 130,853
------------ ------------
Total $2,411,010 $2,096,299
============ ============
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---------------------------------
(Thousands)
CURRENT LIABILITIES:
Short-term loans $ 286,444 $ 204,900
Accounts payable 288,192 231,969
Derivative commodity instruments, at
fair value 79,012 -
Other current liabilities 92,052 83,545
------------ ------------
Total current liabilities 745,700 520,414
------------ ------------
LONG-TERM DEBT 417,564 422,112
------------ ------------
DEFERRED AND OTHER CREDITS:
Deferred income taxes 291,196 260,700
Deferred investment tax credits 18,792 19,892
Deferred revenue 85,518 107,674
Other 28,720 23,224
------------ ------------
Total deferred and other credits 424,226 411,490
------------ ------------
Commitments and contingencies - -
------------ ------------
COMMON STOCKHOLDERS' EQUITY 823,520 742,283
------------ ------------
Total $2,411,010 $2,096,299
============ ============
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock
-------------------------- Foreign Common
Shares No Retained Currency Stockholders'
Outstanding Par Value Earnings Translation Equity
-----------------------------------------------------------------------------
(Thousands)
BALANCE, JANUARY 1, 1995 34,541 $ 210,030 $ 541,476 $ (1,504) $ 750,002
Net income for the year 1995 1,548
Dividends ($1.18 per share) (41,098)
Foreign currency translation 366
Adjustment for Independent Energy
Corporation pooling of interests 233 26 110
Stock issued:
Conversion of 9 1/2% debentures 146 1,611
Restricted stock option plan 43 1,232
Dividend reinvestment plan 52 1,524
Treasury stock (8) (242)
--------- ----------- ------------ ------------- ---------------
BALANCE, DECEMBER 31, 1995 35,007 214,181 502,036 (1,138) 715,079
Net income for the year 1996 59,379
Dividends ($1.18 per share) (41,548)
Foreign currency translation (83)
Acquisition of subsidiary 239 7,000
Stock issued:
Conversion of 9 1/2% debentures 16 178
Restricted stock option plan 36 855
Dividend reinvestment plan 49 1,456
Treasury stock (1) (33)
--------- ----------- ------------ ------------- ---------------
BALANCE, DECEMBER 31, 1996 35,346 223,637 519,867 (1,221) 742,283
Net income for the year 1997 78,057
Dividends ($1.18 per share) (42,679)
Foreign currency translation 1,168
Acquisition of subsidiary 2,401 68,276
Stock issued:
Conversion of 9 1/2% debentures 33 370
Restricted stock option plan 106 3,323
Dividend reinvestment plan 43 1,318
Treasury stock (1,000) (28,596)
--------- ----------- ------------ ------------- ---------------
BALANCE, DECEMBER 31, 1997 36,929 $ 268,328 $ 555,245 $ (53) $ 823,520
========= =========== ============ ============= ===============
<FN>
Shares authorized: Common - 80,000,000 shares, Preferred - 3,000,000 shares.
Shares outstanding are net of treasury stock: 1997 - 56,000 shares ($1,550,000);
1996 - 169,000 shares ($4,023,000); 1995 - 407,000 shares ($9,673,000).
Retained earnings of $422,866,000 are available for dividends on, or purchase
of, common stock pursuant to restrictions imposed by indentures securing
long-term debt.
</FN>
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Equitable Resources, Inc., and all subsidiaries,
ventures and partnerships in which a controlling interest is held (ERI or the
Company). ERI also consolidates its interest in oil and gas joint ventures. ERI
uses the equity method of accounting for companies where its ownership is
between 20% and 50% and for other ventures and partnerships in which less than a
controlling interest is held.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
These investments are accounted for at cost.
INVENTORIES: Inventories, which consist of gas stored underground and
materials and supplies, are stated
at average cost.
PROPERTIES, DEPRECIATION AND DEPLETION: Plant, property and equipment is
carried at cost. Depreciation is provided on the straight-line method at
composite rates based on estimated service lives, ranging from 5 to 70 years
except for most gas and oil production properties as explained below.
The Company uses the successful efforts method of accounting for
exploration and production activities. Under this method, the cost of productive
wells and development dry holes, as well as productive acreage, are capitalized
and depleted on the unit-of-production method.
DEFERRED PURCHASED GAS COST AND OTHER REGULATORY ASSETS: The Company's
distribution and interstate pipelines are subject to rate regulation by state
and federal regulatory commissions. Accounting for these operations is in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation."
Where permitted by regulatory authority under purchased gas adjustment clauses
or similar tariff provisions, the Company defers the difference between
purchased gas cost, less refunds, and the billing of such cost and amortizes the
deferral over subsequent periods in which billings either recover or repay such
amounts.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain other costs, which will be passed through to customers under
ratemaking rules for regulated operations, are deferred by the Company as
regulatory assets. These amounts relate primarily to the accounting for income
taxes. The Company believes that it will continue to be subject to rate
regulation that will provide for the recovery of deferred costs.
DERIVATIVE COMMODITY INSTRUMENTS: The Company uses exchange-traded
natural gas and crude oil futures contracts and options and over-the-counter
(OTC) natural gas and crude oil swap agreements and options for trading purposes
and to hedge exposures to fluctuations in oil and gas prices.
The Company accounts for trading activities using mark-to-market (MTM)
accounting. Under MTM accounting, derivative commodity instruments are reported
at fair value in other current assets and other current liabilities. Changes in
these fair values are reflected as net unrealized gains or losses in operating
revenues.
The Company uses the deferral accounting method to account for
derivative commodity instruments designated and effective as hedges. Under this
method, changes in the market value of these hedge positions are deferred and
included in other current assets and other current liabilities. These deferred
realized and unrealized gains and losses are included in operating revenues when
the hedged transactions occur. It is management's intent to hold derivative
commodity instruments designated as hedges until maturity. However, in the event
a hedge contract is terminated early, the deferred gain or loss realized on
early termination of the contract will be recognized as the hedged production
occurs. If the underlying asset to a hedge contract is sold, the deferred gain
or loss associated with the contract will be recognized at the time the oil and
gas property is sold. Premiums on option contracts are deferred in other current
assets and recognized in operating revenues over the option term. Cash flows
from derivative contracts are considered operating activities.
GOODWILL: Goodwill consists of costs in excess of the net assets of
businesses acquired. Goodwill is amortized on a straight-line basis over a
period of twenty years.
STOCK BASED COMPENSATION: The Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock options and
awards. Accordingly, compensation cost for stock options and awards is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of grant over the exercise price of the stock option or award.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: Revenues for regulated gas sales to retail
customers are recognized as service is rendered, including an accrual for
unbilled revenues from the date of each meter reading to the end of the
accounting period. Revenue is recognized for exploration and production
activities when deliveries of natural gas, oil and natural gas liquids are made.
Revenues from natural gas transportation and storage activities are recognized
in the period service is provided. Revenues from energy marketing activities are
recognized when deliveries occur.
The Company recognizes revenue from shared energy savings contracts as
energy savings are generated. Revenue received from customer contract
termination payments is recognized when received. Revenue from other long-term
contracts, such as turnkey contracts, is recognized on a
percentage-of-completion basis. Any maintenance revenues are recognized as
related services are performed.
INCOME TAXES: The Company files a consolidated federal income tax
return. The current provision for income taxes represents amounts paid or
estimated to be payable. Deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities. Where deferred tax liabilities will be passed through to
customers in regulated rates, the Company establishes a corresponding regulatory
asset for the increase in future revenues that will result when the temporary
differences reverse.
Investment tax credits realized in prior years were deferred and are
being amortized over the estimated service lives of the related properties where
required by ratemaking rules.
EARNINGS PER SHARE: In February 1997 the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, "Earnings Per Share." Under SFAS No. 128,
primary Earnings Per Share (EPS) is replaced by "basic" EPS, which excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
"Diluted" EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted to common
stock.
The Company has adopted the new standard in its 1997 financial
statements. All prior period EPS information (including interim EPS) has been
restated.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME: In June 1997 the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is designed to improve the
reporting of changes in equity from period to period. SFAS No. 130 is effective
for the Company's 1998 financial statements. Management does not expect SFAS No.
130 to have a significant impact on the Company's financial statements.
SEGMENT DISCLOSURES: In June 1997 the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 requires that an enterprise disclose certain information about operating
segments. SFAS No. 131 is effective for the Company's year-end 1998 financial
statements. Management does not expect SFAS No. 131 to have a significant impact
on the Company's financial statements.
RECLASSIFICATION: Certain previously reported amounts have been
reclassified to conform with the 1997 presentation.
B. DERIVATIVE COMMODITY INSTRUMENTS
The Company uses exchange-traded natural gas and crude oil futures
contracts and options and OTC natural gas and crude oil swap agreements and
options (collectively derivative contracts) for trading purposes and to hedge
exposures to fluctuations in oil and gas prices. Futures contracts obligate the
Company to buy or sell a designated commodity at a future date for a specified
price. Swap agreements involve payments to or receipts from counterparties based
on the differential between a fixed and variable price for the commodity.
Exchange-traded instruments are generally settled with offsetting positions but
may be settled by delivery of commodities. OTC arrangements require settlement
in cash.
TRADING ACTIVITIES
The primary functions of the Company's trading business are to provide
price risk management services to the Company's Utilities and Services segments
and to contribute to the Company's earnings by taking market positions within
defined trading limits.
At December 31, 1997, the absolute notional quantities of the futures,
swaps and options contracts held for trading purposes were 43.7 Bcfe, 149.4 Bcfe
and 10.0 Bcfe, respectively. The futures and option contracts all have
maturities of less than 18 months, while the swap agreements extend through
October of 2000. There were no outstanding derivative contracts held for trading
purposes at December 31, 1996.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
B. DERIVATIVE COMMODITY INSTRUMENTS (CONTINUED)
The table below sets forth the end of period fair value and average fair
value during the year for all the derivative contracts held for trading
purposes.
1997 1996
--------------------------------------------------
Assets Liabilities Assets Liabilities
--------------------------------------------------
(Thousands)
Fair value at December 31 $ 82,912 $ 79,012 $ - $ -
Average fair value $ 12,161 $ 10,509 $ 98 $ 75
Trading activity resulted in net gains of $1.1 million and $0.8 million
for 1997 and 1996, respectively, and a net loss of $1.9 million for 1995.
NONTRADING ACTIVITIES
The Company is exposed to risk from fluctuations in energy prices in the
normal course of business. The Company uses derivative contracts to hedge
exposures to oil and gas price changes.
The following table summarizes the absolute notional quantities of the
derivative contracts held for purposes other than trading at December 31, 1997
and 1996. The open futures and options contracts at year-end 1997 all mature
within one year, while the swap agreements have maturities extending through
November of 2000. At December 31, 1996, the remaining terms of the open
derivatives contracts were the same as those at December 31, 1997.
Absolute Notional Deferred Unrealized
Quantity Gain/(Loss)
--------------------- -------------------------
1997 1996 1997 1996
--------------------- -------------------------
(Bcf equivalent) (Millions)
Futures 4.5 14.0 $ 1.0 $ 1.7
Swaps 96.5 136.2 (10.3) (11.1)
Options 1.8 2.6 (0.1) (1.5)
----- ------- ------- ---------
Total 102.8 152.8 $ (9.4) $ (10.9)
===== ======= ======= =========
Deferred realized gains and losses from hedge transactions were a $1.3
million gain and a $1.6 million loss at December 31, 1997, and a $0.4 million
gain and a $1.3 million loss at December 31, 1996. The Company recognized net
losses on its hedging activities of $9.8 million, $44.4 million and $2.0 million
in 1997, 1996, and 1995, respectively. These losses are offset when the
underlying products are sold.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
B. DERIVATIVE COMMODITY INSTRUMENTS (CONTINUED)
The Company is exposed to credit loss in the event of nonperformance by
counterparties to derivative contracts. This credit exposure is limited to
derivative contracts with a positive fair value. Futures contracts have minimal
credit risk because futures exchanges are the counterparties. The Company
manages the credit risk of the other derivative contracts by limiting dealings
to those counterparties who meet the Company's criteria for credit and liquidity
strength.
C. ASSET IMPAIRMENT AND OTHER NONRECURRING ITEMS
The Company's results of operations include several significant
nonrecurring items which are included in operating expense.
In June 1997 an evaluation of the carrying value of long-lived assets
resulted in a write-down of the Utilities segment's investment in the Avoca
bedded salt natural gas storage project, for which the Company recognized a $13
million pretax charge. In September 1997 the Company recorded an additional
pretax charge of $10.7 million related to evaluation and reduction of corporate
office and noncore business functions.
In December 1996 the Company recognized a pretax gain of $7.4 million
related to the curtailment of the Company's defined benefit pension plan for
nonutility employees.
In 1995, as a result of the sustained decrease in gas and oil prices,
the Company recognized a write-down in the carrying value of assets of $121.1
million, which decreased net income by $74.2 million. The 1995 write-down
included $95.1 million for exploration and production properties and intrastate
transmission facilities included in the Supply & Logistics segment and $26.0
million for information systems, storage development projects and other assets
reflected in the Utilities segment.
D. DIRECT BILLING AND OTHER SETTLEMENTS
Kentucky West Virginia Gas Company L.L.C., a subsidiary of the Company,
received Federal Energy Regulatory Commission (FERC) approval of settlement
agreements with all customers for the direct billing to recover the higher
Natural Gas Policy Act (NGPA) prices, which the FERC had denied on natural gas
produced from exploration and production properties between 1978 and 1983. The
portion of the settlement with Equitable Gas division has been subject to
Pennsylvania Public Utility Commission (PUC) review. The PUC approved Equitable
Gas Company's collection of $7.8 million in September 1997 and 1996, and $18.8
million in September 1995 related to the direct billing settlement. The 1995
amount includes $11.0 million for accelerated collection of amounts that would
have otherwise been subject to approval by the PUC and recognized in income in
later years. Approximately $2.4 million from the settlement remains to be
recovered in gas costs filings with the PUC in 1998.
In November 1995 Kentucky West Virginia Gas Company received $13.8
million from Columbia Gas Transmission Company (Columbia) as settlement, in
Columbia's bankruptcy proceeding, of Kentucky West's claim for $19 million
related to the direct billing settlements.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
D. DIRECT BILLING AND OTHER SETTLEMENTS (CONTINUED)
In addition to the direct billing settlement described above, the
Company had various claims against Columbia for abrogation of contracts to
purchase gas from the Company and collection of FERC Order 636 transition costs.
In November 1995 the Company received $31.2 million in Columbia's bankruptcy
settlement related to these items, which increased net income for 1995 by $20.2
million.
E. DEFERRED REVENUE
In November 1995 the Company sold an interest in certain Appalachian gas
properties, the production from which qualifies for nonconventional fuels tax
credit. The Company retained an interest in the properties that will increase
based on performance. As such, the proceeds of $133.5 million were recorded as
deferred revenues and are being recognized in income as financial targets are
met.
F. SALE OF PROPERTY
In July 1997 the Company entered into agreements with five parties for
the sale of the Company's oil and natural gas properties in the western United
States and Canada. The sales were completed in September and October for an
aggregate cash sales price of $170 million. In October 1997 the Company sold its
Union Drilling division, a contract drilling company, for $7 million. The sales
resulted in gains of $52 million.
In October 1995 the Company sold most of its gas and oil properties in
the northern Appalachian basin areas of New York, Pennsylvania and West
Virginia. The properties comprised less than four percent of the Supply &
Logistics segment's total gas and oil production and reserves. The Company
previously operated the majority of these properties with its working interest
averaging approximately 25 percent. Proceeds from the sale were $17 million.
G. ACQUISITIONS
In July 1997 the Company completed its acquisition of Northeast Energy
Services, Inc. (NORESCO) in exchange for a combination of 2.1 million shares of
the Company's stock valued at approximately $67 million and $10 million in cash,
including transaction costs. NORESCO is a provider of comprehensive energy
efficiency systems and services for commercial, industrial, government and
institutional customers and is included in the Services segment. NORESCO's
primary assets are accounts receivable from customers and deferred contract
costs which are included in other assets in the consolidated balance sheets. The
transaction was treated as a purchase for accounting purposes. The Company has
recorded goodwill of $57 million which will be amortized over 20 years. The $67
million noncash portion of the acquisition is excluded from capital expenditures
in the 1997 cash flows statement.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
G. ACQUISITIONS (CONTINUED)
In 1997 the Services segment also acquired Scallop Thermal Industries
and Lighting Management, Inc. for a total cost of $4 million. These acquisitions
were accounted for under the purchase method of accounting.
In 1996 ERI acquired an intrastate pipeline, Three Rivers Pipeline, for
$3.3 million and two performance contracting companies, Conogen and Pequod, in
exchange for cash and stock valued at $8.7 million. The 1996 acquisitions were
accounted for under the purchase method of accounting. The pipeline is included
in the Utilities segment. Pequod and Conogen are included in the Services
segment.
In July 1995 the Company acquired all of the outstanding stock of
Independent Energy Corporation (IEC) in exchange for 232,564 shares of the
Company's common stock held in treasury. IEC is engaged in the development,
construction, operation and ownership of private power and cogeneration
projects. The acquisition was accounted for as a pooling of interests.
The effect of each of these acquisitions, individually and aggregated by
year of purchase, is not material to the results of operations or financial
position of ERI, and therefore, pro forma financial information is not
presented.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
H. INCOME TAXES
The following table summarizes the source and tax effects of temporary
differences between financial reporting and tax bases of assets and liabilities.
December 31,
-----------------------------
1997 1996
-----------------------------
(Thousands)
Deferred tax liabilities (assets):
Exploration and development costs
expensed for income tax reporting $ 88,782 $ 63,435
Tax depreciation in excess of
book depreciation 249,634 251,951
Regulatory temporary differences 28,108 28,467
Deferred purchased gas cost 16,069 21,210
Alternative minimum tax (64,258) (72,470)
Investment tax credit (7,554) (7,997)
Other (6,831) (4,887)
----------- -----------
Total (including amounts classified as
current liabilities of $12,754 for 1997
and $19,009 for 1996) ....................... $ 303,950 $ 279,709
=========== ===========
As of December 31, 1997 and 1996, $63.8 million and $64.1 million,
respectively, of the net deferred tax liabilities are related to rate-regulated
operations and have been deferred as regulatory assets.
Income tax expense (benefit) is summarized as follows:
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
--------------------------------------------------
(Thousands)
Current:
Federal $ 20,040 $ 3,953 $ 36,681
State 837 538 8,360
Deferred:
Federal 20,789 22,905 (56,953)
State 3,327 2,405 (17,384)
Foreign 1,152 781 (11)
----------- ----------- -----------
Total $ 46,145 $ 30,582 $ (29,307)
=========== =========== ===========
Provisions for income taxes differ from amounts computed at the federal
statutory rate of 35% on pretax income. The reasons for the difference are
summarized as follows:
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
H. INCOME TAXES (CONTINUED)
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
(Thousands)
Tax at statutory rate $ 43,471 $ 31,487 $ (9,716)
State income taxes 2,707 1,913 (5,866)
Nonconventional fuels tax credit (816) (1,299) (13,114)
Other 783 (1,519) (611)
----------- ---------- -----------
Income tax expense (benefit) $ 46,145 $ 30,582 $ (29,307)
=========== ========== ===========
Effective tax rate (benefit) 37.2% 34.0% (105.6)%
=========== ========== ===========
The consolidated federal income tax liability of the Company has been
settled through 1994.
I. SHORT-TERM LOANS
Maximum lines of credit available to the Company were $500 million
during 1997, 1996 and 1995. The Company is not required to maintain compensating
bank balances. Commitment fees averaging one-tenth of one percent were paid to
maintain credit availability.
At December 31, 1997, short-term loans consisted of $254.5 million of
commercial paper and $26.3 million of bank loans at a weighted average annual
interest rate of 5.71% and at December 31, 1996, $199.3 million of commercial
paper and $5.6 million of bank loans at a weighted average annual interest rate
of 5.44%. The maximum amount of outstanding short-term loans was $302.5 million
in 1997, $295.5 million in 1996 and $314.6 million in 1995. The average daily
total of short-term loans outstanding was approximately $229.6 million during
1997, $147.4 million during 1996 and $214.2 million during 1995; weighted
average annual interest rates applicable thereto were 5.7% in 1997, 5.5% in 1996
and 6.0% in 1995.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
J. LONG-TERM DEBT
December 31,
1997 1996
--------------------------
(Thousands)
7 1/2% debentures, due July 1, 1999
($75,000 principal amount, net of unamortized
original issue discount) $ 73,184 $ 72,205
9 1/2% convertible subordinated debentures,
due January 15, 2006 - 527
9.9% debentures, due April 15, 2013 5,880 5,880
7 3/4% debentures, due July 15, 2026 150,000 150,000
Medium-term notes:
7.2% to 9.0% Series A, due 1998 thru 2021 100,000 100,000
5.1% to 7.6% Series B, due 2003 thru 2023 75,500 75,500
6.8% to 7.6% Series C, due 2007 thru 2018 18,000 18,000
----------- ----------
Total long-term debt 422,564 422,112
Less long-term debt payable within one year 5,000
----------- ----------
Total $417,564 $422,112
=========== ==========
In 1996 the Company commenced a tender offer for the purchase of all the
outstanding 9.9% debentures due April 15, 2013. Approximately $69 million of the
$75 million debentures were tendered. Premiums paid in 1996 for the redemption
were $6.3 million.
In 1996 the Company issued $150 million of 30-year debentures with a
coupon rate of 7.75%. The proceeds were used to finance the retirement of
certain outstanding debentures including the 9.9% debentures described above. At
December 31, 1997, the Company has the ability to issue $100 million of
additional long-term debt under the provisions of shelf registrations filed with
the Securities and Exchange Commission.
The 9 1/2% convertible subordinated debentures were convertible at any
time into common stock at a conversion price of $11.06 per share. During 1997,
1996 and 1995, $527,000, $178,000 and $1,611,000 of these debentures were
converted into 33,445 shares, 16,089 shares and 145,635 shares of common stock,
respectively.
Interest expense on long-term debt amounted to $35.1 million in 1997,
$34.8 million in 1996 and $36.5 million in 1995. Aggregate maturities of
long-term debt will be $5 million in 1998, $75 million in 1999, none in 2000,
$14 million in 2001 and none in 2002.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
K. EMPLOYEE PENSION BENEFITS
The Company has several trusteed retirement plans covering substantially
all employees. Plans covering union members generally provide benefits of stated
amounts for each year of service. Plans covering salaried utility employees use
a benefit formula which is based upon employee compensation and years of service
to determine benefits to be provided. All other salaried employees who meet
certain minimum service requirements are covered by enhanced 401(k) savings
plans. Plan assets consist principally of mutual funds and other equity and debt
securities.
The following table sets forth the defined benefit plans' funded status
and amounts recognized for those plans in the Company's consolidated balance
sheets:
December 31,
---------------------------
1997 1996
---------------------------
(Thousands)
Actuarial present value of benefit
obligations:
Vested benefit obligation $134,999 $124,477
=========== ==========
Accumulated benefit obligation $141,112 $130,416
=========== ==========
Market value of plan assets $164,801 $165,360
Projected benefit obligation 143,440 137,477
----------- ----------
Excess of plan assets over projected
benefit obligation 21,361 27,883
Unrecognized net asset (1,295) (1,833)
Unrecognized net gain (23,335) (28,871)
Unrecognized prior service cost 14,689 11,124
----------- ----------
Prepaid pension cost recognized in
the consolidated balance sheets $ 11,420 $ 8,303
=========== ==========
At year end the discount rate used in determining the actuarial present
value of benefit obligations was 7% for 1997, 7 3/4% for 1996 and 7 1/2% for
1995. The assumed rate of increase in compensation levels was 4 1/2% for all
three years.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
K. EMPLOYEE PENSION BENEFITS (CONTINUED)
The Company's pension cost related to defined benefit plans, using a 10%
average rate of return on plan assets, comprised the following:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(Thousands)
Service cost benefits earned
during the period $ 2,228 $ 4,053 $ 3,452
Interest cost on projected benefit
obligation 10,280 11,197 11,165
Actual return on assets (31,276) (26,828) (34,054)
Net amortization and deferral 16,720 12,756 19,806
Gain on curtailment - (7,370) -
----------- ----------- -----------
Net periodic pension (benefit) cost $ (2,048) $ (6,192) $ 369
=========== =========== ===========
As of January 1, 1997, the Company amended its 401(k) employee savings
plan for salaried employees to provide a base Company contribution to that plan
for employees no longer eligible for defined benefit plans. In addition, during
1997 the present value of these employees' future retirement benefits under the
defined benefit plans could be rolled over to the 401(k) plan, at the employee's
option, or used to purchase an annuity. Expense recognized by the Company
related to this and other 401(k) savings plans totaled $3.9 million in 1997,
$1.4 million in 1996 and $0.5 million in 1995.
L. OTHER POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees and their
dependents.
In determining the accumulated postretirement benefit obligation at
December 31, 1997, the Company used a beginning inflation factor ranging from 6%
to 8%, depending on the level of coverage, decreasing gradually to 4.0% to 4.5%
after 4 to 8 years and a discount rate of 7%. At December 31, 1996, the
beginning inflation factor had a range from 6% to 8%, decreasing gradually to 4
1/4% to 4 3/4% after 4 to 8 years and the discount rate was 7 3/4%. The
Company's transition obligation is being amortized through 2012.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
L. OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following summarizes the status of the Company's accrued
postretirement benefit costs (OPEBS):
December 31,
------------------------------------
1997 1996
------------------------------------
(Thousands)
Accumulated postretirement benefit
obligation:
Retired employees $ 31,263 $ 26,357
Active employees:
Fully eligible 3,562 4,212
Other 5,252 5,125
-------------- --------------
Total obligation 40,077 35,694
Trust assets 6,274 4,623
-------------- --------------
Obligation in excess of trust assets 33,803 31,071
Unrecognized net loss (14,800) (10,567)
Unrecognized prior service cost 2,172 2,386
Unrecognized transition obligation (14,780) (15,765)
-------------- --------------
Accrued postretirement
benefit cost $ 6,395 $ 7,125
============== ==============
The net periodic cost for postretirement health care and life insurance
benefits includes the following:
Years Ended December 31,
------------------------------------
1997 1996 1995
------------------------------------
(Thousands)
Service cost $ 254 $ 746 $ 993
Interest cost 2,898 2,892 4,200
Amortization of transition obligation 1,197 1,329 2,306
Return on assets (292) (198) -
--------- --------- ---------
Periodic cost $ 4,057 $ 4,769 $ 7,499
========= ========= =========
As of December 31, 1997 and 1996, approximately $4.0 million of the
accrued OPEBS related to rate-regulated operations have been deferred as
regulatory assets. Rate recovery has begun in several jurisdictions which
requires the Company to place agreed upon amounts in trust when collected in
rates until such time as they are applied to retiree benefits or returned to
ratepayers. Trust assets consist principally of equity and debt securities.
An increase of 1% in the assumed medical cost inflation rate would
increase the accumulated postretirement benefit obligation by 7% and would
increase the periodic cost by 6%.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
M. COMMON STOCK AND EARNINGS PER SHARE
COMMON STOCK RESERVE
At December 31, 1997, shares of ERI's authorized and unissued common
stock were reserved as follows:
Possible future acquisitions 6,713,000
Stock compensation plans 1,695,000
Dividend reinvestment and stock purchase plan 49,000
--------------
Total 8,457,000
==============
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." This statement establishes standards for computing and
presenting basic and diluted EPS. It supersedes APB Opinion No. 15 that required
the presentation of primary and fully diluted EPS.
Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding during the period, without considering any
dilutive items. Diluted EPS is computed by dividing net income, adjusted for the
assumed conversion of debt, by the weighted average number of common shares and
potentially dilutive securities, net of shares assumed to be repurchased using
the treasury stock method. Purchases of treasury shares are calculated using the
average share price for the Company's common stock during the period.
Potentially dilutive securities arise from the assumed conversion of outstanding
stock options and awards and convertible debentures.
As required, all previously reported EPS amounts have been replaced with
the presentation of basic and diluted EPS. The impact of the adoption of this
statement and the restatement of prior-period amounts was not material. The
computation of basic and diluted earnings per common share is shown in the table
below:
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
M. COMMON STOCK AND EARNINGS PER SHARE (CONTINUED)
Years Ended December 31,
1997 1996 1995 (c)
---------------------------------
(Thousands except per
share amounts)
BASIC EARNINGS PER COMMON SHARE
Net income applicable to common stock $ 78,057 $ 59,379 $ 1,548
Average common shares outstanding 36,003 35,188 34,793
Basic earnings per common share $ 2.17 $ 1.69 $ 0.04
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (a) $ 78,060 $ 59,414 $ 1,548
Average common shares outstanding 36,003 35,188 34,793
Potentially dilutive securities:
Stock options and awards (b) 109 18 -
Common shares issuable upon conversion
of 9 1/2% convertible debentures 4 53 -
---------- ---------- ----------
Total 36,116 35,259 34,793
========== ========== ==========
Diluted earnings per common share $ 2.16 $ 1.69 $ 0.04
(a) The aftertax benefit of interest expense on the assumed conversion of
the 9 1/2% convertible debentures was $3,000 in 1997 and $35,000 in
1996.
(b) Options to purchase 284,000 and 347,000 shares of common stock were not
included in the computation of diluted earnings per common share because
the options' exercise prices were greater than the average market prices
of the common shares for 1997 and 1996, respectively.
(c) There were no dilutive securities included in the computation because
the options' exercise prices were greater than the average market prices
and the 9 1/2% convertible debentures, if included, would have an
antidilutive effect.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
N. STOCK-BASED COMPENSATION PLANS
LONG-TERM INCENTIVE PLANS
The Company's Long-Term Incentive Plan provides for the granting of
shares of common stock to officers and key employees of the Company. These
grants may be made in the form of stock options, restricted stock, stock
appreciation rights and other types of stock-based or performance-based awards
as determined by the Compensation Committee of the Board of Directors at the
time of each grant. Stock awarded under the plan, or purchased through the
exercise of options, and the value of stock appreciation units are restricted
and subject to forfeiture should an optionee terminate employment prior to
specified vesting dates. In no case may the number of shares granted under the
plan exceed 1,725,500 shares. Options granted under the plan expire 5 to 10
years from the date of grant and some contain vesting provisions which are based
upon Company performance. In 1994 this plan replaced the Key Employee Restricted
Stock Option Plan, which at December 31, 1997, has 39,950 options outstanding at
an option price of $36.50. These options are reflected with the Long-Term
Incentive Plan amounts presented in the tables below.
Also reflected in the option tables below are options assumed in
conjunction with the NORESCO acquisition in July 1997. All outstanding options
granted under NORESCO's 1990 Incentive Stock Option Plan were converted by ERI
to nonqualified stock options with the right to receive, upon exercise of the
option, the same ERI stock and cash that shareholders of NORESCO received in the
acquisition. As a result of this conversion, 872,000 NORESCO stock options were
converted to 256,400 ERI stock options with the exercise price per share
proportionately adjusted. The adjusted exercise prices of these stock options
ranges from $5.1012 to $5.9516 per share. The acquisition also accelerated the
vesting period of these options, the latest of which expire in 2006. During
1997, 180,416 stock options were exercised under this plan.
Pro forma information regarding net income and earnings per share for
options granted is required by SFAS No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value for these option grants was estimated at the dates of grant using a
Black-Scholes option pricing model with the following assumptions for 1997,
1996, and 1995, respectively:
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
N. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
Risk-free interest 5.71% 5.82% 5.97%
rate (range) to 5.79% to 6.34%
Dividend yield 3.96% 4.00% 4.00%
Volatility factor 0.132 0.161 0.161
Weighted-average expected
life of options 1.25 years 2 years 2 years
Options granted 339,100 125,400 739,000
Weighted-average fair market
value of options
granted duriing the year $1.93 $2.51 $2.82
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The amount of
estimated expense that would have been recognized under SFAS No. 123 is not
considered material to the financial statements in any of the years presented.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
N. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The following schedule summarizes the stock option activity:
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Options outstanding January 1 948,650 1,077,325 605,218
Granted 339,100 125,400 739,000
Forfeitures (348,800) (210,650) (212,793)
Exercised (180,416) (43,425) (54,100)
------------- -------------- ------------
Options outstanding December 31 758,534 948,650 1,077,325
============= ============== ============
At December 31:
Prices of options outstanding $ 5.10 $ 27.50 $ 28.625
to $ 36.50 to $ 36.50 to $ 33.81
Average option price $ 28.02 $ 30.59 $ 30.48
On September 5, 1997, the Company granted 106,127 stock awards from the
Long-Term Incentive Plan for the Key Employee Retention Program. This program
was established to provide additional incentive benefits to retain senior
executive employees of the Company. The vesting of these awards is contingent on
attainment of specific stock price targets and the continued employment of the
participants until January 1, 2001. The fair value of these awards was estimated
at the date of grant utilizing a Black-Scholes pricing model and the same 1997
assumptions as listed above and would result in compensation expense not
materially different from that recorded by the Company under APB Opinion No. 25.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
N. STOCK-BASED COMPENSATION PLANS (CONTINUED)
NON-EMPLOYEE DIRECTORS' STOCK INCENTIVE PLAN
The Company's Non-Employee Directors' Stock Incentive Plan provides for
the granting of up to 80,000 shares of common stock in the form of stock option
grants and restricted stock awards to non-employee directors of the Company. The
exercise price for each share is equal to market price of the common stock on
the date of grant. Each option is subject to time-based vesting provisions and
expires five years after date of grant. At December 31, 1997, 27,500 options
were outstanding at prices ranging from $27.50 to $33.87 per share and no
options had been exercised under this plan.
O. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents as well as short-term
loans approximates fair value due to the short maturity of the instruments.
The estimated fair value of long-term debt at December 31, 1997 and
1996, would be $436.3 million and $445.6 million, respectively. The fair value
was estimated based on discounted values using a current discount rate
reflective of the remaining maturity. The Company's 7 1/2% debentures may not be
redeemed prior to maturity.
The estimated fair value of derivative commodity instruments described
in Note B, excluding trading activities which are marked-to-market, was $(9.7)
million and $(.2) million at December 31, 1997 and 1996, respectively.
P. CONCENTRATIONS OF CREDIT RISK
Revenues and related accounts receivable from the Supply & Logistics
segment's operations are generated primarily from the sale of produced natural
gas to utility and industrial customers located mainly in the Appalachian area,
the sale of produced oil to refinery customers in the Appalachian area, the sale
of produced natural gas liquids to a refinery customer in Kentucky, the sale of
produced natural gas liquids and intrastate transportation of natural gas in
Louisiana and the marketing of natural gas and electricity.
The Utilities segment's operating revenues and related accounts
receivable are generated from state-regulated utility natural gas sales and
transportation to more than 266,000 residential, commercial and industrial
customers located in southwest Pennsylvania and parts of West Virginia and
Kentucky; and FERC-regulated interstate pipeline transportation and storage
service for the affiliated utility, Equitable Gas, as well as other utility and
end-user customers located in nine mid-Atlantic and northeastern states. Under
state regulations, the utility is required to provide continuous gas service to
residential customers during the winter heating season.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
P. CONCENTRATIONS OF CREDIT RISK (CONTINUED)
The Services segment's operating revenues and related accounts
receivable are generated from the nationwide marketing of natural gas to brokers
and large volume utility and industrial customers; and cogeneration and power
plant development, performance contracting, and water efficiency and program
development for commercial, industrial and institutional customers and various
government facilities.
The Company is not aware of any significant credit risks which have not
been recognized in provisions for doubtful accounts.
Q. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company reports operations in three segments which reflect its lines
of business. The Supply & Logistics segment's activities comprise the
exploration, development, production and sale of natural gas and oil, extraction
and sale of natural gas liquids, intrastate transportation, nationwide natural
gas marketing and supply, peak shaving, transportation arrangements and
electricity marketing. The Utilities segment's activities comprise the
operations of the Company's state-regulated local distribution company, in
addition to gas transportation, gathering, storage and marketing activities
involving the Company's FERC-regulated gas pipelines. The Services segment's
activities comprise marketing of natural gas, cogeneration and power plant
development, the development and implementation of energy and water efficiency
programs, performance contracting and central facility plant operations.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Q. FINANCIAL INFORMATION BY BUSINESS SEGMENT (CONTINUED)
Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------------------------------------------
(Thousands)
OPERATING REVENUES:
Supply & Logistics $ 1,573,220 $ 1,318,661 $1,059,854
Utilities 467,895 507,441 441,732
Services 345,005 172,335 473
Sales between segments (235,105) (136,638) (76,069)
------------- ------------- -----------
Total $ 2,151,015 $ 1,861,799 $1,425,990
============= ============= ===========
OPERATING INCOME (LOSS):
Supply & Logistics $ 69,123 $ 52,010 $ (32,668)
Utilities 53,286 89,320 55,612
Services (9,971) (12,542) (992)
------------- ------------- -----------
Total $ 112,438 $ 128,788 $ 21,952
============= ============= ===========
IDENTIFIABLE ASSETS:
Supply & Logistics $ 1,262,526 $ 1,089,669 $1,044,045
Utilities 1,017,985 998,064 932,529
Services 184,364 50,584 3,419
Eliminations (53,865) (42,018) (16,680)
------------- ------------- -----------
Total $ 2,411,010 $ 2,096,299 $1,963,313
============= ============= ===========
DEPRECIATION, DEPLETION
AND AMORTIZATION:
Supply & Logistics $ 57,731 $ 55,415 $ 78,444
Utilities 27,261 26,608 26,181
Services 2,150 358 -
------------- ------------- -----------
Total $ 87,142 $ 82,381 $ 104,625
============= ============= ===========
CAPITAL EXPENDITURES:
Supply & Logistics $ 183,467 $ 72,617 $ 68,950
Utilities 41,372 36,831 49,131
Services 28,096 (a) 836 31
------------- ------------- -----------
Total $ 252,935 $ 110,284 $ 118,112
============= ============= ===========
(a) Excludes $68 million total noncash portion of the acquisitions of
NORESCO and Scallop Thermal Management. See Note G.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
R. COMMITMENTS AND CONTINGENCIES
The Company has annual commitments of approximately $31.5 million for
demand charges under existing long-term contracts with pipeline suppliers for
periods extending up to 16 years at December 31, 1997, which relate to gas
distribution operations. However, substantially all of these costs are
recoverable in customer rates.
The Company is subject to federal, state and local environmental laws
and regulations. These laws and regulations, which are constantly changing, can
require expenditures for remediation and may in certain instances result in
assessment of fines. The Company has established procedures for ongoing
evaluation of its operations to identify potential environmental exposures and
assure compliance with regulatory policies and procedures. The estimated costs
associated with identified situations that require remedial action are accrued.
However, certain of these costs are deferred as regulatory assets when
recoverable through regulated rates. Ongoing expenditures for compliance with
environmental laws and regulations, including investments in plant and
facilities to meet environmental requirements, have not been material.
Management believes that any such required expenditures will not be
significantly different in either their nature or amount in the future and does
not know of any environmental liabilities that will have a material effect on
the Company's financial position or results of operations.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
S. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following quarterly summary of operating results reflects variations
due primarily to the seasonal nature of the Company's utility business and
volatility of oil and gas commodity prices:
March June September December
31 30 30 31
(Thousands except per share amounts)
1997
Operating revenues $552,575 $400,760 $508,102 $689,578
Operating income (loss) 53,347 (5,927) 9,951 55,067
Net income (loss) 27,790 (9,263) 16,987 42,543
Earnings (loss) per share - basic $ 0.78 $(0.26) $ 0.47 $ 1.16
Earnings (loss) per share - assuming dilution $ 0.78 $(0.26) $ 0.47 $ 1.15
1996
Operating revenues $640,278 $391,767 $357,011 $472,743
Operating income 69,403 8,983 3,860 46,542
Net income (loss) 38,726 928 (3,687) 23,412
Earnings (loss) per share - basic $ 1.11 $ 0.03 $(0.10) $ 0.66
Earnings (loss) per share - assuming dilution $ 1.10 $ 0.03 $(0.10) $ 0.66
T. NATURAL GAS AND OIL PRODUCING ACTIVITIES
The supplementary information summarized below presents the results of
natural gas and oil activities for the Supply & Logistics segment in
accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing
Activities."
The information presented excludes data associated with natural gas
reserves related to rate-regulated and other utility operations. These reserves
(proved developed) are less than 5% of total Company proved reserves for the
years presented.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
T. NATURAL GAS AND OIL PRODUCING ACTIVITIES (CONTINUED)
PRODUCTION COSTS
The following table presents the costs incurred relating to natural gas
and oil production activities:
1997 1996 1995
-----------------------------------------
(Thousands)
At December 31:
Capitalized costs $779,936 $840,136 $803,124
Accumulated depreciation
and depletion 293,594 342,950 311,524
----------- ----------- -----------
Net capitalized costs $486,342 $497,186 $491,600
=========== =========== ===========
Costs incurred:
Property acquisition:
Proved properties $ 68,334 $ 68 $ 222
Unproved properties 15,813 6,411 -
Exploration 22,665 17,934 14,844
Development 40,982 33,298 31,802
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following table presents the results of operations related to
natural gas and oil production, including the effect in 1995 of impairment of
assets as described in Note C:
1997 1996 1995
-----------------------------------------
(Thousands)
Revenues:
Affiliated $ 52,956 $ 50,968 $ 20,619
Nonaffiliated 97,493 86,319 114,247
Production costs 31,777 31,746 31,626
Exploration expenses 8,950 15,714 13,312
Depreciation and depletion 41,153 40,872 62,212
Impairment of assets - - 65,563
Income tax expense (benefit) 26,303 18,062 (27,992)
----------- ----------- ----------
Results of operations from
producing activities (excluding
corporate overhead) $ 42,266 $ 30,893 $ (9,855)
=========== =========== ==========
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
T. NATURAL GAS AND OIL PRODUCING ACTIVITIES (CONTINUED)
RESERVE INFORMATION (UNAUDITED)
The information presented below represents estimates of proved gas and
oil reserves prepared by Company engineers. Proved developed reserves represent
only those reserves expected to be recovered from existing wells and support
equipment. In 1997 the Company increased its Appalachian reserve life from 35 to
50 years to more closely reflect actual production experience. This revision
increased 1997 proved developed natural gas and crude oil reserves by 78,607
million cubic feet equivalent. Proved undeveloped reserves represent proved
reserves expected to be recovered from new wells after substantial development
costs are incurred. As of December 31, 1997, all of the Company's proved
reserves are in the United States. During 1997 the Company sold its Canadian
properties, which accounted for less than 10% of the Company's proved reserves.
NATURAL GAS 1997 1996 1995
-----------------------------------------------------
(Millions of cubic feet)
Proved developed and undeveloped reserves:
Beginning of year 849,530 845,771 874,964
Revision of previous estimates 80,264 6,710 16,999
Purchase of natural gas in place 62,485 811 23
Sale of natural gas in place (107,138) (368) (31,752)
Extensions, discoveries and other additions 61,380 53,901 50,521
Production (56,693) (57,295) (64,984)
------------- ------------- -------------
End of year 889,828 849,530 845,771
============= ============= =============
Proved developed reserves:
Beginning of year 732,158 739,249 771,635
End of year 769,312 732,158 739,249
OIL 1997 1996 1995
-----------------------------------------------------
(Thousands of barrels)
Proved developed and undeveloped reserves:
Beginning of year 19,517 18,201 18,283
Revision of previous estimates 849 1,867 (356)
Purchase of oil in place 2,592 67 5
Sale of oil in place (12,392) (235) (1,076)
Extensions, discoveries and other additions 1,045 1,344 3,278
Production (1,511) (1,727) (1,933)
------------- ------------- -------------
End of year 10,100 19,517 18,201
============= ============= =============
Proved developed reserves:
Beginning of year 18,482 16,834 18,110
End of year 8,941 18,482 16,834
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
T. NATURAL GAS AND OIL PRODUCING ACTIVITIES (CONTINUED)
STANDARD MEASURE OF DISCOUNTED FUTURE CASH FLOW (UNAUDITED)
Management cautions that the standard measure of discounted future cash
flows should not be viewed as an indication of the fair market value of gas and
oil producing properties, nor of the future cash flows expected to be generated
therefrom. The information presented does not give recognition to future changes
in estimated reserves, selling prices or costs and has been discounted at an
arbitrary rate of 10%. Estimated future net cash flows from natural gas and oil
reserves based on selling prices and costs at year-end price levels are as
follows:
1997 1996 1995
------------------------------------------
(Thousands)
Future cash inflows $ 2,607,077 $3,610,060 $2,279,509
Future production costs (680,405) (790,140) (635,540)
Future development costs (80,965) (50,708) (51,081)
Future income tax expenses (671,713) (1,007,421) (539,106)
------------ ------------ -----------
Future net cash flow 1,173,994 1,761,791 1,053,782
10% annual discount for estimated
timing of cash flows (633,000) (877,077) (535,921)
------------ ------------ -----------
Standardized measure of discounted
future net cash flows $ 540,994 $ 884,714 $ 517,861
============ ============ ===========
Summary of changes in the standardized measure of discounted future net
cash flows:
1997 1996 1995
---------------------------------------
(Thousands)
Sales and transfers of gas
and oil produced - net $ (118,672) $ (105,541) $ (103,240)
Net changes in prices, production
and development costs (447,251) 482,376 54,806
Extensions, discoveries, and
improved recovery, less related costs 58,205 86,306 65,603
Development costs incurred 13,634 13,543 18,620
Purchase (sale) of minerals in
place - net (73,099) 1,506 (22,990)
Revisions of previous quantity estimates 16,913 47,545 5,278
Accretion of discount 108,935 72,375 64,875
Net change in income taxes 143,429 (232,841) (97,808)
Other (45,814) 1,584 (7,950)
------------- ------------ ------------
Net increase (decrease) (343,720) 366,853 (22,806)
Beginning of year 884,714 517,861 540,667
------------- ------------ ------------
End of year $ 540,994 $ 884,714 $ 517,861
============= ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 with respect to directors is
incorporated herein by reference to the section describing "Election of
Directors" in the Company's definitive proxy statement relating to the annual
meeting of stockholders to be held on May 22, 1998, which will be filed with the
Commission within 120 days after the close of the Company's fiscal year ended
December 31, 1997.
Information required by Item 10 with respect to compliance with
Section 16(a) of the Exchange Act is incorporated by reference to the section
describing "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement relating to the annual meeting of
stockholders to be held on May 22, 1998.
Information required by Item 10 with respect to executive officers
is included herein after Item 4 at the end of Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated herein by reference
to the sections describing "Executive Compensation", "Employment Contracts and
Change-In-Control Arrangements" and "Pension Plan" in the Company's definitive
proxy statement relating to the annual meeting of stockholders to be held on May
22, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated herein by reference
to the section describing "Voting Securities and Record Date" in the Company's
definitive proxy statement relating to the annual meeting of stockholders to be
held on May 22, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial statements
The financial statements listed in the accompanying index to
financial statements are filed as part of this annual report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying
index to financial statements and financial schedule is filed
as part of this annual report.
3. Exhibits
The exhibits listed on the accompanying index to exhibits
(pages 67 through 69) are filed as part of this annual report.
(b) Reports on Form 8-K filed during the quarter ended December
31, 1997.
None
EQUITABLE RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS COVERED
BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14 (A))
1. The following consolidated financial statements of Equitable Resources,
Inc. and Subsidiaries are included in Item 8:
PAGE REFERENCE
Statements of Consolidated Income
for each of the three years in
the period ended December 31, 1997 30
Statements of Consolidated Cash Flows
for each of the three years in the
period ended December 31, 1997 31
Consolidated Balance Sheets
December 31, 1997 and 1996 32 & 33
Statements of Common Stockholders'
Equity for each of the three years in the
period ended December 31, 1997 34
Notes to Consolidated Financial Statements 35 through 61
2. Schedule for the Years Ended December 31, 1997,
1996 and 1995 included in Part IV:
II - Valuation and Qualifying
Accounts and Reserves 66
All other schedules are omitted since the subject matter thereof is
either not present or is not present in amounts sufficient to require
submission of the schedules.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------
Balance At Additions Charged Balance
Beginning To Costs At End
Description Of Period and Expenses Deductions Of Period
- ----------------------------------------------------------------------------------------------
(Thousands)
1997
Accumulated Provision
for Doubtful Accounts $ 10,714 $ 16,386 $ 17,115(A) $ 9,985
1996
Accumulated Provision
for Doubtful Accounts $ 10,539 $ 17,707 $ 17,532(A) $ 10,714
1995
Accumulated Provision
for Doubtful Accounts $ 10,890 $ 10,810 $ 11,161(A) $ 10,539
Note:
(A) Customer accounts written off, less recoveries.
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
- ----------------- ------------------------------------------------------- -----------------------------------------------------
3.01 Restated Articles of Incorporation of the Company Filed as Exhibit 3(i) to Form 10-Q for the quarter
dated May 27, 1996 (effective May 28, 1996) ended March 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
3.02 By-Laws of the Company (amended through March 21, Filed as Exhibit 3(ii) to Form 10-Q for the quarter
1996) ended March 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (a) Indenture dated as of April 1, 1983 between the Filed as Exhibit 4.01 (Revised) to Post-Effective
Company and Pittsburgh National Bank relating to Debt Amendment No. 1 to Registration Statement
Securities (Registration No. 2-80575)
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (b) Instrument appointing Bankers Trust Company as Filed as Exhibit 4.01 (b) to Form 10-K for the year
successor trustee to Pittsburgh National Bank ended December 31, 1993
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (d) Resolutions adopted June 22, 1987 by the Finance Filed as Exhibit 4.01 (d) to Form 10-K for the year
Committee of the Board of Directors of the Company ended December 31, 1993
establishing the terms of the 75,000 units
(debentures with warrants) issued July 1, 1987
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (e) Resolution adopted April 6, 1988 by the Ad Hoc Filed as Exhibit 4.01 (e) to Form 10-K for the year
Finance Committee of the Board of Directors of the ended December 31, 1993
Company establishing the terms and provisions of the
9.9% Debentures issued April 14, 1988
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (f) Supplemental indenture dated March 15, 1991 with Filed as Exhibit 4.01(f) to Form 10-K for the year
Bankers Trust Company eliminating limitations on ended December 31, 1996
liens and additional funded debt
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (g) Resolution adopted August 19, 1991 by the Ad Hoc Filed as Exhibit 4.01(g) to Form 10-K for the year
Finance Committee of the Board of Directors of the
ended December 31, 1996 Company Addenda Nos. 1 through
27, establishing the terms and provisions of the Series
A Medium-Term Notes
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (h) Resolutions adopted July 6, 1992 and February 19, Refiled herewith as Exhibit 4.01(h) pursuant to
1993 by the Ad Hoc Finance Committee of the Board of Rule 24 of the SEC's Rules of Practice
Directors of the Company and Addenda Nos. 1 through
8, establishing the terms and provisions of the
Series B Medium-Term Notes
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (i) Resolution adopted July 14, 1994 by the Ad Hoc Filed as Exhibit 4.01(i) to Form 10-K for the year
Finance Committee of the Board of Directors of the ended December 31, 1995
Company and Addenda Nos. 1 and 2, establishing the
terms and provisions of the Series C Medium-Term Notes
- ----------------- ------------------------------------------------------- -----------------------------------------------------
Each management contract and compensatory arrangement in which any
director or any named executive officer participates has been marked with
an asterisk (*)
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
- ----------------- ------------------------------------------------------- -----------------------------------------------------
4.01 (j) Resolution adopted January 18 and July 18, 1996 by Filed as Exhibit 4.01(j) to Form 10-K for the year
the Board of Directors of the Company and Resolutions ended December 31, 1996
adopted July 18, 1996 by the Executive Committee of the
Board of Directors of the Company, establishing the
terms and provisions of the 7.75% Debentures issued
July 29, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.01 Equitable Resources, Inc. Key Employee Restricted Filed as Exhibit 10.01 to Form 10-K for the year
Stock Option and Stock Appreciation Rights Incentive ended December 31, 1994
Compensation Plan (as amended through March 17, 1989)
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.02 Confidential Agreement and Release dated as of August Filed herewith as Exhibit 10.02
1, 1997, with Frederick H. Abrew
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.03 Confidential Agreement and Release dated as of Filed herewith as Exhibit 10.03
February 15, 1998 with Edward J. Meyer.
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.04 (a) Agreement dated May 29, 1996 with Paul Christiano for Filed as Exhibit 10.04(a) to Form 10-K for the year
deferred payment of 1996 director fees beginning May ended December 31, 1996.
29, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.04 (b) Agreement dated November 26, 1996 with Paul Filed as Exhibit 10.04(b) to Form 10-K for the year
Christiano for deferred payment of 1997 director fees ended December 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.04 (c) Agreement dated December 1, 1997 with Paul Christiano Filed herewith as Exhibit 10.04 (c)
for deferred payment of 1998 director fees
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.05 Supplemental Executive Retirement Plan (as amended Filed as Exhibit 10.05 to Form 10-K for the year
and restated through October 20, 1995) ended December 31, 1995
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.06 Retirement Program for the Board of Directors of Filed as Exhibit 10.06 to Form 10-K for the year
Equitable Resources, Inc. (as amended through August ended December 31, 1994
1, 1989)
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.07 Supplemental Pension Plan (as amended and restated Filed as Exhibit 10.07 to Form 10-K for the year
through December 16, 1994) ended December 31, 1994
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.08 Employment Agreement dated as of August 1, 1997, and Filed herewith as Exhibit 10.08
Employment Agreement Addendum dated as of November
19, 1997, with Donald I. Moritz
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.09 Equitable Resources, Inc. and Subsidiaries Short-Term Filed as Exhibit 10.09 to Form 10-K for the year
Incentive Compensation Plan as amended March 1997 ended December 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.10 (a) Agreement dated December 31, 1987 with Malcolm M. Filed as Exhibit 10.10 (a) to Form 10-K for the
Prine for deferred payment of 1988 director fees year ended December 31, 1993
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.10 (b) Agreement dated December 30, 1988 with Malcolm M. Filed as Exhibit 10.10 (b) to Form 10-K for the
Prine for deferred payment of 1989 director fees year ended December 31, 1993
- ----------------- ------------------------------------------------------- -----------------------------------------------------
Each management contract and compensatory arrangement in which any
director or any named executive officer participates has been marked with
an asterisk (*)
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION METHOD OF FILING
- ----------------- ------------------------------------------------------- -----------------------------------------------------
10.11 Trust Agreement with Pittsburgh National Bank to act Filed as Exhibit 10.12 to Form 10-K for the year
as Trustee for Supplemental Pension Plan, ended December 31, 1994
Supplemental Deferred Compensation Benefits,
Retirement Program for Board of Directors, and
Supplemental Executive Retirement Plan
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.12 Equitable Resources, Inc. Non-Employee Directors' Filed as Exhibit 10.13 to Form 10-K for the year
Stock Incentive Plan ended December 31, 1994
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.13 Equitable Resources, Inc. Long-Term Incentive Plan Filed as Exhibit 10.14 to Form 10-K for the year
ended December 31, 1994
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.14 (a) Agreement dated May 24, 1996 with Phyllis A. Savill Filed as Exhibit 10.14(a) to Form 10-K for the year
for deferred payment of 1996 director fees beginning ended December 31, 1996
May 24, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.14 (b) Agreement dated November 27, 1996 with Phyllis A. Filed as Exhibit 10.14 (b) to Form 10-K for the
Savill for deferred payment of 1997 director fees year ended December 31, 1996
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.14 (c) Agreement dated November 30, 1997 with Phyllis A. Filed herewith as Exhibit 10.14 (c)
Savill for deferred payment of 1998 director fees
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.15 Change in Control Agreement executed with certain key Filed as Exhibit 10.15 to the Form 10-K for the
employees year ended December 31, 1995
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.16 Equitable Resources, Inc. and Subsidiaries Deferred Filed as Exhibit 10.16 to the Form 10-K for the
Compensation Plan year ended December 31, 1995
- ----------------- ------------------------------------------------------- -----------------------------------------------------
*10.17 Employment Agreement executed with certain key Filed herewith as Exhibit 10.17
employees
- ----------------- ------------------------------------------------------- -----------------------------------------------------
21 Schedule of Subsidiaries Filed herewith as Exhibit 21
- ----------------- ------------------------------------------------------- -----------------------------------------------------
23.01 Consent of Independent Auditors Filed herewith as Exhibit 23.01
- ----------------- ------------------------------------------------------- -----------------------------------------------------
The Company agrees to furnish to the Commission, upon request, copies
of instruments with respect to long-term debt which have not previously been
filed.
Each management contract and compensatory arrangement in which any
director or any named executive officer participates has been marked with
an asterisk (*)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EQUITABLE RESOURCES, INC.
By: /s/ Donald I. Moritz
---------------------------------------------
Donald I. Moritz
Interim President and Chief Executive Officer
March 19, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Interim President and Chief Executive
/s/ Donald I. Moritz Officer and Director March 19, 1998
- --------------------------------------
Donald I. Moritz
(Principal Executive Officer)
Vice President - Finance and Treasurer/
/s/ Jeffrey C. Swoveland Interim Chief Financial Officer March 19, 1998
- --------------------------------------
Jeffrey C. Swoveland
(Principal Financial Officer)
/s/ John A. Bergonzi Corporate Controller March 19, 1998
- --------------------------------------
John A. Bergonzi
(Principal Accounting Officer)
/s/ Paul Christiano Director March 19, 1998
- --------------------------------------
Paul Christiano
/s/ E. Lawrence Keyes, Jr. Director March 19, 1998
- --------------------------------------
E. Lawrence Keyes, Jr.
/s/ Thomas A. McConomy Director March 19, 1998
- --------------------------------------
Thomas A. McConomy
SIGNATURES (Continued)
/s/ Guy W. Nichols Director March 19, 1998
- --------------------------------------
Guy W. Nichols
/s/ Malcolm M. Prine Director March 19, 1998
- --------------------------------------
Malcolm M. Prine
/s/ James E. Rohr Director March 19, 1998
- --------------------------------------
James E. Rohr
/s/ Phyllis A. Savill Director March 19, 1998
- --------------------------------------
Phyllis A. Savill
/s/ David S. Shapira Director March 19, 1998
- --------------------------------------
David S. Shapira
/s/ J. Michael Talbert Director March 19, 1998
- --------------------------------------
J. Michael Talbert