-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NP32zt/pDLqHV0mdiaUPQue6kaMWlemK3kvXHXV4lUOnPP9/da6VUWsUFuQip7jd GHtEEqUfAu/Dp6fCE2aFXw== 0000033213-99-000003.txt : 19990322 0000033213-99-000003.hdr.sgml : 19990322 ACCESSION NUMBER: 0000033213-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITABLE RESOURCES INC /PA/ CENTRAL INDEX KEY: 0000033213 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 250464690 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03551 FILM NUMBER: 99568894 BUSINESS ADDRESS: STREET 1: 420 BLVD OF THE ALLIES CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4122613000 MAIL ADDRESS: STREET 1: 420 BOULEVARD OF THE ALLIES CITY: PITTSBURGH STATE: PA ZIP: 15219 FORMER COMPANY: FORMER CONFORMED NAME: EQUITABLE GAS CO DATE OF NAME CHANGE: 19841120 10-K 1 FORM 10-K FOR EQUITABLE RESOURCES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 1-3551 EQUITABLE RESOURCES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0464690 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One Oxford Centre, Suite 3300 15219 Pittsburgh, Pennsylvania (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (412) 553-5700 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------------------- ---------------------------- Common Stock, no par value New York Stock Exchange Philadelphia Stock Exchange 7 1/2% Debentures due July 1, 1999 New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Philadelphia Stock Exchange 7.35% Capital Securities due April 15, 2038 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of February 28, 1999: $877,187,780 The number of shares outstanding of the issuer's classes of common stock as of February 28, 1999 33,900,977 DOCUMENTS INCORPORATED BY REFERENCE Part III, a portion of Item 10 and Items 11, 12 and 13 are incorporated by reference to the Proxy Statement for the Annual Meeting of Stockholders on May 26, 1999, to be filed with the Commission within 120 days after the close of the Company's fiscal year ended December 31, 1998. Index to Exhibits - Page 79 TABLE OF CONTENTS Part I Page Item 1 Business 1 Item 2 Properties 6 Item 3 Legal Proceedings 8 Item 4 Submission of Matters to a Vote of Security Holders 9 Item 10 Directors and Executive Officers of the Registrant 10 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6 Selected Financial Data 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A Qualitative and Quantitative Disclosures About Market Risk 37 Item 8 Financial Statements and Supplementary Data 39 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 75 Part III Item 10 Directors and Executive Officers of the Registrant 75 Item 11 Executive Compensation 75 Item 12 Security Ownership of Certain Beneficial Owners and Management 75 Item 13 Certain Relationships and Related Transactions 75 Part IV Item 14 Exhibits and Reports on Form 8-K 76 Index to Financial Statements Covered by Report of Independent Auditors 77 Index to Exhibits 79 Signatures 83 PART I Item 1. Business Equitable Resources, Inc. (Equitable or the Company) is an integrated energy company, with emphasis on natural gas distribution and transmission, Appalachian area natural gas production and energy services marketing in the northeastern section of the United States. The Company also has exploration and production interests in the Gulf of Mexico and energy service management projects in selected U.S. and international markets. The Company and its subsidiaries offer energy (natural gas, natural gas liquids and crude oil) products and services to wholesale and retail customers through three primary businesses: Equitable Utilities, Equitable Production and Equitable Services. The Company and its subsidiaries had 1,588 employees at the end of 1998. The Company was formed under the laws of Pennsylvania by the consolidation and merger in 1925 of two constituent companies, the older of which was organized in 1888. In 1984, the corporate name was changed to Equitable Resources, Inc. to more appropriately reflect the Company's transition from a regulated utility to an integrated energy company. EQUITABLE UTILITIES Equitable Utilities includes two integrated divisions: a regulated natural gas distribution operation and an interstate pipeline business. Natural Gas Distribution Equitable Utilities' distribution operations are conducted by Equitable Gas Company (Equitable Gas), a division of the Company. The service territory for Equitable Gas is southwestern Pennsylvania, municipalities in northern West Virginia and field line sales in eastern Kentucky. The distribution company provides gas services to more than 266,000 customers, comprising approximately 248,000 residential customers and approximately 18,000 commercial and industrial customers. In October 1997, the Pennsylvania Public Utility Commission (PUC) authorized a rate increase for Equitable Gas of $15.8 million annually, most of which is recognized in customers' monthly fixed service charges. This rate structure was designed to reduce Equitable Gas Company's percentage of revenues affected by weather conditions. In 1998, Equitable Gas began to offer "unbundled" service to all of its customers in Pennsylvania, allowing them to choose their natural gas supplier beginning April 1. As of February 1999, approximately 55,400 Pennsylvania residential customers were receiving their gas supply from an alternate supplier. Approximately 43,000 of the customers now purchase their gas from Equitable Energy, the Company's nonregulated marketing subsidiary. Revenues derived from transportation charges on gas sold by other suppliers enable Equitable Gas to avoid economic loss resulting from the switching of residential customers to other suppliers. A material economic loss is avoided because the margin on natural gas commodity approximates the margin received on transportation-only volumes, making Equitable Gas neutral to whether it provides transportation or sales to retail customers. Equitable Gas continues to deliver gas and provide customer services to its customers. Item 1. Business (Continued) Significant changes in the residential transportation customer base are considered unlikely in the near term, even in the deregulated environment, due to the large investment in infrastructure required for residential natural gas transportation. Equitable Gas purchases natural gas through short-term, medium-term and long-term contracts. Most gas is purchased from Southwest suppliers and transported by Texas Eastern Transmission Corporation and Tennessee Gas Pipeline Company. A smaller percentage of natural gas is purchased from production properties in Kentucky owned by Equitable Production. Equitable Gas' rates, terms of service, contracts with affiliates and Equitable's issuance of securities are regulated primarily by the Pennsylvania PUC along with the Kentucky Public Service Commission and the West Virginia Public Service Commission. Historically, approximately 65 percent of natural gas distribution revenue has been recorded during the winter heating season from November through March. Significant quantities of purchased gas are placed in underground storage inventory during the off-peak season to accommodate higher customer demand during the winter heating season. Interstate Pipeline Equitable Utilities' interstate pipeline operations include the natural gas transmission and storage activities of Equitrans, L.P. (Equitrans) and a smaller affiliate, Three Rivers Pipeline Corporation, which are regulated by the Federal Energy Regulatory Commission (FERC). Equitrans transported 72 Bcf of natural gas to both affiliated and non-affiliated customers in 1998. A substantial portion of Equitrans' annual throughput has been gas purchased by Equitable Gas. No revenue loss is expected as a result of residential customers of Equitable Gas switching to other suppliers, since gas transported to Equitable Gas by such suppliers will continue to flow through the Equitrans system. The changing regulatory environment intended to increase competition in the natural gas industry has created a number of opportunities for pipeline companies to expand services and serve new markets. The Company has taken advantage of selected market expansion opportunities concentrating on Equitrans' underground storage facilities and the location and nature of its pipeline system as a link between the country's major long-line gas pipelines. The pipeline operations have more than 500 miles of transmission lines and interconnections with five major interstate pipelines. Equitrans also has 15 gas storage reservoirs with approximately 500 MMcf per day of peak delivery capacity. Equitrans is currently involved in a rate case before the FERC, which is described in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Equitable Utilities generated approximately 46% of the Company's net operating revenues in 1998. Item 1. Business (Continued) EQUITABLE PRODUCTION Equitable Production explores for, produces and delivers natural gas and crude oil, with operations in the Appalachian and the Louisiana offshore Gulf of Mexico regions of the United States. It also engages in natural gas gathering and interstate transportation and the processing and sale of natural gas liquids. During 1998, the Company announced its decision to discontinue, and subsequently sold, the natural gas midstream operations of the unit that was then called ERI Supply & Logistics. With the sale of the midstream operations and the concentration of that unit's activities on natural gas and crude oil exploration and production, Equitable Resources Energy Company, the principal operating company in the segment, was renamed Equitable Production Company and the segment ERI Supply & Logistics was renamed Equitable Production. Natural Gas and Crude Oil Production Equitable Production has two regional exploration and production operations. Equitable Production - East develops natural gas reserves in Kentucky, Virginia and West Virginia. The area in eastern Kentucky and western Virginia contains approximately 88 percent of Equitable's natural gas and crude oil reserves. The Company has been able to develop natural gas reserves at very competitive costs. As a result, even in periods of surplus natural gas supply, the Company has been able to sell all of its natural gas production. Equitable Production also processes and markets natural gas liquids extracted from its Kentucky production. In 1998, many of the managerial responsibilities for the operations conducted by Kentucky West Virginia Gas Company, L.L.C. (Kentucky West) and Nora Transmission Company (Nora) were provided by Equitable Production under a services agreement. These businesses, including pipeline gathering and transmission lines in eastern Kentucky and western Virginia and well operations services throughout the area, will be integrated into Equitable Production East upon receipt of authority from the FERC to decertify the pipeline facilities. Equitable Production - Gulf conducts exploration and production activities in the U.S. Gulf of Mexico, primarily offshore the state of Louisiana. This is a very competitive market requiring substantial ongoing investment in federal leases, in which drilling and production activity by producers has increased in recent years. Approximately 12 percent of the Company's year-end natural gas and crude oil reserves are located in the Gulf region. Equitable Production has not been successful at consistently earning net income from its operations in the Gulf region. The Company is actively evaluating alternatives in order to better derive shareholder value from these operations. Equitable Production sold its oil and gas properties in six western states and the Canadian Rockies in the second half of 1997. The Company used a part of the proceeds from the property sales to finance the acquisition from Chevron USA of two producing gas and oil fields off Louisiana's Gulf Coast. The daily gas and oil production from this acquisition more than offset the production displaced by the western property sale. At year-end 1998, proved developed natural gas and crude oil reserves were 831 billion cubic feet equivalent (Bcfe) compared to 823 Bcfe at year-end 1997. Item 1. Business (Continued) Equitable Production generated approximately 46% of the Company's net operating revenue in 1998, excluding intercompany transactions. EQUITABLE SERVICES The Equitable Services business is comprised of two operating segments: NORESCO and Equitable Energy. The NORESCO segment's activities are conducted through two distinct enterprises: Northeast Energy Services, Inc., which is also referred to as NORESCO, and ERI Services. The financial results for this segment are reported on a combined basis as NORESCO. NORESCO The enterprise NORESCO provides energy and energy related products and services that are designed to reduce its customers' operating costs and improve their productivity. NORESCO's customers include commercial, governmental, institutional and industrial end-users. The business was started in 1995 and was built through a series of acquisitions of privately held energy performance and facility management companies. In September 1996, this segment began marketing a complete menu of energy management services. In July 1997, Equitable significantly added to its energy performance and facilities management capabilities with the acquisition of NORESCO, a leading energy services company. NORESCO operates in a highly competitive industry, with a significant number of companies, including affiliates of large energy companies that have entered this market in recent years. NORESCO is one of the largest and most experienced energy service companies in the United States. It provides comprehensive energy management and energy efficiency solutions for a wide range of customers in the educational, institutional, governmental, commercial and industrial sectors. The majority of NORESCO's revenue and earnings comes from energy saving performance contracting services. NORESCO provides the following integrated energy management services: project development and engineering analysis; construction; management; financing; equipment operation and maintenance; and energy savings metering, monitoring and verification. NORESCO also manages the segment's facilities management division, which develops and operates private power, cogeneration and central plant facilities in the U.S. and selected international markets. These projects serve a diverse clientele including hospitals, universities, commercial and industrial customers and utilities. NORESCO's capabilities offer a "turnkey" approach to facilities management including project development, equipment selection, fuel procurement, environmental permitting, construction, financing and operations and maintenance. Item 1. Business (Continued) At the end of 1998, NORESCO employed 259 people including professional staff, trades-people and plant operators. Construction backlog increased from $14.2 million at year-end 1997 to $74.1 million at the end of 1998. Significant additions to backlog at year-end 1998 included $13.0 million for a central plant facility at a state university, $8.6 million for a central plant facility at a New England shopping mall, $13.4 million for a comprehensive energy program and cogeneration plant at a state-owned medical facility, $5.0 million for an energy conservation project for a large municipality in California, $9.8 million for an energy savings performance contract for the U.S. Air Force and $6.8 million for a comprehensive energy program for a school district in New York. ERI Services is a specialized business unit within Equitable Services in the NORESCO segment, providing energy savings performance contracting (ESPC) services exclusively to the Federal Government. In 1996, the Department of Defense (DOD) and the Department of Energy (DOE) initiated a series of competitive bids for ESPC contracts. The impetus for these programs are mandated targets to reduce energy use by 30% by the year 2005. These contracts serve as a "master" agreement between the DOD/DOE and an energy service company (ESCO), under which the ESCO may enter into individual contracts with site-specific government agencies to develop and implement ESPC projects. Under the terms of these agreements, the ESCO incurs the cost of developing and implementing projects in exchange for a defined share of the cost savings that result from the energy conservation measures, over the term of the contract. At the end of 1998, ERI Services employed 50 professional staff and had construction backlog of $6.8 million, an increase of $5.7 million over year-end 1997. Significant additions to backlog included the following energy savings performance contracts: $1.7 million for the U.S. Air Force; $3.1 million for the U.S. Navy covering three individual projects and $1.8 million for the U.S. Army. Equitable Energy Equitable Energy is a nonregulated residential, commercial and industrial marketer of natural gas in western Pennsylvania, eastern Ohio and West Virginia. The segment was started in 1995 and was built through internal development. Services and products offered by Equitable Energy include commodity procurement and delivery, physical gas management operations and control, and customer support services to its energy customers. To manage the price exposure risk of its marketing operations, Equitable Energy engages in risk management activities including the purchase and sale of financial energy derivative products. Because of this activity, Equitable Energy is also able to offer energy price risk management services to its larger industrial customers. Residential sales and marketing is through Pennsylvania and Ohio "Choice" programs, which offer residential consumers the opportunity to select their natural gas provider. Equitable Services generated approximately 8% of Equitable's net operating revenues in 1998. Item 1. Business (Continued) DISCONTINUED OPERATIONS In December 1998, the Company sold its natural gas midstream operations. The operations included an integrated gas gathering, processing and storage system in Louisiana and a natural gas and electricity trading and marketing business based in Houston, Texas, with an office in Calgary. The consolidated financial statements have been restated to classify these as discontinued operations. Operating revenues as a percentage of total operating revenues for each of the three businesses during the years 1996 through 1998 are as follows: 1998 1997 1996 ------- ------- -------- Equitable Utilities: Residential gas sales 25 % 32 % 35 % Commercial gas sales 3 3 9 Industrial and utility gas sales 3 4 8 Transportation service 6 5 3 Other 2 2 1 ------ ------ ------- Total Utilities 39 46 56 ------ ------ ------- Equitable Production: Produced natural gas 13 10 10 Natural gas liquids 2 3 3 Crude oil 2 3 3 Transportation service 2 1 1 Other 2 4 5 ------ ------ ------- Total Production 21 21 22 ------ ------ ------- Equitable Services: Marketed natural gas 28 27 21 Energy service contracting 12 6 1 ------ ------ ------- Total Services 40 33 22 ------ ------ ------- Total Revenues 100 % 100 % 100 % ====== ====== ======= See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes R and S to the consolidated financial statements in Part II for financial information by business segment and information regarding environmental matters. Item 2. Properties Principal facilities are owned by the Company's business segments with the exception of various office locations and warehouse buildings. A limited amount of equipment is also leased. Almost all transmission, storage and distribution pipelines are located on or under (1) public highways under franchises or permits from various governmental authorities, or (2) private properties owned in fee, or occupied under perpetual easements or other rights acquired for the most part without examination of underlying land titles. The Company's facilities have adequate capacity, are well maintained and, where necessary, are replaced or expanded to meet operating requirements. Item 2. Properties (Continued) EQUITABLE UTILITIES. Equitable Gas owns and operates natural gas distribution properties as well as other general property and equipment in Pennsylvania, West Virginia and Kentucky. Equitrans owns and operates production, underground storage and transmission facilities as well as other general property and equipment in Pennsylvania and West Virginia. Three Rivers Pipeline Corporation owns transmission properties in southwestern Pennsylvania. EQUITABLE PRODUCTION. This business segment, based in Houston, Texas, owns or controls substantially all of the Company's acreage of proved developed and undeveloped gas and oil production properties, which are principally located in the Appalachian and U.S. Gulf of Mexico areas. In addition, Kentucky West owns and operates gathering and transmission properties as well as other general property and equipment in Kentucky. Nora owns a FERC-regulated gathering system in western Virginia. Equitable Production's properties also include hydrocarbon extraction facilities in Kentucky with a 100-mile liquid products pipeline which extends into West Virginia and an interest in two hydrocarbon extraction plants in Texas. Information relating to Company estimates of natural gas and crude oil reserves and future net cash flows is provided in Note U to the consolidated financial statements in Part II. Gas and Crude Oil Production: 1998 1997 1996 ------------------------------ Natural Gas - MMcf produced 59,893 56,693 57,295 - Average sales price per Mcf sold $ 2.16 $ 2.20 $ 1.85 Crude Oil - Thousands of barrels produced 974 1,511 1,727 - Average sales price per barrel $ 13.67 $17.22 $14.78 Average production cost (lifting cost) of natural gas and crude oil during 1998, 1997 and 1996 was $.478, $.499, and $.469 per Mcf equivalent, respectively. Gas Oil ------------ ------------ Total productive wells at December 31, 1998: Total gross productive wells 4,579 398 Total net productive wells 4,063 353 Total acreage at December 31, 1998: Total gross productive acres 565,555 Total net productive acres 512,372 Total gross undeveloped acres 1,475,594 Total net undeveloped acres 1,301,128 Item 2. Properties (Continued) Number of net productive and dry exploratory wells and number of net productive and dry development wells drilled: 1998 1997 1996 ------------ ------------- ------------ Exploratory wells: Productive 4.3 2.9 3.3 Dry 5.0 1.5 5.8 Development wells: Productive 74.6 88.7 73.1 Dry 2.0 - 1.6 No report has been filed with any federal authority or agency reflecting a five percent or more difference from the Company's estimated total reserves. EQUITABLE SERVICES. NORESCO is based in Framingham, Massachusetts, and leases offices in 24 locations throughout the country. Equitable Energy is headquartered in Pittsburgh and leases offices in several northeastern cities. HEADQUARTERS. Equitable has an agreement of sale for its Pittsburgh headquarters building. The sale of the nine-story building, owned by a subsidiary of the Company, is expected to close by mid-1999. The headquarters staff is now located in leased office space in Pittsburgh. Item 3. Legal Proceedings Two subsidiaries of the Company, ET Blue Grass Company and EQT Capital Corporation, are among a group of defendants in a lawsuit filed by Raytheon Engineers & Constructors, Inc. (Raytheon). The lawsuit was filed in the Supreme Court of New York, Steuben County, in June 1997 for payment for work done by Raytheon in connection with a natural gas storage project in Avoca, New York. The storage project's operating partnership and partners, including another subsidiary of the Company, have filed for bankruptcy. Raytheon's total claim for compensatory damages against all defendants is less than $20 million. The Company believes that its subsidiary companies have adequate legal defenses to all of Raytheon's claims. As previously reported in May 1998, the jury in U.S. GAS TRANSPORTATION, INC. V. EQUITABLE RESOURCES MARKETING COMPANY, a breach of contract action filed in the Judicial District Court of Dallas County, Texas, in July 1996, returned a verdict against the Company in the amount of $4.36 million. On motion by the Company, the judge subsequently reduced the award to $762,000. Final judgment has not yet been entered, pending a ruling on attorneys' fees claimed by plaintiff. Once judgment has been entered, the case will be appealable by either party. Item 3. Legal Proceedings (Continued) In INTERSTATE NATURAL GAS COMPANY V. EQUITABLE RESOURCES ENERGY COMPANY ET AL. (including Kentucky West Virginia Gas Company), a royalty case filed in June 1995 in the Kentucky Circuit Court in Floyd County, the judge granted plaintiffs' motion for summary judgment against the Company for breach of fiduciary duty and contract unconscionability. In late 1998, the court finally entered judgment for damages totaling $1.9 million. After posting a guarantee of $2.6 million (including estimated post-judgment interest), the Company appealed the judgments to the Kentucky Court of Appeals. There are no other material pending legal proceedings, other than those which are adequately covered by insurance, to which the Company or any of its subsidiaries is a party, or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1998.
Item 10. Executive Officers - ------------------------------------ ---------------------------------------------------------- Name and Age Title and Business Experience - ------------------------------------ ---------------------------------------------------------- Murry S. Gerber (46) President and Chief Executive Officer Elected to present position June 1, 1998; Chief Executive Officer of Coral Energy, Houston, TX, from November 1996; Treasurer, Shell Oil Company, Houston, from October 1994; General Manager, Strategic Planning-Exploration & Production, Shell Oil, Houston, from February 1992. John C. Gongas, Jr. (54) Senior Vice President Elected to present position May 23, 1996; Vice President-Corporate Operations from May 1995; Vice President-Utility Group from January 1994; Vice President-Utility Services from June 1992. Audrey C. Moeller (63) Vice President and Corporate Secretary Elected to present position May 22, 1986. Johanna G. O'Loughlin (52) Vice President and General Counsel Elected to present position December 19, 1996; Deputy General Counsel from April 1996; Senior Vice President and General Counsel of Fisher Scientific Company, Pittsburgh, PA, from June 1986. David L. Porges (41) Senior Vice President and Chief Financial Officer Elected to present position July 1, 1998; Managing Director, Bankers Trust Corporation, Houston, TX, and New York, NY, from December 1992. George P. Sakellaris (52) Senior Vice President Elected to present position January 27, 1999; President-Equitable Services from February 1998 President and CEO of NORESCO, Inc. from 1989. Gregory R. Spencer (50) Senior Vice President and Chief Administrative Officer Elected to present position May 23, 1996; Vice President-Human Resources and Administration from May 1995: Vice President-Human Resources from October 1994; Vice President of Human Resources Administration of AMSCO International, Inc., Pittsburgh, PA, from May 1993. Richard D. Spencer (45) Vice President and Chief Information Officer Elected to present position July 1, 1998; Vice President-Planning and Chief Information Officer from May 1997; Vice President and Chief Information Officer from April 1996; Manager-Technology Programs of General Electric Corporation, Fairfield, CT, from February 1991. Jeffrey C. Swoveland (43) Vice President - Finance and Treasurer Elected to present position May 23, 1996; Interim Chief Financial Officer from October 1997 to July 1998; Treasurer from December 1995; Director of Alternative Finance from September 1994; Vice President-Global Corporate Banking of Mellon Bank, Pittsburgh, PA, from June 1993. - -------------------------------------------------------------------------------- Officers are elected annually to serve during the ensuing year or until their successors are chosen and qualified. Except as indicated, the officers listed above were elected on May 22, 1998. - --------------------------------------------------------------------------------
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is listed on the New York Stock Exchange and the Philadelphia Stock Exchange. The high and low sales prices reflected in the New York Stock Exchange Composite Transactions as reported by The Wall Street Journal and the dividends declared and paid per share are summarized as follows (in U.S. dollars per share):
1998 1997 - ------------------------------------------------------------------------------------------------------------------------ High Low Dividend High Low Dividend - ------------------------------------------------------------------------------------------------------------------------ 1st Quarter 35 1/4 29 5/8 $0.295 32 3/4 27 3/4 $0.295 2nd Quarter* 35 27 $0.295 31 28 1/16 $0.295 3rd Quarter 30 1/4 20 9/16 $0.295 31 3/4 27 3/8 $0.295 4th Quarter 29 15/16 25 $0.295 35 1/2 29 5/8 $0.295 - ------------------------------------------------------------------------------------------------------------------------ * Actually declared near the end of the preceding quarter.
As of December 31, 1998, there were 6,519 shareholders of record of the Company's common stock. The indentures under which the Company's long-term debt is outstanding contain provisions limiting the Company's right to declare or pay dividends and make certain other distributions on, and to purchase any shares of, its common stock. Under the most restrictive of such provisions, $468 million of the Company's consolidated retained earnings at December 31, 1998, was available for declarations or payments of dividends on, or purchases of, its common stock. The Company anticipates dividends will continue to be paid on a regular quarterly basis.
Item 6. Selected Financial Data 1998 1997 1996 1995 1994 --------------------------------------------------------------------------------- (Restated) (Restated) (Restated) (Restated) --------------------------------------------------------------------------------- (Thousands except per share amounts) Operating revenues $ 882,625 $ 934,034 $ 856,367 $ 624,998 $ 522,127 ============ ============= ============= ============= ============= Net income (loss) from continuing operations (a) $ (27,052) $ 74,187 $ 53,527 $ 17,812 $ 62,545 ============ ============= ============= ============= ============= Net income (loss) from continuing operations per common share: Basic $ (0.73) $ 2.06 $ 1.52 $ 0.51 $ 1.81 ============ ============= ============= ============= ============= Assuming dilution $ (0.73) $ 2.05 $ 1.52 $ 0.51 $ 1.80 ============ ============= ============= ============= ============= Total assets $ 1,854,247 $ 2,328,051 $ 2,096,299 $ 1,963,313 $ 2,019,122 Long-term debt $ 281,350 $ 417,564 $ 422,112 $ 415,527 $ 398,282 Preferred trust securities $ 125,000 $ - $ - $ - $ - Cash dividends paid per share of common stock $ 1.18 $ 1.18 $ 1.18 $ 1.18 $ 1.15 (a) Includes nonrecurring items, as described in Management's Discussion and Analysis of Financial Condition and Result of Operations and in Notes C, D and G to the consolidated financial statements. Excludes discontinued operations and extraordinary items, as described in Management's Discussion and Analysis of Financial Condition and Result of Operations and in Notes F and K to the consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Equitable's net loss for 1998 was $44.1 million, or $1.19 per share, compared with net income of $78.1 million, or $2.17 per share, for 1997 and $59.4 million, or $1.69 per share, for 1996. In addition to the nonrecurring items described below, earnings were impacted by discontinued operations and an extraordinary loss on early extinguishment of debt, described in Notes C and K to the consolidated financial statements. In December 1998, the Company completed the sale of its natural gas midstream operations. Income (loss) from these discontinued operations after taxes was $(8.8) million or $(.24) per share in 1998; $3.9 million, or $0.11 per share, for 1997; and $5.9 million, or $0.17 per share, for 1996. The 1998 results from discontinued operations are recorded net of an aftertax gain on the sale of the operations of $10.1 million, or $0.28 per share. In the fourth quarter of 1998, the Company recognized an extraordinary loss of $8.3 million after taxes, or $0.22 per share, for early retirement of certain long-term debt, repurchased with a portion of the proceeds of the sale of the midstream operations. Equitable's consolidated net income (loss) from continuing operations for 1998 was $(27.1) million, or $(0.73) per share, compared with $74.2 million, or $2.06 per share, for 1997 and $53.5 million, or $1.52 per share, for 1996. Earnings from operations for 1998 include significant nonrecurring items. The Company recognized $81.8 million for restructuring, impairment charges and nonrecurring items across all segments. In addition, the Production segment recorded $23 million of dry hole costs in exploration expense in the fourth quarter, reflecting the Company's determination that several wells did not find reserves in sufficient quantities to justify additional expenditure in view of the Company's current strategic plan. The Utility segment recorded a charge of $6.2 million primarily as a result of the FERC rejection of a proposed rate case settlement for Equitrans, which occurred in December 1998. These charges, which are described in Notes C and D to the consolidated financial statements, are detailed below. Earnings for 1997 include the following nonrecurring items: an aftertax gain of $31.3 million, $0.87 per share, on the sale of certain crude oil and natural gas producing properties in the western United States and Canada and its contract drilling operations; an aftertax charge of $8.5 million, $0.24 per share, from the impairment of a proposed bedded salt natural gas storage project; and a $6.7 million aftertax charge, $0.19 per share, related to the evaluation and reduction of headquarters and noncore business functions. The 1996 net income includes an aftertax gain of $2.7 million, or $.08 per share, from the curtailment of the Company's defined benefit pension plan for certain non-utility employees. RESULTS OF OPERATIONS (Continued) Excluding these nonrecurring and extraordinary items, Equitable's 1998 income from continuing operations after income taxes is $43.4 million, 25% lower than 1997 income from continuing operations after income taxes of $58.1 million, which was 16% higher than 1996 net income of $49.9 million. The decrease in operating income in 1998 compared to 1997, excluding restructuring, impairment charges, nonrecurring items, fourth quarter dry hole costs and the impact of the FERC settlement rejection, is primarily due to decreases in crude oil and natural gas liquids prices, decreased sales volumes in the distribution division resulting from 19% warmer weather, and increased depreciation, depletion and amortization (DD&A) expense. The increase in DD&A is principally a result of increased production in the offshore Gulf of Mexico, where depletion rates are substantially higher than in the Company's other operating regions. The decrease in 1998 operating income was partially offset by higher revenues in the Utility distribution division from increased customer charges in tariff rates established in the fourth quarter of 1997 and increased income from Energy Services, where the Company benefited from the inclusion of a full year of operations at NORESCO, acquired in mid-1997. The 1997 operating results, excluding impairments and restructuring charges, benefited from higher natural gas prices, lower exploration expense, higher, newly-approved residential rates in the Company's regulated utility operations and lower start-up costs in Equitable Energy. These benefits were partially offset by lower natural gas production volumes and lower commercial and industrial sales in the utility operations. 1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES During 1998, management expressed its intention to focus on fundamental strengths in its core businesses. In October 1998, the Company's Board of Directors approved a restructuring plan. As a result of this plan, along with its earlier decision to discontinue and sell the natural gas midstream business, and the sustained decrease in oil and gas commodity prices, the Company took specific actions to reduce its overall cost structure. Certain of the actions taken by the Company resulted in pretax impairment, restructuring and other nonrecurring charges in the fourth quarter of 1998 amounting to $81.8 million. As a result of the specific plans described below, the Company expects to remove approximately $20 million from its annual cost beginning in 1999. These anticipated savings are predominately due to reduced wage-related costs, reduced carrying cost of oil and gas and other property, plant and equipment, reduced rent and building operation charges (associated with office closings) and other miscellaneous savings. The restructuring activities (shown below in tabular format) primarily relate to the following: 1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES (Continued) The elimination of employment positions company-wide: Early in the fourth quarter of 1998, the Company announced that the restructuring plan would eliminate a substantial number of positions. The Company presented a voluntary workforce reduction incentive offer to salaried employees in almost all areas of the Company, including distribution and pipeline operations, production, marketing, sales and administrative areas. Related charges include severance packages, cash payments made directly to terminated employees as well as outplacement services and noncash charges for curtailment of certain defined benefit pension and other post-retirement benefit plans. A total of 164 employees terminated employment, of which 38 had been paid and left the Company as of December 31, 1998. The remaining 126 received their severance packages in 1998 and left the Company by the end of the first quarter of 1999. Redirection of offshore Gulf production: As a result of the decrease in oil and gas prices and unsuccessful drilling results in several of the Company's non-operated blocks, a total review of the strategic direction of the Gulf operations was undertaken. The Company eliminated several layers of management and intends to tightly focus its operations on lower risk, company-operated exploration and development. Taken together, the production and commodity price trends indicated that the undiscounted cash flows from this division would be substantially less than the carrying value of the producing properties. Producing property write-downs were measured based on a comparison of the assets' net book value to the net present value of the properties' estimated future net cash flows. The writedown of undeveloped leases reflects the net realizable value for those properties no longer intended to be developed based on estimated market value less costs to dispose. Proposed integration of Kentucky West Virginia Gas Company, L.L.C. (Kentucky West) with Appalachian production operations: To improve the efficiency of Appalachian production operations, the Company has transferred many of the management responsibilities for Kentucky West to Equitable Production - East under a services agreement. Historically, Kentucky West has provided nonregulated well tending and regulated gas gathering and transmission services to Equitable Production, its largest customer. These businesses will be integrated into Equitable Production - East upon receipt of authority from the FERC to decertify the pipeline facilities. In studying the possibility of decertifying the pipeline, the Company has determined that it is likely that not all costs will ultimately be collectible in rates and has reduced regulatory assets accordingly. In addition, as a result of more closely focusing the Equitable Production - East operations on the Appalachian region, the Company has abandoned several lease prospects outside of its geographical or geological areas of expertise. 1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES (Continued) Decentralization of administrative functions: In the fall of 1998, in conjunction with the decision to focus on the core distribution and Appalachian production operations, management initiated a major decentralization and downsizing of administrative functions previously embodied in a centralized corporate service organization. This initiative resulted in the reorganization of management information systems, engineering, purchasing, accounting, treasury, communications and human resources departments. In addition, insurance and benefit administration, travel, payroll and internal audit functions were outsourced to third party providers. Costs incurred, in addition to severance and other employee separation costs described above, included one-time costs for third party processing, costs to make assets available for sale, lease cancellations for office and computer equipment and noncash charges for the write-down of assets no longer in use. Such assets, which include leasehold improvements and office equipment, have been sold or are being held for sale as of December 31, 1998. Costs incurred also include a noncash charge for the write-down of certain enterprise-wide information systems that will have much more limited use and purpose under the decentralized structure. Exiting certain noncore businesses: As a result of the continued evaluation of profitability of the Company's nonregulated retail gas sales business, the Company has refocused its marketing along core regional lines and eliminated five field offices. In addition, the Company intends to curtail its involvement in several auxiliary business ventures, such as radio dispatch operations and residential real estate development, and has written these investments down to net realizable value. These costs represent the write-down of those facilities to their estimated fair value less costs to sell. The Company is currently negotiating sales agreements for these investments. Part of the current Equitrans rate case addresses the recovery of certain gathering facility costs related to the implementation of Order 636. As a result, the Company recorded an impairment related to those properties. 1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES (Continued)
Reserve Cash/ Restructuring Balance at 1998 Noncash Charge Activity 12/31/98 ----------------------------------------------------------------------- (Millions) Elimination of job responsibilities company-wide: Severance and other employment packages Cash $ (8.2) $ 2.6 $ (5.6) Pension/other benefit plan curtailments Noncash (2.1) 2.1 - Other Cash (0.8) 0.5 (0.3) Redirection of offshore Gulf production: Impairment of undeveloped leases Noncash (15.9) 15.9 - Impairment of producing properties Noncash (19.6) 19.6 - Integration of Kentucky West Virginia Pipeline with Appalachian production operations: Impairment of regulatory assets Noncash (4.0) 4.0 - Impairment of undeveloped leases Noncash (1.4) 1.4 - Decentralization of administrative functions: Impairment of headquarters building Noncash (5.1) 5.1 - Impairment of enterprise-wide computer system Noncash (7.7) 7.7 - Impairment of other assets Noncash (3.3) 3.3 - Exiting certain noncore businesses: Office closing/lease buyout Cash (1.7) 1.6 (0.1) Impairment of radio system assets/buyout lease Noncash/Cash (3.3) 2.1 (1.2) Impairment of investments Noncash (1.5) 1.5 - Impairment of other assets Noncash (3.6) 3.6 - Impairment of pipeline stranded costs Noncash (3.6) 3.6 - ========== =============== =============== Total $ (81.8) $ 74.6 $ (7.2) ========== =============== ===============
In the second quarter of 1997, the Company recognized a pretax impairment charge of $13.0 million related to its investment in a proposed bedded-salt natural gas storage project. During the third quarter of 1997, the Company began the restructuring of its headquarters and nonregulated energy sales offices. These actions resulted in a pretax operating charge in that quarter of $11.1 million. The restructuring activities (shown below in tabular format) primarily relate to the following:
Reserve Cash/ Restructuring Balance at 1997 Noncash Charge Activity 12/31/97 ----------------------------------------------------------------------- (Millions) Downsize headquarters staff: Severance packages Cash $ (3.1) $ 2.8 $ (0.3) Terminate consulting contracts Cash (2.1) 2.1 - Impairment of assets Noncash (1.7) 1.7 - Impairment of investments Noncash (2.2) 2.2 - Airplane lease exit costs Cash (1.7) 1.7 - Other Cash (0.3) 0.3 - Exit Avoca storage project: Impairment of investment Noncash (12.7) 12.7 - Other Cash (0.3) 0.3 - ========== ============ =============== Total $ (24.1) $ 23.8 $ (0.3) ========== ============ ===============
1998 AND 1997 RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES (Continued) Future cash outlays related to the 1998 restructuring charges are anticipated to be completed by the end of fiscal 1999. The Company will continue to evaluate its cost structure and adjust its organization to reflect changing business environments. Business segment operating results are presented in the segment discussions and financial tables on the following pages. EQUITABLE UTILITIES Equitable Utilities' operations comprise the sale and transportation of natural gas to retail customers at state-regulated rates, interstate transportation and storage of natural gas subject to federal regulation and the marketing of natural gas. The local distribution operations of Equitable Gas Company are subject to rate regulation by state regulatory commissions in Pennsylvania, West Virginia and Kentucky. In 1997, Equitable Gas received approval from the Pennsylvania Public Utility Commission (PUC) for a $15.8 million annual increase in base rates which was effective October 15, 1997. The new tariff provided for the unbundling of the local distribution services to enable customers to choose their gas supplier. Gas purchased by the customers, from other suppliers, is transported and delivered by Equitable Gas at regulated rates. While revenues are reduced when residential customers switch to transportation service, due to the elimination of the pass-through of gas costs, there is little impact on net margins. The new rate structure also increased the portion of revenues derived from the fixed monthly customer charge making margins for the distribution operation less sensitive to weather fluctuations for residential sales. The pipeline operations of Equitrans, L.P. and Three Rivers Pipeline Corporation are subject to rate regulation by the FERC. Under present rates, a majority of the annual costs are recovered through fixed charges to customers. Equitrans filed a rate case with the FERC addressing the recovery of certain gathering facility costs related to the implementation of Order 636, the unbundling of sales and transportation services. Effective September 1, 1997, the FERC permitted Equitrans to implement the new rates subject to refund pending the outcome of the regulatory process. In December 1998, the FERC rejected a proposed settlement of the rate case, which would have provided for retroactive recovery of gathering costs. Though originally endorsed by all parties, the withdrawal of support for retroactive recovery by one party caused the settlement proposal to be rejected. The Company recorded a charge associated with the rejection in December 1998 of approximately $6 million. In January 1999, Equitrans filed a new settlement proposal, which provides for prospective recovery of the increased gathering costs. Settlement of the rate case is again pending before the FERC, and Equitrans expects that most or all issues in the proceeding will be resolved through the settlement process in 1999. EQUITABLE UTILITIES (Continued) Equitable Utilities has set the 1999 capital expenditure level at $26.8 million, an 11% increase over capital expenditures of $24.2 million for 1998. The 1999 capital expenditures include $19.1 million for the distribution operations and $7.7 million for pipeline operations, including maintenance and improvements to existing lines and facilities, and approximately $5.5 million for new business development opportunities.
Years Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Operating revenues (millions): Residential gas sales $ 223 $ 294 $ 272 Commercial gas sales 24 32 68 Industrial and utility gas sales 34 42 81 Marketed energy sales 10 13 21 Transportation services 57 47 28 Storage services 10 8 7 Other 6 8 6 ------------- -------------- -------------- Total revenues 364 444 483 Cost of energy purchased 155 223 256 Revenue related taxes 12 15 17 ------------- -------------- -------------- Net operating revenues 197 206 210 ------------- -------------- -------------- Operating expenses: Operation and maintenance 76 73 72 Selling, general and administrative 46 49 46 Depreciation, depletion and amortization 21 20 20 Restructuring and impairment charges 11 13 - ------------- -------------- -------------- Total operating expenses 154 155 138 ------------- -------------- -------------- Operating income $ 43 $ 51 $ 72 ============= ============== ============== Sales quantities (Bcf): Residential 21.2 28.5 30.5 Commercial 2.5 3.2 10.5 Industrial and utility 13.6 14.9 26.6 Marketed gas sales 4.5 4.7 6.7 Transportation deliveries 50.0 47.9 35.4 Average selling prices (per Mcf): Residential $ 10.52 $ 10.33 $ 8.89 Commercial 9.54 10.08 6.51 Industrial and utility 2.50 2.76 3.15 Marketed gas sales 2.17 2.77 3.18 Heating degree days (normal - 5,564) 4,808 5,919 5,988
EQUITABLE UTILITIES (Continued) 1998 vs. 1997 Operating income for Equitable Utilities was $43.1 million in 1998 compared to $50.7 million in 1997. Results for 1998 include pretax charges related to restructuring of $11.7 million as described above. Results for 1997 include a pretax charge of $13.0 million related to the Avoca gas storage project as more fully described in Note C to the consolidated financial statements. Excluding the nonrecurring items in both periods, operating income decreased $8.9 million to $54.8 million in 1998 due primarily to warmer weather and lower margins from marketed gas sales. Distribution Operations Operating revenues for the distribution operations were $328.5 million for 1998, a decrease of $77.8 million from the revenues of $406.3 million for 1997. The decrease in revenues for 1998 is due to the impact of weather that was 19% warmer than the prior year, the effect of retail customers switching to transportation service, lower rates for the pass-through of gas costs to retail customers and lower throughput for nonretail customers. These decreases were partially offset by an increase in revenues from the fixed monthly customer charge of $12.5 million, which reduced the earnings impact of the lower throughput. The decrease of 7.3 Bcf in residential sales volumes is due to the impact of weather and residential customers switching to transportation service. Residential sales volumes were reduced by 1.4 Bcf as customers switched to transportation service under the unbundled services program which, beginning April 1, 1998, allowed residential customers in Pennsylvania to choose their natural gas supplier. For those customers who choose an alternate supplier, Equitable Gas continues to provide transportation and billing service. The cost of energy purchased of $194.2 million for 1998 decreased $74.3 million, or 28%, from the cost of energy purchased of $268.5 million for 1997. The decrease reflects lower rates for pass-through of gas costs to retail customers and decreased sales volumes as described above. Increases and decreases in the cost of energy generally do not affect operating income for the distribution operations as energy cost is a pass-through to customers for all rate-regulated sales. Operating expenses of $100.3 million for 1998, excluding restructuring charges of $2.9 million, were substantially unchanged from the $100.0 million for 1997. Operating income of $34.0 million for 1998, excluding the impact of restructuring charges, decreased $3.8 million from the operating income of $37.8 million for 1997. The decrease was due primarily to lower throughput, resulting from the warmer weather, partially offset by the impact of the new rate structure. EQUITABLE UTILITIES (Continued) Pipeline Operations Operating revenues for the pipeline operations were $67.9 million for 1998, a decrease of $7.6 million from the revenues of $75.5 million for 1997. The decrease in revenues for 1998 was due primarily to lower marketed gas prices and volumes and reduced revenues from extraction services resulting from a change in the contract arrangements. The cost of energy purchased of $5.1 million for 1998 decreased $2.3 million from the cost of energy purchased of $7.4 million for 1997. The decrease results from lower marketed gas prices and volumes. Operating expenses were $50.8 million for 1998 compared with operating expenses of $55.2 million for 1997. The operating expenses for 1998 and 1997 include nonrecurring charges of $8.8 million and $13.0 million, respectively, as more fully described above. Operating expenses, excluding the nonrecurring charges in both periods, were substantially the same. The increase in expenses for the rate case reserve was offset by lower expenses for extraction services resulting from a change in the contract arrangements, lower benefits costs reflecting regulatory treatment and lower corporate overhead costs. Excluding the impact of nonrecurring charges in both periods, operating income of $20.8 million for 1998 decreased $5.1 from the operating income of $25.9 million for 1997. The decrease in operating income is due primarily to lower marketed gas sales and the impact on 1998 from the rate case reserve. 1997 vs. 1996 Operating income for Equitable Utilities decreased by $21.5 million to $50.7 million in 1997 compared to operating income of $72.2 million in 1996. The 1997 period includes a pretax charge of $13.0 million related to the Avoca storage project as more fully described above. Excluding the nonrecurring item, operating income decreased $8.5 million, or 12% to $63.7 million in 1997 due principally to reduced net revenue as a result of lower throughput. EQUITABLE UTILITIES (Continued) Distribution Operations Operating revenues for the distribution operations were $406.3 million for 1997, a decrease of $34.2 million from the revenues of $440.5 million for 1996. Revenues for 1997 benefited from the new rate structure approved for residential retail customers as more fully described above. Revenues decreased due to a 7% decrease in residential volumes, and the impact of commercial and industrial customers moving from gas sales to transportation services based on regulatory changes and the development of new pricing structures. The commercial and industrial changes have little impact on operating income, because the margin earned on the sale of gas approximates the revenues from transportation. The decrease in residential volumes for 1997 is the result of warmer weather experienced during the first quarter of 1997 as compared to 1996. While the weather patterns for the two years resulted in nearly the same number of degree days, volumes lost due to warmer weather in the winter heating months are not recovered in a cool spring and fall. The cost of energy purchased of $268.5 million for 1997 decreased $29.9 million, or 10%, from the cost of energy purchased of $298.4 million for 1996. The decrease is the result of decreased sales volumes. Increases and decreases in the cost of energy generally do not affect operating income for the distribution operations, as energy cost is a pass-through to customers for all rate-regulated sales. Operating expenses of $100.0 million for 1997 increased $3.5 million over operating expenses of $96.5 million for 1996 due to higher provision for uncollectible accounts and increased costs for energy assistance programs. Operating income of $37.8 million for 1997 decreased $7.8 million from the operating income of $45.6 million for 1996. The decrease is due to lower retail throughput and the increase in operating expenses. Pipeline Operations Operating revenues for the pipeline operations were $75.5 million for 1997, a decrease of $7.2 million from the revenues of $82.7 million for 1996. The decrease in revenues for 1997 was due primarily to lower marketed gas and selling prices. The cost of energy purchased of $7.4 million for 1997 decreased $7.1 million from the cost of energy purchased of $14.5 million for 1996. The decrease reflects lower marketed gas volumes and prices. Operating expenses of $42.2 million for 1997, excluding the nonrecurring charge, were substantially the same as the operating expenses for 1996 of $41.7 million. Operating income of $25.9 million for 1997, excluding the nonrecurring charge, was substantially the same as the operating income of $26.5 million for 1996. EQUITABLE PRODUCTION Production operations comprise the production and sale of natural gas, natural gas liquids and crude oil. Production operates its exploration and production activities through Equitable Production Company (Equitable Production), formerly known as Equitable Resources Energy Company. In 1998, the managerial responsibility for the operations conducted by Kentucky West and Nora were transferred to Equitable Production - East operations under a services agreement. The financial results are reclassified to reflect the new structure for all periods presented. In 1997, Equitable Production made a strategic shift to concentrate its exploration and development activities in its core Appalachian and growing Gulf of Mexico holdings. In July 1997, Equitable Production announced that it had entered into sales agreements for $170 million with five purchasers covering its crude oil and natural gas properties in the western United States and Canada, which were no longer a part of Equitable's primary geographic focus. In October 1997, Equitable Production sold its Union Drilling division, a contract drilling company. These asset sales in 1997 resulted in pretax gains of $52.2 million, and more importantly, allowed management of the segment to refocus its exploration and production resources on areas with potential for higher return on invested capital. Equitable Production - East In the Appalachian Region during 1998, 123 wells were drilled at a success rate of 98.7%. This drilling was concentrated within the core areas of southwest Virginia and southeast Kentucky. This activity resulted in an additional 9 million cubic feet per day of gas sales and proved reserve additions of 30.3 Bcf. In 1999, the region will continue to focus on development of its sizable prospect inventory. Equitable Production - Gulf During 1998, daily net natural gas and crude oil production in the Gulf of Mexico increased 29 percent to 76 million cubic feet equivalent per day. The increase is the result of successful development of the 1997 acquisition from Chevron USA of West Cameron Block 180 and 198 fields and West Cameron Block 540 field. Equitable Production operates both fields. Equitable Production is producing about 57 million cubic feet of gas and about 745 barrels of oil per day from these fields and has begun an analysis of additional prospective drilling sites related to the West Cameron 180 and 198 fields. EQUITABLE PRODUCTION (Continued) Equitable Production also participated in other development activity during the year, including a Eugene Island 352 well, in which Equitable Production has a 52.6% working interest, currently producing 62 barrels of oil per day. Also, during 1997 Equitable Production won thirteen of twenty bids on new blocks awarded at the federal lease sale, adding 43,351 net acres, including 100% working interests in South Marsh Island 287, Vermilion 187 and West Cameron 179, and interests varying from 12.5% to 75% in East Cameron 97, Eugene Island 44, Eugene Island 45, Eugene Island 179, Mississippi Canyon 773, South Marsh Island 50, South Marsh Island 274, South Timbalier 196, Vermilion 54 and Vermilion 291. These blocks, together with those acquired since 1995, form the basis for exploration activities planned for 1999. In the fourth quarter, after a total review of the strategic direction of the Gulf operations, the Company focused on a lower risk, company-operated exploration and development program. Equitable Production recognized approximately $35.5 million of impairments associated with its Gulf operations. The write-down was primarily the result of the decrease in oil and gas prices and the Company's decision that certain offshore leases would not be developed. Additionally, Equitable Production recognized $23 million in dry hole expense in the fourth quarter primarily as a result of unsuccessful drilling of five exploratory prospects located offshore in the Gulf of Mexico. Capital Expenditures A 1999 capital expenditure budget of $81.1 million for Equitable Production has been approved. It includes $47.7 million for exploration and development drilling in the Gulf of Mexico and $33.4 million for development of Appalachian holdings including $3.7 million for improvements to gathering system pipelines. The evaluation of new prospects, market forecasts and price trends for natural gas and oil will continue to be the principal factors for the economic justification of drilling investments. EQUITABLE PRODUCTION (Continued)
Years Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Operating revenues (millions): Produced natural gas $ 124 $ 120 $ 106 Transportation 24 27 27 Natural gas liquids 18 25 22 Crude oil 13 26 25 Marketed natural gas 8 10 6 Other 16 44 43 ------------- -------------- -------------- Total revenues 203 252 229 Cost of energy purchased 5 7 2 ------------- -------------- -------------- Net operating revenues 198 245 227 ------------- -------------- -------------- Operating expenses: Operation and maintenance 34 57 57 Production 30 32 31 Dry hole 23 3 9 Other exploration 4 5 6 Selling, general and administrative 33 31 34 Depreciation, depletion and amortization 55 49 47 Restructuring charges 45 2 (2) ------------- -------------- -------------- Total operating expenses 224 179 182 ------------- -------------- -------------- Operating income (loss) $ (26) $ 66 $ 45 ============= ============== ============== Sales quantities: Produced natural gas (Bcf) 57.4 54.6 57.3 Natural gas liquids (million gallons) 67.1 65.5 63.2 Crude oil (MMBls) 1.0 1.5 1.7 Average selling prices: Produced natural gas (per Mcf) $ 2.16 $ 2.20 $ 1.85 Natural gas liquids (per gallon) 0.27 0.38 0.35 Crude oil (per barrel) 13.67 17.22 14.78
1998 vs. 1997 Operating revenues, which are derived primarily from the sale of produced natural gas, crude oil and natural gas liquids were $202.4 million in 1998 compared with $251.7 million in 1997. Included in 1997 are $5.2 million additional revenues from direct bill settlements as described in Note D to the consolidated financial statements, $18.3 million in revenues from contract drilling services associated with Union Drilling, a contract drilling operation which the Company sold in 1997 and $22.8 million in revenues from the western United States and Canada operations sold in 1997. The decrease in operating revenues of $2.0 million in 1998 compared to 1997, excluding nonrecurring amounts and sold operations, is due primarily to decreases in natural gas, crude oil and natural gas liquids prices, partially offset by increased production of natural gas and crude oil. EQUITABLE PRODUCTION (Continued) Realized prices for produced natural gas, crude oil and natural gas liquids decreased 25%, 34% and 32%, respectively, from 1997, while production for natural gas and crude oil, excluding production associated with the west United States and Canada, increased 16% and 24%, respectively. Operating expenses were $223.6 million in 1998 compared with $179.0 million in 1997. Included in the 1998 operating expenses are nonrecurring items primarily associated with write-downs of the carrying value of assets of approximately $44.7 million. The operating expenses also include approximately $23 million of dry hole expense primarily associated with unsuccessful drilling of five exploratory prospects offshore Gulf of Mexico. Included in the 1997 amounts is approximately $34.4 million of operating expenses associated with the assets sold in 1997. The increase in operating expenses in 1998, excluding the nonrecurring items and sold operations, is due to increased depreciation and depletion from higher production. Additionally, production expenses have increased $4.5 million in the Gulf operations as a result of a full year of the 1997 acquisition of West Cameron Block 180 and 198 fields. Selling, general and administrative (SG&A) expenses have also increased by $1.7 million due to the increased activity in the Gulf operations. 1997 vs. 1996 Operating revenues, which are derived primarily from the sale of produced natural gas, crude oil and natural gas liquids and contract drilling, were $251.7 million in 1997 compared with $228.9 million in 1996. The increase in operating revenues in 1997 compared to 1996 is due primarily to increases in natural gas prices. Realized price for produced natural gas increased 19% over 1996 as increases in the market, along with a more favorable overall net hedged position, combined to increase 1997 operating revenues. The 1997 operating revenues also increased due to a 4% increase in natural gas liquids volumes combined with a 7% increase in natural gas liquids price. Operating expenses were $179.0 million in 1997 compared with $182.5 million in 1996. Operating expenses are slightly lower for the year as the decrease in exploration expenses, resulting from less exploratory drilling and a higher success rate in Gulf exploration, were partially offset by higher depreciation and depletion expense related to increased Gulf of Mexico production. EQUITABLE SERVICES Equitable Services provides energy and energy related products and services that are designed to reduce its customers' operating costs and improve their productivity. The majority of Equitable Services' revenue and earnings is derived from energy saving performance contracting services and natural gas marketing activities. Equitable Services is comprised of two distinct business segments: NORESCO and Equitable Energy. The NORESCO segment includes ERI Services, a specialized business unit providing performance contracting services exclusively to the Federal Government. The financial results of the NORESCO segment include ERI Services. NORESCO Equitable Services' financial growth in 1998 was attributable to positive business developments for both NORESCO and ERI Services. NORESCO successfully developed three large energy performance contracts (ESPC) for school districts in upstate New York contributing $3.6 million in margin for the year and providing significant backlog for 1999. NORESCO continued its success in the Massachusetts municipal and school market by developing four new projects in 1998. The market contributed another $3.8 million in margin in 1998. NORESCO also began to benefit from efforts with the Federal Government by signing and implementing large ESPC projects for several agencies with the Department of Defense. In 1998, NORESCO earned margins in excess of $2.0 million from contract work with the Federal Government. NORESCO also completed the implementation of two large contracts for utility-sponsored demand side management services. In total, these two programs deliver 70 million kWH in annual energy savings and contributed $4.2 million to margin in 1998. In the commercial and industrial segment, NORESCO built on its existing client relationships by developing new contracts with two large companies. These two clients contributed more than $3.6 million in margin during 1998. NORESCO also opened new offices in Texas, Colorado and New York and consolidated its offices in Connecticut. NORESCO's construction backlog increased during 1998 from $14.2 million at the beginning of the year to $74.1 million at year-end. ERI Services continued its development of contracts with the Federal Government. In 1998, ERI Services developed eight multimillion dollar ESPCs including a contract at the Crane Naval Station in Indiana, three Army sites in the southeastern regions of the U.S. and two Coast Guard bases in the Caribbean. ERI Services' construction backlog increased during 1998 from $1.1 million at the beginning of the year to $6.8 million at year-end. In 1998, the segment's margins were impacted by several factors: (i) increased competition in the energy services industry, which has driven down margins; (ii) as the industry has matured, clients have become more sophisticated, often resulting in the "unbundling" of services, which can result in the erosion of margins; (iii) a reduction in the weighted contribution to the companies' business from utility sponsored demand-side management programs, which typically yield above-average gross margins; and (iv) a more concentrated focus on the Federal Government market segment, which contributes significantly to the companies' revenue base but also yields lower gross margins than those typically realized from commercial, industrial and institutional clients. EQUITABLE SERVICES (Continued)
NORESCO Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Operating revenues (millions): Marketed natural gas $ - $ - $ 2 Energy service contracting 109 51 8 Other 1 2 - -------------- -------------- --------------- Total revenues 110 53 10 -------------- -------------- --------------- Contract costs: Cost of energy purchased - - 2 Energy service contract costs 81 37 5 -------------- -------------- --------------- Total contract costs 81 37 7 -------------- -------------- --------------- Operating expenses: Selling, general and administrative 19 16 5 Depreciation, depletion and amortization 4 3 1 Restructuring, impairment of assets and other nonrecurring items 3 - - -------------- -------------- --------------- Total operating expenses 26 19 6 -------------- -------------- --------------- Operating income (loss) $ 3 $ (3) $ (3) ============== ============== ===============
1998 vs. 1997 Revenues increased from 1997 to 1998 by $56.7 million. On an annualized basis, NORESCO's revenues increased by 74% from 1997 to 1998 reflecting both the continued expansion of the business and a movement toward higher value contracts. Gross margins from energy services contracting activities decreased to 25.7% in 1998 from 29.3% in 1997. The deterioration in gross margin is a result of a change in the mix of contracts due to the increase in revenues from the lower margin yield government market, increased competition and the full year effect of the step up to fair value of NORESCO contracts for purchase accounting. SG&A expenses increased from 1997 to 1998 by $3.9 million. Increases in corporate overhead expense charged to this segment ($2.0 million) and in NORESCO's SG&A ($6.0 million, a full year in 1998 compared to 7 months in 1997) were partially offset by expense reductions in NORESCO's facilities management division ($2.1 million). ERI Services reduced SG&A expense by $3.2 million in 1998, reflecting a shift away from a start-up enterprise focused mainly on business and staff development and toward a focus on implementation and construction of contract assets. Depreciation, depletion and amortization (DD&A) expense increased from 1997 to 1998 by $1.5 million. This increase reflects goodwill amortization of $3.7 million in 1998 as compared to $2.2 million in 1997. EQUITABLE SERVICES (Continued) 1997 vs. 1996 Revenues increased from 1996 to 1997 by $42.4 million primarily due to the post-acquisition activities of NORESCO and the growth of this segment's business, which began operations in mid-1996. Gross margins from energy services contracting activities decreased to 29.3% in 1997 from 37.1% in 1996. This decrease is attributable to increased competition in the energy services industry, as well as a more heavily weighted contribution from the Federal Government market segment, which has lower gross margins than those typically realized from commercial, industrial and institutional clients. SG&A expenses increased from 1996 to 1997 by $10.1 million, which included $9.9 million from NORESCO. ERI Services' SG&A expense increased by $0.2 million in 1997, which reflects (i) a full year of operation for this business unit as compared to a partial year of operation in 1996 and (ii) the continued expansion of this unit, particularly in the areas of business development activities and professional staff building. DD&A expense increased from 1996 to 1997 by $3.0 million, which included $1.7 million for the amortization of goodwill from the NORESCO acquisition. Also in 1997, amortization of goodwill from the Conogen/Pequod acquisitions increased by $310,000 representing a full year of ownership. Depreciation expense for PP&E also increased by $0.5 million in 1997 primarily due to the addition of NORESCO and allocation of depreciation expense from Equitable headquarters. Equitable Energy Equitable Energy provides gas operations, commodity procurement and delivery, risk management and customer services to energy consumers including large industrial, utility, commercial, institutional and residential end-users. Equitable Energy entered into the residential market in 1998 providing natural gas and other related services to customers in Ohio and Pennsylvania. In 1998, Equitable Energy went through a major restructuring, closing unproductive sales offices and reducing sales and support staff. This segment's primary focus is to provide products and services in those areas where the Company has a strategic marketing advantage, usually due to geographic coverage and ownership of physical assets. EQUITABLE SERVICES (Continued)
Equitable Energy Years Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Marketed natural gas (millions) $ 320 $ 293 $ 229 Cost of energy purchased 314 284 223 -------------- -------------- --------------- Net operating revenues 6 9 6 -------------- -------------- --------------- Operating expenses: Selling, general and administrative 10 14 14 Depreciation, depletion and amortization 1 1 - Restructuring, impairment of assets and other nonrecurring items 3 - - -------------- -------------- --------------- Total operating expenses 14 15 14 -------------- -------------- --------------- Operating loss $ (8) $ (6) $ (8) ============== ============== ===============
1998 vs. 1997 Revenues increased from 1997 to 1998 by $26.3 million. The increase in 1998 revenues was due primarily to residential market programs. Gas margins decreased by $2.7 million in 1998 from 1997. A large group of high margin customers were renewed at lower rates reflecting the highly competitive nature of the business. Also in the last half of 1998, the business yielded lower margins due to decreased throughput for large industrial steel producing clients. SG&A expenses decreased from 1997 to 1998 by $4.3 million. The decreases were due primarily to decreased consulting costs and reduced staffing and office closures. 1997 vs. 1996 The year 1997 was a year of expansion for the Equitable Energy group. In growing the business, which was formed early in 1996, Equitable Energy expanded its gas marketing into many regions, opened several sales offices and added new products to its portfolio. In 1997, its first full year of operations, Equitable Energy was able to more than double its customer base from 1996; however, revenues and margins remained unchanged (nine months of 1996 revenues - $229 million; 1997 - $282 million; and nine months of 1996 margins - $6 million; 1997 - $8 million). Marketing and development efforts were intentionally reduced from 1996 to better focus in areas of high growth potential (nine months of 1996 - $9.5 million; 1997 - $7.6 million). OTHER INCOME STATEMENT ITEMS
Other Income Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Other income (millions): Gain (loss) on sale of assets $ (2) $ 50 $ 1 Equity in earnings of nonconsolidated subsidiaries 3 - - -------------- -------------- --------------- Total other income $ 1 $ 50 $ 1 ============== ============== ===============
OTHER INCOME STATEMENT ITEMS (Continued) In late 1997, NORESCO's facilities management division completed the construction of a 50 MW power plant in Panama, in which NORESCO holds a 45% ownership interest. This plant was operational during 1998 and yielded equity in earnings of nonconsolidated subsidiaries of $2.6 million. The 1997 sale of certain of the Company's crude oil and natural gas production properties in the western United States and Canada and its contract drilling operations is described above in "Results of Operations" and "Equitable Production." There were no other significant changes in other income between 1998 and 1996. Interest Charges Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------- Interest charges (millions) $ 40 $ 35 $ 30 ======= ======== ======== 1998 vs. 1997 Interest costs increased in 1998 as a result of a $44 million increase in average debt outstanding during the year and an increase in the Company's average overall interest rate. The increase in debt outstanding was due to increased capital spending for Gulf of Mexico and midstream projects completed during 1998. The increased rate is due to the April 1998 issuance of 7.35% Preferred Trust Debentures, which replaced lower rate commercial paper borrowings. 1997 vs. 1996 Interest charges rose in 1997 as a result of a 55% increase in the average daily total of short-term loans outstanding of $229 million in 1997 compared to $147 million in 1996. The increased 1997 borrowings were used primarily to finance acquisitions and other capital expenditures described in the segment discussions above. Average annual interest rates on short-term debt remained relatively constant, in a range of 5.0% to 5.7%, throughout the three-year period. Income Taxes Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- Income taxes (net - millions): Income tax expense (benefit) $ (21) $ 44 $ 30 Tax credits (1) (1) (3) -------- -------- ------- Net income tax expense (benefit) $ (22) $ 43 $ 27 ======== ======== ======= 1998 vs. 1997 The effective income tax rate increased from 1997 to 1998. Because 1998 resulted in a loss before income taxes, the increase in the effective tax rate actually signifies a favorable variance from statutory rates, as a result of lower state income taxes. The state income tax benefit is attributable to variances in state effective rates between jurisdictions where income and losses occurred. OTHER INCOME STATEMENT ITEMS (Continued) 1997 vs. 1996 The effective income tax rate increased from 1996 to 1997 as a result of decreased tax credits, nondeductible amortization of goodwill and higher state income tax rates resulting from a change in law. CAPITAL RESOURCES AND LIQUIDITY Cash Flows Operating Activities Cash required for operations is affected primarily by the seasonal nature of Equitable's natural gas distribution operations and the volatility of oil and gas commodity prices. Short-term loans used to support working capital requirements during the summer months are repaid as gas is sold during the heating season. The Company's performance contracting business requires substantial initial working capital investments which are recovered in revenues as the related energy savings are realized or when the contract is assigned. Cash flows from operating activities totaled $64 million in 1998, compared to $114 million in 1997 and $66 million in 1996. Cash flows from operations decreased in 1998 primarily as a result of a $45 million decrease in net operating revenues due to lower sales volumes in the utility segment and lower natural gas, natural gas liquids and crude oil prices in the production segment. In addition, 1998 production segment operating expenses included $23 million of dry hole cost, the majority of which resulted from cash expended in 1998. These cash requirements were somewhat offset by a decrease of $25 million in net working capital requirements in 1998, as the Company eliminated its trading operation in connection with the sale of the discontinued natural gas midstream operations. Cash flows from operations increased in 1997 primarily as a result of a reduction in working capital requirements for deferred purchased gas cost due to the increased collection of deferred costs in regulated rates, somewhat offset by an increase in accounts receivable. CAPITAL RESOURCES AND LIQUIDITY (Continued) Cash flow has been affected by the Alternative Minimum Tax (AMT) since 1988. Equitable incurred an AMT liability in past years primarily as a result of nonconventional fuels tax credits. Although AMT payments can be carried forward indefinitely and applied to income tax liabilities in future periods, they impact cash generated from operations. In 1998, $5.8 million of AMT credits were utilized to reduce current year tax payments. At December 31, 1998, Equitable has available $58.5 million of AMT credit carryforwards. The impact of AMT on future cash flow will depend on the level of taxable income. Investing Activities Equitable's financial objectives require ongoing capital expenditures for growth projects in the Equitable Production and Services units, as well as replacements, improvements and additions to plant assets in the Utilities unit. Such capital expenditures during 1998 were $138.5 million including $73.2 million in natural gas and crude oil production assets in the Gulf region and $30.9 million in new coal-bed methane and conventional natural gas production development in the East. Equitable Services' $11.1 million of 1998 capital spending included international power project development, while Equitable Utilities' $23.3 million included $15.9 million of distribution plant replacements and improvements. In December 1998, the Company completed the sale of its natural gas midstream operations for $338 million, subject to final working capital adjustments. Proceeds from the sale were used to reduce outstanding debt, repurchase shares of the Company's common stock and for operating purposes. In September and October 1997, Equitable completed the sale of its crude oil and natural gas properties in the western United States and Canada for aggregate cash proceeds of $170 million. As part of a tax deferred like-kind exchange, a portion of the proceeds were placed in escrow and used to fund the purchase of Gulf properties from Chevron. The $49 million balance in escrow at December 31, 1997 is included in cash and cash equivalents in the consolidated balance sheets. Early in 1998 the escrow account was closed and the balance of escrow funds and other proceeds were used to pay down short-term debt. A total of $119 million has been authorized for the 1999 capital expenditure program, described in more detail in the segment discussions above. The Company expects to finance its authorized 1999 capital expenditure program with cash generated from operations and with short-term loans. Financing Activities In 1998, financing activities used $199.2 million of cash primarily as a result of a net decrease of $166 million in short-term loans; the early retirement of long-term debt in the amount of $68.6 million, including premiums paid; and Company stock repurchases of $37.7 million. These uses of cash were somewhat offset by the issuance of $125 million of Preferred Trust Capital Securities. A portion of the stock repurchases was executed under the terms of an Accelerated Stock Repurchase Program conducted by an investment banker. Stock repurchased during 1998 represented 4% of outstanding shares. CAPITAL RESOURCES AND LIQUIDITY (Continued) In 1997, financing activities generated $12 million of cash as a result of a net increase of $77 million in short-term loans, partially offset by $29 million used for treasury stock purchases. The common stock was used for a portion of the 2.1 million shares valued at $67 million issued in the purchase of NORESCO, while the short-term loans funded the $10 million cash portion of that purchase and other 1997 capital expenditures. Cash generated in all years was partially offset by the payment of the Company's dividends on common shares, which remained substantially unchanged at $43 million. Capital Resources Equitable has adequate borrowing capacity to meet its financing requirements. Bank loans and commercial paper, supported by available credit, are used to meet short-term financing requirements. Interest rates on these short-term loans averaged 5.0% during 1998. At December 31, 1998, $115 million of commercial paper was outstanding at an average annual interest rate of 5.0%. Equitable maintains a revolving credit agreement with a group of banks providing $500 million of available credit. The agreement requires a facility fee of one-tenth of one percent and expires September 1, 2001. Adequate credit is expected to continue to be available in the future. Rate Regulation Accounting for the operations of Equitable's Utilities segment is in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As described in Note A to the consolidated financial statements, regulatory assets and liabilities are recorded to reflect future collections or payments through the regulatory process. The Company believes that it will continue to be subject to rate regulation that will provide for the recovery of deferred costs. ENVIRONMENTAL MATTERS Equitable and its subsidiaries are subject to extensive federal, state and local environmental laws and regulations that affect their operations. Governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements and injunctions as to future activities. Management does not know of any environmental liabilities that will have a material effect on Equitable's financial position or results of operations. The Company has identified situations that require remedial action for which approximately $4.2 million is accrued at December 31, 1998. Environmental matters are described in Note S to the consolidated financial statements. INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES The rate of inflation in the United States has been moderate over the past several years and has not significantly affected the profitability of the Company. In prior periods of high general inflation, oil and gas prices generally increased at comparable rates; however, there is no assurance that this will be the case in the current environment or in possible future periods of high inflation. Regulated utility operations would be required to file a general rate case in order to recover higher costs of operations. Margins in the energy marketing business in the Equitable Energy segment are highly sensitive to competitive pressures and may not reflect the effects of inflation. The results of operations in the Company's three business segments will be affected by future changes in oil and gas prices and the interrelationship between oil, gas and other energy prices. YEAR 2000 COSTS State of Readiness The Company initiated an enterprise-wide project in 1996 to address the Year 2000 issue. A management team was put in place to manage this project and a detailed project plan has been developed to address the three identified primary risk areas: process controls and facilities, business information systems applications and issues relative to third party product and service providers. This plan is continuously updated and reviewed regularly with senior management and the Board of Directors. The Company is on schedule to complete remediation and testing of all critical components as planned. To date the Company has completed the inventory and assessment phases covering all process controls (embedded chips), facilities and systems applications. The remediation and testing of process controls, using both internal resources and contracted engineers, is well underway (90% complete) and on schedule. The testing and remediation of systems applications are on schedule with approximately 90% of the critical applications remediated and tested. Equitable anticipates that all critical systems will be Y2K compliant by June 1999. Additionally, the Company has developed a formal communications process with external parties with whom it does business to determine the extent to which they have addressed their Year 2000 compliance. The Company will continue to evaluate responses as they are received. Actions to remediate potential problems (up to and including shifting business to Year 2000 compliant vendors from those with problems) will take place in 1999. YEAR 2000 COSTS Costs The total cost of the Company's Year 2000 project is still being evaluated. Until all process control systems have been tested and documented, the full cost of remediation of this part of the project will not be known. The cost to date, however, is $3.4 million, and the total cost estimate for the balance of the project is an additional $1.5 million. All of the costs have been or will be charged to operating expense except $0.5 million of systems upgrades, which will be capitalized and charged to expense over the estimated useful life of the associated hardware and software. Additional costs could be incurred if significant remediation activities are required with third party suppliers (see below). The estimated costs to convert remaining systems is not expected to be material to results of operations in any future period. Risks and Contingencies The Company continues to evaluate risks associated with the potential inability of outside parties to successfully complete their Year 2000 effort, and contingency plans are being developed and/or adapted as appropriate. While the Company believes it has taken the necessary steps to provide for the continued safe and reliable operation of its natural gas delivery system into the Year 2000, monitoring the progress of critical suppliers is an ongoing process. A worst-case scenario would involve the failure of one or more of the gas marketers or pipelines supplying the Company's distribution operations. If this occurs, the Company would either supply its customers from existing internal supply sources or attempt to purchase supply on the "spot" market, probably at somewhat higher prices. Unless supply shortfalls were of a long duration or occurred during a period of extreme weather conditions when spot supplies might not be as readily available, it would be unlikely that the distribution company would have to curtail deliveries to its customers. If it appears that this scenario is more than a remote possibility additional contingency plans will be put into place. AUDIT COMMITTEE The Audit Committee, composed entirely of outside directors, meets periodically with Equitable's independent auditors, its internal auditor and management to review the Company's financial statements and the results of audit activities. The Audit Committee, in turn, reports to the Board of Directors on the results of its review and recommends the selection of independent auditors. FORWARD-LOOKING STATEMENTS Disclosures in this annual report may include forward-looking statements related to such matters as anticipated financial performance, business prospects, capital projects, new products and operational matters. The Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company business include, but are not limited to, the following: weather conditions, the pace of deregulation of retail natural gas and electricity markets, the timing and extent of changes in commodity prices for natural gas and crude oil, changes in interest rates, the timing and extent of the Company's success in acquiring natural gas and crude oil properties and in discovering, developing and producing reserves, the inability of the Company or others to remediate Year 2000 concerns in a timely fashion, delays in obtaining necessary governmental approvals and the impact of competitive factors on profit margins in various markets in which the Company competes. Item 7A. Qualitative and Quantitative Disclosures About Market Risk The Company's primary market risk exposure is the volatility of future prices for natural gas and crude oil, which can affect the operating results of Equitable through the Equitable Production segment and the deregulated marketing group within the Equitable Services segment. The Company's use of derivatives to reduce the effect of this volatility is described in Note B to the consolidated financial statements. The Company uses simple, nonleveraged derivative instruments that are placed with major institutions whose creditworthiness is continually monitored. The Company's use of these derivative financial instruments is implemented under a set of policies approved by the Board of Directors. For commodity price derivatives used to hedge Company production, Equitable sets policy limits relative to expected production and sales levels which are exposed to price risk. The level of price exposure is limited by the value at risk limits allowed by this policy. Volumes associated with future activities, such as new drilling, recompletions and acquisitions, are not eligible for hedging. Management monitors price and production levels on essentially a continuous basis and will make adjustments to quantities hedged as warranted. In general, Equitable's strategy is to become more highly hedged at prices considered to be at the upper end of historical levels. For commodity price derivatives used to hedge marketing physical positions, the marketing group will engage in financial transactions also subject to policies that limit the net positions to specific value at risk limits. In general, this marketing group considers profit opportunities in both physical and financial positions, and Equitable's policies apply equally thereto. With respect to the energy derivatives held by subsidiaries of Equitable as of December 31, 1998, a decrease of 10% in the market price of natural gas from the December 31, 1998 levels would decrease the fair value of these instruments by approximately $5.6 million. The Company is in the process of implementing, and in 1999 intends to use, the value at risk method for determining the market risk of its energy derivatives. Item 7A. Qualitative and Quantitative Disclosures About Market Risk (Continued) The above analysis of the energy derivatives utilized for risk management purposes does not include the favorable impact that the same hypothetical price movement would have on the Company and its subsidiaries' physical purchases and sales of natural gas. The portfolio of energy derivatives held for risk management purposes approximates the notional quantity of the expected or committed transaction volume of physical commodities with commodity price risk for the same time periods. Furthermore, the energy derivative portfolio is managed to complement the physical transaction portfolio, reducing overall risks within limits. Therefore, the adverse impact to the fair value of the portfolio of energy derivatives held for risk management purposes associated with the hypothetical changes in commodity prices referenced above would be offset by a favorable impact on the underlying hedged physical transactions, assuming the energy derivatives are not closed out in advance of their expected term, the energy derivatives continue to function effectively as hedges of the underlying risk, and as applicable, anticipated transactions occur as expected. The disclosure with respect to the energy derivatives relies on the assumption that the contracts will exist parallel to the underlying physical transactions. If the underlying transactions or positions are liquidated prior to the maturity of the energy derivatives, a loss on the financial instruments may occur, or the options might be worthless as determined by the prevailing market value on their termination or maturity date, whichever comes first. The Company has limited variable rate short-term debt. As such, there is some limited exposure to future earnings due to changes in interest rates. A 100 basis point increase or decrease in interest rates would not have a significant impact on future earnings of the Company. Item 8. Financial Statements and Supplementary Data Page Reference Report of Independent Auditors 40 Statements of Consolidated Income for each of the three years in the period ended December 31, 1998 41 Statements of Consolidated Cash Flows for each of the three years in the period ended December 31, 1998 42 Consolidated Balance Sheets December 31, 1998 and 1997 43 & 44 Statements of Common Stockholders' Equity for each of the three years in the period ended December 31, 1998 45 Notes to Consolidated Financial Statements 46 - 74 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Equitable Resources, Inc. We have audited the accompanying consolidated balance sheets of Equitable Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Equitable Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Ernst & Young LLP Pittsburgh, Pennsylvania February 25, 1999
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME YEARS ENDED DECEMBER 31, 1998 1997 1996 -------------------------------------------------- (Restated) (Restated) -------------------------------------------------- (Thousands except per share amounts) Operating revenues $ 882,625 $ 934,034 $ 856,367 Cost of sales 453,537 460,572 410,024 --------------- ---------------- --------------- Net operating revenues 429,088 473,462 446,343 --------------- ---------------- --------------- Operating expenses: Operation & maintenance 109,240 131,648 125,018 Exploration 27,211 7,260 14,785 Production 30,390 32,207 31,224 Selling, general and administrative 109,341 103,141 101,825 Depreciation, depletion and amortization 81,250 72,971 68,319 Restructuring, impairment and other nonrecurring charges 81,840 24,055 (4,385) --------------- ---------------- --------------- Total operating expenses 439,272 371,282 336,786 --------------- ---------------- --------------- Operating income (loss) (10,184) 102,180 109,557 Other 2,667 - - Gain/(loss) on sale of assets (1,614) 50,120 852 --------------- ---------------- --------------- Earnings (loss) from continuing operations, before interest & taxes (9,131) 152,300 110,409 Interest charges 40,302 34,903 29,837 --------------- ---------------- --------------- Income (loss) before income taxes (49,433) 117,397 80,572 Income taxes (benefits) (22,381) 43,210 27,045 --------------- ---------------- --------------- Net income (loss) from continuing operations before extraordinary loss (27,052) 74,187 53,527 Income (loss) from discontinued operations after taxes (8,804) 3,870 5,852 Extraordinary loss after taxes - early extinguishment of debt (8,263) - - --------------- ---------------- --------------- Net income (loss) $ (44,119) $ 78,057 $ 59,379 =============== ================ =============== Average common shares outstanding 36,833 36,003 35,188 =============== ================ =============== Earnings (loss) per share of common stock: Basic: Continuing operations, before extraordinary loss $ (0.73) $ 2.06 $ 1.52 Discontinued operations (0.24) 0.11 0.17 Extraordinary loss - early extinguishment of debt (0.22) - - --------------- ---------------- --------------- Net income $ (1.19) $ 2.17 $ 1.69 =============== ================ =============== Diluted: Continuing operations, before extraordinary loss $ (0.73) $ 2.05 $ 1.52 Discontinued operations (0.24) 0.11 0.17 Extraordinary loss - early extinguishment of debt (0.22) - - --------------- ---------------- --------------- Net income $ (1.19) $ 2.16 $ 1.69 =============== ================ =============== See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS YEARS ENDED DECEMBER 31, 1998 1997 1996 ------------------------------------------------------- (Restated) (Restated) ------------------------------------------------------- (Thousands) Cash flows from operating activities: Net income (loss) from continuing operations, before extraordinary items $ (27,052) $ 74,187 $ 53,527 ----------------- ---------------- ----------------- Adjustments to reconcile net income to net cash provided by operating activities: Impairment of assets 75,245 13,000 - Depreciation, depletion and amortization 81,250 72,971 68,319 Gain on sale of property - (52,204) - Amortization of construction contract costs - net 8,271 7,925 - Deferred income taxes (benefits) (29,537) 31,008 24,207 Changes in other assets and liabilities: Accounts receivable and unbilled revenues 117,521 (59,015) (47,909) Deferred purchased gas cost 5,646 16,026 (49,919) Prepaid expenses and other 32,353 (12,858) (10,281) Accounts payable (121,396) 54,254 49,784 Deferred revenue (16,529) (22,156) (22,200) Other - net (36,800) (27,285) (21,758) ----------------- ---------------- ----------------- Total adjustments 116,024 21,666 (9,757) ----------------- ---------------- ----------------- Net cash provided by continuing operating activities 88,972 95,853 43,770 Net cash (used in) provided by discontinued operations (24,473) 18,321 21,798 ----------------- ---------------- ----------------- Net cash provided by operating activities 64,499 114,174 65,568 ----------------- ---------------- ----------------- Cash flows from investing activities: Capital expenditures on continuing operations (138,520) (220,100) (88,177) Capital expenditures on discontinued operations in year of disposal (32,004) - - Proceeds from sale of property 338,255 181,566 4,180 Net noncurrent assets held for sale - (32,835) (22,107) ----------------- ---------------- ----------------- Net cash used in investing activities 167,731 (71,369) (106,104) ----------------- ---------------- ----------------- Cash flows from financing activities: Issuance of common stock 2,496 6,631 2,306 Purchase of treasury stock (37,747) (28,596) (33) Dividends paid (43,800) (42,679) (41,548) Proceeds from issuance of long-term debt - - 144,919 Purchase of debt due 1999 through 2026 (68,556) - - Proceeds from preferred trust securities 125,000 - - Repayments and retirements of long-term debt (10,880) - (150,440) Increase (decrease) in short-term loans (165,741) 76,544 69,900 ----------------- ---------------- ----------------- Net cash provided (used) by financing activities (199,228) 11,900 25,104 ----------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents 33,002 54,705 (15,432) Cash and cash equivalents at beginning of year 69,442 14,737 30,169 ----------------- ---------------- ----------------- Cash and cash equivalents at end of year $ 102,444 $ 69,442 $ 14,737 ================= ================ ================= Cash paid during the year for: Interest (net of amount capitalized) $ 46,973 $ 43,533 $ 43,025 ================= ================ ================= Income taxes $ 15,568 $ 16,030 $ 10,456 ================= ================ =================
See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, ASSETS 1998 1997 ------------------------------------------------------- (Restated) ------------------------------------------------------- (Thousands) Current assets: Cash and cash equivalents $ 102,444 $ 69,442 Accounts receivable (less accumulated provision for doubtful accounts: 1998, $9,470; 1997, $9,985) 192,955 354,121 Unbilled revenues 41,616 32,527 Inventory 33,743 37,156 Deferred purchased gas cost 39,445 44,053 Derivative commodity instruments, at fair value - 82,912 Prepaid expenses and other 34,832 64,523 -------------------- -------------------- Total current assets 445,035 684,734 -------------------- -------------------- Property, plant and equipment 1,960,390 1,862,412 Less accumulated depreciation and depletion 762,320 675,410 -------------------- -------------------- Net property, plant and equipment 1,198,070 1,187,002 -------------------- -------------------- Net assets of discontinued operations - 238,182 -------------------- -------------------- Other assets: Regulatory assets 65,983 69,919 Goodwill 68,128 66,823 Other 77,031 81,391 -------------------- -------------------- Total other assets 211,142 218,133 -------------------- -------------------- Total $ 1,854,247 $ 2,328,051 ==================== ==================== See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 --------------------------------------------------- (Restated) --------------------------------------------------- (Thousands) Current liabilities: Current portion long-term debt $ 74,136 $ 5,000 Short-term loans 115,703 281,444 Accounts payable 152,784 288,192 Derivative commodity instruments, at fair value - 79,012 Other current liabilities 94,382 92,053 ------------------- -------------------- Total current liabilities 437,005 745,701 ------------------- -------------------- Long-term debt 281,350 417,564 ------------------- -------------------- Deferred and other credits: Deferred income taxes 172,474 208,236 Deferred investment tax credits 17,695 18,792 Deferred revenue 68,989 85,518 Other 43,315 28,720 ------------------- -------------------- Total deferred and other credits 302,473 341,266 ------------------- -------------------- Commitments and contingencies - - ------------------- -------------------- Preferred trust securities 125,000 - ------------------- -------------------- Common stockholders' equity: Common stock, no par value, authorized 80,000 shares; shares issued: 1998, 37,252; 1997, 36,985 280,400 269,879 Treasury stock, shares at cost: 1998, 1,396; 1997, 56 (39,298) (1,551) Retained earnings 467,326 555,245 Accumulated other comprehensive income (9) (53) ------------------- -------------------- Total common stockholders' equity 708,419 823,520 ------------------- -------------------- Total $ 1,854,247 $ 2,328,051 =================== ==================== See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES STATEMENTS OF COMMON STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 Common Stock Accumulated ---------------------------------- Other Common Shares No Retained Comprehensive Stockholders' Outstanding Par Value Earnings Income Equity -------------------------------------------------------------------------------------- (Thousands) Balance, December 31, 1995 35,007 $ 214,181 $502,036 $(1,138) $715,079 Comprehensive income: Net income for the year 1996 59,379 Foreign currency translation (83) Total comprehensive income 59,296 Dividends ($1.18 per share) (41,548) (41,548) Stock issued: Acquisition of subsidiary 239 7,000 Conversion of 9 1/2% debentures 16 178 Restricted stock option plan 36 855 Dividend reinvestment plan 49 1,456 Treasury stock (1) (33) Net change in common stock 9,456 ------------ --------------- --------------- -------------- --------------- Balance, December 31, 1996 35,346 223,637 519,867 (1,221) 742,283 Comprehensive income: Net income for the year 1997 78,057 Foreign currency translation 1,168 Total comprehensive income 79,225 Dividends ($1.18 per share) (42,679) (42,679) Stock issued: Acquisition of subsidiary 2,401 68,276 Conversion of 9 1/2% debentures 33 370 Restricted stock option plan 106 3,323 Dividend reinvestment plan 43 1,318 Treasury stock (1,000) (28,596) Net change in common stock 44,691 ------------ --------------- --------------- -------------- --------------- Balance, December 31, 1997 36,929 268,328 555,245 (53) 823,520 Comprehensive income: Net loss for the year 1998 (44,119) Foreign currency translation 44 Total comprehensive income (44,075) Dividends ($1.18 per share) (43,800) (43,800) Stock issued: Acquisition of subsidiary 171 5,460 Restricted stock option plan 56 3,990 Dividend reinvestment plan 40 1,071 Treasury stock (1,340) (37,747) Net change in common stock (27,226) ------------ --------------- --------------- -------------- --------------- Balance, December 31, 1998 35,856 $ 241,102 $ 467,326 $ (9) $ 708,419 ============ =============== =============== ============== =============== Common shares authorized: 80,000,000 shares. Preferred shares authorized: 3,000,000 shares. There are no preferred shares issued or outstanding. Common shares outstanding are net of treasury stock: 1998 - 1,396,000 shares ($39,298,000); 1997 - 56,000 shares ($1,551,000); 1996 - 169,000 shares ($4,023,000). Retained earnings of $468,074,000 are available for dividends on, or purchase of, common stock pursuant to restrictions imposed by indentures securing long-term debt. See notes to consolidated financial statements
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 A. Summary of Significant Accounting Policies PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Equitable Resources, Inc. and all subsidiaries, ventures and partnerships in which a controlling interest is held (Equitable or the Company). Equitable also consolidates its interest in oil and gas joint ventures. Equitable uses the equity method of accounting for companies where its ownership is between 20% and 50%. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. These investments are accounted for at cost. Interest earned on cash equivalents is included in interest charges. INVENTORIES: Inventories, which consist of gas stored underground and materials and supplies, are stated at average cost. PROPERTIES, DEPRECIATION AND DEPLETION: Plant, property and equipment is carried at cost. Depreciation is provided on the straight-line method based on estimated service lives, ranging from 3 to 70 years except for most natural gas and crude oil production properties as explained below. The Company uses the successful efforts method of accounting for exploration and production activities. Under this method, the cost of productive wells and development dry holes, as well as productive acreage, are capitalized and depleted on the unit-of-production method. DEFERRED PURCHASED GAS COST AND OTHER REGULATORY ASSETS: The Company's distribution and interstate pipelines are subject to rate regulation by state and federal regulatory commissions. Accounting for these operations is in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Where permitted by regulatory authority under purchased gas adjustment clauses or similar tariff provisions, the Company defers the difference between purchased gas cost, less refunds, and the billing of such cost and amortizes the deferral over subsequent periods in which billings either recover or repay such amounts. Certain other costs, which will be passed through to customers under ratemaking rules for regulated operations, are deferred by the Company as regulatory assets when recovery through rates is expected. These amounts relate primarily to the accounting for income taxes. The Company believes that it will continue to be subject to rate regulation that will provide for the recovery of deferred costs. A. Summary of Significant Accounting Policies (Continued) DERIVATIVE COMMODITY INSTRUMENTS: The Company uses exchange-traded natural gas and crude oil futures contracts and options and over-the-counter (OTC) natural gas and crude oil swap agreements and options to hedge exposures to fluctuations in oil and gas prices. The Company uses the deferral accounting method to account for derivative commodity instruments designated and effective as hedges. Under this method, changes in the market value of these hedge positions are deferred and included in other current assets and other current liabilities. These deferred realized and unrealized gains and losses are included in operating revenues when the hedged transactions occur. It is management's intent to hold derivative commodity instruments designated as hedges until maturity. However, in the event a hedge contract is terminated early, the deferred gain or loss realized on early termination of the contract will be recognized as the hedged production occurs. If the underlying asset to a hedge contract is sold, the deferred gain or loss associated with the contract will be recognized at the time the oil and gas property is sold. Premiums on option contracts are deferred in other current assets and recognized in operating revenues over the option term. Cash flows from derivative contracts are considered operating activities. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The Company has not yet determined when it will adopt the provisions of this statement, which may be implemented at the beginning of any fiscal quarter. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company. In November 1998, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities." The EITF concluded that energy trading activities should be recognized on a mark-to-market basis based on the fair value of the contracts. Trading activities should be reported separately (either net or gross) in the income statement. The consensus is effective for fiscal years beginning after December 15, 1998 and must be adopted by a cumulative catch up adjustment. A. Summary of Significant Accounting Policies (Continued) The Company has not determined what the effect of EITF Issue No. 98-10 will be on the earnings and financial position of the Company, the impact of which is not expected to be material. GOODWILL: Goodwill consists of costs in excess of the net assets of businesses acquired. Goodwill is amortized on a straight-line basis over a period of twenty years. STOCK BASED COMPENSATION: The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options and awards. Accordingly, compensation cost for stock options and awards is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the exercise price of the stock option or award. REVENUE RECOGNITION: Revenues for regulated gas sales to retail customers are recognized as service is rendered, including an accrual for unbilled revenues from the date of each meter reading to the end of the accounting period. Revenue is recognized for exploration and production activities when deliveries of natural gas, crude oil and natural gas liquids are made. Revenues from natural gas transportation and storage activities are recognized in the period service is provided. Revenues from energy marketing activities are recognized when deliveries occur. The Company recognizes revenue from shared energy savings contracts as energy savings are measured and verified. Revenue received from customer contract termination payments is recognized when received. Revenue from other long-term contracts, such as turnkey contracts, is recognized on a percentage-of-completion basis, determined using the cost-to-cost method. Any maintenance revenues are recognized as related services are performed. SALES OF RECEIVABLES: The Company finances some amounts due from customers with financial institutions. At the time of the transfer, the amounts due from the customer are recognized as revenue, the transfer is accounted for as the sale of a receivable, the receivable is removed from the books and any related deferred costs are charged to operations immediately. INCOME TAXES: The Company files a consolidated federal income tax return. The current provision for income taxes represents amounts paid or estimated to be payable. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Where deferred tax liabilities will be passed through to customers in regulated rates, the Company establishes a corresponding regulatory asset for the increase in future revenues that will result when the temporary differences reverse. A. Summary of Significant Accounting Policies (Continued) Investment tax credits realized in prior years were deferred and are being amortized over the estimated service lives of the related properties where required by ratemaking rules. EARNINGS PER SHARE: "Basic" EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. "Diluted" EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock. COMPREHENSIVE INCOME: In 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income includes net income and other changes to stockholders' equity in the current period, examples of which include foreign currency translation adjustments and certain changes in the value of derivative financial instruments. SFAS No. 130 does not impact amounts previously reported for net income. Because the Company does not have material items accounted for as other comprehensive income, the adoption of SFAS No. 130 did not have a significant impact on the Company's financial statements. SEGMENT DISCLOSURES: In 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires that an enterprise disclose certain information about operating segments. Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and are subject to evaluation by the Company's chief executive officer in deciding how to allocate resources. Operating segments are evaluated on their contribution to the Company's consolidated results, based on earnings before interest and taxes. Interest charges, income taxes and certain corporate office expenses are managed on a consolidated basis and are allocated pro forma to operating segments. Prior year segment information has been reclassified to conform with the current operating structure. RECLASSIFICATION: Certain previously reported amounts have been reclassified to conform with the 1998 presentation. B. Derivative Commodity Instruments The Company uses exchange-traded natural gas and crude oil futures contracts, options and OTC natural gas and crude oil swap agreements and options (collectively derivative contracts) to hedge exposures to fluctuations in oil and gas prices. Futures contracts obligate the Company to buy or sell a designated commodity at a future date for a specified price. Swap agreements involve payments to or receipts from counterparties based on the differential between a fixed and variable price for the commodity. Exchange-traded instruments are generally settled with offsetting positions but may be settled by delivery of commodities. OTC arrangements require settlement in cash. Hedging Activities The Company is exposed to risk from fluctuations in energy prices in the normal course of business. The Company uses derivative contracts to hedge exposures to oil and gas price changes. The following table summarizes the absolute notional quantities of the derivative contracts held for purposes other than trading at December 31, 1998 and 1997. The open futures and options contracts at year-end 1998 have maturities extending through October 2001, while the swap agreements have maturities extending through May of 2001. At December 31, 1997, the remaining terms of the open futures and options contracts were the same as those at December 31, 1998 while the swap agreements had maturities extending through November of 2000. Absolute Notional Quantity Gain/(Loss) -------------------------- ---------------------------- 1998 1997 1998 1997 -------------------------- ---------------------------- (Bcf equivalent) (Millions) Futures 8.6 4.5 $ (2.1) $ 1.0 Swaps 19.6 96.5 (15.7) (10.3) Options 1.9 1.8 1.0 (0.1) -------- -------- ---------- ---------- Total 30.1 102.8 $ (16.8) $ (9.4) ======== ======== ========== ========== Deferred realized amounts from hedge transactions were a $.6 million gain at December 31, 1998, and a $1.3 million gain and a $1.6 million loss at December 31, 1997. The Company recognized net losses on its hedging activities of $3.0 million, $9.8 million and $44.4 million in 1998, 1997 and 1996, respectively. These losses are offset when the underlying products are sold. B. Derivative Commodity Instruments (Continued) The Company is exposed to credit loss in the event of nonperformance by counterparties to derivative contracts. This credit exposure is limited to derivative contracts with a positive fair value. Futures contracts have minimal credit risk because futures exchanges are the counterparties. The Company manages the credit risk of the other derivative contracts by limiting dealings to those counterparties who meet the Company's criteria for credit and liquidity strength. Trading Activities In 1998, the Company sold its natural gas midstream operations eliminating the trading functions. Previously, the primary functions of the Company's trading business were to provide price risk management services to the Company's Utilities and Services segments and to contribute to the Company's earnings by taking market positions within defined trading limits. There were no outstanding derivative contracts held for trading purposes at December 31, 1998. At December 31, 1997, the absolute notional quantities of the futures, swaps and options contracts held for trading purposes were 43.7 Bcfe, 149.4 Bcfe and 10.0 Bcfe, respectively. The table below sets forth the end of period fair value and average fair value during the year for all the derivative contracts held for trading purposes. 1997 ----------------------------------- Assets Liabilities ----------------------------------- (Thousands) Fair value at December 31 $ 82,912 $ 79,012 Average fair value $ 12,161 $ 10,509 Trading activity resulted in net gains of $1.1 million for 1997 and $0.8 million for 1996, respectively. C. Asset Impairment and Other Nonrecurring Items The Company's results of operations include several significant nonrecurring items which are included in operating expense. C. Asset Impairment and Other Nonrecurring Items (Continued) In December 1998, as a result of a sustained decrease in natural gas and crude oil prices and a change in management's objectives in the Gulf of Mexico, the Company recognized a write-down in the carrying value of crude oil and natural gas production assets of $36.9 million. To improve the efficiency of Appalachian production operations, the Company has transferred many of the management responsibilities for its Kentucky West Virginia Gas Company, L.L.C. (Kentucky West) to Equitable Production - East under a services agreement. In studying the possibility of decertifying the pipeline, the Company determined that it is likely that not all costs will be collectible in rates and has reduced regulatory and other assets by $9.2 million, including $3.6 million in Equitable Utilities and $5.6 million in Equitable Production. In addition, the Company implemented a fundamental restructuring of its utility, nonregulated retail sales and headquarters groups. This process included a voluntary workforce reduction incentive offer to reduce staff, the closing or consolidation of several offices, reconfiguration of management information systems, the realignment of many administrative functions to specific operating segments and the curtailment of several auxiliary business ventures. Expenses associated with these initiatives totaled $35.7 million including $8.1 million in the utility group, $2.1 million in the production group, $2.7 million in energy services, $3.0 million in the energy sales unit and $19.8 million in headquarters. In June 1997, an evaluation of the carrying value of long-lived assets resulted in a write-down of the Utilities segment's investment in the Avoca bedded salt natural gas storage project, for which the Company recognized a $13 million pretax charge. In September 1997, the Company recorded an additional pretax charge of $10.7 million related to evaluation and reduction of headquarters and noncore business functions. In December 1996, the Company recognized a pretax gain of $7.4 million related to the curtailment of the Company's defined benefit pension plan for non-utility employees. D. Direct Billing and Other Settlements Kentucky West, a subsidiary of the Company, received Federal Energy Regulatory Commission (FERC) approval of settlement agreements with all customers for the direct billing to recover the higher Natural Gas Policy Act (NGPA) prices, which the FERC had denied on natural gas produced from exploration and production properties between 1978 and 1983. The portion of the settlement with Equitable Gas division has been subject to Pennsylvania Public Utility Commission (PUC) review. The PUC approved Equitable Gas Company's collection of $2.6 million in September 1998 and $7.8 million in September 1997 and 1996 related to the direct billing settlement. E. Deferred Revenue In 1995, the Company sold an interest in certain Appalachian natural gas properties, the production from which qualifies for nonconventional fuels tax credit. The Company retained an interest in the properties that will increase based on performance. As such, the proceeds of $133.5 million were recorded as deferred revenues and are being recognized in income as financial targets are met. F. Discontinued Operations In April 1998, management adopted a formal plan to sell the Company's natural gas midstream operations. The operations included an integrated natural gas gathering, processing and storage system in Louisiana and a natural gas and electricity trading and marketing business based in Houston. The financial statements for all periods have been restated to classify these as discontinued operations. In December 1998, the Company completed the sale of these operations to various parties for $338.3 million, which included working capital adjustments. Net income (loss) from discontinued operations was $(8.8) million, $3.9 million and $5.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. The net loss in 1998 reflects an aftertax gain on the sale of $10.1 million. The net income (loss) for each year was reported net of income tax expense (benefit) of $(0.2) million, $3.2 million and $3.4 million in 1998, 1997 and 1996, respectively. Interest expense allocated to discontinued operations was $7.4 million, $7.2 million and $6.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The net of assets of discontinued operations are summarized as follows: December 31, ------------------ 1997 ------------------ (millions) Property, plant and equipment $ 319.5 Deferred credits (81.3) ------- Total $ 238.2 ======= G. Sale Of Property In July 1997, the Company entered into agreements with five parties for the sale of the Company's crude oil and natural gas properties in the western United States and Canada. The sales were completed in September and October for an aggregate cash sales price of $170 million. In October 1997, the Company sold its Union Drilling division, a contract drilling company, for $7 million. These sales resulted in gains of $52 million in 1997. H. Acquisitions In July 1997, the Company acquired Northeast Energy Services, Inc. (NORESCO) in exchange for a combination of 2.1 million shares of the Company's stock valued at approximately $67 million and $10 million in cash, including transaction costs. NORESCO is a provider of comprehensive energy efficiency systems and services for commercial, industrial, government and institutional customers and is included in the Services segment. NORESCO's primary assets are accounts receivable from customers and deferred contract costs, which are included in other assets in the consolidated balance sheets. The transaction was treated as a purchase for accounting purposes. The Company recorded goodwill of $57 million which is being amortized over 20 years. The $67 million noncash portion of the acquisition is excluded from capital expenditures in the 1997 cash flows statement. In 1997, the Services segment also acquired Scallop Thermal Industries and Lighting Management, Inc. for a total cost of $4 million. These acquisitions were accounted for under the purchase method of accounting. The effect of each of these acquisitions, individually and aggregated by year of purchase, is not material to the results of operations or financial position of Equitable, and therefore, pro forma financial information is not presented. I. Income Taxes The following table summarizes the source and tax effects of temporary differences between financial reporting and tax bases of assets and liabilities. December 31, -------------------------- 1998 1997 -------------------------- (Thousands) Deferred tax liabilities (assets): Exploration and development costs expensed for income tax reporting $ 86,742 $ 88,782 Tax depreciation in excess of book depreciation 163,788 249,634 Regulatory temporary differences 26,095 28,108 Deferred purchased gas cost 13,594 16,069 Deferred revenues/expenses (14,324) (1,839) Alternative minimum tax (58,517) (64,258) Investment tax credit (6,998) (7,554) Uncollectible accounts (5,583) (4,897) Postretirement benefits (3,971) (2,489) Other (13,750) 2,394 ----------- ----------- Total (including amounts classified as current liabilities of $14,602 for 1998 and $12,754 for 1997, and amounts classified as net assets of discontinued operations of $82,960 in 1997) $ 187,076 $ 303,950 =========== =========== As of December 31, 1998 and 1997, $62.1 million and $63.8 million, respectively, of the net deferred tax liabilities are related to rate-regulated operations and have been deferred as regulatory assets. I. Income Taxes (Continued) Income tax expense (benefit) is summarized as follows: Years Ended December 31, ----------------------------------------------------- 1998 1997 1996 ----------------------------------------------------- (Thousands) Current: Federal $ 5,331 $ 10,333 $ 2,602 State 339 717 226 Deferred: Federal (22,033) 27,756 21,431 State (7,504) 3,252 2,005 Foreign 1,486 1,152 781 ------------- ------------- ------------ Total $ (22,381) $ 43,210 $ 27,045 ============= ============= ============ Provisions for income taxes differ from amounts computed at the federal statutory rate of 35% on pretax income. The reasons for the difference are summarized as follows: Years Ended December 31, ------------------------------------------- 1998 1997 1996 ------------------------------------------- (Thousands) Tax at statutory rate $ (17,301) $ 41,089 $ 28,200 State income taxes (4,657) 2,580 1,450 Nonconventional fuels tax credit (1,199) (816) (1,299) Other 776 357 (1,306) ---------- ----------- ------------ Income tax expense (benefit) $ (22,381) $ 43,210 $ 27,045 ========== =========== ============ Effective tax rate (benefit) (45.3)% 36.8% 33.6% ========== =========== ============ The consolidated federal income tax liability of the Company has been settled through 1994. J. Short-Term Loans Maximum lines of credit available to the Company were $500 million during 1998, 1997 and 1996. The Company is not required to maintain compensating bank balances. Commitment fees averaging one-tenth of one percent were paid to maintain credit availability. J. Short-Term Loans (Continued) At December 31, 1998, short-term loans consisted of $115.7 million of commercial paper at a weighted average annual interest of 5.02% and at December 31, 1997, short-term loans consisted of $254.5 million of commercial paper and $26.3 million of bank loans at a weighted average annual interest rate of 5.71%. The maximum amount of outstanding short-term loans was $315.7 million in 1998, $302.5 million in 1997 and $295.5 million in 1996. The average daily total of short-term loans outstanding was approximately $191.7 million during 1998, $229.6 million during 1997 and $147.4 million during 1996; weighted average annual interest rates applicable thereto were 5.0% in 1998, 5.7% in 1997 and 5.5% in 1996. K. Long-Term Debt December 31, --------------------------- 1998 1997 --------------------------- (Thousands) 7 1/2% debentures, due July 1, 1999 ($75,000 principal amount, net of unamortized original issue discount) $ 74,136 $ 73,184 7 3/4% debentures, due July 15, 2026 115,000 150,000 Medium-term notes: 7.2% to 9.0% Series A, due 2001 thru 2021 72,850 100,000 5.1% to 7.6% Series B, due 2003 thru 2023 75,500 75,500 6.8% to 7.6% Series C, due 2007 thru 2018 18,000 18,000 9.9% debentures, due April 15, 2013 - 5,880 ----------- ----------- Total long-term debt 355,486 422,564 Less long-term debt payable within one year 74,136 5,000 ----------- ----------- Total $281,350 $417,564 =========== =========== In 1998, as a result of the sale of the Company's natural gas midstream operations, the Company repurchased and retired $35.0 million of 7 3/4% debentures and $22.2 million of Series A Medium-Term Notes. Premiums paid were $12.7 million, recognized net of income tax benefits, as an extraordinary loss on early extinguishment of debt in 1998 of $8.3 million. At December 31, 1998, the Company has the ability to issue $100 million of additional long-term debt under the provisions of shelf registrations filed with the Securities and Exchange Commission. K. Long-Term Debt (Continued) Interest expense on long-term debt amounted to $34.9 million in 1998, $35.1 million in 1997 and $34.8 million in 1996. Aggregate maturities of long-term debt will be $75 million in 1999, none in 2000, $10 million in 2001, none in 2002 and $24 million in 2003. L. Trust Preferred Capital Securities In April 1998, $125 million of 7.35% Trust Preferred Capital Securities were issued. The capital securities were issued through a subsidiary trust, Equitable Resources Capital Trust I, established for the purpose of issuing the capital securities and investing the proceeds in 7.35% Junior Subordinated Debentures issued by the Company. The capital securities have a mandatory redemption date of April 15, 2038; however, at the Company's option, the securities may be redeemed on or after April 23, 2003. Proceeds were used to reduce short-term debt outstanding. Interest expense for the year ended December 31, 1998 includes $6.3 million of preferred dividends related to the trust preferred capital securities. M. Pension and Other Postretirement Benefit Plans The Company has pension and other post retirement benefit plans covering certain Utility segment employees. Plans covering union members generally provide benefits of stated amounts for each year of service. Plans covering salaried utility employees use a benefit formula which is based upon employee compensation and years of service. The following table sets forth the pension and other benefit plans' funded status and amounts recognized for those plans in the Company's consolidated balance sheets: M. Pension and Other Postretirement Benefit Plans (Continued)
Pension Benefits Other Benefits -------------------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------------------- (Thousands) Change in benefit obligation: Benefit obligation at beginning of year $143,440 $137,477 $ 40,077 $ 35,694 Service cost 2,177 2,228 334 254 Interest cost 9,933 10,280 2,759 2,898 Amendments 323 5,638 - - Actuarial (gain) loss 10,017 20,563 2,983 4,659 Benefits paid (9,319) (14,275) (4,168) (3,428) Expenses paid (205) (185) - - Curtailments 2,519 (436) - - Settlements (11,362) (18,989) - - Special termination benefits 970 1,139 1,506 - -------------- -------------- -------------- -------------- Benefit obligation at end of year 148,493 143,440 43,491 40,077 -------------- -------------- -------------- -------------- Change in plan assets: Fair value of plan assets at beginning of year 164,801 165,360 6,274 4,623 Actual return on plan assets 31,867 30,218 368 292 Employer contribution 1,632 1,069 1,812 1,359 Benefits paid (9,319) (14,275) - - Expenses paid (205) (185) - - Settlements (11,571) (17,386) - - -------------- -------------- -------------- -------------- Fair value of plan assets at end of year 177,205 164,801 8,454 6,274 -------------- -------------- -------------- -------------- Funded status 28,712 21,361 (35,037) (33,803) Unrecognized net actuarial (gain) loss (26,885) (23,335) 16,595 14,800 Unrecognized prior service cost (credit) 13,125 14,689 (140) (2,172) Unrecognized initial net (asset) obligation (819) (1,295) 13,376 14,780 ============== ============== ============== ============== Net amount recognized $ 14,133 $ 11,420 $ (5,206) $ (6,395) ============== ============== ============== ============== Weighted-average assumptions as of December 31: Discount rate 6.75 % 7.00 % 6.75 % 7.00 % Expected return on plan assets 10.00 10.00 7.50 7.50 Rate of compensation increase 4.50 4.50 4.50 4.50
For measurement purposes, a 5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4 percent for 2002 and remain at that level thereafter. The pension asset of $14,133 at December 31, 1998 and $11,420 at December 31, 1997 is included in prepaid expenses and other current assets in the consolidated balance sheets. The accrued liability for other postretirement benefits of $5,206 at December 31, 1998 and $6,395 at December 31, 1997 is included in other current liabilities. M. Pension and Other Postretirement Benefit Plans (Continued) The Company's costs related to defined benefit pension and other benefit plans comprised the following:
Pension Benefits Other Benefits --------------------------------------- ------------------------------------- 1998 1997 1996 1998 1997 1996 -------------------------------------------------------------------------------- (Thousands) Components of net periodic benefit cost: Service cost $ 2,177 $ 2,227 $ 4,053 $ 334 $ 254 $ 609 Interest cost 9,933 10,280 11,198 2,759 2,898 2,987 Expected return on plan assets (13,377) (13,254) (12,907) (522) (483) (197) Amortization of prior service cost 1,579 1,441 1,193 (15) (214) (97) Amortization of initial net (asset) obligation (390) (422) (395) 986 985 1,162 Recognized net actuarial (gain) loss 3 (30) (49) 749 617 321 Divestitures - - - (1,719) - - Special termination benefits 970 1,139 - 1,506 - - Settlement (gain) loss (2,295) (4,016) (1,983) - - - Curtailment (gain) loss 319 587 (7,301) 419 - - ----------- ----------- ----------- ---------- ----------- ---------- Net periodic benefit cost $(1,081) $(2,048) $(6,191) $ 4,497 $ 4,057 $ 4,785 =========== =========== =========== ========== =========== ==========
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $31,695, $31,695 and $28,426, respectively, as of December 31, 1998 and $49,243, $49,243 and $43,736, respectively, as of December 31, 1997. Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
One-Percentage Point Increase One-Percentage Point Decrease -------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 -------------------------------------------------------------------------------- (Thousands) Effect on total of service and interest cost components $ 188 $ 247 $ 284 $ (177) $ - $ - Effect on postretirement benefit obligation 2,316 2,983 2,498 (2,238) - -
As of December 31, 1998, approximately $1.0 million of the accrued postretirement benefits related to rate-regulated operations have been deferred as regulatory assets. Rate recovery requires the Company to place agreed upon amounts in trust when collected in rates until such time as they are applied to retiree benefits or returned to ratepayers. Trust assets consist principally of equity and debt securities. As of January 1, 1997, the Company amended its 401(k) employee savings plan for salaried employees to provide a base Company contribution to that plan for employees no longer eligible for defined benefit plans. In addition, during 1997 the present value of these employees' future retirement benefits under the defined benefit plans could be rolled over to the 401(k) plan, at the employee's option, or used to purchase an annuity. Expense recognized by the Company related to this and other 401(k) savings plans totaled $3.5 million in 1998, $3.9 million in 1997 and $1.4 million in 1996. N. Common Stock and Earnings Per Share Common Stock Reserve At December 31, 1998, shares of Equitable's authorized and unissued common stock were reserved as follows: Possible future acquisitions 6,496,000 Stock compensation plans 1,792,000 Dividend reinvestment and stock purchase plan 469,000 ------------------- Total 8,757,000 =================== Earnings Per Share Basic EPS is computed by dividing income (loss) from continuing operations before extraordinary loss by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted EPS is computed by dividing income (loss) from continuing operations before extraordinary loss, adjusted for the assumed conversion of debt, by the weighted average number of common shares and potentially dilutive securities, net of shares assumed to be repurchased using the treasury stock method. Purchases of treasury shares are calculated using the average share price for the Company's common stock during the period. Potentially dilutive securities arise from the assumed conversion of outstanding stock options and awards and, in years prior to 1998, the assumed conversion of then-outstanding convertible debentures. The computation of basic and diluted earnings (loss) per common share from continuing operations is shown in the table below: N. Common Stock and Earnings Per Share (Continued)
Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ---------------------------------------------------- (Thousands except per share amounts) Basic earnings (loss) per common share: Net income (loss) from continuing operations, before exraordinary item, applicable to common stock $(27,052) $ 74,187 $ 53,527 Average common shares outstanding 36,833 36,003 35,188 Basic earnings (loss) per common share from continuing operations, before extraordinary item $ (0.73) $ 2.17 $ 1.52 Diluted earnings (loss) per common share: Net income (loss) from continuing operations, before exraordinary item, applicable to common stock (a) $(27,052) $ 74,190 $ 53,562 Average common shares outstanding 36,833 36,003 35,188 Potentially dilutive securities: Stock options and awards (b) - 109 18 Common shares issuable upon conversion of 9 1/2% convertible debentures - 4 53 ------------- -------------- -------------- Total 36,833 36,116 35,259 ============= ============== ============== Diluted earnings (loss) per common share from continuing operations, before extraordinary item $ (0.73) $ 2.05 $ 1.52
(a) The aftertax benefit of interest expense on the assumed conversion of the 9 1/2% convertible debentures was $3,000 in 1997 and $35,000 in 1996. (b) Options to purchase 284,000 shares of common stock were not included in the computation of diluted earnings per common share because the options' exercise prices were greater than the average market prices of the common shares for 1997. O. Stock-Based Compensation Plans Long-Term Incentive Plans The Company's Long-Term Incentive Plan provides for the granting of shares of common stock to officers and key employees of the Company. These grants may be made in the form of stock options, restricted stock, stock appreciation rights and other types of stock-based or performance-based awards as determined by the Compensation Committee of the Board of Directors at the time of each grant. Stock awarded under the plan, or purchased through the exercise of options, and the value of stock appreciation units are restricted and subject to forfeiture should an optionee terminate employment prior to specified vesting dates. In no case may the number of shares granted under the plan exceed 1,725,500 shares. Options granted under the plan expire 5 to 10 years from the date of grant and some contain vesting provisions which are based upon Company performance. In 1994, this plan replaced the Key Employee Restricted Stock Option Plan, which at December 31, 1998, has 203,100 options outstanding at an option price of $33.81 per share. These options are reflected with the Long-Term Incentive Plan amounts presented in the tables below. Also reflected in the option tables below are options assumed in conjunction with the NORESCO acquisition in July 1997. All outstanding options granted under NORESCO's 1990 Incentive Stock Option Plan were converted by Equitable to nonqualified stock options with the right to receive, upon exercise of the option, the same Equitable stock and cash that shareholders of NORESCO received in the acquisition. As a result of this conversion, 872,000 NORESCO stock options were converted to 256,400 Equitable stock options with the exercise price per share proportionately adjusted. The adjusted exercise prices of these stock options ranges from $5.1012 to $5.9516 per share. The acquisition also accelerated the vesting period of these options, the latest of which expire in 2006. During 1998, 52,000 stock options were exercised under this plan, with 24,000 outstanding at December 31, 1998. Pro forma information regarding net income and earnings per share for options granted is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these option grants was estimated at the dates of grant using a Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively. O. Stock-Based Compensation Plans (Continued)
Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ---------------------------------------------------- Risk-free interest rate (range) 4.80% 5.71% 5.82% to to to 5.63% 5.79% 6.34% Dividend yield 4.06% 3.96% 4.00% Volatility factor 0.173 0.132 0.161 Weighted-average expected life of options 4 years 1.25 years 2 years Options granted 1,014,900 339,100 125,400 Weighted-average fair market value of options granted during the year $3.91 $1.93 $2.51
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The amount of estimated expense that would have been recognized under SFAS No. 123 is not considered material to the financial statements in any of the years presented. O. Stock-Based Compensation Plans (Continued) The following schedule summarizes the stock option activity:
Years Ended December 31, -------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------- Options outstanding January 1 758,534 948,650 1,077,325 Granted 1,014,900 339,100 125,400 Forfeitures (453,257) (348,800) (210,650) Exercised (61,992) (180,416) (43,425) --------------- --------------- --------------- Options outstanding December 31 1,258,185 758,534 948,650 =============== =============== =============== Options outstanding at December 31, 1998 include 230,120 exercisable at that date. At December 31: Prices of options outstanding $ 5.10 $ 5.10 $ 27.50 to to to $ 34.63 $ 36.50 $ 36.50 Average option price $ 29.26 $ 28.02 $ 30.59
On September 5, 1997, the Company granted 106,127 stock awards from the Long-Term Incentive Plan for the Key Employee Retention Program. This program was established to provide additional incentive benefits to retain senior executive employees of the Company. The vesting of these awards is contingent on attainment of specific stock price targets and the continued employment of the participants until January 1, 2001. In 1998, the Company granted 25,000 additional stock awards from the Long-Term Incentive Program to key executives. The fair value of these awards was estimated at the date of grant utilizing a Black-Scholes pricing model and the same assumptions as listed above and would result in compensation expense not materially different from that recorded by the Company under APB Opinion No. 25. O. Stock-Based Compensation Plans (Continued) Non-Employee Directors' Stock Incentive Plan The Company's Non-Employee Directors' Stock Incentive Plan provides for the granting of up to 80,000 shares of common stock in the form of stock option grants and restricted stock awards to non-employee directors of the Company. The exercise price for each share is equal to market price of the common stock on the date of grant. Each option is subject to time-based vesting provisions and expires five years after date of grant. At December 31, 1998, 35,000 options were outstanding at prices ranging from $28.38 to $34.63 per share and no options had been exercised under this plan. P. Fair Value of Financial Instruments The carrying value of cash and cash equivalents, as well as short-term loans, approximates fair value due to the short maturity of the instruments. The estimated fair value of long-term debt at December 31, 1998 and 1997 would be $391.2 million and $436.3 million, respectively. The fair value was estimated based on discounted values using a current discount rate reflective of the remaining maturity. The Company's 7 1/2% debentures may not be redeemed prior to maturity. The estimated fair value of derivative commodity instruments described in Note B, excluding trading activities which are marked-to-market, was $(16.8) million and $(9.7) million at December 31, 1998 and 1997, respectively. Q. Concentrations of Credit Risk Revenues and related accounts receivable from the Equitable Production segment's operations are generated primarily from the sale of produced natural gas to utility and industrial customers located mainly in the Appalachian area, the sale of crude oil to refinery customers in the Appalachian area, the sale of produced natural gas liquids to a refinery customer in Kentucky and transportation of natural gas in Kentucky and Virginia. The Utilities segment's operating revenues and related accounts receivable are generated from state-regulated utility natural gas sales and transportation to more than 266,000 residential, commercial and industrial customers located in southwest Pennsylvania and parts of West Virginia and Kentucky; and FERC-regulated interstate pipeline transportation and storage service for the affiliated utility, Equitable Gas, as well as other utility and end-user customers located in nine mid-Atlantic and northeastern states. Under state regulations, the utility is required to provide continuous gas service to residential customers during the winter heating season. Q. Concentrations of Credit Risk (Continued) The Services segment's operating revenues and related accounts receivable are generated from the nationwide marketing of natural gas to brokers and large volume utility and industrial customers; and cogeneration and power plant development, performance contracting, and water efficiency and program development for commercial, industrial and institutional customers and various government facilities. The Company is not aware of any significant credit risks which have not been recognized in provisions for doubtful accounts. R. Financial Information by Business Segment The Company reports operations in four segments, which reflect its lines of business. The Equitable Utilities segment's activities comprise the operations of the Company's state-regulated local distribution company, in addition to gas transportation, storage and marketing activities involving the Company's interstate natural gas pipelines. The Equitable Production segment's activities comprise the exploration, development, production, gathering and sale of natural gas and oil, and extraction and sale of natural gas liquids. NORESCO's activities comprise cogeneration and power plant development, the development and implementation of energy and water efficiency programs, performance contracting and central facility plant operations. The Equitable Energy segment provides marketing, supply and transportation services for the natural gas and electricity markets. Operating segments are evaluated on their contribution to the Company's consolidated results, based on earnings before interest and taxes. Interest charges and income taxes are managed on a consolidated basis and allocated pro forma to operating segments. Headquarters costs are billed to operating segments based on a fixed allocation of the annual headquarters operating budget. Differences between budget and actual headquarters expenses are not allocated to operating segments, but included as a reconciling item to consolidated earnings from continuing operations. Substantially all of the Company's operating revenues, net income from continuing operations and assets are generated or located in the United States of America. The financial information by business segment in the following tables excludes amounts related to discontinued operations. R. Financial Information by Business Segment (Continued)
Years Ended December 31, ------------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------------- (Thousands) Revenues from external customers: Equitable Utilities $ 342,154 $428,155 $ 474,498 Equitable Production 182,239 191,756 179,354 NORESCO 109,514 52,790 10,373 Equitable Energy 248,718 261,333 192,142 ---------------- ---------------- ----------------- Total $ 882,625 $934,034 $ 856,367 ================ ================ ================= Intersegment revenues: Equitable Utilities $ 22,055 $ 16,169 $ 8,447 Equitable Production 20,111 59,923 49,500 Equitable Energy 71,114 32,179 36,651 ---------------- ---------------- ----------------- Total $ 113,280 $108,271 $ 94,598 ================ ================ ================= Depreciation, depletion and amortization: Equitable Utilities $ 21,422 $ 20,502 $ 20,290 Equitable Production 55,243 49,070 47,661 4,300 2,775 287 Equitable Energy 285 624 81 ---------------- ---------------- ----------------- Total $ 81,250 $ 72,971 $ 68,319 ================ ================ ================= Segment profit (loss): Equitable Utilities $ 43,145 $ 50,662 $ 72,161 Equitable Production (27,707) 118,204 45,441 NORESCO 5,126 (2,647) (2,697) Equitable Energy (7,608) (6,397) (8,412) ---------------- ---------------- ----------------- Total operating segments 12,956 159,822 106,493 Less: reconciling items Headquarters operating expenses (gains) not allocated to operating segments: Impairments of investments and other assets 19,756 8,655 - Benefit plan curtailment applicable to headquarters - - (1,804) Other 2,331 (1,133) (2,112) ---------------- ---------------- ----------------- Total reconciling items (9,131) 152,300 110,409 Interest expense 40,302 34,903 29,837 Income tax expenses (benefit) (22,381) 43,210 27,045 ---------------- ---------------- ----------------- Net income from continuing operations, before extraordinary item $ (27,052) $ 74,187 $ 53,527 ================ ================ =================
R. Financial Information by Business Segment (Continued)
Years Ended December 31, ------------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------------- (Thousands) Other significant noncash expense items: Equitable Utilities: Change in deferred purchased gas cost $ 4,608 $ 16,026 $ (49,919) Noncash restructuring charges 11,251 12,700 158 Equitable Production: Lease impairments 36,908 - - Noncash restructuring charges 6,812 2,200 (2,378) NORESCO: Cost of contracts in excess of billings 8,271 7,925 - Noncash restructuring charges 1,764 - - Equitable Energy: Noncash restructuring charges 758 - - ================ ================ ================= Total $ 70,372 $ 38,851 $ (52,139) ================ ================ ================= Segment assets: Equitable Utilities $ 848,697 $ 850,026 Equitable Production 598,252 995,143 NORESCO 169,370 148,066 Equitable Energy 149,977 37,650 ---------------- ---------------- Total operating segments 1,766,296 2,030,885 Headquarters assets, including cash and short-term investments and net intercompany accounts receivable 87,951 58,984 ---------------- ---------------- Total $1,854,247 $2,089,869 ================ ================ Expenditures for segment assets: Equitable Utilities $ 23,297 $ 39,281 $ 36,281 Equitable Production 104,121 185,558 73,167 NORESCO 11,102 28,096 (a) 836 Equitable Energy - - - ---------------- ---------------- ----------------- Total $ 138,520 $ 252,935 $ 110,284 ================ ================ ================= (a) Excludes $68 million total noncash portion of the acquisitions of NORESCO and Scallop Thermal Management. See Note H.
S. Commitments and Contingencies There are various claims and legal proceedings against the Company arising from the normal course of business. Although counsel is unable to predict with certainty the ultimate outcome, management and counsel believe the Company has significant and meritorious defenses to any claims and intend to pursue them vigorously. Management believes that the ultimate outcome of any matter currently pending against the Company will not materially affect the financial position of the Company although they could be material to the reported results of operations for the period in which they occur. The Company has annual commitments of approximately $27.4 million for demand charges under existing long-term contracts with pipeline suppliers for periods extending up to 14 years at December 31, 1998, which relate to gas distribution operations. However, substantially all of these costs are recoverable in customer rates. The Company is subject to federal, state and local environmental laws and regulations. These laws and regulations, which are constantly changing, can require expenditures for remediation and may in certain instances result in assessment of fines. The Company has established procedures for ongoing evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policies and procedures. The estimated costs associated with identified situations that require remedial action are accrued. However, certain of these costs are deferred as regulatory assets when recoverable through regulated rates. Ongoing expenditures for compliance with environmental laws and regulations, including investments in plant and facilities to meet environmental requirements, have not been material. Management believes that any such required expenditures will not be significantly different in either their nature or amount in the future and does not know of any environmental liabilities that will have a material effect on the Company's financial position or results of operations. T. Interim Financial Information (Unaudited) The following quarterly summary of operating results reflects variations due primarily to the seasonal nature of the Company's utility business and volatility of oil and gas commodity prices:
March June September December 31 30 30 31 ----------------------------------------------------------------------------------- (Thousands except per share amounts) 1998 Operating revenues $299,367 $182,097 $159,318 $241,843 Operating income (loss) 48,842 13,365 13,512 (85,903) Net income (loss) from continuing operations before extraordinary items 24,652 2,274 2,037 (56,015) Earnings (loss) per share from continuing operations before extraordinary items: Basic $ 0.66 $ 0.06 $ 0.06 $ (1.53) Assuming dilution $ 0.66 $ 0.06 $ 0.06 $ (1.53) 1997 (Restated) Operating revenues $312,481 $177,896 $165,337 $278,320 Operating income (loss) 49,337 (4,494) 8,348 48,989 Net income (loss) from continuing operations before extraordinary items 25,238 (7,731) 16,350 40,330 Earnings (loss) per share from continuing operations before extraordinary items: Basic $ 0.71 $ (0.22) $ 0.45 $ 1.10 Assuming dilution $ 0.71 $ (0.22) $ 0.45 $ 1.09
U. Natural Gas and Oil Producing Activities (Unaudited) The supplementary information summarized below presents the results of natural gas and oil activities for the Equitable Production segment in accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." The information presented excludes data associated with natural gas reserves related to rate-regulated and other utility operations. These reserves (proved developed) are less than 5% of total Company proved reserves for the years presented. U. Natural Gas and Oil Producing Activities (Unaudited) (Continued) Production Costs The following table presents the costs incurred relating to natural gas and oil production activities:
1998 1997 1996 ------------------------------------------------------ (Thousands) At December 31: Capitalized costs $861,035 $779,936 $840,136 Accumulated depreciation and depletion 355,535 293,594 342,950 -------------- -------------- --------------- Net capitalized costs $505,500 $486,342 $497,186 ============== ============== =============== Costs incurred: Property acquisition: Proved properties $ 4,799 $68,334 $ 68 Unproved properties 18,069 15,813 6,411 Exploration 27,144 22,665 17,934 Development 76,762 40,982 33,298
Results of Operations for Producing Activities The following table presents the results of operations related to natural gas and oil production, including the effect in 1998 of impairment of assets as described in Note C:
1998 1997 1996 ------------------------------------------------------ (Thousands) Revenues: Affiliated $39,553 $52,956 $50,968 Nonaffiliated 99,437 97,493 86,319 Production costs 30,390 31,777 31,746 Exploration expenses 30,982 8,950 15,714 Depreciation and depletion 49,348 41,153 40,872 Impairment of assets 29,230 - - Income tax expense (benefit) (1,166) 26,303 18,062 -------------- -------------- --------------- Results of operations from producing activities (excluding corporate overhead) $ 206 $42,266 $30,893 ============== ============== ===============
U. Natural Gas and Oil Producing Activities (Unaudited) (Continued) Reserve Information The information presented below represents estimates of proved gas and oil reserves prepared by Company engineers. Proved developed reserves represent only those reserves expected to be recovered from existing wells and support equipment. In 1997, the Company increased its Appalachian reserve life from 35 to 50 years to more closely reflect actual production experience. This revision increased 1997 proved developed natural gas and crude oil reserves by 78,607 million cubic feet equivalent. Proved undeveloped reserves represent proved reserves expected to be recovered from new wells after substantial development costs are incurred. As of December 31, 1998, all of the Company's proved reserves are in the United States. During 1997, the Company sold its Canadian properties, which accounted for less than 10% of the Company's proved reserves.
Natural Gas 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (Millions of cubic feet) - -------------------------------------------------------------------------------------------------------------------- Proved developed and undeveloped reserves: Beginning of year 889,828 849,530 845,771 Revision of previous estimates 6,502 80,264 6,710 Purchase of natural gas in place 8,474 62,485 811 Sale of natural gas in place - (107,138) (368) Extensions, discoveries and other additions 54,970 61,380 53,901 Production (59,893) (56,693) (57,295) ------------------------------------------------------ End of year 899,881 889,828 849,530 ------------------------------------------------------ Proved developed reserves: Beginning of year 769,312 732,158 739,249 End of year 780,817 769,312 732,158 Oil 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (Thousands of barrels) - -------------------------------------------------------------------------------------------------------------------- Proved developed and undeveloped reserves: Beginning of year 10,100 19,517 18,201 Revision of previous estimates (966) 849 1,867 Purchase of oil in place 5 2,592 67 Sale of oil in place - (12,392) (235) Extensions, discoveries and other additions 1,661 1,045 1,344 Production (974) (1,511) (1,727) ------------------------------------------------------- End of year 9,826 10,100 19,517 ------------------------------------------------------- Proved developed reserves: Beginning of year 8,941 18,482 16,834 End of year 8,331 8,941 18,482
U. Natural Gas and Oil Producing Activities (Unaudited) (Continued) Standard Measure of Discounted Future Cash Flow
1998 1997 1996 --------------------------------------------------------------- (Thousands) Future cash inflows $ 1,870,002 $2,607,077 $ 3,610,060 Future production costs (606,777) (680,405) (790,140) Future development costs (84,454) (80,965) (50,708) Future income tax expenses (366,225) (671,713) (1,007,421) ------------------ ---------------- ---------------- Future net cash flow 812,546 1,173,994 1,761,791 10% annual discount for estimated timing of cash flows (387,673) (633,000) (877,077) ------------------ ---------------- ---------------- Standardized measure of discounted future net cash flows $ 424,873 $ 540,994 $ 884,714 ================== ================ ================
Management cautions that the standard measure of discounted future cash flows should not be viewed as an indication of the fair market value of gas and oil producing properties, nor of the future cash flows expected to be generated therefrom. The information presented does not give recognition to future changes in estimated reserves, selling prices or costs and has been discounted at an arbitrary rate of 10%. Estimated future net cash flows from natural gas and oil reserves based on selling prices and costs at year-end price levels are as follows: Summary of changes in the standardized measure of discounted future net cash flows:
1998 1997 1996 --------------------------------------------------------------- (Thousands) Sales and transfers of gas and oil produced - net $ (108,600) $(118,672) $(105,541) Net changes in prices, production and development costs (343,061) (447,251) 482,376 Extensions, discoveries, and improved recovery, less related costs 67,986 58,205 86,306 Development costs incurred 32,497 13,634 13,543 Purchase (sale) of minerals in place - net 6,439 (73,099) 1,506 Revisions of previous quantity estimates (260) 16,913 47,545 Accretion of discount 84,463 108,935 72,375 Net change in income taxes 158,285 143,429 (232,841) Other (13,870) (45,814) 1,584 ------------------ ---------------- ---------------- Net increase (decrease) (116,121) (343,720) 366,853 Beginning of year 540,994 884,714 517,861 ------------------ ---------------- ---------------- End of year $ 424,873 $ 540,994 $ 884,714 ================== ================ ================
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant Information required by Item 10 with respect to directors is incorporated herein by reference to the section describing "Election of Directors" in the Company's definitive proxy statement relating to the annual meeting of stockholders to be held on May 26, 1999, which will be filed with the Commission within 120 days after the close of the Company's fiscal year ended December 31, 1998. Information required by Item 10 with respect to compliance with Section 16(a) of the Exchange Act is incorporated by reference to the section describing "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement relating to the annual meeting of stockholders to be held on May 26, 1999. Information required by Item 10 with respect to executive officers is included herein after Item 4 at the end of Part I. Item 11. Executive Compensation Information required by Item 11 is incorporated herein by reference to the sections describing "Executive Compensation", "Employment Contracts and Change-In-Control Arrangements" and "Pension Plan" in the Company's definitive proxy statement relating to the annual meeting of stockholders to be held on May 26, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by Item 12 is incorporated herein by reference to the section describing "Voting Securities and Record Date" in the Company's definitive proxy statement relating to the annual meeting of stockholders to be held on May 26, 1999. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits and Reports on Form 8-K (a) 1. Financial Statements The financial statements listed in the accompanying index to financial statements are filed as part of this annual report. 2. Financial Statement Schedule The financial statement schedule listed in the accompanying index to financial statements and financial schedule is filed as part of this annual report. 3. Exhibits The exhibits listed on the accompanying index to exhibits (pages 79 through 82) are filed as part of this annual report. (b) Reports on Form 8-K filed during the quarter ended December 31, 1998. Form 8-K dated October 7, 1998 announcing Board of Director authorization to repurchase up to 5,600,000 shares of Equitable Resources, Inc. Common Stock. Form 8-K dated December 7, 1998 announcing Purchase Agreement with AEP Resources, Inc. and affiliates ("Buyer") and certain subsidiaries of Equitable Resources, Inc. ("Registrant") for purchase of substantially all of Registrant's natural gas midstream operations. EQUITABLE RESOURCES, INC. INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS (Item 14 (a)) 1. The following consolidated financial statements of Equitable Resources, Inc. and Subsidiaries are included in Item 8: Page Reference Statements of Consolidated Income for each of the three years in the period ended December 31, 1998 41 Statements of Consolidated Cash Flows for each of the three years in the period ended December 31, 1998 42 Consolidated Balance Sheets December 31, 1998 and 1997 43 & 44 Statements of Common Stockholders' Equity for each of the three years in the period ended December 31, 1998 45 Notes to Consolidated Financial Statements 46 through 74 2. Schedule for the Years Ended December 31, 1998, 1997 and 1996 included in Part IV: II - Valuation and Qualifying Accounts and Reserves 78 All other schedules are omitted since the subject matter thereof is either not present or is not present in amounts sufficient to require submission of the schedules.
EQUITABLE RESOURCES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1998 Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------------ Balance At Additions Charged Balance Beginning To Costs At End Description Of Period and Expenses Deductions Of Period - ------------------------------------------------------------------------------------------------------------------------ 1998 Accumulated Provisions for Doubtful Accounts $ 9,985 $ 15,321 $15,836 (a) $ 9,470 1997 Accumulated Provisions for Doubtful Accounts $10,714 $ 16,386 $17,115 (a) $ 9,985 1996 Accumulated Provisions for Doubtful Accounts $10,539 $ 17,707 $17,532 (a) $10,714 Note: (a) Customer accounts written off, less recoveries.
INDEX TO EXHIBITS EXHIBITS DESCRIPTION METHOD OF FILING - ----------------- ------------------------------------------------------- ----------------------------------------------------- 3.01 Restated Articles of Incorporation of the Company Filed as Exhibit 3(i) to Form 10-Q for the quarter dated May 27, 1996 (effective May 28, 1996) ended March 31, 1996 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 3.02 By-Laws of the Company (amended through March 19, Filed as Exhibit 3(ii) to Form 10-Q for the quarter 1998) ended March 31, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (a) Indenture dated as of April 1, 1983 between the Filed as Exhibit 4.01 (Revised) to Post-Effective Company and Pittsburgh National Bank relating to Debt Amendment No. 1 to Registration Statement Securities (Registration No. 2-80575) ------------------------------------------------------- ----------------------------------------------------- 4.01 (b) Instrument appointing Bankers Trust Company as Refiled herewith as Exhibit 4.01 (b) pursuant to successor trustee to Pittsburgh National Bank Item 10 (d) of Regulation S-K - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (c) Resolutions adopted June 22, 1987 by the Finance Refiled herewith as Exhibit 4.01 (c) pursuant to Committee of the Board of Directors of the Company Item 10 (d) of Regulation S-K establishing the terms of the 75,000 units (debentures with warrants) issued July 1, 1987 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (d) Supplemental indenture dated March 15, 1991 with Filed as Exhibit 4.01 (f) to Form 10-K for the year Bankers Trust Company eliminating limitations on ended December 31, 1996 liens and additional funded debt - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (e) Resolution adopted August 19, 1991 by the Ad Hoc Filed as Exhibit 4.01 (g) to Form 10-K for the Finance Committee of the Board of Directors of the year ended December 31, 1996 Company Addenda Nos. 1 through 27, establishing the terms and provisions of the Series A Medium-Term Notes - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (f) Resolutions adopted July 6, 1992 and February 19, Refiled as Exhibit 4.01 (h) to Form 10-K for the 1993 by the Ad Hoc Finance Committee of the Board of year ended December 31, 1997 Directors of the Company and Addenda Nos. 1 through 8, establishing the terms and provisions of the Series B Medium-Term Notes - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (g) Resolution adopted July 14, 1994 by the Ad Hoc Filed as Exhibit 4.01 (i) to Form 10-K for the year Finance Committee of the Board of Directors of the ended December 31, 1995 Company and Addenda Nos. 1 and 2, establishing the terms and provisions of the Series C Medium-Term Notes - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (h) Resolution adopted January 18 and July 18, 1996 by Filed as Exhibit 4.01(j) to Form 10-K for the year the Board of Directors of the Company and Resolutions ended December 31, 1996 adopted July 18, 1996 by the Executive Committee of the Board of Directors of the Company, establishing the terms and provisions of the 7.75% Debentures issued July 29, 1996 - ----------------- ------------------------------------------------------- -----------------------------------------------------
- ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (i) Junior Subordinated Indenture Between Equitable Filed as Exhibit 4.1 to Form 10-Q for the quarter Resources, Inc. and Bankers Trust Company ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (j) Amended and Restated Trust Agreement Between Filed as Exhibit 4.2 to Form 10-Q for the quarter Equitable Resources, Inc. and Bankers Trust Company ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (k) Equitable Resources, Inc. 7.35% Junior Subordinated Filed as Exhibit 4.3 to Form 10-Q for the quarter Deferrable Interest Debentures Certificate ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 4.01 (l) Rights Agreement dated as of April 1, 1996 between Filed as Exhibit 1 to Registration Statement on the Company and Chemical Mellon Shareholder Services, Form 8-A filed April 16, 1996 L.L.C., setting forth the terms of the Company's Preferred Stock Purchase Rights Plan - ----------------- ------------------------------------------------------- ----------------------------------------------------- 10.01 Trust Agreement with Pittsburgh National Bank to act Filed as Exhibit 10.12 to Form 10-K for the year as Trustee for Supplemental Pension Plan, ended December 31, 1994 Supplemental Deferred Compensation Benefits, Retirement Program for Board of Directors and Supplemental Executive Retirement Plan - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.02 Equitable Resources, Inc. Key Employee Restricted Filed as Exhibit 10.01 to Form 10-K for the year Stock Option and Stock Appreciation Rights Incentive ended December 31, 1994 Compensation Plan (as amended through March 17, 1989) - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.03 Retirement Program for the Board of Directors of Filed as Exhibit 10.06 to Form 10-K for the year Equitable Resources, Inc. (as amended through August ended December 31, 1994 1, 1989) - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.04 Supplemental Pension Plan (as amended and restated Filed as Exhibit 10.07 to Form 10-K for the year through December 16, 1994) ended December 31, 1994 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.05 Equitable Resources, Inc. and Subsidiaries Short-Term Filed as Exhibit 10.09 to Form 10-K for the year Incentive Compensation Plan as amended March 1997 ended December 31, 1996 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.06 Equitable Resources, Inc. Non-Employee Directors' Filed as Exhibit 10.13 to Form 10-K for the year Stock Incentive Plan ended December 31, 1994 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.07 Equitable Resources, Inc. Long-Term Incentive Plan Filed as Exhibit 10.14 to Form 10-K for the year ended December 31, 1994 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.08 Change in Control Agreement executed with certain key Filed as Exhibit 10.15 to Form 10-K for the year employees ended December 31, 1995 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.09 Equitable Resources, Inc. and Subsidiaries Deferred Filed as Exhibit 10.16 to Form 10-K for the year Compensation Plan ended December 31, 1995 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.10 Employment Agreement executed with certain key Filed as Exhibit 10.17 to Form 10-K for the year employees ended December 31, 1997 - ----------------- ------------------------------------------------------- -----------------------------------------------------
- ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.11 Equitable Resources, Inc. Breakthrough Long-Term Filed as Exhibit 10.4 to Form 10-Q for the quarter Incentive Plan with certain executives of the Company ended September 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.12 Employment Agreement dated as of May 4, 1998 with Filed as Exhibit 10.2 to Form 10-Q for the quarter Murry S. Gerber ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.13 Change in Control Agreement dated May 4, 1998 with Filed as Exhibit 10.3 to Form 10-Q for the quarter Murry S. Gerber ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.14 Supplemental Executive Retirement Agreement dated as Filed as Exhibit 10.4 to Form 10-Q for the quarter of May 4, 1998 with Murry S. Gerber ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.15 Post-Termination Confidentiality and Non-Competition Filed as Exhibit 10.5 to Form 10-Q for the quarter Agreement dated May 4, 1998 with Murry S. Gerber ended June 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.16 Employment Agreement dated as of July 1, 1998 with Filed as Exhibit 10.1 to Form 10-Q for the quarter David L. Porges ended September 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.17 Change in Control Agreement dated July 1, 1998 with Filed as Exhibit 10.2 to Form 10-Q for the quarter David L. Porges ended September 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.18 Post-Termination Confidentiality and Non-Competition Filed as Exhibit 10.3 to Form 10-Q for the quarter Agreement dated July 1, 1998 with David L. Porges ended September 30, 1998 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.19 (a) Agreement dated May 29, 1996 with Paul Christiano for Filed as Exhibit 10.04 (a) to Form 10-K for the deferred payment of 1996 director fees beginning May year ended December 31, 1996 29, 1996 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.19 (b) Agreement dated November 26, 1996 with Paul Christiano Filed as Exhibit 10.04 (b) to Form 10-K for the for deferred payment of 1997 director fees year ended December 31, 1996 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.19 (c) Agreement dated December 1, 1997 with Paul Filed as Exhibit 10.04 (c) to Form 10-K for the Christiano for deferred payment of 1998 director fees year ended December 31, 1997 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.19 (d) Agreement dated December 15, 1998 with Paul Filed herewith as Exhibit 10.19 (d) Christiano for deferred payment of 1999 director fees - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.20 (a) Agreement dated May 24, 1996 with Phyllis A. Domm for Filed as Exhibit 10.14 (a) to Form 10-K for the deferred payment of 1996 director fees beginning May year ended December 31, 1996 24, 1996 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.20 (b) Agreement dated November 27, 1996 with Phyllis A. Filed as Exhibit 10.14 (b) to Form 10-K for the Domm for deferred payment of 1997 director fees year ended December 31, 1996 - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.20 (c) Agreement dated November 30, 1997 with Phyllis A. Filed as Exhibit 10.14 (c) to Form 10-K for the Domm for deferred payment of 1998 director fees year ended December 31, 1997 - ----------------- ------------------------------------------------------- -----------------------------------------------------
- ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.20 (d) Agreement dated December 5, 1998 with Phyllis A. Domm Filed herewith as Exhibit 10.20 (d) for deferred payment of 1999 director fees - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.21 (a) Agreement dated December 31, 1987 with Malcolm M. Refiled herewith as Exhibit 10.21 (a) pursuant to Prine for deferred payment of 1988 director fees Item 10 (d) of Regulation S-K - ----------------- ------------------------------------------------------- ----------------------------------------------------- * 10.21 (b) Agreement dated December 30, 1988 with Malcolm M. Refiled herewith as Exhibit 10.21 (b) pursuant to Prine for deferred payment of 1989 director fees Item 10 (d) of Regulation S-K - ----------------- ------------------------------------------------------- ----------------------------------------------------- 10.22 Purchase Agreement by and among Equitable Resources Filed as Exhibit 10.5 to Form 10-Q for the quarter Energy Company, ET Bluegrass Company, EREC Nevada, ended September 30, 1998 Inc. and ERI Services. Inc. and AEP Resources, Inc. dated September 12, 1998 for the purchase of midstream assets - ----------------- ------------------------------------------------------- ----------------------------------------------------- 21 Schedule of Subsidiaries Filed herewith as Exhibit 21 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 23.01 Consent of Independent Auditors Filed herewith as Exhibit 23.01 - ----------------- ------------------------------------------------------- ----------------------------------------------------- 27.01 (a) Financial Data Schedule for Year 1998 Filed electronically - ----------------- ------------------------------------------------------- ----------------------------------------------------- 27.01 (b) Restated Financial Data Schedule for Year 1997 Filed electronically - ----------------- ------------------------------------------------------- ----------------------------------------------------- 27.01 (c) Restated Financial Data Schedule for Year 1996 Filed electronically - --------------------------------------------------------------------------------------------------------------------------------- The Company agrees to furnish to the Commission, upon request, copies of instruments with respect to long-term debt which have not previously been filed. - ---------------------------------------------------------------------------------------------------------------------------------
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EQUITABLE RESOURCES, INC. By: /s/ Murry S. Gerber Murry S. Gerber President and Chief Executive Officer March 17, 1999 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. President and Chief Executive /s/ Murry S. Gerber Officer and Director - ------------------------------------- Murry S. Gerber (Principal Executive Officer) March 17, 1999 Senior Vice President and /s/ David L. Porges Chief Financial Officer - ------------------------------------- David L. Porges (Principal Financial Officer) March 17, 1999 Corporate Controller and /s/ John A. Bergonzi Assistant Treasurer - ------------------------------------- John A. Bergonzi (Principal Accounting Officer) March 17, 1999 /s/ Paul Christiano Director - ------------------------------------- Paul Christiano March 17, 1999 /s/ Phyllis A. Domm Director - ------------------------------------- Phyllis A. Domm March 17, 1999 SIGNATURES (Continued) /s/ E. Lawrence Keyes, Jr. Director - ------------------------------------- E. Lawrence Keyes, Jr. March 17, 1999 /s/ Thomas A. McConomy Director - ------------------------------------- Thomas A. McConomy March 17, 1999 /s/ Donald I. Moritz Director - ------------------------------------- Donald I. Moritz March 17, 1999 /s/ Guy W. Nichols Director - ------------------------------------- Guy W. Nichols March 17, 1999 /s/ Malcolm M. Prine Director - ------------------------------------- Malcolm M. Prine March 17, 1999 /s/ James E. Rohr Director - ------------------------------------- James E. Rohr March 17, 1999 Director - ------------------------------------- David S. Shapira /s/ J. Michael Talbert Director - ------------------------------------- J. Michael Talbert March 17, 1999 EX-4.01(B) 2 INSTRUMENT APPOINTING BANKERS TRUST COMPANY INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE entered into as of the 1st day of February, 1985, among EQUITABLE RESOURCES, INC., a Pennsylvania corporation, formerly known as Equitable Gas Company (the "Issuer"), PITTSBURGH NATIONAL BANK ("PNB"), and BANKERS TRUST COMPANY, a New York banking corporation ("Bankers"). W I T N E S S E T H WHEREAS, the Issuer and PNB entered into an Indenture dated as of April 1, 1983 (the "Indenture") providing for the issuance from time to time of the Issuer's unsecured debentures, notes or other evidences of indebtedness (defined in the Indenture as "Securities"), to be issued in one or more series as provided in the Indenture; WHEREAS, there has been issued under the Indenture $50,000,000 aggregate principal amount of the Issuer's Debentures, 12-1/8% Series Due April 1, 2008 (the "Debentures"), all of which are outstanding at the date hereof and which are the only Securities outstanding under the Indenture; WHEREAS, PNB has been acting as Trustee under the Indenture; WHEREAS, Section 610(b) of the Indenture provides that the Trustee may resign at any time and be discharged of the trust created by the Indenture by giving written notice thereof to the Issuer and by mailing notice of its resignation to the holders of Debentures; WHEREAS, Section 610(e) of the Indenture further provides for the appointment by the Issuer of a successor Trustee in the event of the Trustee's resignation; WHEREAS, the Issuer has, by action of its Board of Directors, determined to appoint Bankers as successor Trustee under the Indenture; and WHEREAS, Bankers is qualified to act as successor Trustee under the Indenture and is willing to accept such appointment as successor Trustee on the terms and conditions set forth herein and under the Indenture. NOW, THEREFORE, pursuant to the provisions of the Indenture, in consideration of the covenants herein contained and intending to be legally bound hereby, the Issuer, PNB and Bankers agree as follows: 1. PNB hereby resigns as Trustee under the Indenture. 2. The Issuer hereby accepts the resignation of PNB as Trustee under the Indenture. Pursuant to the authority vested in it by Section 610(e) of the Indenture, the Issuer hereby appoints Bankers as successor Trustee under the Indenture, with all the estate, properties, rights, powers, trusts, duties and obligations heretofore vested in PNB as Trustee under the Indenture. The Issuer also hereby designates, pursuant to Section 1002 of the Indenture, the corporate trust office of Bankers, presently located at Four Albany Street, New York, New York 10015, as the office or agency of the Issuer in the Borough of Manhattan, the City of New York, New York where (a) the Debentures outstanding under the Indenture may be presented or surrendered for payment, (b) the Debentures may be presented for registration of transfer or exchange, and (c) notices and demands to or upon the Issuer in respect of the Indenture or the Debentures may be served. The Issuer also hereby confirms its prior designation, pursuant to Section 1002 of the Indenture and Section 5.1 of the Board Resolution establishing certain terms and provisions of the Debenture, of the corporate trust office of PNB, presently located at Fifth Avenue and Wood Street, Pittsburgh, Pennsylvania 15222 as the office or agency of the Issuer in the City of Pittsburgh, Pennsylvania for the aforesaid purposes. PNB's resignation as Trustee, Bankers' succession as Trustee and the designation of the office described in the second preceding sentence shall each be effective at the close of business on the date of this instrument. 3. The Issuer represents and warrants to Bankers that: (a) it is validly organized and existing under the laws of the sate of its incorporation and has the power and authority to carry out its business as now conducted; (b) the Debentures were validly and lawfully issued; (c) it has performed or fulfilled each covenant, agreement and condition on its part to be performed or fulfilled under the Indenture; (d) it has no knowledge of the existence of any default, or Event of Default (as defined in the Indenture), or any event which upon notice or passage of time or both would become an Event of Default under the Indenture; and (e) it has not appointed any paying agents under the Indenture other than PNB. 4. PNB represents and warrants to the Issuer and to Bankers that: (a) it has made, or promptly will make, available to Bankers, originals of all documents relating to the trust created by the Indenture and all information in the possession of its corporate trust department relating to the administration of the trust and will furnish to Bankers any of such documents or information as Bankers may select; (b) based on information known to the Trustee, no default, or Event of Default (as defined in the Indenture), or any event which would notice or passage of time or both would become an Event of Default under the Indenture exists; and (c) it has lawfully and fully discharged its duties as Trustee under the Indenture. 5. Bankers represents and warrants to the Issuer that it is qualified and eligible to act as Trustee under the Indenture, including under the provisions of Sections 608 and 609 thereof. 6. Bankers hereby accepts the appointment as successor Trustee under the Indenture and the trust created thereby, and assumes all rights, powers, duties and obligations of the Trustee under the Indenture. Bankers will execute said trust exercise and perform said rights, powers, duties and obligations upon the terms and conditions set forth in the Indenture. 7. Bankers hereby accepts the designation of its corporate trust office as the office or agency of the Issuer in the Borough of Manhattan, the City of New York, New York for the purposes specified in paragraph 2. 8. PNB hereby acknowledges receipt of all compensation and other amounts due it under the Indenture and hereby confirms, assigns, transfers and sets over to Bankers, as successor Trustee under the Indenture, upon the trust expressed in the Indenture, any and all moneys and all the rights, powers, trusts, duties and obligations which PNB now holds as Trustee under and by virtue of the Indenture. 9. Bankers shall, on behalf of the Company and PNB and at the expense of the Company, mail a notice, in the form of Annex A hereto, of the resignation and succession effected hereby to the holders of the Debentures within 10 days of the date hereof. 10. Except as affected hereby, the Indenture is hereby confirmed and shall remain in full force and effect. 11. The Issuer and PNB hereby agree, upon the request of Bankers, to execute, acknowledge and deliver such further instruments of conveyance and assurance and do such other things as may be required for more fully and certainly vesting and confirming in Bankers all of the properties, rights, powers, duties and obligations of Bankers as successor Trustee under the Indenture. 12. Terms not otherwise defined in this Agreement are used as defined in the Indenture. 13. This Agreement and the rights of the parties hereunder shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania. 14. This agreement may be executed and acknowledged in one or more counterparts, and by the different parties hereto on separate counterparts, each of which shall be deemed an original, and all such counterparts shall together constitute but one and the same instrument. This Agreement shall become effective upon the execution of counterparts hereof by all parties hereto whether or not all such parties have executed the same counterpart. WITNESS the due execution hereof as of the date first above written. CORPORATE SEAL ATTEST: EQUITABLE RESOURCES, INC. - ------------------------------------ ---------------------------------- Audrey C. Moeller, Secretary John C. Bertges, Senior Vice President - Financial and Adminsitrative CORPORATE SEAL ATTEST: PITTSBURGH NATIONAL BANK - ------------------------------------ ---------------------------------- Authorized Officer Joseph A. Richardson, Jr., Senior Vice President and Secretary CORPORATE SEAL ATTEST: BANKERS TRUST COMPANY - ------------------------------------ ---------------------------------- Assistant Secretary Vice President ANNEX A NOTICE OF RESIGNATION OF TRUSTEE AND APPOINTMENT OF SUCCESSOR TRUSTEE To the Holders of EQUITABLE GAS COMPANY (now EQUITABLE RESOURCES, INC.) DEBENTURES, 12-1/8% SERIES DUE APRIL 1, 2008 (the "Debentures") NOTICE IS HEREBY GIVEN that, pursuant to Section 610 of the Indenture dated as of April 1, 1983 (the "Indenture") under which the above mentioned Debentures were issued, the undersigned PITTSBURGH NATIONAL BANK has resigned as Trustee under the Indenture, and EQUITABLE RESOURCES, INC., formerly Equitable Gas Company (the "Company"), has appointed BANKERS TRUST COMPANY as successor Trustee under the Indenture. Bankers Trust Company has, pursuant to Section 611 of the Indenture, accepted such appointment. The address of the corporate trust office of the successor Trustee is Four Albany Street, New York, New York 10015. The Company has also designed said office as the office or agency of the Company in the Borough of Manhattan, the City of New York, New York where (a) the Debentures may be presented or surrendered for payment, (b) the Debentures may be presented for registration of transfer or exchange and (c) notices and demands to or upon the Company in respect of the Debentures or the Indenture may be served. Such resignation and succession and the designation of such office are all effective at the close of business on the date of this Notice. Pittsburgh national Bank remains the office or agency of the Company for such purposes in the City of Pittsburgh, Pennsylvania. Debentures being sent for payment or registration of transfer or exchange should be sent to one of the following addresses: By Mail By Hand Corporate Trust Office Corporate Trust Office Pittsburgh National Bank Pittsburgh National Bank Fifth Avenue and Wood Street Fifth Avenue and Wall Street Pittsburgh, PA 15222 Pittsburgh, PA 15222 Bankers Trust Company Bankers Trust Company Corporate Trust and Agency Group Corporate Trust and Agency Group Securities Processing Service Division Securities Processing Service Division P.O. Box 2579 123 Washington Street Church Street Station First Floor New York, NY 10008 New York, NY 10006 Dated: February 1, 1985 EQUITABLE RESOURCES, INC. PITTSBURGH NATIONAL BANK BANKERS TRUST COMPANY COMMONWEALTH OF PENNSYLVANIA ) ) ss: COUNTY OF ALLEGHENY ) On this 1st day of February, 1985, before me, the undersigned officer, personally appeared JOHN C. BERTGES, who acknowledged himself to be Vice President - Financial and Administrative of Equitable Resources, Inc., a corporation, and that he as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My Commission Expires: COMMONWEALTH OF PENNSYLVANIA ) ) ss: COUNTY OF ALLEGHENY ) On this 1st day of February, 1985, before me, the undersigned officer, personally appeared JOSEPH A. RICHARDSON, JR., who acknowledged himself to be Senior Vice President and Secretary of Pittsburgh National Bank, a national banking association, and that he as such Senior Vice President and Secretary, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of said banking association by himself as Vice President and Secretary. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My Commission Expires: STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On this 1st day of February, 1985, before me, the undersigned officer, personally appeared T. J. MOSKIE, who acknowledged himself to be Vice President of Bankers Trust Company, a New York banking association, and that he as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of said banking association by himself as Vice President. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public My Commission Expires: EX-4.01(C) 3 RESOLUTIONS ESTABLISHING TERMS OF DEBENTURES Resolutions Adopted June 22, 1987 by the Finance Committee of the Board of Directors of the Company Approving the Issue and Sale of $75,000,000 Debentures, 7-1/2% Series Due July 1, 1999, With 1,500,000 Common Stock Purchase Warrants RESOLVED, That this Committee hereby authorizes and approves the issue and sale by the Company of 75,000 Units (the "Units"), each Unit consisting of $1,000 principal amount of a Debenture, 7-1/2% Series due July 1, 1999 (collectively, the "Debentures") and 20 Common Stock Purchase Warrants (collectively, the "Warrants"), each such Warrant being exercisable to purchase one share of the Common Stock, without par value, of the Company (the "Common Stock"); RESOLVED FURTHER, That the Debentures and Warrants comprising the Units shall have the terms and provisions (i) set forth in the attached Board Resolution establishing the terms and provisions of the Debentures and hereby adopted by this Committee, and (ii) as hereinafter set forth; RESOLVED FURTHER, That the initial Exercise Price of each Warrant shall be $57.50 per share, to be evidenced by Warrant Certificates to be countersigned and delivered by Mellon Bank, N.A., as Warrant Agent (the "Warrant Agent") under a Warrant Agreement to be dated June 23, 1987 (the "Warrant Agreement") between the Company and the Warrant Agent, and expiring at 5:00 p.m., prevailing local time in New York, New York on July 1, 1992, with the number of Warrants and the Exercise Price to be subject to adjustment as provided in the Warrant Agreement; RESOLVED FURTHER, That the Debentures and the Warrants comprising each Unit shall not be separately transferable until October 1, 1987 or such earlier date as may be determined on behalf of the Company by the President, the Executive Vice President or the Vice President and Treasurer, with the consent of the Representative of the Underwriters, all as more fully set forth in the Warrant Agreement and Board Resolution; RESOLVED FURTHER, That the Underwriting Agreement dated June 23, 1987 between the Company and The First Boston Corporation ("First Boston"), on behalf of itself and as Representative of the several Underwriters named on Schedule A thereto, presented to this meeting (the "Underwriting Agreement") be and the same hereby is approved, and that the proper officers of the Company be and thereby they are authorized and directed to execute and deliver, on behalf of the Company, the Underwriting Agreement, substantially in the form presented to this meeting, with such changes therein as the officers executing the same may approve; RESOLVED FURTHER, That the Company shall issue and sell for cash to the several Underwriters named in the Underwriting Agreement the Units at the purchase price of $985.00 per Unit specified in the Underwriting Agreement, and that the proper officers of the Company be, and each of them hereby is, authorized and directed to cause the Units, in the amounts agreed to be purchased by each Underwriter, to be delivered to First Boston for the several accounts of such Underwriters against payment to the Company of the purchase price therefor, all in accordance with the provisions of the Underwriting Agreement; RESOLVED FURTHER, That the form of Warrant Agreement presented to this meeting between the Company and the Warrant Agent, providing for the appointment of the Warrant Agent and for certain terms and provisions of the Warrants, be and the same hereby is approved, and that the proper officers of the Company be and hereby they are authorized and directed to execute and deliver, on behalf of the Company, the Warrant Agreement substantially in the form presented to this meeting, with such changes therein as the officers executing the same may approve; RESOLVED FURTHER, That the authority of the Company's Transfer Agent and Registrar with respect to the issuance, transfer, countersignature and registration of shares of the Company's Common Stock be and hereby it is extended to cover the authorized but unissued shares of Common Stock issuable upon exercise of Warrants, and that the proper officers of the Company be and hereby they are authorized and directed to issue such orders and instructions to the Company's Transfer Agent and Registrar as they or any of them shall deem necessary or advisable in connection with the foregoing; RESOLVED FURTHER, That the actions of the officers of the Company in causing to be filed with the Securities and Exchange Commission (the "SEC") on April 7, 1987 a Registration Statement (Form S-3, Registration Number 33-13232), including a Preliminary Prospectus dated April 7, 1987, relating to 75,000 Units and 1.575 million shares of Common Stock be, and hereby it is, in all respects ratified, confirmed and approved, and that the proper officers of the Company be, and each of them hereby is, authorized and empowered, for and on behalf of the Company, to prepare or cause to be prepared and to execute and file with the SEC Amendment No. 1, including a Final Prospectus, to the Registration Statement, and to use such Amendment and such Final Prospectus in connection with the offering and sale of the Units; RESOLVED FURTHER, That the forms of Debentures and Warrants (proofs of May 8, 1987 and May 7, 1987, respectively) presented to this meeting be and the same hereby are approved, and that the proper officers of the Company be and hereby they are authorized and directed to execute and deliver, on behalf of the Company, the Debentures and Warrants in substantially the forms presented to this meeting, with the blanks appropriately filled, and with such changes therein as the officers executing the same may approved; RESOLVED FURTHER, That the Debentures shall, as provided in the Indenture, be signed in the name and on behalf of the Company by the facsimile signature of the President of the Company under its corporate seal (which may be printed, engraved or otherwise reproduced on the Debentures, by facsimile or otherwise), attested by the facsimile signature of the Secretary of the Company, and that the facsimile signatures of Donald I. Moritz and Audrey C. Moeller, as President and Secretary of the Company, respectively, be and hereby they are adopted and approved for such purpose; RESOLVED FURTHER, That the action of the proper officers of the Company, in causing to be filed with the New York Stock Exchange an application for the listing thereon, subject to official notice of issuance, of $75,000,000 principal amount of 7-1/2% Debentures due July 1, 1999 and 1,500,000 shares of authorized but unissued shares of common stock issuable upon exercise of common stock warrants sold in conjunction with the Debentures due July 1, 1999, is hereby ratified, confirmed and approved and each of them is hereby authorized to make such changes therein and to take such steps as may be necessary or desirable to conform to applicable requirements for listing of such Debentures and share of common stock; RESOLVED FURTHER, That the form presented to this meeting of the proposed Indemnity Agreement between the Company and The New York Stock Exchange, relating to the listing on said Exchange of the Debentures executed by facsimile signature as aforesaid, be and the same hereby is approved, and that the proper officers of the Company be and hereby they are authorized and directed to execute and deliver, on behalf of the Company, such Indemnity Agreement substantially in the form presented to this meeting, with such changes therein as the officers executing the same may approve; RESOLVED FURTHER, That the action of the proper officers of the Company in causing to be filed with the Philadelphia Stock Exchange and application for the listing thereon, subject to official notice of issuance, of 1,500,000 shares of authorized but unissued shares of common stock is hereby ratified, confirmed and approved. On motion duly made and seconded, the following resolution was unanimously adopted: RESOLVED, That in accordance with Section 301 of the Indenture dated as of April 1, 1983 (the "Indenture") from the Company to Bankers Trust Company, as trustee (the "Trustee"), there is hereby established for authentication and delivery by the Trustee the third series of Securities (such series being referred to herein as the "Debentures") of the Company to be issued under the Indenture, having the following terms and provisions in addition to the terms and provisions established by the Indenture: 1.1 Title. The title of the Debentures shall be "Debentures, 7-1/2% Series Due July 1, 1999". 2.1 Principal Amount. The aggregate principal amount of the Debentures which may be authenticated and delivered under the Indenture (except for Debentures authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Debentures pursuant to Section 304, 305, 306, 906 or 1107 of the Indenture) shall be limited to $75,000,000. 3.1 Maturity. The principal of the Debentures shall be payable on July 1, 1999. 4.1 Interest Rate. The Debentures shall bear interest at the rate of 7-1/2% per annum until the principal thereof is paid or made available for payment and (to the extent that the payment of such interest shall be legally enforceable) at the same rate per annum on any overdue principal and premium and on any overdue installment of interest. 4.2 Interest Accrual. Interest on the Debentures shall accrue from the date of the original issue of any of the Debentures or from the most recent Interest Payment Date (as specified in Section 4.3 below) to which interest has been paid or duly provided for. 4.3 Interest Payment Date. The Interest Payment Dates on which interest on the Debentures shall be paid or duly provided for shall be semiannually on January 1 and July 1 in each year, commending January 1, 1988. 4.4 Regular Record Dates. The Regular Record Dates for the interest on the Debentures so payable on any Interest Payment Date (as specified in Section 4.3 above) shall be the December 15 or June 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. 5.1 Place of Payment. Principal of the Debentures shall be payable at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, the City of New York, New York. Unless otherwise designated by the Company in a written notice to the Trustee, such office or agency in the Borough of Manhattan for the above purpose shall be the Corporate Trust Office of the Trustee. Interest on the Debentures shall be payable by check mailed to the registered address of the holder of record on the Regular Record Date for such interest payment. 6.1 Redemption. The Debentures shall not be redeemable, in whole or in part, prior to maturity. 7.1 Denominations. As contemplated by the Indenture, the Debentures shall be issuable in denominations of $1,000 and any integral multiple thereof. 8.1 Convertibility. he Debentures shall not be convertible into shares of capital stock or other securities of the Company. 9.1 Repayment. Except as provided in Section 10.1 hereof, the Company shall have no obligation to repay the Debentures (at the option of holders or otherwise) prior to the Maturity of the Debentures (as specified in Section 3.1 above). 10.1 Acceleration. In the event of a declaration of acceleration of the maturity of the Debentures pursuant to Section 502 of the Indenture, only an amount of principal equal to the accreted value of the Debentures may be declared to be due and payable. The accreted value of the Debentures shall be equal to the issue price of the Debentures as established for the purchasers upon original issue, increased by the amount of original issue discount which such purchasers would have been required to include in gross income to the time of such declaration of acceleration, in each case as determined for purposes of federal income taxes under the provisions of the Internal Revenue Code as in effect on the date of original issuance of the Debentures. In determining the issue price and original issue discount of the Debentures, the Trustee shall be entitled to rely on a certificate of a firm of independent certified public accountants who shall be satisfactory to the Trustee (and who may be accountants to the Company). 11.1 Section 403 of the Indenture. Section 403 of the Indenture shall apply to the Debentures. 12.1 Transfers. Until October 1, 1987 or such earlier date (the "Termination Date") as may be determined by the Company with the consent of The First Boston Corporation, the Debentures may not be transferred without the simultaneous transfer of 20 of the Company's Common Stock Purchase Warrants (the "Warrants") to the same registered holder for each $1,000 principal amount of Debentures so transferred. 13.1 Other Provisions. The Debentures shall have no other terms than as set forth in this Board Resolution and the Indenture or as may be set forth in any indenture or indentures supplemental to the Indenture. Capitalized terms used in this Board Resolution have the meanings set forth in the Indenture unless otherwise indicated or the context indicates otherwise. EX-10.19(D) 4 DEFERRED PAYMENT DIRECTORS FEES-CHRISTIANO Exhibit 10.19 (d) EQUITABLE RESOURCES, INC. Board of Directors Deferred Compensation Agreement THIS AGREEMENT, made and executed this 15th day of December, 1998, by and between Equitable Resources, Inc., herein designated as "Equitable", and Paul Christiano, herein designated as the "Participant." WITNESSETH: WHEREAS, the Participant is currently a member of the Board of Directors of Equitable as a Director or an Advisory Director; and WHEREAS, Equitable and the Participant desire to defer all of the fees arising from the above-stated relationship. NOW, THEREFORE, the parties hereby agree as follows: Section 1 - Account 1.1) Effective 15 December 1998, the Participant herein elects to defer, under the terms of this Agreement, all compensation earned for his/her service as a Director or an Advisory Director of Equitable for the calendar year 1999. 1.2) Equitable shall establish a bookkeeping account, hereinafter referred to as the "Account", and shall credit to the Account the amounts of the deferred fees. 1.3) Interest shall be credited to the Account monthly. The rate of interest shall be the same as the yield for 30-day Treasury Bills applicable to the first day of such month. Section 2 - Payment 2.1) All amounts credited to the Account on the Participant's behalf shall be payable in one lump sum by Equitable to the Participant on _________________ (date selected by the Participant) but in no event later than sixty (60) days after the Participant ceases to be a Director or an Advisory Director of Equitable. Unless a date specific is selected by the Participant, the distribution will be made within sixty (60) days after the Participant ceases to be a Director or an Advisory Director of Equitable; provided, however, that nothing contained in this Section 2.1 shall negate the provisions of Section 2.3 below. 2.2) In the event of the death of the Participant, such payment shall be made to the Participant's beneficiary. For purposes of the Agreement, "beneficiary" means any person(s) or trust(s) or combination of these, last designated by the Participant to receive benefits provided under this Agreement. Such designation shall be in writing filed with the Compensation Committee of the Board of Directors (the "Committee") and shall be revocable at any time through written instrument similarly filed without consent of any beneficiary. In the absence of any designation, the beneficiary shall be the Participant's spouse, if surviving, otherwise, all amounts payable hereunder shall be delivered by Equitable to the executors and administrators of the Participant's estate for administration as a part thereof. 2.3) For financial reasons, the Participant may apply to the Committee for withdrawal from the Agreement prior to the Payment Date. Such early withdrawal shall lie within the absolute discretion of the Committee. Upon approval from the Committee, and within fifteen (15) days thereafter, the Participant will be deemed to have withdrawn from the Agreement and a distribution, in the amount necessary, will be made in a one-time payment. Amounts still payable to the Participant after the application of this Paragraph 2.3 shall be distributed pursuant to the foregoing Paragraphs of this Section 2. Section 3 - Miscellaneous Provisions 3.1) Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between Equitable and the Participant, his/her designated beneficiary or any other person. Any fees deferred under the provisions of this Agreement shall continue for all purposes to be a part of the general funds of Equitable. To the extent that any person acquires a right to receive payment from Equitable under this Agreement, such right shall be no greater than the right of any unsecured general creditor of Equitable. 3.2) The right of the Participant or any other person to the payment of deferred fees under this Agreement shall not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 3.3) If the Committee shall find that any person to whom any payment is payable under this Agreement is unable to care for his/her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, child, a parent, or a brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of Equitable under this Agreement. 3.4) Nothing contained herein shall be construed as conferring upon the Participant the right to continue in the service of Equitable as a member of the Board of Directors. 3.5) This Agreement shall be binding upon and inure to the benefit of Equitable, its successors and assigns and the Participant and his/her heirs, executors, administrators and legal representatives. 3.6) Equitable may terminate this Plan at any time. Upon such termination, the Committee shall dispose of any benefits of the Participant as provided in Section 2. Equitable may also amend the provisions of this Plan at any time; provided, however, that no amendment shall affect the rights of the Participant, or his/her beneficiaries, to the receipt of payment of benefits to the extent of any compensation deferred before the time of the amendment. This Agreement shall terminate when the payment due under this Agreement is made. 3.7) This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Section 4 - Committee 4.1) The Committee's interpretation and construction of the Agreement, and the actions thereunder, including the amount or recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. The Committee members shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement unless attributable to his/her own willful misconduct or lack of good faith. IN WITNESS WHEREOF, Equitable has caused this Agreement to be executed by its duly authorized officers and the Participant has hereunto set his/her hand as of the date first above written. ATTEST: EQUITABLE RESOURCES, INC. s/ Audrey C. Moeller s/ M. S. Gerber - -------------------------- -------------------------------- Vice President and President and Corporate Secretary Chief Executive Officer WITNESS: (Participant) s/ Edna L. Jackson s/ Paul Christiano - -------------------------- -------------------------------- Edna L. Jackson Paul Christiano EX-10.20(D) 5 DEFERRED PAYMENT DIRECTORS FEES-DOMM Exhibit 10.20 (d) EQUITABLE RESOURCES, INC. Board of Directors Deferred Compensation Agreement THIS AGREEMENT, made and executed this 5th day of December, 1998, by and between Equitable Resources, Inc., herein designated as "Equitable", and Phyllis A. Domm, herein designated as the "Participant." WITNESSETH: WHEREAS, the Participant is currently a member of the Board of Directors of Equitable as a Director or an Advisory Director; and WHEREAS, Equitable and the Participant desire to defer all of the fees arising from the above-stated relationship. NOW, THEREFORE, the parties hereby agree as follows: Section 1 - Account 1.1) Effective January 1, 1999, the Participant herein elects to defer, under the terms of this Agreement, all compensation earned for his/her service as a Director or an Advisory Director of Equitable for the calendar year 1999. 1.2) Equitable shall establish a bookkeeping account, hereinafter referred to as the "Account", and shall credit to the Account the amounts of the deferred fees. 1.3) Interest shall be credited to the Account monthly. The rate of interest shall be the same as the yield for 30-day Treasury Bills applicable to the first day of such month. Section 2 - Payment 2.1) All amounts credited to the Account on the Participant's behalf shall be payable in one lump sum by Equitable to the Participant on _________________ (date selected by the Participant) but in no event later than sixty (60) days after the Participant ceases to be a Director or an Advisory Director of Equitable. Unless a date specific is selected by the Participant, the distribution will be made within sixty (60) days after the Participant ceases to be a Director or an Advisory Director of Equitable; provided, however, that nothing contained in this Section 2.1 shall negate the provisions of Section 2.3 below. 2.2) In the event of the death of the Participant, such payment shall be made to the Participant's beneficiary. For purposes of the Agreement, "beneficiary" means any person(s) or trust(s) or combination of these, last designated by the Participant to receive benefits provided under this Agreement. Such designation shall be in writing filed with the Compensation Committee of the Board of Directors (the "Committee") and shall be revocable at any time through written instrument similarly filed without consent of any beneficiary. In the absence of any designation, the beneficiary shall be the Participant's spouse, if surviving, otherwise, all amounts payable hereunder shall be delivered by Equitable to the executors and administrators of the Participant's estate for administration as a part thereof. 2.3) For financial reasons, the Participant may apply to the Committee for withdrawal from the Agreement prior to the Payment Date. Such early withdrawal shall lie within the absolute discretion of the Committee. Upon approval from the Committee, and within fifteen (15) days thereafter, the Participant will be deemed to have withdrawn from the Agreement and a distribution, in the amount necessary, will be made in a one-time payment. Amounts still payable to the Participant after the application of this Paragraph 2.3 shall be distributed pursuant to the foregoing Paragraphs of this Section 2. Section 3 - Miscellaneous Provisions 3.1) Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between Equitable and the Participant, his/her designated beneficiary or any other person. Any fees deferred under the provisions of this Agreement shall continue for all purposes to be a part of the general funds of Equitable. To the extent that any person acquires a right to receive payment from Equitable under this Agreement, such right shall be no greater than the right of any unsecured general creditor of Equitable. 3.2) The right of the Participant or any other person to the payment of deferred fees under this Agreement shall not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 3.3) If the Committee shall find that any person to whom any payment is payable under this Agreement is unable to care for his/her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, child, a parent, or a brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of Equitable under this Agreement. 3.4) Nothing contained herein shall be construed as conferring upon the Participant the right to continue in the service of Equitable as a member of the Board of Directors. 3.5) This Agreement shall be binding upon and inure to the benefit of Equitable, its successors and assigns and the Participant and his/her heirs, executors, administrators and legal representatives. 3.6) Equitable may terminate this Plan at any time. Upon such termination, the Committee shall dispose of any benefits of the Participant as provided in Section 2. Equitable may also amend the provisions of this Plan at any time; provided, however, that no amendment shall affect the rights of the Participant, or his/her beneficiaries, to the receipt of payment of benefits to the extent of any compensation deferred before the time of the amendment. This Agreement shall terminate when the payment due under this Agreement is made. 3.7) This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Section 4 - Committee 4.1) The Committee's interpretation and construction of the Agreement, and the actions thereunder, including the amount or recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. The Committee members shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement unless attributable to his/her own willful misconduct or lack of good faith. IN WITNESS WHEREOF, Equitable has caused this Agreement to be executed by its duly authorized officers and the Participant has hereunto set his/her hand as of the date first above written. ATTEST: EQUITABLE RESOURCES, INC. s/ Audrey C. Moeller s/ M. S. Gerber - -------------------------- -------------------------------- Vice President and President and Corporate Secretary Chief Executive Officer WITNESS: (Participant) s/ Robert E. Domm s/ Phyllis A. Domm - -------------------------- -------------------------------- Robert E. Domm Phyllis A. Domm EX-10.21(A) 6 DEFERRED PAYMENT DIRECTORS FEES-PRINE Exhibit 10.21 (a) EQUITABLE RESOURCES, INC. Board of Directors Deferred Compensation Agreement THIS AGREEMENT, made and executed this 31st day of December, 1987, by and between Equitable Resources, Inc., herein designated as "Equitable", and Malcolm M. Prine Christiano, herein designated as the "Participant." WITNESSETH: WHEREAS, the Participant is currently a member of the Board of Directors of Equitable as a Director or an Advisory Director; and WHEREAS, Equitable and the Participant desire to defer all of the fees arising from the above-stated relationship. NOW, THEREFORE, the parties hereby agree as follows: Section 1 - Account 1.1) Effective January 1, 1988, the Participant herein elects to defer, under the terms of this Agreement, all compensation earned for his/her service as a Director or an Advisory Director of Equitable for the calendar year 1988. 1.2) Equitable shall establish a bookkeeping account, hereinafter referred to as the "Account", and shall credit to the Account the amounts of the deferred fees. 1.3) Interest shall be credited to the Account monthly. The rate of interest shall be the same as the yield for 30-day Treasury Bills applicable to the first day of such month. Section 2 - Payment 2.1) All amounts credited to the Account on the Participant's behalf shall be payable in one lump sum by Equitable to the Participant on _________________ (date selected by the Participant) but in no event later than sixty (60) days after the Participant ceases to be a Director or an Advisory Director of Equitable. 2.2) In the event of the death of the Participant, such payment shall be made to the Participant's beneficiary. For purposes of the Agreement, "beneficiary" means any person(s) or trust(s) or combination of these, last designated by the Participant to receive benefits provided under this Agreement. Such designation shall be in writing filed with the Compensation Committee of the Board of Directors (the "Committee") and shall be revocable at any time through written instrument similarly filed without consent of any beneficiary. In the absence of any designation, the beneficiary shall be the Participant's spouse, if surviving, otherwise, all amounts payable hereunder shall be delivered by Equitable to the executors and administrators of the Participant's estate for administration as a part thereof. 2.3) For financial reasons, the Participant may apply to the Committee for withdrawal from the Agreement prior to the Payment Date. Such early withdrawal shall lie within the absolute discretion of the Committee. Upon approval from the Committee, and within fifteen (15) days thereafter, the Participant will be deemed to have withdrawn from the Agreement and a distribution, in the amount necessary, will be made in a one-time payment. Amounts still payable to the Participant after the application of this Paragraph 2.3 shall be distributed pursuant to the foregoing Paragraphs of this Section 2. Section 3 - Miscellaneous Provisions 3.1) Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between Equitable and the Participant, his/her designated beneficiary or any other person. Any fees deferred under the provisions of this Agreement shall continue for all purposes to be a part of the general funds of Equitable. To the extent that any person acquires a right to receive payment from Equitable under this Agreement, such right shall be no greater than the right of any unsecured general creditor of Equitable. 3.2) The right of the Participant or any other person to the payment of deferred fees under this Agreement shall not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 3.3) If the Committee shall find that any person to whom any payment is payable under this Agreement is unable to care for his/her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, child, a parent, or a brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of Equitable under this Agreement. 3.4) Nothing contained herein shall be construed as conferring upon the Participant the right to continue in the service of Equitable as a member of the Board of Directors. 3.5) This Agreement shall be binding upon and inure to the benefit of Equitable, its successors and assigns and the Participant and his/her heirs, executors, administrators and legal representatives. 3.6) Equitable may terminate this Plan at any time. Upon such termination, the Committee shall dispose of any benefits of the Participant as provided in Section 2. Equitable may also amend the provisions of this Plan at any time; provided, however, that no amendment shall affect the rights of the Participant, or his/her beneficiaries, to the receipt of payment of benefits to the extent of any compensation deferred before the time of the amendment. This Agreement shall terminate when the payment due under this Agreement is made. 3.7) This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Section 4 - Committee 4.1) The Committee's interpretation and construction of the Agreement, and the actions thereunder, including the amount or recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. The Committee members shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement unless attributable to his own willful misconduct or lack of good faith. IN WITNESS WHEREOF, Equitable has caused this Agreement to be executed by its duly authorized officers and the Participant has hereunto set his/her hand as of the date first above written. ATTEST: EQUITABLE RESOURCES, INC. s/ Audrey C. Moeller s/ D. I. Moritz - -------------------------- -------------------------------- Vice President and President and Corporate Secretary Chief Executive Officer WITNESS: (Participant) s/ Barbara I. Dixon s/ Malcolm M. Prine - -------------------------- -------------------------------- EX-10.21(B) 7 DEFERRED PAYMENT DIRECTORS FEES-PRINE Exhibit 10.21 (b) EQUITABLE RESOURCES, INC. Board of Directors Deferred Compensation Agreement THIS AGREEMENT, made and executed this 30th day of December, 1988, by and between Equitable Resources, Inc., herein designated as "Equitable", and Malcolm M. Prine Christiano, herein designated as the "Participant." WITNESSETH: WHEREAS, the Participant is currently a member of the Board of Directors of Equitable as a Director or an Advisory Director; and WHEREAS, Equitable and the Participant desire to defer all of the fees arising from the above-stated relationship. NOW, THEREFORE, the parties hereby agree as follows: Section 1 - Account 1.1) Effective January 1, 1989, the Participant herein elects to defer, under the terms of this Agreement, all compensation earned for his/her service as a Director or an Advisory Director of Equitable for the calendar year 1989. 1.2) Equitable shall establish a bookkeeping account, hereinafter referred to as the "Account", and shall credit to the Account the amounts of the deferred fees. 1.3) Interest shall be credited to the Account monthly. The rate of interest shall be the same as the yield for 30-day Treasury Bills applicable to the first day of such month. Section 2 - Payment 2.1) All amounts credited to the Account on the Participant's behalf shall be payable in one lump sum by Equitable to the Participant on _________________ (date selected by the Participant) but in no event later than sixty (60) days after the Participant ceases to be a Director or an Advisory Director of Equitable. 2.2) In the event of the death of the Participant, such payment shall be made to the Participant's beneficiary. For purposes of the Agreement, "beneficiary" means any person(s) or trust(s) or combination of these, last designated by the Participant to receive benefits provided under this Agreement. Such designation shall be in writing filed with the Compensation Committee of the Board of Directors (the "Committee") and shall be revocable at any time through written instrument similarly filed without consent of any beneficiary. In the absence of any designation, the beneficiary shall be the Participant's spouse, if surviving, otherwise, all amounts payable hereunder shall be delivered by Equitable to the executors and administrators of the Participant's estate for administration as a part thereof. 2.3) For financial reasons, the Participant may apply to the Committee for withdrawal from the Agreement prior to the Payment Date. Such early withdrawal shall lie within the absolute discretion of the Committee. Upon approval from the Committee, and within fifteen (15) days thereafter, the Participant will be deemed to have withdrawn from the Agreement and a distribution, in the amount necessary, will be made in a one-time payment. Amounts still payable to the Participant after the application of this Paragraph 2.3 shall be distributed pursuant to the foregoing Paragraphs of this Section 2. Section 3 - Miscellaneous Provisions 3.1) Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between Equitable and the Participant, his/her designated beneficiary or any other person. Any fees deferred under the provisions of this Agreement shall continue for all purposes to be a part of the general funds of Equitable. To the extent that any person acquires a right to receive payment from Equitable under this Agreement, such right shall be no greater than the right of any unsecured general creditor of Equitable. 3.2) The right of the Participant or any other person to the payment of deferred fees under this Agreement shall not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 3.3) If the Committee shall find that any person to whom any payment is payable under this Agreement is unable to care for his/her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, child, a parent, or a brother or sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of Equitable under this Agreement. 3.4) Nothing contained herein shall be construed as conferring upon the Participant the right to continue in the service of Equitable as a member of the Board of Directors. 3.5) This Agreement shall be binding upon and inure to the benefit of Equitable, its successors and assigns and the Participant and his/her heirs, executors, administrators and legal representatives. 3.6) Equitable may terminate this Plan at any time. Upon such termination, the Committee shall dispose of any benefits of the Participant as provided in Section 2. Equitable may also amend the provisions of this Plan at any time; provided, however, that no amendment shall affect the rights of the Participant, or his/her beneficiaries, to the receipt of payment of benefits to the extent of any compensation deferred before the time of the amendment. This Agreement shall terminate when the payment due under this Agreement is made. 3.7) This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Section 4 - Committee 4.1) The Committee's interpretation and construction of the Agreement, and the actions thereunder, including the amount or recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. The Committee members shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement unless attributable to his own willful misconduct or lack of good faith. IN WITNESS WHEREOF, Equitable has caused this Agreement to be executed by its duly authorized officers and the Participant has hereunto set his/her hand as of the date first above written. ATTEST: EQUITABLE RESOURCES, INC. s/ Audrey C. Moeller s/ D. I. Moritz - -------------------------- -------------------------------- Vice President and President and Corporate Secretary Chief Executive Officer WITNESS: (Participant) s/ Barbara I. Dixon s/ Malcolm M. Prine - -------------------------- -------------------------------- EX-21 8 SCHEDULE OF SUBSIDIARIES AT 12/31/98 EXHIBIT 21 EQUITABLE RESOURCES, INC. AND SUBSIDIARY COMPANIES AS OF DECEMBER 31, 1998 EQT Capital Corporation Equitable Energy, L.L.C. Equitable Power Services Company Equitable Production Company Equitrans, L.P. EREC Canada Ltd. EREC Nevada, Inc. EREC Properties. L.L.C. ERI Global Partners, Inc. ERI Holdings ERI Holdings II ERI Investments, Inc. ERI JAM, LLC ERI Power Services Canada Ltd. ERI Providence, L.L.C. ERI Services Canada Ltd. ERI Services, Inc. ERI Services (St. Lucia) Limited ET Avoca Company ET Blue Grass Company 420 Energy Investments, Inc. IEC Hunterdon, Inc. IEC Management Services, Inc. IEC Montclair, Inc. IEC Plymouth, Inc. Independent Energy Corporation Independent Energy Finance Corporation Independent Energy Operations, Inc. Kentucky West Virginia Gas Company, L.L.C. Nora Transmission Company Northeast Energy Services, Inc. Three Rivers Pipeline Corporation EX-23.01 9 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.01 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 25, 1999, with respect to the consolidated financial statements and schedule of Equitable Resources, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1998 in the Prospectus part of the following Registration Statements: Registration Statement No. 33-52151 on Form S-8 pertaining to the 1994 Equitable Resources, Inc. Long-Term Incentive Plan; Registration Statement No. 33-52137 on Form S-8 pertaining to the 1994 Equitable Resources, Inc. Non-Employee Directors' Stock Incentive Plan; Registration Statement No. 33-53703 on Form S-3 pertaining to the registration of $100,000,000 Medium-Term Notes, Series C of Equitable Resources, Inc.; Post-Effective Amendment No. 2 to Registration Statement No. 2-69010 on Form S-8 pertaining to the Equitable Resources, Inc. Key Employee Restricted Stock Option and Stock Appreciation Rights Incentive Compensation Plan; Post-Effective Amendment No. 1 to Registration Statement No. 33-00252 on Form S-8 pertaining to the Equitable Resources, Inc. Employee Savings Plan; Post-Effective Amendment No. 1 to Registration Statement No. 33-10508 on Form S-8 pertaining to the Equitable Resources, Inc. Key Employee Restricted Stock Option and Stock Appreciation Rights Incentive Compensation Plan; Registration Statement No. 333-01879 on Form S-8 pertaining to the Equitable Resources, Inc. Employee Stock Purchase Plan; Registration Statement No. 333-22529 on Form S-8 pertaining to the Equitable Resources, Inc. Employee Savings and Protection Plan; Registration Statement No. 333-20323 on Form S-3 pertaining to the registration of 164,345 shares of Equitable Resources, Inc. common stock; Registration Statement No. 333-32197 on Form S-8 pertaining to the Equitable Resources, Inc. Nonstatutory Stock Option Plan. Registration Statement No. 333-06839 on Form S-3 pertaining to the registration of $168,000,000 of debt securities of Equitable Resources, Inc.; Pittsburgh, Pennsylvania By /s/ Ernst & Young LLP March 17, 1999 Ernst & Young LLP EX-27.01(A) 10 FDS 1998 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. In the following financial data schedule, Earnings Per Share - Basic are listed in the Earnings Per Share - Primary field. Due to Edgar filing rules and required tags, the EPS - Primary field could not be changed to read EPS - Basic.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1998 DEC-31-1998 102,444 0 202,425 9,470 33,743 445,035 1,960,390 762,320 1,854,247 437,005 281,350 0 0 241,102 467,317 1,854,247 0 882,625 0 453,537 423,951 15,321 40,302 (49,433) (22,381) (27,052) (8,804) (8,263) 0 (44,119) (1.19) (1.19)
EX-27.01(B) 11 FDS RESTATED 1997 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. In the following financial data schedule, Earnings Per Share - Basic are listed in the Earnings Per Share - Primary field. Due to Edgar filing rules and required tags, the EPS - Primary field could not be changed to read EPS - Basic.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RESTATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 & 1997 INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1997 DEC-31-1997 69,442 0 364,106 9,985 37,156 684,734 1,862,412 675,410 2,328,051 745,701 417,564 0 0 268,328 555,192 2,328,051 0 934,034 0 460,572 354,896 16,386 34,903 117,397 43,210 74,187 3,870 0 0 78,057 2.17 2.16
EX-27.01(C) 12 FDS RESTATED 1996 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. In the following financial data schedule, Earnings Per Share - Basic are listed in the Earnings Per Share - Primary field. Due to Edgar filing rules and required tags, the EPS - Primary field could not be changed to read EPS - Basic.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RESTATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 & 1997 INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1996 DEC-31-1996 14,737 0 306,889 10,714 38,009 485,761 1,897,995 713,623 2,012,513 521,801 422,112 0 0 223,637 518,646 2,012,513 0 856,367 0 410,024 319,079 17,707 29,837 80,572 27,045 53,527 5,852 0 0 59,379 1.69 1.69
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