Why did net income decline in 1994 even though revenues grew?

Revenue growth came mainly from the natural gas marketing segment, which benefited from the full-year effect of the LIG acquisition and higher marketed volumes. However, the 13% decline in average wellhead gas prices, higher operating and interest expenses, and weak margins at LIG (due to lower liquids processing margins) reduced profitability. Net income fell to $60.7 million from $73.5 million.

How strong is the company's production and reserve base?

Natural gas production reached a record 62.5 Bcf in 1994, up 17% from 53.6 Bcf in 1993. Proved gas reserves were 875 Bcf at year-end, with 771.7 Bcf proved developed, and oil reserves totaled 18.3 million barrels. About 77% of reserves are in Appalachia, 18% in the Rockies, and 5% in the Gulf.

What is the outlook for the company's capital spending and financing?

The company planned a 1995 capital program of about $140.9 million, with $71.0 million for exploration and production, $25.2 million for marketing (mainly gas storage development), $25.1 million for distribution, and $19.6 million for transmission. It expects to fund this from operating cash flow and short-term loans, and it has adequate credit capacity under its new $500 million revolving facility.

What are the main risks investors should consider?

Key risks include continued weak natural gas and liquids prices, which management said showed little sign of improving in early 1995; margin pressure at the LIG subsidiary; and possible refunds to customers related to FERC Order 636 restructuring at Equitrans. The company also faces an uncertain recovery of its claim in Columbia Gas Transmission's Chapter 11 bankruptcy, which has not been recognized in the financial statements.

Is the company's dividend secure, and what is its financial flexibility?

The company expects to continue paying regular quarterly dividends, which totaled $1.15 per share in 1994 and were raised to $0.295 in the fourth quarter. Its long-term debt indentures limit dividends to $408.8 million of retained earnings. Shareholders' equity was $750 million, and the company had $23.4 million in cash, with long-term debt maturing modestly over the next several years.

EQT 10-K FY1994 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 22, 1995. Cited figures are marked; the original filing is the authoritative source.

Equitable Resources, Inc. (EQT) reported 1994 operating revenues of $1.40 billion^a (up from $1.09 billion in 1993) but net income fell 17% to $60.7 million, or $1.76 per share, from $73.5 million, or $2.27 per share.

Management attributed the decline to a 13%^b drop in average wellhead natural gas prices, higher operating and interest expenses, and weaker margins at its Louisiana Intrastate Gas (LIG) subsidiary, which was acquired in June 1993. Revenue growth was driven largely by the natural gas marketing segment, which expanded marketed volumes nearly 70%, even though LIG fell short of profit expectations as liquids processing margins collapsed. Operationally, the company set a record for natural gas production of 62.5 Bcf (up 17%), while proved gas reserves grew to 875 Bcf and proved oil reserves to 18.3 million barrels.

The business is diversified across four segments: exploration and production, natural gas marketing, natural gas distribution (regulated utility serving over 265,000 customers in Pittsburgh and surroundings), and natural gas transmission (three FERC-regulated pipelines). Financially, the company ended 1994 with total assets of $2.02 billion^c, common equity of $750 million, and long-term debt of $398 million. Liquidity appeared adequate, supported by a new $500 million five-year revolving credit facility established in January 1995, though short-term loans rose to $269 million.

The company also carries about $82.9 million^d of alternative minimum tax credit carryforwards and an effective tax rate of just 12.6% in 1994, aided by nonconventional fuels credits. For investors, the key issues are the sensitivity of earnings to gas prices, the drag from the LIG acquisition, and the stock's decline from a 1994 high of $38.75 to a low of $25.50. Management described early-1995 wellhead prices as showing little sign of improvement, and the company's dividend was raised to $0.295 per quarter in late 1994.

02—Key points

Key Highlights

Net income fell 17% to $60.7 million ($1.76 per share) in 1994, down from $73.5 million ($2.27 per share) in 1993, while revenues rose 28% to $1.40 billion.
Average wellhead natural gas prices declined 13% in 1994, the main driver of lower profitability despite record production of 62.5 Bcf (up 17%).
Proved gas reserves reached 875 Bcf and proved oil reserves 18.3 million barrels at year-end 1994, with 77% of reserves located in Appalachia.
Natural gas marketing revenues rose to $890.8 million, but LIG's operating income fell to $4.1 million from $11.7 million due to weaker liquids processing margins.
The company established a $500 million five-year revolving credit facility in January 1995, against $269.3 million of short-term loans outstanding at year-end.
Effective tax rate was only 12.6% in 1994 due to a $16.4 million nonconventional fuels tax credit, and $82.9 million of AMT credit carryforwards remain available.
Quarterly dividend increased to $0.295 per share in Q4 1994, with total 1994 dividends of $1.15 per share; $408.8 million of retained earnings is available for dividends.

03—Questions

Frequently Asked Questions

Why did net income decline in 1994 even though revenues grew?
Revenue growth came mainly from the natural gas marketing segment, which benefited from the full-year effect of the LIG acquisition and higher marketed volumes. However, the 13% decline in average wellhead gas prices, higher operating and interest expenses, and weak margins at LIG (due to lower liquids processing margins) reduced profitability. Net income fell to $60.7 million from $73.5 million.
How strong is the company's production and reserve base?
Natural gas production reached a record 62.5 Bcf in 1994, up 17% from 53.6 Bcf in 1993. Proved gas reserves were 875 Bcf at year-end, with 771.7 Bcf proved developed, and oil reserves totaled 18.3 million barrels. About 77% of reserves are in Appalachia, 18% in the Rockies, and 5% in the Gulf.
What is the outlook for the company's capital spending and financing?
The company planned a 1995 capital program of about $140.9 million, with $71.0 million for exploration and production, $25.2 million for marketing (mainly gas storage development), $25.1 million for distribution, and $19.6 million for transmission. It expects to fund this from operating cash flow and short-term loans, and it has adequate credit capacity under its new $500 million revolving facility.
What are the main risks investors should consider?
Key risks include continued weak natural gas and liquids prices, which management said showed little sign of improving in early 1995; margin pressure at the LIG subsidiary; and possible refunds to customers related to FERC Order 636 restructuring at Equitrans. The company also faces an uncertain recovery of its claim in Columbia Gas Transmission's Chapter 11 bankruptcy, which has not been recognized in the financial statements.
Is the company's dividend secure, and what is its financial flexibility?
The company expects to continue paying regular quarterly dividends, which totaled $1.15 per share in 1994 and were raised to $0.295 in the fourth quarter. Its long-term debt indentures limit dividends to $408.8 million of retained earnings. Shareholders' equity was $750 million, and the company had $23.4 million in cash, with long-term debt maturing modestly over the next several years.

04—Continue

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