01—Abstract
Summary
Summary of the 10-K filed March 24, 1997. Cited figures are marked; the original filing is the authoritative source.
Equitable Resources, Inc. (EQT) reported 1996 operating revenues of $1.86 billiona (up from $1.43 billion in 1995) and net income of $59.4 million, or $1.69 per share, versus $1.5 million ($0.04 per share) in 1995.
The 1995 result was depressed by a $121.1 millionb pre-tax asset impairment under SFAS 121 (a $74.2 million after-tax hit), partly offset by nonrecurring gains from the Columbia Gas bankruptcy settlement and regulatory approvals. Excluding these items, the improvement in 1996 was driven by lower depletion rates, a 19% increase in average produced gas prices, lower interest costs, and higher natural gas liquids margins, partly offset by a 12% decline in gas production. Operating income rose to $128.8 million from $22.0 million, and the quarterly dividend was held at $0.295 per share ($1.18 annually).
The company reorganized into three segments in 1996: supply and logistics (about 71% of segment revenue, mainly marketing and Appalachian production), utilities (Equitable Gas serving roughly 266,000 customers in Pittsburgh and surrounding areas, plus three FERC-regulated pipelines), and a new non-regulated services segment that posted a $12.5 millionc operating loss from start-up costs. Proved gas reserves were 849.5 Bcf at year-end 1996, with 78% in Appalachia, and the company is well positioned on supply with management forecasting ample gas supply for at least a decade. Investors should weigh the earnings recovery against structural pressures.
Cash flow from operations fell to $65.6 milliond from $279.8 million, reflecting working capital build and the absence of 1995 settlement inflows. Short-term borrowings rose to $204.9 million, the company is paying the Alternative Minimum Tax each year, and a pending $28 million Pennsylvania base-rate request adds regulatory uncertainty. Earnings also remain sensitive to natural gas and oil prices, which the company's hedging program only partly mitigates.
02—Key points
Key Highlights
- Net income rebounded to $59.4 million ($1.69/share) in 1996 from $1.5 million ($0.04/share) in 1995, which included a $74.2 million after-tax impairment charge.
- Operating revenues rose 31% to $1.86 billion, driven by a 40% increase in average marketed gas prices and higher natural gas liquids and electricity sales.
- Operating income more than quintupled to $128.8 million, helped by lower depreciation and depletion ($82.4 million vs. $104.6 million) and lower operating costs at the utility.
- Cash flow from operations dropped sharply to $65.6 million from $279.8 million, as working capital needs and the lapse of 1995 settlement receipts weighed on cash generation.
- Proved reserves ended 1996 at 849.5 Bcf of gas and 19.5 million barrels of oil; natural gas production declined 12% to 57.3 Bcf.
- New services segment (energy marketing and efficiency services) posted a $12.5 million operating loss in its start-up year, a near-term drag on earnings.
- Dividend held at $1.18 per share annually, with $387.2 million of retained earnings available for dividends under debt indenture restrictions.
03—Questions
Frequently Asked Questions
Why did earnings swing so dramatically between 1995 and 1996?
The 1995 results included a $121.1 million pre-tax ($74.2 million after-tax) impairment of long-lived assets under SFAS 121, driven by sharply lower gas and oil prices. That charge depressed 1995 net income to $1.5 million. In 1996 there was no comparable charge, and earnings also benefited from lower depletion rates, higher produced gas prices, and lower interest costs. Partly offsetting this, 1996 included a $4.4 million after-tax pension curtailment gain, which the company describes as nonrecurring.
Is the dividend safe?
The company held its quarterly dividend at $0.295 per share through 1995 and 1996 and stated it anticipates continuing regular quarterly payments. Dividends paid ($41.5 million in 1996) are covered by net income, but operating cash flow fell to $65.6 million in 1996, below dividends plus capital expenditures, so the company relied on short-term borrowings. Dividends are also restricted under debt indentures to $387.2 million of retained earnings.
What are the main risks to future earnings?
Earnings are highly sensitive to natural gas and oil prices, which drive marketed and produced gas margins and the value of reserves. Regulatory outcomes matter as well: the Pennsylvania PUC is reviewing a $28 million base-rate increase request and a proposed customer choice unbundling. Tax credits from nonconventional fuels are declining after the 1995 property sale, and the company has been paying the Alternative Minimum Tax. The new services segment is still loss-making in its start-up phase.
How much is the company relying on debt and short-term borrowing?
Long-term debt was $422.1 million at year-end 1996, roughly flat with 1995. Short-term loans rose to $204.9 million from $135.0 million, reflecting seasonal storage financing and working capital needs. The company has a $500 million revolving credit agreement and $100 million remaining under a shelf registration, and management says it expects to finance 1997 capital spending of about $187 million with operating cash flow and short-term loans.
Where is the company's growth expected to come from?
Management planned 1997 capital spending of $187.1 million, with the largest share ($121.7 million) in supply and logistics, including $67.5 million for Gulf of Mexico and Gulf Coast drilling and $23.2 million for Appalachian development. The company also acquired Scallop Thermal Management in February 1997 and agreed to buy a 67.2-mile Louisiana pipeline from the Department of Energy for $22 million, and it is expanding its non-regulated energy services business.
04—Continue