01—Abstract
Summary
Summary of the 10-K filed March 19, 1999. Cited figures are marked; the original filing is the authoritative source.
Equitable Resources, Inc. (EQT) reported a difficult 1998.
Operating revenues were $882.6 milliona, down from $934.0 million in 1997, and the company posted a net loss of $44.1 million, or $1.19 per share, versus net income of $78.1 million in 1997. The loss from continuing operations was $27.1 million, or $0.73 per share, after $81.8 million of restructuring, impairment and nonrecurring charges, including $23 million of Gulf of Mexico dry hole costs and roughly $36.9 million of Gulf production asset write-downs. Warmer weather (19% warmer than 1997), lower commodity prices (realized natural gas prices down 25%, crude oil down 34%) and the costs of the restructuring all weighed on results.
Excluding nonrecurring items, income from continuing operations was $43.4 millionb, 25% below 1997. The company is repositioning around its core businesses: regulated gas distribution (Equitable Gas), Appalachian gas production, and energy services (NORESCO and Equitable Energy). It sold its natural gas midstream operations to AEP Resources in December 1998 for $338 million, and used the proceeds to reduce debt and repurchase about 4% of outstanding shares.
Management targets roughly $20 millionc of annual cost savings from 1999 onward, and is evaluating alternatives for its loss-making Gulf of Mexico operations. Balance sheet strength was reduced by the year's losses: total assets fell to $1.85 billion from $2.33 billion, and common equity dropped to $708 million from $824 million. Long-term debt was reduced to $281 million, partly offset by $125 million of 7.35% trust preferred securities.
The $1.18d annual dividend was maintained. Key risks for investors include commodity price exposure, the unresolved Equitrans FERC rate case, legal exposure (Raytheon claims below $20 million and a $1.9 million royalty judgment under appeal), and the execution of cost reductions and the Gulf strategy review. The company stated that its Year 2000 remediation was on schedule, with critical systems expected to be compliant by June 1999.
02—Key points
Key Highlights
- 1998 net loss of $44.1 million ($1.19/share) versus 1997 net income of $78.1 million ($2.17/share), driven by $81.8 million of restructuring, impairment and nonrecurring charges
- Loss from continuing operations of $27.1 million ($0.73/share); excluding nonrecurring items, income was $43.4 million, down 25% from 1997
- Revenues of $882.6 million, down 6% from $934.0 million, with realized gas prices down 25% and crude oil prices down 34%
- Sold natural gas midstream operations for $338 million in December 1998, used to reduce debt and repurchase about 4% of shares
- Restructuring expected to save about $20 million annually beginning in 1999; Gulf of Mexico operations under strategic review after $23 million of dry hole costs and about $36.9 million of write-downs
- Total assets fell to $1.85 billion and common equity to $708 million; long-term debt reduced to $281 million; $125 million of 7.35% trust preferred securities issued in 1998
- Dividend maintained at $0.295 per quarter ($1.18 annually); $468 million of retained earnings available for dividends under debt indentures
03—Questions
Frequently Asked Questions
Why did Equitable Resources report a net loss in 1998 after earning $78 million in 1997?
The loss reflects $81.8 million of pretax restructuring, impairment and other nonrecurring charges, $23 million of dry hole costs from unsuccessful Gulf of Mexico exploration wells, a $6.2 million Equitrans charge after FERC rejected a rate settlement, and an $8.3 million after-tax extraordinary loss on early debt retirement. Lower commodity prices and 19% warmer weather also reduced operating results.
What is the company's strategic direction after the 1998 restructuring?
Management is focusing on core businesses: regulated gas distribution and interstate pipeline (Equitable Utilities), Appalachian production (Equitable Production East), and energy services (NORESCO and Equitable Energy). It sold the midstream business, exited several noncore ventures, and is evaluating alternatives to improve shareholder value from the Gulf of Mexico, where results have not been consistently profitable.
Is the dividend at risk?
The company stated it anticipates continuing regular quarterly dividends of $0.295 per share. The 1998 payout of $43.8 million was covered by operating cash flow of $64.5 million only narrowly, and 1998 net income was negative, so the dividend's sustainability depends on the cost savings and on commodity prices recovering. Retained earnings of $467 million are available for dividends under the most restrictive debt indenture.
What are the main legal and regulatory risks disclosed?
The Raytheon Engineers lawsuit over an Avoca, New York gas storage project seeks less than $20 million in compensatory damages. A Texas breach-of-contract verdict was reduced to $762,000 pending final judgment and possible appeal. A Kentucky royalty case resulted in $1.9 million in damages, which the company is appealing after posting a $2.6 million guarantee. The Equitrans FERC rate case on gathering cost recovery remains pending, with a new settlement filed in January 1999. Management does not expect environmental liabilities to be material.
How exposed is the company to commodity prices?
Equitable Production's natural gas and crude oil revenues are directly exposed to price swings. The company uses exchange-traded futures, options and OTC swaps to hedge production. A 10% decline in natural gas prices from year-end 1998 levels would reduce the fair value of its energy derivatives by about $5.6 million, which the company says would be offset by higher value on the physical positions being hedged. Its standardized measure of discounted future net cash flows declined to $425 million from $541 million.
04—Continue