EQT

Business Context and Reporting Period

This Form 10-Q covers Equitable Resources, Inc. (ERI) for the quarterly period ended September 30, 1998. The company operates in three primary segments: Production (exploration and production of natural gas and crude oil), Utilities (regulated gas distribution and transportation), and Services (energy marketing and efficiency contracting). The financial statements have been restated to classify the company's natural gas midstream operations as discontinued operations following a plan adopted in April 1998 to sell these assets.

Key Financial Metrics

Note: Q3 1997 results included a one-time gain of $25.6M from property sales and a nonrecurring charge of $10.7M. YTD 1997 included a $23.7M nonrecurring charge.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased due to lower crude oil and natural gas liquids prices, reduced volumes from the sale of western properties in 1997, and warmer weather reducing retail gas demand.
• Profitability: Net income from continuing operations dropped significantly year-over-year. Excluding one-time items in 1997, adjusted net income for Q3 1997 would have been $6.1M, compared to $2.0M in Q3 1998.
• Cash Flow Volatility: Operating cash flow turned negative in Q3 1998 ($18.9M used) compared to positive in Q3 1997, primarily due to reduced collections of accounts receivable from warmer winter weather and timing differences in discontinued operations.
• Segment Performance:
  • Production: Operating income fell due to lower commodity prices and volumes, partially offset by cost reductions from asset sales.
  • Utilities: Operating income improved significantly due to rate increases implemented in late 1997, offsetting lower volumes from warm weather.
  • Services: Operating income turned positive ($0.5M) from a loss in the prior year, driven by growth in energy service contracting, though energy marketing margins were pressured.

Outlook, Risks, and Unusual Items

• Discontinued Operations Sale: The company announced an agreement to sell its midstream operations for $320 million, expected to close before year-end. Proceeds may be used to retire debt or repurchase stock.
• Restructuring Charge: Management expects to record a pretax restructuring charge of at least $20 million in the fourth quarter of 1998. This relates to workforce reductions, removal of management layers, closing unprofitable marketing regions, and the potential sale of the Pittsburgh headquarters.
• Capital Structure: In April 1998, the company issued $125 million in Trust Preferred Capital Securities to reduce short-term debt.
• Year 2000 Compliance: The company is on schedule for remediation and testing of critical systems. Estimated total costs are approximately $5.1 million ($2.5M incurred to date). Risks include potential supply disruptions from third-party vendors.
• Forward-Looking Risks: Key risks include weather conditions, commodity price volatility, deregulation pace, and the success of reserve acquisition and development.

Investor Verification Checklist

• Verify the closing date and final net proceeds of the $320 million midstream operations sale.
• Confirm the magnitude and specific components of the anticipated $20 million+ fourth-quarter restructuring charge.
• Monitor the impact of the planned workforce reductions and management layer removals on future operating expenses.
• Assess the company's ability to maintain liquidity given the negative operating cash flow in Q3 and reliance on short-term loans.
• Review the status of Year 2000 remediation for critical third-party suppliers to gauge supply chain risk.