EQT Corp annual report, FY2017

EQT Corporation — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are noted where relevant. EQT is an Appalachian-focused natural gas producer and midstream operator. It completed its acquisition of Rice Energy on November 13, 2017, adding acreage and the RMP gathering and water businesses. The acquired operations were included only from the closing date.

Financial and operating metrics

Metric	2017	2016
Operating revenue	$3.378 billion	$1.608 billion
Operating income (loss)	$933.0 million	$(278.3) million
Net income (loss) attributable to EQT	$1.509 billion ($8.04 diluted EPS)	$(453.0) million ($(2.71) diluted EPS)
Cash from operating activities	$1.638 billion	$1.064 billion
Cash used in investing activities	$(4.127) billion	$(2.961) billion
Cash from financing activities	$1.533 billion	$1.399 billion
Cash and cash equivalents, year-end	$147.3 million	$1.104 billion
Long-term debt, as presented in selected financial data	$7.332 billion	$3.289 billion
Total assets	$29.523 billion	$15.473 billion

Revenue rose about 110%; production sales volumes increased 16.9% to 887.5 Bcfe and average realized price, including settled derivatives, rose 23.1% to $3.04/Mcfe.
GAAP operating revenue includes a $390.0 million gain on derivatives not designated as hedges, versus a $249.0 million loss in 2016. These fair-value changes can materially affect reported results.
The reported operating margin was approximately 27.6% in 2017, compared with a negative 17.3% in 2016; comparisons are affected by derivative gains/losses, the Rice acquisition and 2016 impairments.
Net income improvement was substantially influenced by a roughly $1.2 billion deferred tax benefit from the reduction in the federal corporate tax rate. The filing reports a 2017 income tax benefit of $1.116 billion, versus a $263.5 million benefit in 2016.
Capital expenditures were about $2.779 billion, including $1.385 billion for well development and $1.007 billion for property acquisitions. Investing cash use also included about $1.560 billion of net cash paid for the Rice merger.
Year-end current assets were $1.163 billion and current liabilities were $1.232 billion, implying a working-capital deficit of about $69 million. Cash fell by $956 million during the year.
The company issued $3.0 billion of notes in October, repaid or redeemed debt including $700 million of its 2018 notes, and reported $1.761 billion of credit-facility borrowings at year-end across the consolidated group. EQT, EQM and RMP were in compliance with their reported debt covenants.

Material changes versus the prior period

Rice added approximately 270,000 net acres, including about 205,000 net Marcellus acres and 65,000 net Ohio Utica acres, plus interests in RMP. The acquisition was funded with stock, cash, debt proceeds and credit-facility borrowings; EQT issued approximately 91 million shares and paid approximately $1.6 billion net cash consideration.
Proved reserves increased 59% to 21.4 Tcfe, primarily due to acquisitions. Production sales volumes reached a record and average realized prices improved, while operating costs increased with higher volumes, transport commitments and processing.
Segment reporting changed after the merger to five segments: EQT Production, EQM Gathering, EQM Transmission, RMP Gathering and RMP Water. Rice’s partial-year contribution and the changed segment structure limit direct comparability.
Operating cash flow increased by $573 million. Investing cash use increased by $1.166 billion, principally from Rice, drilling and completion spending, and higher MVP contributions.
Attributable fourth-quarter net income was $1.280 billion, including the outsized tax-reform benefit; quarterly operating income was $214.8 million. Fourth-quarter results also included Rice operations from November 13.

Outlook, risks and unusual items

For 2018, EQT forecast production sales volumes of 1,520–1,560 Bcfe, well-development spending of approximately $2.2 billion, and about $0.2 billion for acreage and related items. The plan called for approximately 195 gross wells. Management projected 2019 production sales volumes 15% above expected 2018 volumes.
2018 midstream investment was forecast at approximately $1.5 billion through EQM, including $1.0–$1.2 billion in MVP contributions; RMP planned approximately $260 million of gathering and water investment.
The 300-mile Mountain Valley Pipeline had FERC certification and a targeted fourth-quarter 2018 in-service date. Estimated total project cost was approximately $3.5 billion, excluding AFUDC. Construction timing, permitting, cost and execution remain important uncertainties.
The board planned to announce by the end of March 2018 its decision on options to address EQT’s sum-of-the-parts discount. Management also intended to integrate Rice, pursue operational efficiencies and longer laterals, and potentially transfer Rice-retained midstream assets to EQM.
Key risks include natural-gas prices and Appalachian basis differentials; transportation capacity and long-term capacity commitments; execution and financing of growth projects; Rice integration and synergy delivery; concentration in the Appalachian Basin; regulation, environmental matters and hydraulic-fracturing restrictions; and potential impairment if commodity prices or operating assumptions weaken. The Huron assets had a reported carrying value of approximately $3 billion and were identified as potentially vulnerable to future impairments.
Contractual obligations included $16.6 billion of purchase obligations in the schedule, which excludes $5.6 billion of EQM-related capacity commitments. These long-term commitments merit review alongside planned capital spending and liquidity.
Environmental and legal matters included ongoing agency proceedings. Management believed pending matters would not materially affect the company, but outcomes were uncertain; identified environmental remediation costs of approximately $11.2 million were accrued. The MVP performance guarantee was $91 million, and legacy NORESCO guarantees had an undiscounted maximum of approximately $95 million; management assessed the likelihood of payment as remote.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting. Rice’s internal controls were excluded from the year-end assessment during the permitted integration period; Rice represented 45% of consolidated assets at year-end.

Important facts for investors to verify

Separate recurring operating performance and cash generation from derivative fair-value movements and the one-time tax benefit; confirm the impact of settled hedges and price/basis changes.
Review the final Rice purchase-price allocation, integration progress, realized synergies, and the full-year contribution of Rice beyond the brief post-close period.
Track MVP permits, construction milestones, final cost, funding requirements, shipper commitments and planned in-service date.
Assess liquidity against the current-liability deficit, debt maturities, credit-facility usage, capital plans and substantial long-term pipeline and purchase commitments.
Monitor reserve revisions and development economics, including the large proved-undeveloped reserve base and sensitivity of the Huron and other non-core assets to commodity prices.
Check the final accounting and cash-tax effects of tax reform, including use or refund of approximately $435 million in AMT credit carryforwards and the provisional nature of some tax estimates.