EQT Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; figures are unaudited. EQT’s principal businesses were natural gas, NGL and oil production, and midstream gathering, transportation, storage and marketing. Its former Distribution segment was sold in December 2013 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenues | $578.7m | $479.6m | $1,766.5m | $1,368.6m |
| Operating income | $231.5m | $167.1m | $813.1m | $473.5m |
| Net income attributable to EQT | $98.6m | $88.3m | $401.7m | $275.4m |
| Diluted EPS attributable to EQT | $0.65 | $0.58 | $2.63 | $1.82 |
- Q3 operating margin was approximately 40.0%, versus 34.8% a year earlier; nine-month operating margin was approximately 46.0%, versus 34.6%.
- Q3 continuing income attributable to EQT rose to $98.6m from $86.0m. For the nine months, it increased to $399.9m from $232.5m. Growth reflected higher production volumes and midstream revenues; nine-month results also included a $37.7m asset-exchange gain and lower interest expense.
- Q3 production sales volumes increased 24.6% to 123.3 Bcfe; the average effective sales price to EQT Corporation fell 5.8% to $3.88/Mcfe, primarily due to weaker Appalachian basis. Nine-month sales volumes rose 23.4% to 339.6 Bcfe and the average effective sales price increased 3.6% to $4.34/Mcfe.
- For the first nine months, operating cash flow was $1,141.9m, capital expenditures from continuing operations were $1,606.3m, and investing cash outflow was $2,100.7m. Cash flow from operations less continuing-operations capital expenditures was negative approximately $464.4m, before other investing items.
- At September 30, cash and cash equivalents were $1,171.5m, with another $338.6m classified as restricted cash. Current assets were $1,859.2m and current liabilities $616.8m. Total debt, including current maturities, was $2,994.3m, compared with $2,501.5m at year-end 2013.
Material changes, financing and unusual items
- Production segment operating income was $140.0m in Q3, up from $97.6m; Midstream operating income was $93.6m, up from $78.5m. Midstream gathering volumes rose 24% and transmission throughput rose 50% year over year in Q3.
- In May, EQT contributed the Jupiter gathering system to EQT Midstream Partners (EQM) for $1.18bn. EQM’s public unit offering generated approximately $902.5m net proceeds. EQM also issued $500m of 4.00% senior notes due 2024; proceeds repaid its credit-facility borrowings and funded general purposes. EQT consolidated EQM and reported public limited partners’ interests as noncontrolling interests.
- The Range Resources exchange closed in June: EQT received about 73,000 net acres and 900 producing wells in the Permian Basin in exchange for Nora assets and $159m cash. The recorded $37.7m pretax gain included a $28m gain from de-designating cash-flow hedges; the total gain remained subject to final purchase-price adjustments.
- Q3 included a $34.3m gain from hedge ineffectiveness, compared with $3.4m in Q3 2013. Results are sensitive to commodity prices and Appalachian basis; management noted the regional basis discount had persisted since mid-2013 and expected it to continue.
- The Jupiter transaction created a $500m qualified trust for potential like-kind exchanges. EQT reported $338.6m remaining as restricted cash at September 30 and expected not to use all remaining funds before the November 3, 2014 deadline, anticipating additional federal taxable gain in Q4.
Outlook, risks and contingencies
- 2014 total capital investment, excluding acquisitions, was expected to be approximately $2.3bn, including $1.8bn for well development and $225m–$250m for EQM. Management projected 465–470 Bcfe of sales, approximately 25% production-volume growth, and 6,650–6,750 Mbbls of NGL volumes.
- Management expected approximately 362 gross wells to be drilled in 2014 and planned about $0.5bn of midstream infrastructure investment. Funding was expected from cash on hand, operating cash flow and EQM debt and equity issuances.
- OVC was planned as a 36-mile, 1.0 Bcf/day pipeline with estimated cost of $300m and expected mid-2016 service, subject to FERC approval. EQT had contracted for 650 MMcf/day for 20 years. MVP was expected to enter service in Q4 2018; it had 2.0 Bcf/day of 20-year commitments, with final scope and capacity still under development and FERC approvals required.
- New third-party transportation agreements increased EQT Energy’s future aggregate commitments by approximately $2.2bn for 750,000 Dth/day of capacity; agreements with EQM and MVP added approximately $9.3bn of commitments for 2.15 million Dth/day, generally for 20 years.
- EQT reported compliance with debt covenants and no borrowings or letters of credit outstanding under its $1.5bn revolving facility; EQM also had none outstanding under its $750m facility. EQT’s ratings were BBB (S&P), Baa3 (Moody’s) and BBB- (Fitch), all stable. EQM’s Moody’s rating was Ba1; S&P and Fitch rated it BBB-.
- Legal matters included a Pennsylvania environmental dispute: PADEP sought $4.5m in civil penalties after an alleged 2012 water release, and the PFBC filed a misdemeanor complaint. EQT expected penalties exceeding $100,000 but did not expect a material financial impact. EQT also recorded a $2.2m legal contingency related to a separate lease dispute and cited cyber incidents as a newly identified standalone risk.
Investor facts to verify
- Whether projected 2014 production, capital spending and volume growth were achieved, and how lower Appalachian basis affected realized prices.
- The cash-flow and return implications of the large development program, acquisitions and multiyear transportation commitments.
- The final tax impact of the Jupiter transaction and the disposition of restricted trust funds after the like-kind exchange deadline.
- Final purchase-price adjustments and the economics of the Range exchange, including the noncash hedge-related portion of the gain.
- FERC approvals, customer commitments, final scope, costs and execution timelines for OVC and MVP, as well as developments in environmental and other legal proceedings.