EQT Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. EQT operates Production, Midstream and Distribution businesses. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Operating revenue | $558.7 million | $450.0 million |
| Operating income | $198.6 million | $152.2 million |
| Net income | $109.3 million | $72.0 million |
| Net income attributable to EQT | $100.3 million; diluted EPS $0.66 | $72.0 million; diluted EPS $0.48 |
| Operating cash flow | $305.2 million | $222.1 million |
| Capital expenditures | $304.3 million | $269.6 million |
| Cash and equivalents | $160.3 million | $182.1 million at Dec. 31, 2012 |
| Total debt on balance sheet | $2.506 billion | $2.526 billion at Dec. 31, 2012 |
| Total assets | $8.802 billion | $8.850 billion at Dec. 31, 2012 |
Operating margin was approximately 35.6%, versus 33.8% a year earlier. Cash flow from operations approximately covered capital expenditures, leaving a $21.7 million decline in cash during the quarter. EQT and its Midstream Partnership had no borrowings or letters of credit outstanding under their respective revolving facilities. EQT reported $499.4 million in current liabilities and $657.1 million in current assets.
Quarterly dividend declared was $0.03 per share, down from $0.22 per share in Q1 2012. The company stated a new annual dividend rate of $0.12 per share effective January 2013.
Material changes and operating drivers
- Revenue rose 24.2%; operating income increased 30.5%; and net income attributable to EQT increased $28.3 million. Management cited 47% higher production sales volumes, increased midstream volumes and colder Distribution weather. Growth was partly offset by lower average realized production prices and higher DD&A.
- Production sales volumes grew 46.8% to 79.4 Bcfe, with Marcellus volumes more than doubling. The average effective sales price to EQT Corporation fell 11.8% to $4.27/Mcfe; the production-segment price fell 12.5% to $3.14/Mcfe. Lower hedge gains and NGL prices outweighed higher NYMEX gas prices.
- Production operating income increased 25.5% to $74.1 million. Production DD&A rose 44.3% to $124.9 million, mainly reflecting higher volumes. Exploration expense also rose as unproved acreage impairments increased.
- Midstream operating income increased 32.2% to $74.2 million. Gathering volumes rose 42.2%, and transmission throughput rose 92.4%; Sunrise Pipeline capacity revenues contributed to transmission growth. Lower storage and marketing margins partly offset gains.
- Distribution operating income increased 42.2% to $52.3 million. Weather was 30% colder than in Q1 2012, lifting throughput 17.8%; a favorable gas-cost audit adjustment also benefited results.
- The effective tax rate declined to 33.0% from 38.3%, principally due to 2012 state net-operating-loss adjustments and the Midstream Partnership IPO/noncontrolling ownership structure. Q1 2013 net income included $9.0 million attributable to noncontrolling interests.
Outlook, risks and contingencies
- 2013 guidance: approximately $1.1 billion of well-development spending; about 172 gross wells (153 Marcellus, 11 Upper Devonian and 8 Utica); production sales volumes of 340–350 Bcfe, approximately 33% above 2012; and NGL volumes of 4.5–4.7 million barrels.
- EQT planned approximately $400 million of 2013 midstream infrastructure spending, with expected incremental gathering capacity of about 400 MMcf/day and transmission capacity of about 450 MMcf/day. Planned funding sources were cash on hand, operating cash flow and expected asset dropdown proceeds to EQT Midstream Partners.
- The proposed sale of Equitable Gas and Homeworks to PNG Companies remained subject to regulatory approvals and was not classified as held for sale at March 31. EQT expected necessary approvals by year-end. The HSR waiting period expired April 22, 2013 without a further-information request. Transaction completion, approvals, timing and business disruption remained risks; $2.1 million of related costs were incurred in Q1.
- Natural gas and NGL price volatility is a principal risk. At March 31, cash-flow hedge positions covered 428 Bcf and extended through December 2017; management estimated approximately $30.7 million of deferred net hedge gains would enter earnings over the next 12 months, assuming no price changes or new transactions. A hypothetical 10% gas-price move would change the fair value of non-trading gas derivatives by roughly $166 million, before the offsetting impact on physical transactions.
- Moody’s downgraded EQT to Baa3/P-3 with a stable outlook on March 21; S&P rated it BBB/A-2 and Fitch BBB-/F3, all with stable outlooks. EQT stated it was in compliance with debt covenants. A downgrade below investment grade could constrain market access, raise borrowing or collateral costs, and affect counterparties.
- Ordinary-course legal and regulatory matters were pending or threatened. Management believed reserves were appropriate and did not expect currently pending matters to materially affect financial position, results or liquidity. No material risk-factor changes from the 2012 Form 10-K were reported. Management cautioned that interim results may not indicate full-year results because of seasonality and commodity-price volatility.
Important facts for investors to verify
- Whether production growth and 2013 volume guidance are achieved, and how lower realized prices, hedge settlements and NGL pricing affect earnings and cash generation.
- Whether planned capital spending, expected Midstream dropdown proceeds and operating cash flow adequately fund the development program while maintaining liquidity and leverage.
- Timing, approvals, consideration and operational effects of the Equitable Gas and Homeworks sale; the filing does not state a completed transaction or a clear final closing date.
- Credit-rating developments, covenant headroom and potential collateral needs under commodity-derivative agreements.
- Weather normalization and the sustainability of Distribution’s audit-related benefit, alongside changes in bad-debt expense and customer collections.