EQT Corporation — 2012 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. EQT operated in three segments: natural gas production, midstream gathering and transmission, and regulated gas distribution. The company focused investment on Marcellus development and formed EQT Midstream Partners, LP (the Partnership), while agreeing to sell its distribution subsidiaries.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $1.642 billion | $1.640 billion |
| Operating income | $470.5 million | $861.3 million |
| Net income attributable to EQT | $183.4 million; diluted EPS $1.22 | $479.8 million; diluted EPS $3.19 |
| Cash provided by operating activities | $820.9 million | $915.3 million |
| Capital expenditures | $1.399 billion | $1.274 billion |
| Cash and cash equivalents at year-end | $182.1 million | $831.3 million |
| Long-term debt, including current portion | $2.526 billion | $2.747 billion |
- Production sales volumes rose 33% to 258.5 Bcfe. Marcellus sales increased 85% to 150.6 Bcfe; gathering volumes grew 30% to 335.4 TBtu.
- Average wellhead sales price, including hedges, fell to $4.26/Mcfe from $5.37/Mcfe. Hedging added $1.19/Mcf to the 2012 average natural gas sales price.
- Operating income fell substantially, reflecting lower realized production prices, increased DD&A and operating costs, and the absence of $202.9 million in 2011 disposition gains. Attributable net income also reflected higher interest expense, including a $23.3 million charge to close a forward-starting interest-rate hedge.
- Production depletion rose to $1.54/Mcfe from $1.25/Mcfe. Lease operating expense, excluding production taxes, was $0.18/Mcfe versus $0.20/Mcfe.
- Distribution operating income declined to $68.6 million from $86.9 million, mainly because 2012 was unusually warm; heating degree days were 9.6% below 2011.
- Liquidity included an undrawn $1.5 billion revolving credit facility expiring in 2016. EQT reported compliance with debt covenants and no short-term borrowings at year-end. Working capital was approximately $282 million, based on reported current assets and liabilities.
Material changes and strategic transactions
- EQT completed the Partnership’s July 2012 IPO, receiving approximately $231 million of net proceeds directly and retaining control and a majority interest. The Partnership’s results remained consolidated; public ownership was recorded as a noncontrolling interest.
- In December 2012, EQT agreed to transfer Equitable Gas and Equitable Homeworks to PNG Companies for $720 million in cash, subject to adjustments, plus selected midstream assets and commercial arrangements. Required regulatory approvals and antitrust review were pending at year-end; the businesses were not classified as held for sale.
- EQT indefinitely suspended Huron development in favor of Marcellus investment. Huron and CBM together supplied about 42% of 2012 production sales volumes; management expected about 27% in 2013.
- Proved reserves increased 12% to 6.0 Tcfe, including 4.3 Tcfe in the Marcellus. However, lower SEC pricing assumptions contributed to negative reserve revisions. The standardized measure of discounted future net cash flows declined to $2.155 billion from $3.933 billion.
- The annual dividend remained $0.88 per share for 2012. EQT announced a reduction to an annual rate of $0.12 per share effective January 2013, citing the planned change in its business mix after the distribution sale.
Outlook, risks and unusual items
- For 2013, management forecast production sales of 335–340 Bcfe, approximately 31% growth, and about $1.15 billion of well-development spending. The plan called for approximately 172 gross wells, including 153 Marcellus wells.
- Management planned approximately $400 million of midstream infrastructure investment, including about 400 MMcf/day of additional gathering capacity and 450 MMcf/day of transmission capacity. The overall 2013 capital plan was forecast at $1.595 billion, to be funded by cash on hand, operating cash flow and expected midstream asset sales to the Partnership.
- Key risks include natural gas price volatility, reliance on gathering and pipeline capacity, execution and cost risks in drilling and infrastructure projects, regulatory and environmental requirements (including hydraulic fracturing and emissions rules), hedge-counterparty and collateral exposure, and the concentration of production in the Appalachian Basin.
- The proposed distribution sale depended on regulatory and antitrust approvals and could be delayed or fail to close. Rating agencies took adverse or review actions following its announcement: Moody’s placed ratings under review for downgrade and Fitch downgraded EQT; S&P affirmed its ratings with a stable outlook.
- Long-term pipeline demand-charge and precedent-agreement commitments totaled approximately $2.033 billion. The company also disclosed NORESCO energy-savings guarantees with a maximum undiscounted exposure of approximately $192 million, while stating performance was remote and no liability was recorded.
- EQT disclosed Pennsylvania environmental Notices of Violation; it disputed some allegations and could not determine whether penalties would result. Management did not expect pending legal matters to materially affect the company’s financial position, results or liquidity.
- A derivative put-premium accounting error resulted in an $8.2 million revenue reduction in 2012 relating to amounts that should have been recorded in 2010 and 2011. Management concluded it was not material to prior periods or 2012 and said it did not affect cash flow or covenant compliance. The external auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification checklist
- Track approval, closing terms and proceeds from the proposed Equitable Gas and Homeworks sale, including the value and economics of transferred midstream assets and commercial agreements.
- Compare 2013 production, well count, capital spending and gathering/transmission additions with management’s forecasts; assess funding and expected Partnership asset sales.
- Review realized gas prices, hedge settlements and coverage, derivative collateral requirements, and the sensitivity of earnings and cash flow to commodity prices.
- Monitor reserve revisions and development costs, particularly the impact of SEC price assumptions and the pace of converting Marcellus proved undeveloped reserves.
- Assess debt ratings, liquidity after the planned distribution sale, the reduced dividend, and the company’s ability to meet contractual pipeline and other commitments.
- Check for material outcomes from environmental notices, regulatory proceedings, or other contingencies, and review the full audited financial statements and notes for detail.