EQT Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; quarterly results are included. EQT operates Production, Midstream and regulated Distribution businesses, primarily in the Appalachian Basin.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $1.640 billion | $1.374 billion |
| Operating income | $861.3 million | $470.5 million |
| Net income | $479.8 million | $227.7 million |
| Diluted EPS | $3.19 | $1.57 |
| Cash from operations | $915.3 million | $789.7 million |
| Cash capital expenditures | $1.274 billion | $1.247 billion |
| Cash and cash equivalents at year-end | $831.3 million | $0 |
| Long-term debt, including current portion | $2.747 billion | $1.949 billion |
| Total assets | $8.773 billion | $7.098 billion |
- Revenue grew about 19%, net income about 111%, and production sales volumes 44% to 194.4 Bcfe. The average wellhead sales price including hedges fell to $5.37/Mcfe from $5.62/Mcfe; hedges added approximately $0.55/Mcf to natural gas prices in both years.
- Operating income included $202.9 million of pre-tax gains on the Langley and Big Sandy asset sales. The gains totaled $128.3 million after tax. Excluding the disposition gains, operating income was approximately $658.4 million; reported operating margin was about 52.5%, versus about 40.1% excluding those gains.
- Operating cash flow increased, but exceeded cash capital expenditures by approximately $359 million. Investing cash flow was helped by $620.0 million of asset-sale proceeds. Financing cash flow included $750 million of new notes; EQT paid $131.6 million of dividends.
- Year-end current assets were $1.690 billion and current liabilities $804.9 million, a current ratio of approximately 2.1. The $1.5 billion revolving credit facility had no loans or letters of credit outstanding at year-end.
- Production operating income rose to $387.1 million, with sales volumes up 44%; lease operating expense excluding production taxes declined to $0.20/Mcfe. Midstream operating income rose to $416.6 million, including the disposition gains; gathering volumes increased 32%, while storage, marketing and other net revenue declined 35%. Distribution operating income increased to $86.9 million.
- Proved reserves were 5.365 Tcfe, including 3.414 Tcfe in the Marcellus. Marcellus proved reserves increased 19%; total proved reserves included 2.399 Tcfe of proved undeveloped reserves, all in the Marcellus.
Changes, outlook and risks
- Management shifted capital toward the higher-return Marcellus play amid falling natural gas prices. In January 2012, EQT suspended new Huron development indefinitely; it had already suspended new CBM development in Virginia. Huron and CBM supplied about 58% of 2011 production sales volumes, with management expecting about 40% in 2012.
- For 2012, management forecast production sales volumes of 250–255 Bcfe, approximately 30% growth; about $1.055 billion for well development and $365 million for midstream infrastructure. The plan called for 146 gross Marcellus wells and 12 Huron wells, the latter already spud or needed to retain leases. Management expected to fund the plan from operating cash flow and cash on hand.
- Planned 2012 infrastructure additions included 445 MMcfe/day of gathering capacity and 700 MMcfe/day of transmission capacity, including the Sunrise Pipeline project, expected to enter service in 2012. Execution, permitting, cost and timing risks could affect these plans.
- In February 2012, EQT Midstream Partners filed to register a proposed IPO. If completed, EQT planned to contribute its wholly owned Equitrans subsidiary; EQT expected to remain the general partner and continue consolidating the partnership.
- Key exposures include volatile natural gas prices, drilling and reserve-estimation uncertainty, inadequate gathering/processing/transmission capacity, counterparty credit risk, and environmental and regulatory changes, including hydraulic-fracturing and emissions rules. Commodity hedges can limit upside and may require collateral.
- Contractual obligations totaled $6.736 billion, including $2.331 billion of purchase obligations, primarily pipeline demand charges. NORESCO-related guarantees had stated maximum exposures of approximately $213 million for savings guarantees and $35 million for bonds and other obligations; management considered performance remote and recorded no liability. Legal matters were not expected by management to materially affect the company; identified environmental remediation accruals were $1.7 million.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of the 2011 earnings increase reflects recurring operations versus the $202.9 million pre-tax asset-sale gains, and whether the 2012 production-growth and capital-spending plan was achieved.
- Whether Marcellus drilling economics remain attractive at prevailing gas prices, and whether reserve estimates and development timing support the 2.399 Tcfe of proved undeveloped reserves.
- Progress, cost and in-service timing for Sunrise and planned gathering and transmission expansions, including capacity access for EQT and third parties.
- Debt maturities, refinancing needs, covenant headroom and liquidity under lower commodity prices or higher collateral requirements; Moody’s outlook was negative at year-end while S&P and Fitch outlooks were stable.
- Potential consequences of the proposed midstream partnership IPO, including assets contributed, retained obligations, governance and any effects on consolidated results.
- Exposure to pipeline demand commitments, NORESCO guarantees, union negotiations and evolving environmental, hydraulic-fracturing and emissions requirements.