EQT Corporation — 2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter filing. EQT operated three segments: natural gas production, midstream gathering/transmission/storage and marketing, and regulated distribution. Its principal assets and operations were in the Appalachian Basin.
Financial and operating performance
Unless otherwise noted, financial amounts are in millions of dollars.
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenue | $1,322.7 | $1,269.8 | +4% |
| Operating income | $470.5 | $356.8 | +32% |
| Net income | $227.7 | $156.9 | +45% |
| Diluted EPS | $1.57 | $1.19 | +32% |
| Cash provided by operations | $789.7 | $725.7 | +9% |
| Capital expenditures | $1,246.9 | $963.9 | +29% |
| Long-term debt at year-end | $1,949.2 | $1,949.2 | No change |
- Operating margin was approximately 35.5%, up from 28.1%; net margin was approximately 17.2%, up from 12.4%.
- Operating cash flow less capital expenditures was approximately negative $457 million. EQT reported no cash balance at year-end.
- At year-end, current assets were $827.9 million and current liabilities were $597.0 million. The company had a $1.5 billion revolving credit facility, with $53.7 million borrowed and a $23.5 million letter of credit outstanding.
- Production segment sales volumes rose 34.5% to 134.6 Bcfe. Proved reserves increased 28% to 5.2 Tcfe; Marcellus proved reserves reached 2.9 Tcfe.
- Segment operating income: Production $223.5 million (up 20%), Midstream $178.9 million (up 16%), and Distribution $83.2 million (up 5%).
- Fourth-quarter 2010 revenue was $371.2 million, operating income $134.7 million, and net income $73.1 million, compared with $344.0 million, $113.2 million, and $55.4 million, respectively, in fourth-quarter 2009.
Material changes versus 2009
- Higher production volumes, gathering revenues, NGL sales and lower incentive compensation and exploration expense contributed to the increase in net income. Lower realized gas prices, higher depletion and interest expense, and weaker storage and marketing revenues partly offset those gains.
- Production average well-head sales price, net of hedges, was reported as $3.93/Mcfe versus $4.11/Mcfe in 2009. Unit lease operating expense excluding production taxes fell 20% to $0.24/Mcfe; production depletion rose to $1.26/Mcfe from $1.06.
- EQT issued 12.725 million common shares in 2010, raising $537.2 million net, and used equity as part of its growth financing. Production capital spending rose substantially, including property acquisitions.
- The company acquired about 58,000 net Marcellus acres, a gathering system and producing wells for $282.2 million, of which $230.7 million was paid in stock.
Outlook, risks and unusual items
- Management expected 2011 natural gas sales volume growth of 30%, with sales exceeding 175 Bcfe. The 2011 capital plan was approximately $970 million: $691 million for well development, $244 million for midstream infrastructure and $35 million for distribution and other items. Management said it expected to fund the plan without accessing capital markets through year-end.
- Plans included 130 MMcfe/day of incremental gathering capacity and continued work on the Equitrans Marcellus expansion, expected to add about 550 MMcfe/day of transmission capacity over two years. Phase 2 was subject to FERC approval.
- On February 1, 2011, after year-end, EQT sold its Langley, Kentucky processing complex and associated NGL pipeline for $230 million, subject to adjustments, and entered into long-term processing and NGL service arrangements.
- Key risks include volatile natural gas and NGL prices, hedge-counterparty performance and possible collateral calls; drilling, reserve and infrastructure execution; hydraulic-fracturing and other environmental regulation; pipeline access and curtailments; and regulated-rate recovery. Moody’s, S&P and Fitch affirmed investment-grade ratings, but Moody’s and S&P outlooks were negative.
- Contractual obligations totaled about $4.98 billion, including $1.61 billion of purchase obligations and $1.03 billion of scheduled interest payments. Disclosed contingent exposures included NORESCO guarantees with a maximum aggregate amount of about $234 million and an ANPI liquidity guarantee estimated at up to $31 million; management considered performance under the guarantees unlikely or remote and recorded no related liability.
- Management said pending legal and regulatory matters were not expected to materially affect financial position, results or liquidity. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the Production pricing disclosures: the operating-results table reports $3.93/Mcfe net of hedges, while another production table reports $3.14/Mcfe. Confirm the different scopes or calculations.
- Review how the 2011 production-growth and capital-spending targets depend on drilling results, takeaway capacity, permits and planned infrastructure completion.
- Assess liquidity and financing needs against negative cash flow after capital expenditures, the zero year-end cash balance, debt maturities and the company’s dependence on operating cash flow and asset-sale proceeds.
- Examine reserve assumptions and development funding: 604 Bcfe of downward reserve revisions were recorded in 2010, primarily after removing Huron undeveloped locations to prioritize Marcellus development.
- Check the final proceeds and accounting for the February 2011 processing-asset sale, and monitor the quantified guarantee exposures, pipeline commitments and any changes in credit ratings or collateral requirements.