EQT Corporation — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. EQT operated through EQT Production, focused on Appalachian natural gas, NGL and oil production, and EQT Midstream, providing gathering, transmission, storage and marketing services.
Financial and operating results
- Revenue: Continuing-operations operating revenues were $1.862 billion, up 35% from $1.377 billion in 2012. Production sales volumes rose 43% to 378.2 Bcfe; Marcellus volumes increased 82% to 275.0 Bcfe. Midstream gathered volumes increased 39% to 466.4 TBtu.
- Profit: Operating income was $654.6 million, compared with $389.6 million in 2012; reported operating margin was approximately 35%, versus 28%. Income from continuing operations attributable to EQT was $298.7 million, or $1.97 per diluted share, versus $135.9 million, or $0.90, in 2012. Net income attributable to EQT was $390.6 million, or $2.57 per diluted share, including $91.8 million of income from discontinued operations.
- Q4 results: Operating revenues were $493.4 million and operating income was $181.1 million. Income from continuing operations attributable to EQT was $61.9 million; net income attributable to EQT was $115.2 million, or $0.75 per diluted share, including discontinued operations.
- Cash flow and investment: Operating cash flow was $1.200 billion, up from $808.5 million. Continuing-operations capital expenditures were $1.764 billion, leaving approximately $564 million of cash-flow deficit before asset-sale proceeds, financing and other investing items. Cash and cash equivalents rose to $845.6 million from $182.1 million.
- Margins and pricing: EQT’s average effective sales price was $4.13/Mcfe including hedges, versus $4.17/Mcfe in 2012. The average effective price to Production increased to $3.08/Mcfe from $2.98/Mcfe. Appalachian gas basis weakened in the second half of 2013; hedge contribution declined to $0.36/Mcf from $1.10/Mcf in 2012.
- Debt and liquidity: Long-term debt was $2.502 billion, down slightly from $2.526 billion; the company reported no year-end borrowings under its $1.5 billion revolving facility. The facility was amended in February 2014 and extended to 2019. Credit ratings were investment grade, with stable outlooks; EQT reported compliance with debt covenants.
Material changes versus 2012
- Production growth and higher transmission activity drove stronger continuing-operations earnings and operating cash flow; higher DD&A, SG&A, taxes and noncontrolling interests partly offset the gains.
- EQT sold Equitable Gas and Homeworks in December 2013, exiting substantially all of its former Distribution segment. Consideration included $740.6 million cash, midstream assets preliminarily valued at $141.4 million and other contractual assets preliminarily valued at $32.5 million. The transaction generated a $43.8 million after-tax gain recorded in discontinued operations; prior periods were recast.
- EQT Midstream Partners completed a 2013 public unit offering, raising $529.4 million net. EQT’s retained partnership interest fell to 44.6% after the offering and related transactions; EQT continued consolidating the Partnership and recording public investors’ noncontrolling interest.
- The annual dividend was reduced from $0.88 per share in 2012 to $0.12 in 2013, effective January 2013, as EQT repositioned around its production and midstream businesses.
- A separate sale of energy marketing contracts generated a $19.6 million pretax gain. Operating income also benefited from this unusual item.
Outlook, risks and contingencies
- 2014 outlook: EQT forecast approximately $2.5 billion of capital investment, including $1.9 billion for well development and $610 million for midstream infrastructure. It projected sales volumes of 460–480 Bcfe, approximately 24% growth, and NGL volumes of 6.8–6.9 million barrels. The plan included 357 gross wells and additional gathering and transmission capacity; expected funding sources included operating cash flow, cash on hand and midstream asset sales to the Partnership.
- Management expected Appalachian basis to remain negative relative to Henry Hub because of regional supply growth. Natural gas price and basis volatility, hedging effectiveness and possible collateral requirements remain material exposures.
- Key risks include dependence on the Appalachian Basin and adequate pipeline capacity; drilling, reserve-estimation and development execution; hydraulic-fracturing and other environmental regulation; permitting delays; commodity-price changes; counterparty credit risk; and access to capital. Proved reserves were 8.3 Tcfe, up 39%, but reserve estimates depend on assumptions and development plans.
- Contractual obligations totaled $5.82 billion, including $2.17 billion of pipeline demand charges and other purchase obligations. Environmental remediation accruals were approximately $0.6 million. EQT reported pending legal and regulatory matters, including environmental notices of violation, but stated it did not expect currently pending matters to materially affect its financial position, results or liquidity.
- Outstanding NORESCO energy-savings guarantees had a maximum undiscounted exposure of approximately $172 million over a decreasing period of about 14 years; EQT assessed the likelihood of payment as remote and recorded no liability.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of 2013 earnings and cash flow growth is sustainable after separating the Equitable Gas disposal gain, the marketing-contract gain and other nonrecurring effects.
- Whether EQT can deliver its 2014 volume targets and planned gathering and transmission expansions within the stated capital budget and funding assumptions.
- The sensitivity of realized Appalachian prices and hedge results to continued negative basis, and the potential cash or collateral effects of commodity-price movements.
- The remaining development timetable and economics for 4.4 Tcfe of proved undeveloped reserves, including lease expirations and required 2014 drilling obligations.
- The post-sale operating and cash-flow effects of exiting Distribution, including the value and durability of the acquired midstream assets and long-term commercial arrangements.
- Future borrowing needs, the use and terms of dropdowns or other asset monetizations, and any changes in debt ratings, covenant headroom or contractual commitments.