EQT Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. EQT reports three segments: Production, Midstream, and Distribution. Unaudited interim results may not indicate full-year results, given seasonality and commodity-price volatility. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $336.7 | $257.3 | $1,141.4 | $951.5 |
| Operating income | $134.8 | $88.2 | $485.6 | $335.8 |
| Gain on dispositions | $180.1 | — | $202.9 | — |
| Net income | $178.9 | $36.5 | $388.9 | $154.6 |
| Diluted EPS | $1.19 | $0.24 | $2.59 | $1.07 |
- Q3 operating margin was approximately 40.0%; nine-month operating margin was approximately 42.5%. Net income benefited materially from asset-sale gains: management attributed $111.3 million, or $0.74 per diluted share, of Q3 net income to the after-tax Big Sandy Pipeline gain. Nine-month EPS included $0.91 per diluted share from the reported gains.
- Nine-month operating cash flow was $713.3 million versus $621.0 million. Cash capital additions were $892.6 million, implying approximately $179.2 million of negative operating-cash-flow-minus-capex. Investing cash flow was a net use of $219.1 million, including $620.0 million of disposition proceeds.
- Cash was $334.9 million at September 30, 2011, versus none reported at year-end 2010. Current assets were $968.9 million and current liabilities $592.6 million. No borrowings or letters of credit were outstanding under the revolving facility at quarter-end; the facility provides $1.5 billion of capacity and matures in December 2014.
- Debt totaled approximately $2.004 billion, including $25.3 million current and $1.979 billion long-term, compared with $1.949 billion at year-end 2010. The company repaid $53.7 million of short-term loans during the period. It reported compliance with debt covenants.
- Quarterly and year-to-date dividends declared were $0.22 and $0.66 per share, respectively. The board declared a further $0.22 quarterly dividend payable December 1, 2011.
Material changes and segment trends
- Production: Q3 production sales volumes rose 50.9% to 51.3 Bcfe; nine-month volumes rose 47.4% to 141.4 Bcfe. Marcellus sales volumes increased sharply. Nine-month segment operating income grew 65.5% to $281.0 million, while the average wellhead sales price to EQT was $5.42/Mcfe versus $5.75/Mcfe.
- Midstream: Nine-month operating income increased 23.2% to $160.5 million. Gathering volumes rose 32.7%, supporting gathering revenue, while storage, marketing and other net revenue fell 38.8%, in part due to lower commodity volatility and asset sales.
- Distribution: Nine-month operating income increased 23.7% to $64.8 million, supported by colder weather, West Virginia rate increases, reserve reversals and lower expenses.
- In July, EQT sold Big Sandy Pipeline for $390 million, recording a $180.1 million pretax gain. In February it sold the Langley processing complex and associated NGL pipeline for $230.5 million, recording a $22.8 million pretax gain. The May ANPI acquisition added producing interests and resulted in a $10.1 million pretax remeasurement gain recorded in other income.
- Total assets increased to $7.720 billion from $7.098 billion at December 31, 2010; net property, plant and equipment increased to $6.486 billion from $5.910 billion.
Outlook, risks and unusual items
- Management expected 2011 produced-gas sales of 195 Bcfe, the high end of prior guidance of 190–195 Bcfe, and reiterated 2012 guidance of more than 250 Bcfe. The 2011 capital-expenditure forecast was approximately $1.41 billion, excluding the ANPI transaction, including about $50 million for lease acquisitions.
- Estimated drilling cost per well increased from $6.0 million to $6.7 million due to oil-field inflation. EQT planned about 310 MMcfe/day of incremental Marcellus gathering capacity during 2011; 150 MMcfe/day had been added through the Callisto Compressor Station. FERC approved construction of Phase II of the Equitrans Marcellus expansion.
- Management was evaluating structural alternatives for Midstream to finance anticipated capital investment. Forward-looking statements depend on commodity prices, production, operating costs, regulation and other risks; management cautioned that actual results may differ.
- Natural-gas price exposure is managed with derivatives. At September 30, hedging instruments covered approximately 214 Bcf for risk-management purposes; a hypothetical 10% gas-price decrease would increase derivative fair value by about $86.4 million, while a 10% increase would reduce it by about $84.8 million. These sensitivities exclude offsetting changes in physical transactions.
- Credit ratings were Moody’s Baa2, S&P BBB and Fitch BBB. Moody’s and Fitch had downgraded ratings in 2011; S&P’s outlook was negative. A downgrade below investment grade could raise borrowing costs, collateral needs and limit market access. EQT said $2.3 million of additional collateral would have been required on relevant derivative liabilities if downgraded below investment grade at quarter-end.
- Legal and regulatory claims were pending or threatened; the company said reserves were adequate and expected no material effect from currently pending matters. Equitable Gas’s union contract expired September 25, 2011; the parties continued under its terms while negotiating. No material risk-factor changes from the 2010 Form 10-K were reported.
Key investor verification points
- Separate recurring operating performance from the Big Sandy and Langley sale gains and other transaction-related items.
- Reconcile reported capital spending with cash PP&E additions and non-cash ANPI and prior-year property transactions.
- Track Marcellus volume growth, realized pricing, well costs, capital requirements and gathering-capacity execution against guidance.
- Review debt maturities, credit-rating developments, covenant compliance and potential derivative collateral requirements.
- Assess the sustainability of Midstream and Distribution earnings, including the effects of asset sales, commodity volatility, weather and regulatory outcomes.