EQT Corporation — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Unaudited interim results; amounts below are in millions of dollars unless otherwise noted. EQT operates natural gas production, midstream gathering and transportation, and regulated distribution businesses.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenue | $218.4 | $297.8 | $925.8 | $1,167.6 |
| Operating income | $39.9 | $162.7 | $243.6 | $383.3 |
| Net income | $2.9 | $96.2 | $101.5 | $222.1 |
| Diluted EPS | $0.02 | $0.73 | $0.77 | $1.74 |
- Calculated operating margin was 18.3% for Q3 2009 versus 54.6% in Q3 2008; nine-month margin was 26.3% versus 32.8%. Net margin was 1.3% versus 32.3% for Q3 and 11.0% versus 19.0% year to date.
- Nine-month operating cash flow was $552.6, investing cash outflow $645.5, and financing cash inflow $285.4. Capital expenditures were $636.1; operating cash flow less capital expenditures was negative $83.5.
- Cash was $192.5 at September 30, versus none reported at December 31, 2008. Current assets were $730.2 and current liabilities $494.6, a current ratio of approximately 1.48.
- Long-term debt was $1,949.2, plus $2.3 current portion; short-term loans were zero, down from $319.9 at year-end 2008. Debt increased largely following issuance of $700 million of 8.125% senior notes due 2019. Interest expense rose to $78.1 for nine months from $41.0.
- Dividends declared remained $0.22 per share quarterly ($0.66 for nine months). The board declared a further $0.22 dividend payable December 1, 2009.
Changes versus comparable periods
- Q3 net income fell to $2.9 from $96.2; nine-month net income fell to $101.5 from $222.1. Management attributed the decline primarily to lower commodity prices and higher share-based compensation expense.
- Lower natural gas and NGL prices and weaker storage price spreads reduced pretax results by $47.1 in Q3 and $149.0 year to date. Increased production volumes and midstream activity partially offset the pressure.
- EQT Production sales volumes rose 18% in Q3 and 19% year to date, while average wellhead sales price fell 36.8% and 33.6%, respectively. Production operating income decreased 53% in Q3 and 46% year to date.
- Midstream operating income increased 27% in Q3 to $37.9, but rose only 5% year to date to $119.7. Higher gathering and transmission activity helped, while lower NGL prices and higher operating costs weighed on results.
- Distribution operating income improved to $3.2 in Q3 from a $1.8 loss and rose to $56.4 for nine months, aided by approved Pennsylvania base-rate increases and lower expenses.
- The prior-year Q3 SG&A included an $84.2 million compensation expense reversal under the 2005 incentive program; Q3 2009 included $24.3 million of expense under the 2009 Shareholder Value Plan. This unusual comparison materially affects reported earnings.
Outlook, risks and unusual items
- Management described a reduced 2009 capital spending plan relative to 2008, while continuing horizontal drilling in the Huron and Marcellus shale formations and Appalachian infrastructure development. No clear consolidated earnings or revenue guidance is provided in the supplied filing text.
- The Equitrans Marcellus expansion is contingent on firm shipper agreements and FERC approval; most expected investment would begin in the second half of 2011. A separate Tennessee Gas Pipeline expansion agreement provides EQT 350,000 Dth per day of planned capacity beginning in November 2011.
- Hedges covered approximately 60% of expected 2009 natural gas production sales volumes and more than 40% through 2011. Management reported that a 10% natural-gas price decline would increase the fair value of non-trading derivatives by about $75.9 million; a 10% increase would decrease it by about $73.0 million. These sensitivities exclude offsetting effects on physical sales.
- Credit ratings at quarter-end were investment grade: Moody’s Baa1, S&P BBB, and Fitch BBB+. Moody’s had revised its outlook to negative. EQT reported compliance with debt covenants. Its $1.5 billion revolving facility had no borrowings and a $24.4 million letter of credit outstanding; the filing says a Lehman syndicate member’s failure to fund reduced effective availability to $1.405 billion.
- If downgraded below investment grade, EQT could face added collateral requirements; the filing estimates $29.2 million of additional collateral would have been required at quarter-end under specified derivative provisions.
- The West Virginia royalty litigation had a proposed settlement with preliminary court approval, subject to a fairness hearing and class-member participation conditions. EQT said reserves were adequate. Other pending claims were not expected by management to materially affect results, financial position, or liquidity.
- Q3 included $4.0 million of impairment expense from the headquarters relocation. The estimated nine-month tax rate was 40.9%; Q3’s effective rate was 70.9%, reflecting nondeductible compensation and a revised annual tax-rate estimate. A pending IRS method-change request could reduce the estimated 2009 annual rate by approximately 1.9 percentage points if approved.
Most important facts for investors to verify
- Whether lower commodity prices, hedge coverage, and production growth support future realized prices and cash generation.
- Whether drilling and infrastructure spending can be funded while operating cash flow remains below capital expenditures.
- Progress and approvals for Equitrans expansion and other pipeline capacity plans.
- Liquidity and borrowing availability under the revolving credit facility, including exposure to lender nonperformance and any credit-rating changes.
- Final resolution and financial impact of the royalty settlement, tax matters, and other contingencies.
- How much of the sharp year-over-year earnings decline reflects recurring operating conditions versus incentive compensation and other unusual items.