EQT Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited consolidated results; amounts below are in millions except per-share data and operating measures. EQT operates in Production, Midstream and Distribution. The company cautions that interim results are affected by seasonality and commodity-price volatility and may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $257.5 | $238.0 | $694.2 | $707.4 |
| Operating income | $78.5 | $67.5 | $247.6 | $203.7 |
| Net income | $30.0 | $26.6 | $118.1 | $98.6 |
| Diluted earnings per share | $0.20 | $0.20 | $0.84 | $0.75 |
- Q2 revenue increased 8.2% and net income rose 12.6% year over year; six-month revenue fell 1.9% while net income increased 19.7%.
- Six-month operating cash flow was $476.6 million, versus $468.4 million in 2009. Investing cash outflow was $523.6 million, principally reflecting $522.9 million of capital expenditures. Financing cash inflow was $472.6 million, including $537.2 million of net proceeds from the 2010 equity offering. Ending cash was $425.6 million, compared with no cash at year-end 2009.
- At June 30, current assets were $886.7 million and current liabilities $479.8 million. Long-term debt was $1.949 billion, unchanged from year-end 2009; short-term loans were zero. The $1.5 billion revolving facility had no borrowings and a $23.9 million standby letter of credit outstanding. EQT reported compliance with its debt covenants.
- Six-month dividends declared were $0.44 per share. On July 14, the board declared a further $0.22 quarterly dividend, payable September 1.
Segment results and material changes
- Production: Q2 operating income declined to $23.8 million from $33.6 million despite revenue growth to $101.0 million from $89.9 million. Six-month operating income increased to $82.3 million from $78.1 million. Six-month production and sales volumes rose about 28% and 31%, respectively, but average wellhead price fell 5.9% to $3.64/Mcfe. Higher DD&A and SG&A weighed on results; Q2 SG&A included a $4.5 million charge to buy out excess salt-water processing and disposal capacity.
- Midstream: Q2 operating income increased 79.8% to $59.0 million; six-month operating income rose 54.4% to $126.3 million. Six-month net operating revenue grew 31.3% to $228.2 million, driven by higher NGL prices and greater gathering and processing volumes. Q2 NGL sales price rose 69.8% year over year; gathered volumes increased 19.9%.
- Distribution: Q2 operating income fell 54.1% to $4.3 million, with net operating revenue down 9.7% to $29.2 million. Management cited unusually warm weather, lower asset-optimization revenue and higher bad-debt expense. Six-month operating income declined 2.8% to $51.7 million; rate increases partly offset weather and expense pressures.
Outlook, risks and notable items
- Management forecast 2010 capital expenditures of approximately $1.2 billion, excluding acquisitions, focused on Production growth and Midstream infrastructure. EQT said it would continue horizontal drilling in the Marcellus, Huron/Berea and other Appalachian plays.
- EQT acquired approximately 48,000 net Marcellus acres for $260.2 million in Q2, about 90% paid with EQT shares and 10% in cash. The company reported approximately 500,000 net acres in the high-pressure Marcellus fairway. It completed a March equity offering of 12.5 million shares at $44 each; underwriters later purchased 225,000 additional shares.
- Midstream projects included planned gathering-capacity additions by year-end 2010 and a staged Equitrans Marcellus Expansion. Phase 1, estimated at $15 million, was expected to be completed in Q4 2010. Phase 2 was subject to regulatory and commercial processes, with service anticipated in fall 2012. A proposed processing/NGL infrastructure joint venture with DCP was under negotiation under a non-binding letter of intent.
- Management expected 2010 storage, marketing and other net revenues to be about 15% below 2009, citing lower margins and spreads and the expiration of higher-price contracts. A West Virginia distribution-rate settlement was expected to add approximately $1.6 million in annual revenue if approved; it was not yet effective at quarter-end.
- Commodity exposure is partly hedged: price protection covered approximately 35%, 25% and 10% of expected produced gas sales in 2010, 2011 and 2012, respectively, with hedge positions extending through 2015. A 10% natural-gas price decline was estimated to increase the fair value of non-trading derivatives by $66.1 million; a 10% increase would reduce it by $63.3 million. These derivative sensitivities exclude the offsetting effect on physical sales.
- Credit ratings were investment grade, but S&P and Moody’s outlooks were negative. Management warned that a downgrade could raise borrowing costs, increase collateral requirements and limit capital-market access. A below-investment-grade downgrade on June 30 would have required an estimated $13.9 million of additional derivative collateral.
- A West Virginia royalty class action settlement received final court approval and the action was dismissed on April 28, 2010; claims administration remained ongoing. EQT said other pending or threatened legal and regulatory matters were reserved and not expected to materially affect results, though outcomes could not be predicted with certainty. The IRS was reviewing research-credit claims of $3.8 million for 2001–2005; federal audits for 2006–2009 began in Q2.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during Q2. It disclosed no material changes to previously reported risk factors.
Investor verification priorities
- Verify that Production volume growth and well economics can offset lower realized gas prices, rising depletion and continued development spending.
- Track execution, cost, regulatory approvals and commercial commitments for the gathering expansions, Equitrans phases and proposed DCP joint venture.
- Assess whether the $1.2 billion capital program and acquisition strategy remain funded by operating cash flow and available liquidity, and monitor dilution from equity financing.
- Review hedge coverage, realized hedge prices, derivative collateral terms and counterparty exposure alongside the underlying physical gas and NGL positions.
- Monitor the West Virginia rate case, royalty-settlement administration, tax-credit review and bad-debt trends in Distribution.