EQT Corporation — 2014 Form 10-K Summary
Business context and reporting period
This is the annual report for the fiscal year ended December 31, 2014, not a standalone fourth-quarter filing. EQT operates in two segments: EQT Production, which explores for and produces natural gas, NGLs and oil, and EQT Midstream, which gathers, transports, stores and markets gas. EQT consolidates EQT Midstream Partners, LP (EQM), despite holding a 34.4% limited-partner interest at year-end, and records public investors’ share as noncontrolling interests. The former Distribution business was sold in December 2013 and is presented as discontinued operations.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $2.470 billion | $1.862 billion |
| Operating income | $853.4 million | $654.6 million |
| Income from continuing operations attributable to EQT | $385.6 million; $2.53 diluted EPS | $298.7 million; $1.97 diluted EPS |
| Net income attributable to EQT | $387.0 million; $2.54 diluted EPS | $390.6 million; $2.57 diluted EPS |
| Cash from operating activities | $1.415 billion | $1.163 billion |
| Cash and cash equivalents at year-end | $1.077 billion | $845.6 million |
| Total debt at year-end | $2.989 billion | $2.502 billion |
Revenue rose 32.6% and operating income rose 30.4%; operating margin was approximately 34.6%, versus 35.2% in 2013. Continuing earnings attributable to EQT increased, but reported net income attributable to EQT was slightly lower, largely because 2013 included income from discontinued operations associated with the Distribution sale. Interest expense declined to $136.5 million from $142.7 million. No company borrowings were outstanding under its $1.5 billion revolving credit facility at year-end; EQM also had no year-end borrowings under its $750 million facility. The company reported compliance with debt covenants.
Production sales volume reached a record 476.3 Bcfe, up 26%; Marcellus sales increased 38%. EQT’s average realized production price was $3.23/Mcfe, up from $3.15. Gathered volumes increased 27% to 590.5 TBtu, while transmission throughput rose 56.5%. Production operating income was $506.0 million, up 36.3%; Midstream operating income was $384.3 million, up 16.9%.
Cash used in investing activities was $2.444 billion. Continuing-operations capital expenditures were $2.900 billion, including $448 million of noncash items; cash capital expenditures were $2.452 billion. Cash from operations was therefore below cash capital expenditures by approximately $1.037 billion. Financing cash flow of $1.261 billion included EQM’s $902.5 million unit offering and $500 million note issuance. The company’s current assets were $1.904 billion and current liabilities $833.5 million.
Material changes and unusual items
- Proved reserves increased 29% to 10.7 Tcfe, primarily through Marcellus development. Proved undeveloped reserves were 5.9 Tcfe; the company reported a 22-year reserve life using 2014 production.
- A $267.3 million pretax impairment was recognized in 2014, entirely in Production: $180.7 million on proved properties in the Permian and Utica and $86.6 million on unproved Utica properties. The charge was recorded in the fourth quarter. Fourth-quarter operating income was $40.3 million versus $181.1 million a year earlier, and EQT-attributable net loss was $14.7 million versus net income of $115.2 million.
- In the Range asset exchange, EQT received about 73,000 net Permian acres and 900 producing wells, and transferred Nora assets and $167.3 million cash. EQT recorded a $34.1 million pretax gain, including a $28.0 million gain from de-designating certain hedges.
- Following EQM’s $1.18 billion purchase of a gathering system from EQT, EQM issued units and $500 million of 4.00% notes due 2024. The company’s noncontrolling interest in EQM increased to 63.6%.
- Effective December 31, 2014, EQT de-designated all commodity cash-flow hedges. Previously accumulated gains remain in other comprehensive income while the forecast transactions remain probable; subsequent fair-value changes are recognized in earnings. EQT estimated $153.2 million of accumulated net gains would be recognized in earnings over the next 12 months.
Outlook, risks and contingencies
In January 2015, EQT reduced its 2015 capital plan by approximately $450 million in response to lower commodity prices. It forecast approximately $2.55 billion of total capital investment, excluding acquisitions, including $1.85 billion for Production and $0.7 billion for Midstream. Production sales were forecast at 575–600 Bcfe, implying approximately 23% growth; planned drilling included 191 gross wells. Management cited commodity-price uncertainty and warned that sustained low prices could reduce operating cash flow and require further spending cuts.
Planned infrastructure included the Ohio Valley Connector, estimated at $300 million with 850 BBtu/day capacity and expected in service in mid-2016, subject to FERC approval. The Mountain Valley Pipeline joint venture estimated total project cost of $2.5–$3.5 billion, had 2.0 Bcf/day of 20-year firm commitments, and targeted service in fourth-quarter 2018, subject to approvals. EQT also intended to pursue an IPO of a holding-company partnership interest in 2015 and considered asset sales and joint ventures to fund development.
Key risks include natural gas and NGL price and basis volatility, regional transport constraints, high capital needs, project execution and permitting, environmental and hydraulic-fracturing regulation, reserve-estimation uncertainty, and counterparty credit exposure. EQT also disclosed $10.3 billion of future capacity payments under transportation agreements with EQM and MVP, with terms up to 20 years; these commitments are excluded from the contractual-obligations table. Other contractual obligations totaled $9.016 billion, including $4.722 billion of purchase obligations and $2.987 billion of debt.
Legal matters include Pennsylvania environmental claims arising from a 2012 water release; PADEP sought $4.5 million in civil penalties. EQT expected penalties above $100,000 but did not expect the matter to materially affect its financial position, results or liquidity. The company also disclosed a $130 million MVP performance guarantee and up to $153 million of legacy NORESCO savings guarantees, assessing the likelihood of payment as remote. EQT terminated its defined-benefit pension plan effective December 31, 2014; completion of the termination and annuity purchases was expected by the end of 2016.
The financial statements received an unqualified audit opinion, and the auditor and management concluded internal control over financial reporting was effective as of year-end.
Most important facts for investors to verify
- Whether 2015 production growth and the revised capital budget were achieved amid lower commodity prices, and the resulting effect on operating cash flow and funding needs.
- Whether impairment assumptions, especially for Utica and Permian properties, and reserve estimates remain supportable under updated prices and development plans.
- How the discontinuation of hedge accounting affected reported earnings, cash flows, collateral needs and realization of accumulated hedge gains.
- Whether OVC and MVP obtained required approvals, met cost and timing targets, secured further shipper commitments, and shifted the expected funding obligations to EQM as planned.
- The scale and economics of EQT’s long-term pipeline commitments, EQM financing and ownership changes, and proposed holding-company IPO or other asset monetizations.
- The ultimate outcomes of the Pennsylvania environmental claims, pension-plan termination costs and other guarantees or contingencies.