EQT Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. EQT operates in natural gas production, midstream gathering/processing/transportation and storage, and regulated distribution. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in millions.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $238.0 | $334.0 | $707.4 | $869.8 |
| Operating income | $67.5 | $101.1 | $203.7 | $220.6 |
| Net income | $26.6 | $55.4 | $98.6 | $125.9 |
| Diluted EPS | $0.20 | $0.44 | $0.75 | $1.00 |
| Operating margin | 28.4% | 30.3% | 28.8% | 25.4% |
- Q2 revenue declined 28.7% and net income declined 51.9% year over year; six-month revenue declined 18.7% and net income declined 21.7%.
- Q2 interest expense rose to $26.5 million from $14.3 million; six-month interest expense was $45.7 million versus $28.0 million.
- Cash from operating activities was $468.1 million for the first half, versus $88.7 million a year earlier. The filing attributes the increase partly to working-capital movements and a $99.5 million IRS refund; operating cash flow was also helped by lower margin-deposit requirements.
- Investing cash outflow was $448.9 million, including $439.3 million of capital expenditures, down from $524.9 million and $511.1 million, respectively, in the prior-year period. Financing cash inflow was $316.1 million; cash ended at $335.3 million versus zero at year-end 2008.
- At June 30, total debt was approximately $1.954 billion, including $4.3 million current and $1.949 billion long-term debt; short-term loans were zero, compared with $319.9 million at December 31, 2008. Current assets were $874.5 million and current liabilities $447.5 million.
- The company issued $700 million of 8.125% senior notes due June 2019, using proceeds to repay revolving-credit borrowings and support the 2009 capital program. Its $1.5 billion revolving facility had no outstanding balance at June 30; stated availability was effectively $1.405 billion because Lehman Brothers Bank had not funded its $95 million commitment.
Business developments and changes
- Production: Q2 sales volumes rose 22%, but the average wellhead price fell 42% to $3.59/Mcfe; segment operating income declined 54.6% to $33.6 million. For the first half, sales volumes rose 19%, average price fell 31.7% to $3.87/Mcfe, and operating income fell 42.0% to $78.1 million. Lower commodity prices were the principal headwind; higher production partly offset it.
- Midstream: Q2 operating income increased 38.8% to $32.8 million as gathering, transmission and marketing activity grew, including from the Big Sandy pipeline. First-half operating income decreased 3.2% to $81.8 million: higher net operating revenues were offset by increased operating and maintenance and depreciation costs. NGL prices were substantially lower.
- Distribution: Q2 operating income increased to $9.4 million from $2.0 million; first-half operating income rose 33.1% to $53.2 million. The February 2009 Pennsylvania rate-case settlement increased base rates and provided for reconciliation of customer-assistance program costs. Lower bad-debt and overhead expenses also contributed.
- Consolidated Q2 results were adversely affected by approximately $62 million of pretax impact from lower wellhead and NGL prices. The comparable first-half impact from lower wellhead/NGL prices and storage spreads was approximately $110 million pretax. Higher depreciation and interest reflected investment in producing properties and infrastructure.
Outlook, risks and contingencies
- No specific consolidated earnings or revenue guidance is stated in the supplied filing text. Management said the 2009 capital plan was reduced from 2008 amid economic and capital-market conditions, while continuing to prioritize horizontal drilling, emerging plays and Appalachian infrastructure. Midstream expected to hold an expansion-capacity open season in Q4 2009.
- Hedging extended through 2015 and covered approximately 60% of expected 2009 natural gas production sales and more than 40% through 2011. Management said a $0.10/Mcf change in average NYMEX gas prices would affect diluted EPS by about $0.02 in 2009 and $0.04 annually in 2010–2011. These sensitivities do not represent a standalone forecast of total results.
- Key risks include natural-gas and NGL price volatility, lower storage spreads, execution and operating costs of drilling/infrastructure expansion, access to capital, counterparty and customer credit, and regulatory and litigation outcomes. A downgrade below investment grade could increase borrowing costs and collateral needs. Moody’s maintained Baa1 but changed its outlook to negative; S&P affirmed BBB with stable outlook, and Fitch assigned BBB+ with stable outlook. EQT reported compliance with debt covenants at June 30; the credit facility’s maximum debt-to-capitalization ratio is 65%.
- Derivative liabilities with credit-rating contingent features could require up to $24.8 million of additional collateral if EQT were downgraded below investment grade, based on June 30 positions. A West Virginia royalty class-action settlement had preliminary court approval but remained subject to a fairness hearing and class participation conditions; EQT said its reserve was sufficient. Other pending legal matters were not expected by management to materially affect the company.
- The filing cautions that interim results may not indicate full-year results because of seasonality and commodity-price volatility. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether production growth and realized prices, including hedge settlements, support profitability as the hedge book rolls forward.
- Whether operating cash generation remains adequate after adjusting for the IRS refund and working-capital and margin-deposit movements.
- Actual 2009 capital spending, project returns, production performance, and the timing and economics of planned midstream capacity expansion.
- Debt, revolving-credit availability, ratings and potential derivative collateral requirements, particularly given the negative Moody’s outlook.
- Final approval and financial resolution of the royalty settlement, and any material developments in other legal, tax or regulatory matters.