EQT Corporation — 2009 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are noted below. EQT operates Production, Midstream, and regulated Distribution businesses, primarily in the Appalachian Basin.
Financial and operating performance
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenue | $1.270 billion | $1.576 billion | Down 19% |
| Operating income | $356.8 million | $464.8 million | Down 23% |
| Net income | $156.9 million | $255.6 million | Down 39% |
| Diluted EPS | $1.19 | $2.00 | Down 41% |
| Operating margin | 28.1% | 29.5% | Down 1.4 percentage points |
| Net margin | 12.4% | 16.2% | Down 3.8 percentage points |
| Cash from operations | $725.7 million | $509.2 million | Up 43% |
| Capital expenditures | $963.9 million | $1.344 billion | Down 28% |
| Long-term debt | $1.949 billion | $1.249 billion | Up $700 million |
Cash and cash equivalents were zero at year-end. Operating cash flow less capital expenditures was approximately negative $238 million. EQT reported current assets of $695.2 million and current liabilities of $612.7 million. Its $1.5 billion revolving facility had effective availability of $1.405 billion after Lehman Brothers failed to fund its commitment; year-end borrowings were $5 million, with a $24.4 million standby letter of credit outstanding. The company reported compliance with debt covenants. Dividends were $0.88 per share.
- Production: Produced-gas sales rose 19% to 100.1 Bcfe; average wellhead price fell 29.5% to $3.75/Mcfe. Production operating income declined 40% to $151.1 million. Lease operating expense excluding production taxes fell 14% to $0.30/Mcfe.
- Midstream: Operating income increased 40% to $189.0 million as gathering, processing, and transmission activity expanded. Net operating revenues rose 27% to $386.2 million.
- Distribution: Operating income increased 32% to $78.9 million, benefiting from Pennsylvania base-rate increases and lower operating expenses. Weather was warmer than the 30-year average.
- Q4 2009: Revenue was $344.0 million, operating income $113.2 million, and net income $55.4 million; diluted EPS was $0.42.
Material changes and unusual items
- Lower realized natural-gas prices, higher depletion and interest expense, and increased incentive compensation drove the annual earnings decline. Increased production volumes and stronger Midstream and Distribution results partly offset those pressures.
- EQT issued $700 million of 8.125% senior notes due 2019. Interest expense rose to $111.8 million from $58.4 million.
- A $45.1 million charge related to the 2009 Shareholder Value Plan was recorded; awards were paid in cash at year-end. A separate $5.2 million charge related to the headquarters relocation.
- Proved reserves increased 31% to 4.068 Tcfe. Reserve additions included drilling and the impact of new SEC reserve-reporting rules. The standardized measure of discounted future net cash flows fell to $798.8 million from $2.012 billion, reflecting lower price assumptions and increased estimated development costs; the filing cautions that this measure is not fair market value.
- The West Virginia royalty litigation was settled, subject to final court approval; management said the recorded reserve was sufficient. Other pending claims were not expected by management to materially affect results or liquidity.
Guidance, outlook, and key risks
- Management projected 2010 produced-gas sales growth of 20% and planned $850 million of capital expenditures: $565 million for well development, $245 million for Midstream infrastructure, and $40 million for Distribution and corporate items. Management expected to fund the plan primarily with operating cash flow and available credit.
- EQT planned to continue horizontal drilling in Huron/Berea and Marcellus. The Equitrans Marcellus Expansion Project remained dependent on firm shipper agreements and FERC approval; an open season indicated demand above 1.1 million Dth per day.
- Commodity-price volatility could affect revenue, reserves, liquidity, and hedge collateral needs. Hedges covered approximately 40% of expected production sales in 2010, 30% in 2011, and 10% in 2012.
- Other material risks include regulatory and environmental changes, infrastructure constraints, drilling and reserve-estimation uncertainty, counterparty credit risk, and access to capital. S&P revised its outlook to negative and lowered the short-term rating in February 2010; Moody’s outlook was also negative.
- Contractual obligations totaled $5.517 billion, including $2.007 billion of purchase obligations and $1.949 billion of debt. Guarantees included up to $274 million of maximum undiscounted NORESCO savings-guarantee exposure, which EQT considered remote, and a separate ANPI liquidity guarantee capped at an estimated $30 million.
- CEO Murry Gerber was scheduled to step aside after the April 2010 annual meeting; President and COO David Porges was expected to become CEO, with Gerber remaining Executive Chairman through the 2011 annual meeting.
Investor verification priorities
- Reconcile reported operating cash flow with the large drilling and infrastructure program, and assess funding needs beyond the stated 2010 plan.
- Review natural-gas price assumptions, hedge coverage and counterparties, potential collateral calls, and sensitivity of reserve economics to prices.
- Validate reserve additions and development commitments under the new SEC rules, including the projected cost and timing to develop proved undeveloped reserves.
- Track credit-rating outlooks, the 2011 revolving-facility maturity, lender availability, and debt-covenant headroom.
- Confirm final court approval and financial resolution of the royalty settlement, and monitor environmental, regulatory, and guarantee exposures.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2009.