EQT Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited. EQT operates in natural gas production, midstream gathering/processing/transmission, and regulated distribution. Comparisons below are with Q1 2009 unless noted.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $436.6 million | $469.4 million | Down 7.0% |
| Operating income | $169.1 million | $136.1 million | Up 24.2% |
| Net income | $88.1 million | $72.0 million | Up 22.3% |
| Diluted EPS | $0.65 | $0.55 | Up 18.2% |
| Operating margin | 38.7% | 29.0% | Calculated from reported figures |
| Net margin | 20.2% | 15.3% | Calculated from reported figures |
| Operating cash flow | $275.4 million | $212.6 million | Up $62.8 million |
| Capital expenditures | $217.5 million | $207.7 million | Up 4.7% |
| Operating cash flow less capital expenditures | $57.1 million | $4.9 million | Calculated measure |
Revenue fell despite higher production and midstream activity, principally reflecting lower Distribution revenues and lower purchased-gas costs. Lower purchased-gas costs helped support consolidated operating income. Interest expense increased to $34.1 million from $19.2 million, largely reflecting additional long-term debt issued in 2009. The effective tax rate was 36.2%; management estimated the full-year 2010 rate at approximately 36.2%.
Segment results
- EQT Production: Operating income rose 31.7% to $58.5 million; revenue rose 31.9% to $129.0 million. Production was 31,397 MMcfe, up 28.3%, and sales volumes rose 30.6%. Average well-head price was $4.23/Mcfe versus $4.16. DD&A increased 54.8% to $40.9 million.
- EQT Midstream: Operating income rose 37.4% to $67.3 million. Net operating revenues increased 26.2% to $116.8 million, with higher NGL prices, gathering volumes and fees, and transmission activity; lower third-party marketing margins partly offset gains.
- Distribution: Operating income increased 8.1% to $47.4 million and net operating revenues rose 9.2% to $76.8 million, primarily due to Pennsylvania base-rate increases. Operating expenses increased 10.9%, including higher bad-debt expense.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $553.0 million at March 31, 2010, compared with none reported at year-end 2009. Current assets were $1.118 billion and current liabilities $471.8 million; the resulting current ratio was approximately 2.37.
- Long-term debt was unchanged at $1.949 billion; no short-term loans were outstanding at quarter-end. Total liabilities were $3.761 billion and total equity $2.799 billion.
- Q1 financing included $527.7 million net proceeds from a public offering of 12.5 million shares. The company reported $495.9 million of net cash provided by financing activities.
- Operating cash flow included a $121.5 million IRS refund related to the 2009 net operating loss carryback. The offering proceeds were held in money-market funds at quarter-end and intended to accelerate development of the Marcellus Shale and Huron/Berea plays.
- The $1.5 billion revolving credit facility had no borrowings outstanding. Lehman Brothers Bank’s failure to fund its committed share reduced effective facility availability to $1.405 billion; a $23.9 million standby letter of credit was outstanding. EQT reported compliance with debt covenants, including a maximum debt-to-capitalization ratio of 65%.
Material changes, outlook and risks
- Production and gathering growth were significant: EQT drilled 108 gross wells, including 77 horizontal wells, in Q1 2010. Management emphasized continued horizontal drilling and development of its Appalachian acreage. No consolidated full-year earnings guidance is stated in the provided filing text.
- EQT announced a planned acquisition of approximately 58,000 net Marcellus acres, a 200-mile gathering system and about 100 producing vertical wells for approximately $280 million, payable 90% in EQT stock and 10% in cash. Management expected a significant portion to close by April 30, 2010, subject to customary conditions; the filing does not establish completion by the report date.
- Midstream projects included gathering-capacity additions targeted for year-end 2010 and a $15 million first phase of the Equitrans Marcellus Expansion Project, with completion expected in Q4 2010. A provisional mid-2012 in-service date was anticipated for the remaining expansion project. These are forward-looking expectations, not guarantees.
- Commodity prices remain a key risk. Hedging covered approximately 34% of expected 2010, 20% of 2011 and 6% of 2012 natural-gas production sales volumes. Management estimated a $0.10 change in average NYMEX gas prices could affect diluted EPS by approximately $0.05, $0.08 and $0.10 in 2010, 2011 and 2012, respectively.
- Credit ratings were investment grade, but S&P and Moody’s outlooks were negative; S&P cited growth in exploration/production and midstream businesses. A downgrade could increase borrowing costs, collateral requirements, and constrain capital-market access. Derivative contracts also expose EQT to counterparty and collateral risk.
- A West Virginia royalty litigation settlement received final court approval on April 28, 2010; management believed its reserve was sufficient. Other legal and regulatory matters were described as not expected to materially affect the company, although outcomes remain uncertain.
- Management cautioned that seasonal distribution and storage activity and commodity-price volatility mean quarterly results are not necessarily indicative of full-year results. The company reported effective disclosure controls and no material Q1 changes in internal control over financial reporting.
Key investor verification points
- Confirm the closing, final consideration and share dilution associated with the announced Marcellus acreage acquisition.
- Assess whether production growth, realized prices and hedges support returns after rising depletion, operating and interest costs.
- Check the sustainability of operating cash flow excluding the $121.5 million tax refund and the timing and returns of planned capital spending.
- Monitor credit-rating outlooks, revolving-credit availability, covenant headroom and potential derivative collateral needs.
- Review the basis, timing and execution risks behind the production and midstream expansion plans, as well as litigation settlement costs and remaining contingencies.
- Investigate the substantial decline in prepaid expenses and other current assets, from $154.5 million at year-end to $12.4 million at March 31; the supplied filing text does not clearly explain this movement.