Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017 |
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| FOR THE TRANSITION PERIOD FROM TO |
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| COMMISSION FILE NUMBER 1-3551 |
EQT CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
PENNSYLVANIA | | 25-0464690 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
| | |
625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania | | 15222 |
(Address of principal executive offices) | | (Zip code) |
(412) 553-5700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
| | | | | |
Large Accelerated Filer x | | | Accelerated Filer ¨ | | Emerging Growth Company ¨ |
Non-Accelerated Filer ¨ | (Do not check if a smaller reporting company) | | Smaller Reporting Company ¨ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2017, 173,327 (in thousands) shares of common stock, no par value, of the registrant were outstanding.
EQT CORPORATION AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
Statements of Consolidated Operations (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands, except per share amounts) |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 576,714 |
| | $ | 304,532 |
| | $ | 1,250,179 |
| | $ | 668,959 |
|
Pipeline and net marketing services | 67,853 |
| | 57,692 |
| | 151,169 |
| | 129,339 |
|
Gain (loss) on derivatives not designated as hedges | 46,326 |
| | (234,693 | ) | | 187,068 |
| | (125,698 | ) |
Total operating revenues | 690,893 |
| | 127,531 |
| | 1,588,416 |
| | 672,600 |
|
| | | | | | | |
Operating expenses: | |
| | |
| | |
| | |
|
Transportation and processing | 134,818 |
| | 84,207 |
| | 268,524 |
| | 161,400 |
|
Operation and maintenance | 20,581 |
| | 16,353 |
| | 40,867 |
| | 33,489 |
|
Production | 44,393 |
| | 45,891 |
| | 90,182 |
| | 87,093 |
|
Exploration | 3,481 |
| | 3,591 |
| | 6,603 |
| | 6,714 |
|
Selling, general and administrative | 57,009 |
| | 77,352 |
| | 129,067 |
| | 135,335 |
|
Depreciation, depletion and amortization | 240,817 |
| | 224,629 |
| | 472,735 |
| | 445,860 |
|
Total operating expenses | 501,099 |
| | 452,023 |
| | 1,007,978 |
| | 869,891 |
|
| | | | | | | |
Operating income (loss) | 189,794 |
| | (324,492 | ) | | 580,438 |
| | (197,291 | ) |
| | | | | | | |
Other income | 6,638 |
| | 7,644 |
| | 10,019 |
| | 12,484 |
|
Interest expense | 44,078 |
| | 36,305 |
| | 86,733 |
| | 72,485 |
|
Income (loss) before income taxes | 152,354 |
| | (353,153 | ) | | 503,724 |
| | (257,292 | ) |
Income tax expense (benefit) | 29,709 |
| | (172,346 | ) | | 130,374 |
| | (164,910 | ) |
Net income (loss) | 122,645 |
| | (180,807 | ) | | 373,350 |
| | (92,382 | ) |
Less: Net income attributable to noncontrolling interests | 81,519 |
| | 77,838 |
| | 168,232 |
| | 160,627 |
|
Net income (loss) attributable to EQT Corporation | $ | 41,126 |
| | $ | (258,645 | ) | | $ | 205,118 |
| | $ | (253,009 | ) |
| | | | | | | |
Earnings per share of common stock attributable to EQT Corporation: | |
| | |
| | |
| | |
|
Basic: | |
| | |
| | |
| | |
|
Weighted average common stock outstanding | 173,462 |
| | 166,801 |
| | 173,320 |
| | 161,909 |
|
Net income (loss) | $ | 0.24 |
| | $ | (1.55 | ) | | $ | 1.18 |
| | $ | (1.56 | ) |
Diluted: | |
| | |
| | |
| | |
|
Weighted average common stock outstanding | 173,582 |
| | 166,801 |
| | 173,525 |
| | 161,909 |
|
Net income (loss) | $ | 0.24 |
| | $ | (1.55 | ) | | $ | 1.18 |
| | $ | (1.56 | ) |
Dividends declared per common share | $ | 0.03 |
| | $ | 0.03 |
| | $ | 0.06 |
| | $ | 0.06 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Statements of Consolidated Comprehensive Income (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands) |
Net income (loss) | $ | 122,645 |
| | $ | (180,807 | ) | | $ | 373,350 |
| | $ | (92,382 | ) |
| | | | | | | |
Other comprehensive (loss) income, net of tax: | |
| | |
| | |
| | |
|
Net change in cash flow hedges: | |
| | |
| | |
| | |
|
Natural gas, net of tax benefit of $(1,101), $(10,701), $(1,685), and $(19,040) | (1,672 | ) | | (15,940 | ) | | (2,560 | ) | | (28,364 | ) |
Interest rate, net of tax expense of $27, $27, $52, and $52 | 36 |
| | 36 |
| | 72 |
| | 72 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $49, $6,100, $98, and $6,235 | 77 |
| | 9,622 |
| | 153 |
| | 9,835 |
|
Other comprehensive loss | (1,559 | ) | | (6,282 | ) | | (2,335 | ) | | (18,457 | ) |
Comprehensive income (loss) | 121,086 |
| | (187,089 | ) | | 371,015 |
| | (110,839 | ) |
Less: Comprehensive income attributable to noncontrolling interests | 81,519 |
| | 77,838 |
| | 168,232 |
| | 160,627 |
|
Comprehensive income (loss) attributable to EQT Corporation | $ | 39,567 |
| | $ | (264,927 | ) | | $ | 202,783 |
| | $ | (271,466 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Statements of Condensed Consolidated Cash Flows (Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
| (Thousands) |
Cash flows from operating activities: | |
Net income (loss) | $ | 373,350 |
| | $ | (92,382 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Deferred income taxes | 130,088 |
| | (165,594 | ) |
Depreciation, depletion and amortization | 472,735 |
| | 445,860 |
|
Asset and lease impairments | 4,101 |
| | 4,063 |
|
(Recoveries of) provision for losses on accounts receivable | (962 | ) | | 552 |
|
Other income | (10,019 | ) | | (12,484 | ) |
Stock-based compensation expense | 21,297 |
| | 23,877 |
|
(Gain) loss on derivatives not designated as hedges | (187,068 | ) | | 125,698 |
|
Cash settlements (paid) received on derivatives not designated as hedges | (20,158 | ) | | 195,229 |
|
Pension settlement charge | — |
| | 9,403 |
|
Changes in other assets and liabilities: | |
| | |
|
Accounts receivable | 32,013 |
| | 6,137 |
|
Accounts payable | 5,759 |
| | (15,595 | ) |
Other items, net | (12,142 | ) | | (31,360 | ) |
Net cash provided by operating activities | 808,994 |
| | 493,404 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (680,456 | ) | | (821,738 | ) |
Capital expenditures for acquisitions | (811,207 | ) | | — |
|
Deposit on acquisition | — |
| | (10,000 | ) |
Sales of investments in trading securities | 283,758 |
| | — |
|
Capital contributions to Mountain Valley Pipeline, LLC | (59,940 | ) | | (40,663 | ) |
Sales of interests in Mountain Valley Pipeline, LLC | — |
| | 12,533 |
|
Restricted cash, net | 75,000 |
| | — |
|
Net cash used in investing activities | (1,192,845 | ) | | (859,868 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Proceeds from the issuance of common shares of EQT Corporation, net of issuance costs | — |
| | 1,226,006 |
|
Proceeds from the issuance of common units of EQT Midstream Partners, LP, net of issuance costs | — |
| | 217,102 |
|
Increase in borrowings on EQT Midstream Partners, LP credit facility | — |
| | 260,000 |
|
Decrease in borrowings on EQT Midstream Partners, LP credit facility | — |
| | (559,000 | ) |
Dividends paid | (10,413 | ) | | (9,776 | ) |
Distributions to noncontrolling interests | (111,994 | ) | | (87,911 | ) |
Proceeds from awards under employee compensation plans | — |
| | 2,040 |
|
Cash paid for taxes related to net settlement of share-based incentive awards | (17,573 | ) | | (26,195 | ) |
Bridge facility structuring and related fees | (7,350 | ) | | — |
|
Repurchase of common stock | (15 | ) | | (17 | ) |
Net cash (used in) provided by financing activities | (147,345 | ) | | 1,022,249 |
|
Net change in cash and cash equivalents | (531,196 | ) | | 655,785 |
|
Cash and cash equivalents at beginning of period | 1,103,540 |
| | 1,601,232 |
|
Cash and cash equivalents at end of period | $ | 572,344 |
| | $ | 2,257,017 |
|
| | | |
Cash paid during the period for: | |
| | |
|
Interest, net of amount capitalized | $ | 89,554 |
| | $ | 73,763 |
|
Income taxes, net | $ | 9,702 |
| | $ | 1,294 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
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| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (Thousands) |
Assets | |
| | |
|
| | | |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 572,344 |
| | $ | 1,103,540 |
|
Trading securities | — |
| | 286,396 |
|
Accounts receivable (less accumulated provision for doubtful accounts: $5,961 at June 30, 2017 and $6,923 at December 31, 2016) | 310,975 |
| | 341,628 |
|
Derivative instruments, at fair value | 85,442 |
| | 33,053 |
|
Prepaid expenses and other | 28,092 |
| | 63,602 |
|
Total current assets | 996,853 |
| | 1,828,219 |
|
| | | |
Property, plant and equipment | 19,769,299 |
| | 18,216,775 |
|
Less: accumulated depreciation and depletion | 5,512,037 |
| | 5,054,559 |
|
Net property, plant and equipment | 14,257,262 |
| | 13,162,216 |
|
| | | |
Restricted cash | — |
| | 75,000 |
|
Investment in nonconsolidated entity | 260,737 |
| | 184,562 |
|
Other assets | 209,159 |
| | 222,925 |
|
Total assets | $ | 15,724,011 |
| | $ | 15,472,922 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (Thousands) |
Liabilities and Shareholders’ Equity | |
| | |
|
| | | |
Current liabilities: | |
| | |
|
Current portion of long-term debt | $ | 707,189 |
| | $ | — |
|
Accounts payable | 368,422 |
| | 309,978 |
|
Derivative instruments, at fair value | 107,880 |
| | 257,943 |
|
Other current liabilities | 172,235 |
| | 236,719 |
|
Total current liabilities | 1,355,726 |
| | 804,640 |
|
| | | |
Long-term debt | 2,584,973 |
| | 3,289,459 |
|
Deferred income taxes | 1,876,324 |
| | 1,760,004 |
|
Other liabilities and credits | 529,418 |
| | 499,572 |
|
Total liabilities | 6,346,441 |
| | 6,353,675 |
|
| | | |
Equity: | |
| | |
|
Shareholders’ equity: | |
| | |
|
Common stock, no par value, authorized 320,000 shares, shares issued: 177,896 at June 30, 2017 and 177,896 at December 31, 2016 | 3,440,691 |
| | 3,440,185 |
|
Treasury stock, shares at cost: 4,569 at June 30, 2017 (including 250 held in rabbi trust) and 5,069 at December 31, 2016 (including 226 held in rabbi trust) | (82,000 | ) | | (91,019 | ) |
Retained earnings | 2,703,778 |
| | 2,509,073 |
|
Accumulated other comprehensive (loss) income | (293 | ) | | 2,042 |
|
Total common shareholders’ equity | 6,062,176 |
| | 5,860,281 |
|
Noncontrolling interests in consolidated subsidiaries | 3,315,394 |
| | 3,258,966 |
|
Total equity | 9,377,570 |
| | 9,119,247 |
|
Total liabilities and equity | $ | 15,724,011 |
| | $ | 15,472,922 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Statements of Condensed Consolidated Equity (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests in Consolidated Subsidiaries | | |
| Shares Outstanding | | No Par Value | | Retained Earnings | | | | Total Equity |
| (Thousands) |
Balance, January 1, 2016 | 152,554 |
| | $ | 2,049,201 |
| | $ | 2,982,212 |
| | $ | 46,378 |
| | $ | 2,950,251 |
| | $ | 8,028,042 |
|
Comprehensive income (net of tax): | | | | | | | | | | | |
Net (loss) income | |
| | |
| | (253,009 | ) | | |
| | 160,627 |
| | (92,382 | ) |
Net change in cash flow hedges: | |
| | |
| | |
| | | | |
| | |
Natural gas, net of tax benefit of $(19,040) | | | | | | | (28,364 | ) | | | | (28,364 | ) |
Interest rate, net of tax expense of $52 | | | | | | | 72 |
| | | | 72 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $6,235 | | | | | | | 9,835 |
| | | | 9,835 |
|
Dividends ($0.06 per share) | |
| | |
| | (9,776 | ) | | |
| | |
| | (9,776 | ) |
Stock-based compensation plans, net | 643 |
| | 9,862 |
| | |
| | |
| | 161 |
| | 10,023 |
|
Distributions to noncontrolling interests ($1.455 and $0.256 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively) | |
| | |
| | |
| | |
| | (87,911 | ) | | (87,911 | ) |
Issuance of common shares of EQT Corporation | 19,550 |
| | 1,226,006 |
| | | | | | | | 1,226,006 |
|
Issuance of common units of EQT Midstream Partners, LP | | | | | | | | | 217,102 |
| | 217,102 |
|
Changes in ownership of consolidated subsidiaries | | | 25,293 |
| |
|
| | | | (40,487 | ) | | (15,194 | ) |
Balance, June 30, 2016 | 172,747 |
| | $ | 3,310,362 |
| | $ | 2,719,427 |
| | $ | 27,921 |
| | $ | 3,199,743 |
| | $ | 9,257,453 |
|
| | | | | | | | | | | |
Balance, January 1, 2017 | 172,827 |
| | $ | 3,349,166 |
| | $ | 2,509,073 |
| | $ | 2,042 |
| | $ | 3,258,966 |
| | $ | 9,119,247 |
|
Comprehensive income (net of tax): | | | | | | | | | | | |
Net income | |
| | |
| | 205,118 |
| | |
| | 168,232 |
| | 373,350 |
|
Net change in cash flow hedges: | |
| | |
| | |
| | | | |
| | |
Natural gas, net of tax benefit of $(1,685) | | | | | | | (2,560 | ) | | | | (2,560 | ) |
Interest rate, net of tax expense of $52 | | | | | | | 72 |
| | | | 72 |
|
Other post-retirement benefit liability adjustment, net of tax expense of $98 | | | | | | | 153 |
| | | | 153 |
|
Dividends ($0.06 per share) | |
| | |
| | (10,413 | ) | | |
| | |
| | (10,413 | ) |
Stock-based compensation plans, net | 500 |
| | 9,525 |
| | |
| | |
| | 190 |
| | 9,715 |
|
Distributions to noncontrolling interests ($1.74 and $0.368 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively) | |
| | |
| | |
| | |
| | (111,994 | ) | | (111,994 | ) |
Balance, June 30, 2017 | 173,327 |
| | $ | 3,358,691 |
| | $ | 2,703,778 |
| | $ | (293 | ) | | $ | 3,315,394 |
| | $ | 9,377,570 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A. Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and subsidiaries as of June 30, 2017 and December 31, 2016, the results of its operations for the three and six month periods ended June 30, 2017 and 2016 and its cash flows and equity for the six month periods ended June 30, 2017 and 2016. In this Quarterly Report on Form 10-Q, references to “we,” “us,” “our,” “EQT,” “EQT Corporation,” and the “Company” refer collectively to EQT Corporation and its consolidated subsidiaries.
As of December 31, 2016, the Company reports its results of operations through three business segments: EQT Production, EQT Gathering and EQT Transmission. The segment disclosures and discussions contained in this Quarterly Report on Form 10-Q have been recast to reflect the current reporting structure for all periods presented. Certain previously reported amounts have been reclassified to conform to the current year presentation under the current segment reporting structure.
The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.
For further information on the Company, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 22 of this Quarterly Report on Form 10-Q.
B. EQT GP Holdings, LP
In January 2015, the Company formed EQT GP Holdings, LP (EQGP) (NYSE: EQGP), a Delaware limited partnership, to own the Company's partnership interests in EQT Midstream Partners, LP (EQM) (NYSE: EQM). EQGP owned the following EQM partnership interests as of June 30, 2017, which represent EQGP’s only cash-generating assets: 21,811,643 EQM common units, representing a 26.6% limited partner interest in EQM; 1,443,015 EQM general partner units, representing a 1.8% general partner interest in EQM; and all of EQM’s incentive distribution rights, or IDRs, which entitle EQGP to receive up to 48.0% of all incremental cash distributed in a quarter after $0.5250 has been distributed in respect of each common unit and general partner unit of EQM for that quarter. The Company is the ultimate parent company of EQGP and EQM.
The Company consolidates the results of EQGP but records an income tax provision only on its ownership percentage of EQGP earnings. The Company records the noncontrolling interest of the EQGP and EQM public limited partners (i.e., the EQGP limited partner interests not owned by the Company and the EQM limited partner interests not owned by EQGP) in its financial statements.
On July 25, 2017, the Board of Directors of EQGP's general partner declared a cash distribution to EQGP’s unitholders for the second quarter of 2017 of $0.21 per common unit, or approximately $55.9 million. The distribution will be paid on August 23, 2017 to unitholders of record, including the Company, at the close of business on August 4, 2017.
C. EQT Midstream Partners, LP
In January 2012, the Company formed EQM to own, operate, acquire and develop midstream assets in the Appalachian Basin. EQM provides midstream services to the Company and other third parties. EQM is consolidated in the Company’s financial statements. The Company records the noncontrolling interest of the EQM public limited partners in its financial statements.
On July 25, 2017, the Board of Directors of EQM's general partner declared a cash distribution to EQM’s unitholders for the second quarter of 2017 of $0.935 per common unit. The cash distribution will be paid on August 14, 2017 to unitholders of record, including EQGP, at the close of business on August 4, 2017. Based on the 80,581,758 EQM common units outstanding on July 27, 2017, the aggregate cash distributions by EQM to EQGP for the second quarter 2017 will be approximately $56.5 million consisting of: $20.4 million in respect of its limited partner interest, $1.9 million in respect of its general partner interest and $34.2 million in respect of its IDRs. These distribution amounts to EQGP related to its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the second quarter 2017 distribution.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
D. Investment in Nonconsolidated Entity
As of June 30, 2017, EQM owned a 45.5% interest (the MVP Interest) in Mountain Valley Pipeline, LLC (MVP Joint Venture). The MVP Joint Venture plans to construct the Mountain Valley Pipeline (MVP), an estimated 300-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. The MVP Joint Venture has secured a total of 2.0 Bcf per day of 20-year firm capacity commitments, including a 1.29 Bcf per day firm capacity commitment by the Company. On June 23, 2017, the Federal Energy Regulatory Commission (FERC) issued the Final Environmental Impact Statement for the project, and the MVP Joint Venture anticipates receiving the FERC certificate by the fourth quarter of 2017. The pipeline is targeted to be placed in-service during the fourth quarter of 2018.
The MVP Joint Venture has been determined to be a variable interest entity because it has insufficient equity to finance its activities during the construction stage of the project. EQM is not the primary beneficiary because it does not have the power to direct the activities of the MVP Joint Venture that most significantly impact its economic performance. Certain business decisions require the approval of owners holding more than a 66 2/3% interest in the MVP Joint Venture and no one member owns more than a 66 2/3% interest. The Company, through its ownership interest in EQM, accounts for the interest in the MVP Joint Venture as an equity method investment as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.
In May 2017, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for $18.3 million, of which $5.5 million was paid on July 13, 2017 and the remaining $12.8 million is expected to be paid on August 15, 2017. The capital contribution payable has been reflected on the Condensed Consolidated Balance Sheet as of June 30, 2017 with a corresponding increase to the Company's investment in the MVP Joint Venture.
The Company’s ownership share of the earnings for the three months ended June 30, 2017 and 2016 related to the MVP Joint Venture was $5.1 million and $1.9 million, respectively. The Company’s ownership share of the earnings for the six months ended June 30, 2017 and 2016 related to the MVP Joint Venture was $9.4 million and $3.4 million, respectively. These earnings are reported in other income on the Statements of Consolidated Operations for the periods presented.
As of June 30, 2017, EQM had issued a $91 million performance guarantee in favor of the MVP Joint Venture to provide performance assurances for MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP. Upon the FERC's initial release to begin construction of the MVP, EQM's guarantee will terminate; EQM will then be obligated to issue a new guarantee in an amount equal to 33% of MVP Holdco’s remaining obligations to make capital contributions to the MVP Joint Venture in connection with the then remaining construction budget, less, subject to certain limits, any credit assurances issued by any affiliate of EQM under such affiliate's precedent agreement with the MVP Joint Venture.
As of June 30, 2017, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $352 million, which included the investment in nonconsolidated entity balance on the Condensed Consolidated Balance Sheet as of June 30, 2017 and amounts which could have become due under the performance guarantee as of that date.
E. Consolidated Variable Interest Entities
The Company determined EQGP and EQM to be variable interest entities. Through EQT's ownership and control of EQGP's general partner and control of EQM's general partner, EQT has the power to direct the activities that most significantly impact their economic performance. In addition, through EQT's limited partner interest in EQGP and EQGP's general partner interest, limited partner interest and IDRs in EQM, EQT has the obligation to absorb the losses of EQGP and EQM and the right to receive benefits from EQGP and EQM, in accordance with such interests. As EQT has a controlling financial interest in EQGP, and is the primary beneficiary of EQGP, EQT consolidates EQGP who consolidates EQM. See Note 12 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information related to the consolidated variable interest entities.
The risks associated with the operations of EQGP and EQM are discussed in their respective Annual Reports on Form 10-K for the year ended December 31, 2016, as updated by any Quarterly Reports on Form 10-Q. See further discussion of the impact that EQT's ownership and control of EQGP and EQM have on EQT's financial position, results of operations and cash flows included in EQT's Annual Report on Form 10-K for the year ended December 31, 2016, including in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. See Notes B and C for further discussion of EQGP and EQM, respectively.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents amounts included in the Company's Condensed Consolidated Balance Sheets that were for the use or obligation of EQGP or EQM as of June 30, 2017 and December 31, 2016.
|
| | | | | | | | |
Classification | | June 30, 2017 | | December 31, 2016 |
| | (Thousands) |
Assets: | | |
| | |
|
Cash and cash equivalents | | $ | 12,787 |
| | $ | 60,453 |
|
Accounts receivable | | 21,261 |
| | 20,662 |
|
Prepaid expenses and other | | 2,320 |
| | 5,745 |
|
Property, plant and equipment, net | | 2,696,154 |
| | 2,578,834 |
|
Other assets | | 281,993 |
| | 206,104 |
|
Liabilities: | | | | |
Accounts payable | | $ | 42,755 |
| | $ | 35,831 |
|
Other current liabilities | | 41,589 |
| | 32,242 |
|
Long-term debt | | 986,542 |
| | 985,732 |
|
Other liabilities and credits | | 9,974 |
| | 9,562 |
|
The following table summarizes EQGP's Statements of Consolidated Operations and Cash Flows for the three and six months ended June 30, 2017 and 2016, inclusive of affiliate amounts.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands) |
Operating revenues | $ | 198,966 |
| | $ | 178,042 |
| | $ | 402,392 |
| | $ | 363,828 |
|
Operating expenses | 58,463 |
| | 49,787 |
| | 117,988 |
| | 99,410 |
|
Other expenses (income) | 1,949 |
| | (2,832 | ) | | 3,862 |
| | (2,448 | ) |
Net income | $ | 138,554 |
| | $ | 131,087 |
| | $ | 280,542 |
| | $ | 266,866 |
|
| | | | | | | |
Net cash provided by operating activities | $ | 158,886 |
| | $ | 159,475 |
| | $ | 319,655 |
| | $ | 275,119 |
|
Net cash used in investing activities | (125,612 | ) | | (213,377 | ) | | (207,299 | ) | | (336,899 | ) |
Net cash (used in) provided by financing activities | (63,255 | ) | | 137,883 |
| | (160,022 | ) | | (214,821 | ) |
F. Financial Information by Business Segment
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and which are subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources.
The Company reports its operations in three segments, which reflect its lines of business: EQT Production, EQT Gathering and EQT Transmission. The EQT Production segment includes the Company’s exploration for, and development and production of, natural gas, natural gas liquids (NGLs) and a limited amount of crude oil, primarily in the Appalachian Basin. The EQT Production segment also includes the marketing activities of the Company. The operations of EQT Gathering include the natural gas gathering activities of the Company, consisting solely of assets that are owned and operated by EQM. The operations of EQT Transmission include the natural gas transmission and storage activities of the Company, consisting solely of assets that are owned and operated by EQM.
Operating segments are evaluated on their contribution to the Company’s consolidated results based on operating income. Other income, interest and income taxes are managed on a consolidated basis. Headquarters’ costs are billed to the operating segments based upon an allocation of the headquarters’ annual operating budget. Differences between budget and actual headquarters’ expenses are not allocated to the operating segments.
Substantially all of the Company’s operating revenues, income from operations and assets are generated or located in the United States.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2017 | EQT Production | | EQT Gathering | | EQT Transmission | | Intersegment Eliminations | | EQT Corporation |
Revenues: | (Thousands) |
Sales of natural gas, oil and NGLs | $ | 576,714 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 576,714 |
|
Pipeline and net marketing services | 8,061 |
| | 112,145 |
| | 86,821 |
| | (139,174 | ) | | 67,853 |
|
Gain on derivatives not designated as hedges | 46,326 |
| | — |
| | — |
| | — |
| | 46,326 |
|
Total operating revenues | $ | 631,101 |
| | $ | 112,145 |
| | $ | 86,821 |
| | $ | (139,174 | ) | | $ | 690,893 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2016 | EQT Production | | EQT Gathering | | EQT Transmission | | Intersegment Eliminations | | EQT Corporation |
Revenues: | (Thousands) |
Sales of natural gas, oil and NGLs | $ | 304,532 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 304,532 |
|
Pipeline and net marketing services | 7,114 |
| | 100,155 |
| | 77,887 |
| | (127,464 | ) | | 57,692 |
|
Loss on derivatives not designated as hedges | (234,693 | ) | | — |
| | — |
| | — |
| | (234,693 | ) |
Total operating revenues | $ | 76,953 |
| | $ | 100,155 |
| | $ | 77,887 |
| | $ | (127,464 | ) | | $ | 127,531 |
|
|
| | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2017 | EQT Production | | EQT Gathering | | EQT Transmission | | Intersegment Eliminations | | EQT Corporation |
Revenues: | (Thousands) |
Sales of natural gas, oil and NGLs | $ | 1,250,179 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,250,179 |
|
Pipeline and net marketing services | 22,516 |
| | 214,474 |
| | 187,918 |
| | (273,739 | ) | | 151,169 |
|
Gain on derivatives not designated as hedges | 187,068 |
| | — |
| | — |
| | — |
| | 187,068 |
|
Total operating revenues | $ | 1,459,763 |
| | $ | 214,474 |
| | $ | 187,918 |
| | $ | (273,739 | ) | | $ | 1,588,416 |
|
|
| | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2016 | EQT Production | | EQT Gathering | | EQT Transmission | | Intersegment Eliminations | | EQT Corporation |
Revenues: | (Thousands) |
Sales of natural gas, oil and NGLs | $ | 668,959 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 668,959 |
|
Pipeline and net marketing services | 17,399 |
| | 198,164 |
| | 165,664 |
| | (251,888 | ) | | 129,339 |
|
Loss on derivatives not designated as hedges | (125,698 | ) | | — |
| | — |
| | — |
| | (125,698 | ) |
Total operating revenues | $ | 560,660 |
| | $ | 198,164 |
| | $ | 165,664 |
| | $ | (251,888 | ) | | $ | 672,600 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands) |
Operating income (loss): | |
| | |
| | | | |
EQT Production | $ | 52,765 |
| | $ | (447,735 | ) | | $ | 310,195 |
| | $ | (453,213 | ) |
EQT Gathering | 83,310 |
| | 73,175 |
| | 156,899 |
| | 145,779 |
|
EQT Transmission | 57,782 |
| | 55,854 |
| | 129,306 |
| | 120,370 |
|
Unallocated expenses (a) | (4,063 | ) | | (5,786 | ) | | (15,962 | ) | | (10,227 | ) |
Total operating income (loss) | $ | 189,794 |
| | $ | (324,492 | ) | | $ | 580,438 |
| | $ | (197,291 | ) |
| |
(a) | Unallocated expenses consist primarily of compensation expense and administrative costs, including the Rice Merger (defined in Note N) acquisition-related expenses. |
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Reconciliation of operating income (loss) to net income (loss): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands) | | | | |
Total operating income (loss) | $ | 189,794 |
| | $ | (324,492 | ) | | $ | 580,438 |
| | $ | (197,291 | ) |
Other income | 6,638 |
| | 7,644 |
| | 10,019 |
| | 12,484 |
|
Interest expense | 44,078 |
| | 36,305 |
| | 86,733 |
| | 72,485 |
|
Income tax expense (benefit) | 29,709 |
| | (172,346 | ) | | 130,374 |
| | (164,910 | ) |
Net income (loss) | $ | 122,645 |
| | $ | (180,807 | ) | | $ | 373,350 |
| | $ | (92,382 | ) |
|
| | | | | | | |
| As of June 30, 2017 | | As of December 31, 2016 |
| (Thousands) |
Segment assets: | |
| | |
|
EQT Production | $ | 11,884,454 |
| | $ | 10,923,824 |
|
EQT Gathering | 1,329,333 |
| | 1,225,686 |
|
EQT Transmission | 1,429,385 |
| | 1,399,201 |
|
Total operating segments | 14,643,172 |
| | 13,548,711 |
|
Headquarters assets, including cash and short-term investments | 1,080,839 |
| | 1,924,211 |
|
Total assets | $ | 15,724,011 |
| | $ | 15,472,922 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands) |
Depreciation, depletion and amortization: | |
| | |
| | | | |
EQT Production | $ | 219,211 |
| | $ | 208,809 |
| | $ | 430,308 |
| | $ | 414,485 |
|
EQT Gathering | 9,555 |
| | 7,594 |
| | 18,415 |
| | 14,857 |
|
EQT Transmission | 11,845 |
| | 6,937 |
| | 23,532 |
| | 13,681 |
|
Other | 206 |
| | 1,289 |
| | 480 |
| | 2,837 |
|
Total | $ | 240,817 |
| | $ | 224,629 |
| | $ | 472,735 |
| | $ | 445,860 |
|
| | | | | | | |
Expenditures for segment assets (b): | |
| | |
| | | | |
EQT Production (c) | $ | 455,721 |
| | $ | 234,325 |
| | $ | 1,401,179 |
| | $ | 471,891 |
|
EQT Gathering | 53,708 |
| | 86,278 |
| | 102,546 |
| | 159,365 |
|
EQT Transmission | 29,978 |
| | 115,946 |
| | 51,367 |
| | 176,017 |
|
Other | 2,967 |
| | 2,880 |
| | 4,595 |
| | 5,702 |
|
Total | $ | 542,374 |
| | $ | 439,429 |
| | $ | 1,559,687 |
| | $ | 812,975 |
|
| |
(b) | Includes the capitalized portion of non-cash stock-based compensation expense and the impact of capital accruals. |
| |
(c) | Expenditures for segment assets in the EQT Production segment included $49.6 million and $34.8 million for general leasing activity during the three months ended June 30, 2017 and 2016, respectively, and $94.9 million and $68.1 million for general leasing activity during the six months ended June 30, 2017 and 2016, respectively. The three and six months ended June 30, 2017 also includes $141.7 million and $811.2 million of cash capital expenditures, respectively, for the acquisitions discussed in Note M. During the six months ended June 30, 2017, the Company also incurred $9.7 million of non-cash capital expenditures for the acquisitions discussed in Note M. |
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
G. Derivative Instruments
The Company’s primary market risk exposure is the volatility of future prices for natural gas and NGLs, which can affect the operating results of the Company primarily at EQT Production. The Company’s overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.
The Company uses over the counter (OTC) derivative commodity instruments, primarily swap and collar agreements that are typically placed with financial institutions. The creditworthiness of all counterparties is regularly monitored. Swap agreements involve payments to or receipts from counterparties based on the differential between two prices for the commodity. Collar agreements require the counterparty to pay the Company if the index price falls below the floor price and the Company to pay the counterparty if the index price rises above the cap price. The Company also sells call options that require the Company to pay the counterparty if the index price rises above the strike price. The Company engages in basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to interest rate fluctuations on potential debt issuances. The Company has also engaged in a limited number of swaptions and power-indexed natural gas sales and swaps that are accounted for as derivative commodity instruments.
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature. The Company can net settle its derivative instruments at any time.
The Company discontinued cash flow hedge accounting in 2014; therefore, all changes in fair value of the Company’s derivative instruments are recognized within operating revenues in the Statements of Consolidated Operations.
In prior periods, derivative commodity instruments used by the Company to hedge its exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sale of EQT Production's produced volumes and forecasted natural gas purchases and sales were designated and qualified as cash flow hedges. As of June 30, 2017 and December 31, 2016, the forecasted transactions that were hedged as of December 31, 2014 remained probable of occurring and as such, the amounts in accumulated other comprehensive income (OCI) will continue to be reported in accumulated OCI and will be reclassified into earnings in future periods when the underlying hedged transactions occur. The forecasted transactions extend through December 2018. As of June 30, 2017 and December 31, 2016, the Company deferred net gains of $7.0 million and $9.6 million, respectively, in accumulated OCI, net of tax, related to the effective portion of the change in fair value of its derivative commodity instruments designated as cash flow hedges. The Company estimates that approximately $3.0 million of net gains on its derivative commodity instruments reflected in accumulated OCI, net of tax, as of June 30, 2017 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions.
Contracts which result in physical delivery of a commodity expected to be used or sold by the Company in the normal course of business are designated as normal purchases and sales and are exempt from derivative accounting.
OTC arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Thousands) |
Commodity derivatives designated as cash flow hedges | |
Amount of gain reclassified from accumulated OCI, net of tax, into operating revenues (effective portion) | $ | 1,672 |
| | $ | 15,940 |
| | $ | 2,560 |
| | $ | 28,364 |
|
| | | | | | | |
Interest rate derivatives designated as cash flow hedges | |
| | |
| | | | |
Amount of loss reclassified from accumulated OCI, net of tax, into interest expense (effective portion) | $ | (36 | ) | | $ | (36 | ) | | $ | (72 | ) | | $ | (72 | ) |
| | | | | | | |
Derivatives not designated as hedging instruments | |
| | |
| | |
| | |
|
Amount of gain (loss) recognized in operating revenues | $ | 46,326 |
| | $ | (234,693 | ) | | $ | 187,068 |
| | $ | (125,698 | ) |
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of equity production and portions of its basis exposure covering approximately 614 Bcf of natural gas and 735 Mbbls of NGLs as of June 30, 2017, and 646 Bcf of natural gas and 1,095 Mbbls of NGLs as of December 31, 2016. The open positions at June 30, 2017 and December 31, 2016 had maturities extending through December 2020.
The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities as of June 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | | |
As of June 30, 2017 | | Derivative instruments, recorded in the Condensed Consolidated Balance Sheet, gross | | Derivative instruments subject to master netting agreements | | Margin deposits remitted to counterparties | | Derivative instruments, net |
| | (Thousands) |
Asset derivatives: | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 85,442 |
| | $ | (49,465 | ) | | $ | — |
| | $ | 35,977 |
|
Liability derivatives: | | | | | | |
| | |
|
Derivative instruments, at fair value | | $ | 107,880 |
| | $ | (49,465 | ) | | $ | — |
| | $ | 58,415 |
|
|
| | | | | | | | | | | | | | | | |
As of December 31, 2016 | | Derivative instruments, recorded in the Condensed Consolidated Balance Sheet, gross | | Derivative instruments subject to master netting agreements | | Margin deposits remitted to counterparties | | Derivative instruments, net |
| | (Thousands) |
Asset derivatives: | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 33,053 |
| | $ | (23,373 | ) | | $ | — |
| | $ | 9,680 |
|
Liability derivatives: | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 257,943 |
| | $ | (23,373 | ) | | $ | — |
| | $ | 234,570 |
|
Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings by Standard & Poor’s Rating Service (S&P) or Moody’s Investors Service (Moody’s) are lowered below investment grade, additional collateral must be deposited with the counterparty if the amounts outstanding on those contracts exceed certain thresholds. The additional collateral can be up to 100% of the derivative liability. As of June 30, 2017, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $12.2 million, for which the Company had no collateral posted on June 30, 2017. If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade on June 30, 2017, the Company would not have been required to post any additional collateral under the agreements with the respective counterparties. The required margin on the Company’s derivative instruments is subject to significant change as a result of factors other than credit rating, such as gas prices and credit thresholds set forth in agreements between the hedging counterparties and the Company. Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies. The Company’s senior unsecured debt was rated BBB by S&P and Baa3 by Moody’s at June 30, 2017. In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Baa3 or higher by Moody’s. Anything below these ratings is considered non-investment grade. See also "Security Ratings and Financing Triggers" under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
H. Fair Value Measurements
The Company records its financial instruments, principally derivative instruments, at fair value in its Condensed Consolidated Balance Sheets. The Company estimates the fair value using quoted market prices, where available. If quoted market prices are not available, fair value is based upon models that use market-based parameters as inputs, including forward curves, discount rates, volatilities and nonperformance risk. Nonperformance risk considers the effect of the Company’s credit standing on the fair value of liabilities and the effect of the counterparty’s credit standing on the fair value of assets. The Company estimates nonperformance risk by analyzing publicly available market information, including a comparison of the yield on debt instruments with credit ratings
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
similar to the Company’s or counterparty’s credit rating and the yield of a risk-free instrument and credit default swaps rates where available.
The Company has categorized its assets and liabilities recorded at fair value into a three-level fair value hierarchy, based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities in Level 2 primarily include the Company’s swap and collar agreements.
The fair value of the commodity swaps included in Level 2 is based on standard industry income approach models that use significant observable inputs, including but not limited to New York Mercantile Exchange (NYMEX) natural gas and propane forward curves, LIBOR-based discount rates and basis forward curves. The Company’s collars, options and swaptions are valued using standard industry income approach option models. The significant observable inputs utilized by the option pricing models include NYMEX forward curves, natural gas volatilities and LIBOR-based discount rates. The NYMEX natural gas and propane forward curves, LIBOR-based discount rates, natural gas volatilities and basis forward curves are validated to external sources at least monthly.
The following assets and liabilities were measured at fair value on a recurring basis during the applicable period:
|
| | | | | | | | | | | | | | | | |
| | | | Fair value measurements at reporting date using |
Description | | As of June 30, 2017 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| | (Thousands) |
Assets | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 85,442 |
| | $ | — |
| | $ | 85,442 |
| | $ | — |
|
Liabilities | | | | | | | | |
Derivative instruments, at fair value | | $ | 107,880 |
| | $ | — |
| | $ | 107,880 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | Fair value measurements at reporting date using |
Description | | As of December 31, 2016 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| | (Thousands) |
Assets | | |
| | |
| | |
| | |
|
Trading securities | | $ | 286,396 |
| | $ | — |
| | $ | 286,396 |
| | $ | — |
|
Derivative instruments, at fair value | | $ | 33,053 |
| | $ | — |
| | $ | 33,053 |
| | $ | — |
|
Liabilities | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 257,943 |
| | $ | — |
| | $ | 257,943 |
| | $ | — |
|
The carrying values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments. The carrying values of borrowings under EQM’s credit facilities approximate fair value as the interest rates are based on prevailing market rates.
The fair values of trading securities classified as Level 2 are priced using nonbinding market prices that are corroborated by observable market data. Inputs into these valuation techniques include actual trade data, broker/dealer quotes and other similar data. As of March 31, 2017, the Company closed its positions on all trading securities. As of December 31, 2016, the Company reflected its investment in trading securities as Level 2 fair value measurements.
The Company estimates the fair value of its debt using its established fair value methodology. Because not all of the Company’s debt is actively traded, the fair value of the debt is a Level 2 fair value measurement. Fair value for non-traded debt obligations is estimated using a standard industry income approach model which utilizes a discount rate based on market rates for debt with similar remaining time to maturity and credit risk. The estimated fair value of total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.5 billion at June 30, 2017 and December 31, 2016. The carrying
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
value of total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.3 billion at June 30, 2017 and December 31, 2016.
The Company recognizes transfers between Levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Levels 1, 2 and 3 during the periods presented.
I. Income Taxes
For the six months ended June 30, 2017, the Company calculated the provision for income taxes by applying the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring items) for the quarter. The Company determined small fluctuations in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate and thus an estimated annual effective tax rate would not provide a reliable estimate for the six months ended June 30, 2016. As a consequence, the Company used a discrete effective tax rate method to calculate taxes for the six months ended June 30, 2016.
All of EQGP’s income is included in the Company’s pre-tax income. However, the Company is not required to record income tax expense with respect to the portion of EQGP’s income allocated to the noncontrolling public limited partners of EQGP and EQM, which reduces the Company’s effective tax rate in periods when the Company has consolidated pre-tax income and increases the Company's effective tax rate in periods when the Company has consolidated pre-tax loss.
The Company had consolidated pre-tax income for the six months ended June 30, 2017, compared to a consolidated pre-tax loss for the six months ended June 30, 2016. The Company’s effective tax rate for the six months ended June 30, 2017 was 25.9% compared to 64.1% for the six months ended June 30, 2016. The decrease in the effective income tax rate was attributable to the Company's consolidated pre-tax income for the six months ended June 30, 2017, for which EQGP's income allocated to the noncontrolling limited partners reduced the effective tax rate. The Company's pre-tax income increased primarily due to an increase in EQT Production segment operating income during the period resulting primarily from a higher average realized price and gains on derivatives not designated as hedges for the six months ended June 30, 2017.
There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended June 30, 2017.
J. Revolving Credit Facilities
The Company has a $1.5 billion unsecured revolving credit facility that expires in February 2019. The Company had no borrowings or letters of credit outstanding under its revolving credit facility as of June 30, 2017 or December 31, 2016 or at any time during the three and six months ended June 30, 2017 and 2016.
EQM has a $750 million credit facility that expires in February 2019. EQM had no borrowings and no letters of credit outstanding under the $750 million credit facility as of June 30, 2017 or December 31, 2016. There were no borrowings outstanding at any time during the three and six months ended June 30, 2017. During the three and six months ended June 30, 2016, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was $128 million and $299 million, respectively, and the average daily balance was approximately $33 million and $83 million, respectively. Interest was incurred at a weighted average annual interest rate of approximately 1.9% for the three and six months ended June 30, 2016.
See “Capital Resources and Liquidity” in Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for description of the proposed amendments to the Company's $1.5 billion revolving credit facility and EQM's $750 million credit facility.
K. Earnings Per Share
Potentially dilutive securities (options and restricted stock awards) included in the calculation of diluted earnings per share totaled 120,228 and 204,430 for the three and six months ended June 30, 2017, respectively. Options to purchase common stock excluded from potentially dilutive securities because they were anti-dilutive totaled 713,800 and 473,700 for the three and six months ended June 30, 2017, respectively. In periods when the Company reports a net loss, all options and restricted stock awards are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on loss per share. Due to the Company's net loss for the three and six months ended June 30, 2016, all outstanding options and restricted stock awards were excluded from the calculation of diluted earnings per share. The excluded options and restricted stock awards totaled 1,760,780
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
and 1,859,890 for the three and six months ended June 30, 2016, respectively. The impact of EQM’s and EQGP’s dilutive units did not have a material impact on the Company’s earnings per share calculations for any of the periods presented.
L. Changes in Accumulated Other Comprehensive Income by Component
The following tables explain the changes in accumulated OCI by component during the applicable period:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
| Natural gas cash flow hedges, net of tax | | Interest rate cash flow hedges, net of tax | | Other post- retirement benefit liability adjustment, net of tax | | Accumulated OCI, net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of April 1, 2017 | $ | 8,719 |
| | $ | (663 | ) | | $ | (6,790 | ) | | $ | 1,266 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (1,672 | ) | (a) | 36 |
| (a) | 77 |
| (b) | (1,559 | ) |
Accumulated OCI (loss), net of tax, as of June 30, 2017 | $ | 7,047 |
| | $ | (627 | ) | | $ | (6,713 | ) | | $ | (293 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2016 |
| Natural gas cash flow hedges, net of tax | | Interest rate cash flow hedges, net of tax | | Pension and other post- retirement benefits liability adjustment, net of tax | | Accumulated OCI, net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of April 1, 2016 | $ | 52,338 |
| | $ | (807 | ) | | $ | (17,328 | ) | | $ | 34,203 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (15,940 | ) | (a) | 36 |
| (a) | 9,622 |
| (b) | (6,282 | ) |
Accumulated OCI (loss), net of tax, as of June 30, 2016 | $ | 36,398 |
| | $ | (771 | ) | | $ | (7,706 | ) | | $ | 27,921 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
| Natural gas cash flow hedges, net of tax | | Interest rate cash flow hedges, net of tax | | Other post- retirement benefit liability adjustment, net of tax | | Accumulated OCI, net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of January 1, 2017 | $ | 9,607 |
| | $ | (699 | ) | | $ | (6,866 | ) | | $ | 2,042 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (2,560 | ) | (a) | 72 |
| (a) | 153 |
| (b) | (2,335 | ) |
Accumulated OCI (loss), net of tax, as of June 30, 2017 | $ | 7,047 |
| | $ | (627 | ) | | $ | (6,713 | ) | | $ | (293 | ) |
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2016 |
| Natural gas cash flow hedges, net of tax | | Interest rate cash flow hedges, net of tax | | Pension and other post- retirement benefits liability adjustment, net of tax | | Accumulated OCI, net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of January 1, 2016 | $ | 64,762 |
| | $ | (843 | ) | | $ | (17,541 | ) | | $ | 46,378 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (28,364 | ) | (a) | 72 |
| (a) | 9,835 |
| (b) | (18,457 | ) |
Accumulated OCI (loss), net of tax, as of June 30, 2016 | $ | 36,398 |
| | $ | (771 | ) | | $ | (7,706 | ) | | $ | 27,921 |
|
(a) See Note G for additional information.
(b) The accumulated OCI reclassification for the three and six months ended June 30, 2017 is attributable to the net actuarial loss and net prior service cost related to the Company’s post-retirement benefit plans. The accumulated OCI reclassification for the three and six months ended June 30, 2016 is attributable to the net actuarial loss and net prior service cost related to the Company’s defined benefit pension plans and other post-retirement benefit plans. See Note 15 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
M. Acquisitions
On February 1, 2017, the Company acquired approximately 14,000 net Marcellus acres located in Marion, Monongalia and Wetzel Counties of West Virginia from a third-party for $130 million.
On February 27, 2017, the Company acquired approximately 85,000 net Marcellus acres, including drilling rights on approximately 44,000 net Utica acres and current natural gas production of approximately 110 MMcfe per day, from Stone Energy Corporation for $522.5 million. The acquired acres are primarily located in Wetzel, Marshall, Tyler and Marion Counties of West Virginia. The acquired assets also include 174 operated Marcellus wells and 20 miles of gathering pipeline.
On June 30, 2017, the Company acquired approximately 11,000 net Marcellus acres, and the associated Utica drilling rights, from a third-party for $83.5 million. The acquired acres are primarily located within Allegheny, Washington and Westmoreland Counties of Pennsylvania.
In connection with the acquisitions which occurred during the six months ended June 30, 2017, the Company paid net cash of $736.0 million. The purchase prices remain subject to customary post-closing adjustments as of June 30, 2017. The preliminary fair value assigned to the acquired property, plant and equipment as of the opening balance sheet dates totaled $747.9 million. In connection with the 2017 acquisitions, the Company assumed approximately $7.2 million of net current liabilities and $4.7 million of non-current liabilities. The amounts presented in the financial statements represent the Company's estimates based on preliminary valuations of acquired assets and liabilities and are subject to change based on the Company's finalization of asset and liability valuations.
As a result of post-closing adjustments on its 2016 acquisitions, the Company paid $75.2 million for additional undeveloped acreage and recorded other non-cash adjustments which reduced the preliminary fair values assigned to the acquired property, plant and equipment by $2.2 million during the six months ended June 30, 2017. The purchase prices for the Company’s 2016 acquisitions, as well as the fair values assigned to the acquired assets and assumed liabilities, remain preliminary as of June 30, 2017.
N. Rice Merger
On June 19, 2017, the Company entered into an Agreement and Plan of Merger (the Rice Merger Agreement) with Rice Energy Inc. (Rice) (NYSE: RICE), pursuant to which Rice will merge with and into a wholly owned indirect subsidiary of EQT through a series of transactions (the Rice Merger). If the Rice Merger is completed, each share of the common stock of Rice (Rice Common Stock) issued and outstanding immediately prior to the effective time (the Effective Time) of the Rice Merger (other than shares excluded by the Rice Merger Agreement) will be converted into the right to receive 0.37 of a share of the common stock of the Company (EQT Common Stock) and $5.30 in cash (collectively, the Merger Consideration).
Based on the closing price of EQT Common Stock on the New York Stock Exchange on June 16, 2017, the last trading day before the public announcement of the Rice Merger, the aggregate value of the Merger Consideration payable to Rice stockholders was approximately $6.7 billion. The Company will also assume or refinance approximately $1.5 billion of net debt and preferred equity of Rice and its subsidiaries and will assume other assets and liabilities of Rice at the Effective Time. Based on the estimated number of shares of EQT Common Stock and Rice Common Stock that will be outstanding immediately prior to the Effective Time, the Company estimates that, upon the closing of the Rice Merger, existing EQT shareholders and former Rice stockholders will own approximately 65% and 35%, respectively, of the Company’s outstanding shares.
The waiting period applicable to the Rice Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 was terminated by the Federal Trade Commission on July 18, 2017. The Rice Merger is expected to close in the fourth quarter of 2017, subject to certain customary closing conditions, including the approval by the Company’s shareholders of the issuance of shares of EQT Common Stock as Merger Consideration and the adoption of the Rice Merger Agreement by Rice stockholders.
On June 19, 2017, in connection with its entry into the Rice Merger Agreement, the Company also entered into a commitment letter (the Commitment Letter) with Citigroup Global Markets Inc. (Citi), pursuant to which Citi and its affiliates committed to provide, subject to the terms and conditions set forth therein, up to $1.4 billion of senior unsecured bridge loans (the Bridge Facility), the proceeds of which may be used to pay the cash portion of the Merger Consideration, to refinance certain existing indebtedness of the Company, Rice and their respective subsidiaries, and to pay fees and expenses in connection with the Rice Merger and related transactions. On July 14, 2017, the Company entered into a joinder letter to the Commitment Letter, pursuant to which 16 additional banks assumed a portion of Citi’s commitment under the Bridge Facility. The Company capitalized $7.4
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
million in debt issuance costs paid to Citi for structuring and related fees for the Bridge Facility in June 2017. The Company is amortizing these debt issuance costs through the expected date of issuance of permanent financing for the Rice Merger. The Company amortized approximately $0.8 million of the Bridge Facility debt issuance costs during the three months ended June 30, 2017.
The Rice Merger Agreement provides for certain termination rights for both the Company and Rice, including the right of either party to terminate the Rice Merger Agreement if the Rice Merger is not consummated by February 19, 2018 (which may be extended by either party to May 19, 2018 under certain circumstances). Upon termination of the Rice Merger Agreement under certain specified circumstances, the Company may be required to pay Rice, or Rice may be required to pay the Company, a termination fee of $255.0 million. In addition, if the Rice Merger Agreement is terminated because of a failure of a party’s shareholders to approve the proposals required to complete the Rice Merger, that party may be required to reimburse the other party for its transaction expenses in an amount equal to $67.0 million.
The Company expects to finance the cash portion of the Merger Consideration and the transactions related to the Rice Merger with cash on hand and proceeds from Company debt offerings, borrowings under the Company’s $1.5 billion credit facility and/or borrowings under the Bridge Facility.
O. Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date which approved a one year deferral of ASU No. 2014-09 for annual reporting periods beginning after December 15, 2017. The Company expects to adopt the ASUs using the modified retrospective method of adoption on January 1, 2018. During 2016, the Company completed an analysis of the impact of the standard on its broad contract types. As a result, the Company anticipates that this standard will not have a material impact on net income. The Company has made significant progress in a detailed review of the impact of the standard on each of its contracts, which it expects to complete in the third quarter of 2017. The Company is evaluating the impact of the standard on its related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The changes primarily affect the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This standard will eliminate the cost method of accounting for equity investments. The ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, with early adoption of certain provisions permitted. The Company will adopt this standard in the first quarter of 2018 and does not expect that the adoption will have a material impact on its financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The ASU will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The primary effect of adopting the new standard will be to record assets and obligations for contracts currently recognized as operating leases. The Company has completed a high level identification of agreements covered by this standard and will continue to evaluate the impact this standard will have on its financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU is part of the FASB initiative to reduce complexity in accounting standards. The areas for simplification in this ASU involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted this standard in the first quarter of 2017 with no significant impact on its reported results or disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the presentation and classification of eight specific cash flow issues. The amendments in the ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted this standard in the second quarter of 2017 with no material impact on its financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company anticipates this standard will not have a material impact on its financial statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU provides additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company anticipates this standard will not have a material impact on its financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance regarding which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations in conjunction with the Condensed Consolidated Financial Statements, and the notes thereto, included elsewhere in this report.
CAUTIONARY STATEMENTS
Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “could,” “would,” “will,” “may,” “forecast,” “approximate,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters. Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the matters discussed in the section captioned “Outlook” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the expectations of plans, strategies, objectives and growth and anticipated financial and operational performance of the Company and its subsidiaries, including guidance regarding the Company’s strategy to develop its Marcellus, Utica, Upper Devonian and other reserves; drilling plans and programs (including the number, type, feet of pay and location of wells to be drilled and the availability of capital to complete these plans and programs); production sales volumes (including liquids volumes) and growth rates; gathering and transmission volumes; infrastructure programs (including the timing, cost and capacity of the gathering and transmission expansion projects); the cost, capacity, timing of regulatory approval, and anticipated in-service date of the Mountain Valley Pipeline (MVP) project; technology (including drilling and completion techniques); monetization transactions, including asset sales, joint ventures or other transactions involving the Company’s assets; acquisition transactions; the Company's ability to complete, the timing of, and the Company's financing of the funds required for, the Rice Merger (as defined in Note N to the Condensed Consolidated Financial Statements); natural gas prices, changes in basis and the impact of commodity prices on the Company's business; reserves; potential future impairments of the Company's assets; projected capital expenditures and capital contributions; the amount and timing of any repurchases under the Company’s share repurchase authorization; liquidity and financing requirements, including funding sources and availability; hedging strategy; the effects of government regulation and litigation; and tax position. The forward-looking statements included in this Quarterly Report on Form 10-Q involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has based these forward-looking statements on current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and beyond the Company’s control. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors”, and elsewhere in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as updated by Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q.
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.
In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about the Company. The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments. Accordingly, these representations and warranties alone may not describe the actual state of affairs of the Company or its affiliates as of the date they were made or at any other time.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CORPORATE OVERVIEW
Three Months Ended June 30, 2017 vs. Three Months Ended June 30, 2016
Net income attributable to EQT Corporation for the three months ended June 30, 2017 was $41.1 million, $0.24 per diluted share, compared with net loss attributable to EQT Corporation of $258.6 million, a loss of $1.55 per diluted share, for the three months ended June 30, 2016. The increase was primarily attributable to gains on derivatives not designated as hedges for the three months ended June 30, 2017 compared to losses on derivatives not designated as hedges for the three months ended June 30, 2016, a $0.75 increase in the average realized price, a 7.3% increase in production sales volumes and higher pipeline and net marketing services revenue, partly offset by higher income tax expense, higher operating expenses, higher interest expense and higher net income attributable to noncontrolling interests of EQGP and EQM.
EQT Production paid $11.2 million and received $86.1 million of net cash settlements for derivatives not designated as hedges for the three months ended June 30, 2017 and 2016, respectively, that are included in the average realized price but are not in GAAP operating revenues.
Net income attributable to noncontrolling interests of EQGP and EQM was $81.5 million for the three months ended June 30, 2017 compared to $77.8 million for the three months ended June 30, 2016. The $3.7 million increase was primarily the result of increased net income at EQM and increased ownership of EQM common units by third-parties.
In connection with the Rice Merger, the Company recorded $4.2 million in acquisition-related expenses during the three months ended June 30, 2017. The Company also capitalized $7.4 million in debt issuance costs related to the Bridge Facility (as defined in Note N to the Condensed Consolidated Financial Statements) in June 2017. The Company is amortizing these debt issuance costs through the expected date of issuance of permanent financing for the Rice Merger. The Company amortized approximately $0.8 million of the Bridge Facility debt issuance costs during the three months ended June 30, 2017.
Six Months Ended June 30, 2017 vs. Six Months Ended June 30, 2016
Net income attributable to EQT Corporation for the six months ended June 30, 2017 was $205.1 million, $1.18 per diluted share, compared with net loss attributable to EQT Corporation of $253.0 million, a loss of $1.56 per diluted share, for the six months ended June 30, 2016. The increase was primarily attributable to gains on derivatives not designated as hedges for the six months ended June 30, 2017 compared to losses on derivatives not designated as hedges for the six months ended June 30, 2016, an $0.80 increase in the average realized price, a 6.5% increase in production sales volumes and higher pipeline and net marketing services revenue, partly offset by higher income tax expense, higher operating expenses, higher interest expense and higher net income attributable to noncontrolling interests of EQGP and EQM.
EQT Production paid $20.2 million and received $195.2 million of net cash settlements for derivatives not designated as hedges for the six months ended June 30, 2017 and 2016, respectively, that are included in the average realized price but are not in GAAP operating revenues.
Net income attributable to noncontrolling interests of EQGP and EQM was $168.2 million for the six months ended June 30, 2017 compared to $160.6 million for the six months ended June 30, 2016. The $7.6 million increase was primarily the result of increased net income at EQM and increased ownership of EQM common units by third-parties.
In connection with the Rice Merger, the Company recorded $4.2 million in acquisition-related expenses during the six months ended June 30, 2017. The Company also capitalized $7.4 million in debt issuance costs related to the Bridge Facility in June 2017. The Company is amortizing these debt issuance costs through the expected date of issuance of permanent financing for the Rice Merger. The Company amortized approximately $0.8 million of the Bridge Facility debt issuance costs during the six months ended June 30, 2017.
See “Business Segment Results of Operations” for a discussion of production sales volumes and gathering and transmission firm reservation fee revenues.
See “Investing Activities” under the caption “Capital Resources and Liquidity” for a discussion of capital expenditures.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Operational Data
The following table presents detailed natural gas and liquids operational information to assist in the understanding of the Company’s consolidated operations, including the calculation of the Company's average realized price ($/Mcfe), which is based on EQT Production adjusted operating revenues, a non-GAAP supplemental financial measure. EQT Production adjusted operating revenues is presented because it is an important measure used by the Company’s management to evaluate period-to-period comparisons of earnings trends. EQT Production adjusted operating revenues should not be considered as an alternative to EQT Corporation total operating revenues as reported in the Statements of Consolidated Operations, the most directly comparable GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of EQT Production adjusted operating revenues to EQT Corporation total operating revenues.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
in thousands (unless noted) | | 2017 | | 2016 | | % | | 2017 | | 2016 | | % |
NATURAL GAS | | | | | | |
| | | | | | |
Sales volume (MMcf) | | 167,682 |
| | 167,741 |
| | — |
| | 332,146 |
| | 333,015 |
| | (0.3 | ) |
NYMEX price ($/MMBtu) (a) | | $ | 3.18 |
| | $ | 1.95 |
| | 63.1 |
| | $ | 3.25 |
| | $ | 2.02 |
| | 60.9 |
|
Btu uplift | | 0.26 |
| | 0.16 |
| | 62.5 |
| | 0.27 |
| | 0.17 |
| | 58.8 |
|
Natural gas price ($/Mcf) | | $ | 3.44 |
| | $ | 2.11 |
| | 63.0 |
| | $ | 3.52 |
| | $ | 2.19 |
| | 60.7 |
|
| | | | | | | | | | | | |
Basis ($/Mcf) (b) | | $ | (0.60 | ) | | $ | (0.75 | ) | | (20.0 | ) | | $ | (0.39 | ) | | $ | (0.58 | ) | | (32.8 | ) |
Cash settled basis swaps (not designated as hedges) ($/Mcf) | | (0.04 | ) | | (0.04 | ) | | — |
| | — |
| | 0.08 |
| | (100.0 | ) |
Average differential, including cash settled basis swaps ($/Mcf) | | $ | (0.64 | ) | | $ | (0.79 | ) | | (19.0 | ) | | $ | (0.39 | ) | | $ | (0.50 | ) | | (22.0 | ) |
| | | | | | | | | | | | |
Average adjusted price ($/Mcf) | | $ | 2.80 |
| | $ | 1.32 |
| | 112.1 |
| | $ | 3.13 |
| | $ | 1.69 |
| | 85.2 |
|
Cash settled derivatives (cash flow hedges) ($/Mcf) | | 0.02 |
| | 0.16 |
| | (87.5 | ) | | 0.01 |
| | 0.14 |
| | (92.9 | ) |
Cash settled derivatives (not designated as hedges) ($/Mcf) | | (0.02 | ) | | 0.55 |
| | (103.6 | ) | | (0.05 | ) | | 0.50 |
| | (110.0 | ) |
Average natural gas price, including cash settled derivatives ($/Mcf) | | $ | 2.80 |
| | $ | 2.03 |
| | 37.9 |
| | $ | 3.09 |
| | $ | 2.33 |
| | 32.6 |
|
| | | | | | | | | | | | |
Natural gas sales, including cash settled derivatives | | $ | 469,165 |
| | $ | 342,561 |
| | 37.0 |
| | $ | 1,028,364 |
| | $ | 777,414 |
| | 32.3 |
|
| | | | | | | | | | | | |
LIQUIDS | | | | | | |
| | | | | | |
NGLs (excluding ethane): | | | | | | |
| | | | | | |
Sales volume (MMcfe) (c) | | 18,895 |
| | 14,442 |
| | 30.8 |
| | 36,035 |
| | 28,094 |
| | 28.3 |
|
Sales volume (Mbb |