10-Q
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 SEPTEMBER 30, 2015 |
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | |
Large Accelerated Filer x | | Accelerated Filer ¨ |
Non-Accelerated Filer ¨ | | Smaller reporting company ¨ |
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 September 30, 2015, 152,540 (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 Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (Thousands, except per share amounts) |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 358,977 |
| | $ | 526,521 |
| | $ | 1,306,684 |
| | $ | 1,596,894 |
|
Pipeline and marketing services | 56,775 |
| | 50,381 |
| | 203,164 |
| | 185,680 |
|
Gain (loss) on derivatives not designated as hedges | 161,263 |
| | 1,821 |
| | 209,114 |
| | (16,058 | ) |
Total operating revenues | 577,015 |
| | 578,723 |
| | 1,718,962 |
| | 1,766,516 |
|
| | | | | | | |
Operating expenses: | |
| | |
| | |
| | |
|
Transportation and processing | 65,033 |
| | 49,121 |
| | 187,709 |
| | 146,019 |
|
Operation and maintenance | 32,385 |
| | 27,944 |
| | 92,693 |
| | 80,752 |
|
Production | 32,505 |
| | 33,840 |
| | 95,353 |
| | 97,662 |
|
Exploration | 8,177 |
| | 3,606 |
| | 32,153 |
| | 12,477 |
|
Selling, general and administrative | 60,633 |
| | 57,131 |
| | 193,415 |
| | 169,382 |
|
Depreciation, depletion and amortization | 208,227 |
| | 175,578 |
| | 599,791 |
| | 484,908 |
|
Total operating expenses | 406,960 |
| | 347,220 |
| | 1,201,114 |
| | 991,200 |
|
| | | | | | | |
Gain on sale / exchange of assets | — |
| | — |
| | — |
| | 37,749 |
|
Operating income | 170,055 |
| | 231,503 |
| | 517,848 |
| | 813,065 |
|
| | | | | | | |
Other income | 2,661 |
| | 1,004 |
| | 6,289 |
| | 6,134 |
|
Interest expense | 36,547 |
| | 35,717 |
| | 110,596 |
| | 99,558 |
|
Income before income taxes | 136,169 |
| | 196,790 |
| | 413,541 |
| | 719,641 |
|
Income tax expense | 35,936 |
| | 64,496 |
| | 28,393 |
| | 239,920 |
|
Income from continuing operations | 100,233 |
| | 132,294 |
| | 385,148 |
| | 479,721 |
|
Income from discontinued operations, net of tax | — |
| | — |
| | — |
| | 1,772 |
|
Net income | 100,233 |
| | 132,294 |
| | 385,148 |
| | 481,493 |
|
Less: Net income attributable to noncontrolling interests | 59,446 |
| | 33,739 |
| | 165,398 |
| | 79,824 |
|
Net income attributable to EQT Corporation | $ | 40,787 |
| | $ | 98,555 |
| | $ | 219,750 |
| | $ | 401,669 |
|
| | | | | | | |
Amounts attributable to EQT Corporation: | |
| | |
| | |
| | |
|
Income from continuing operations | $ | 40,787 |
| | $ | 98,555 |
| | $ | 219,750 |
| | $ | 399,897 |
|
Income from discontinued operations, net of tax | — |
| | — |
| | — |
| | 1,772 |
|
Net income | $ | 40,787 |
| | $ | 98,555 |
| | $ | 219,750 |
| | $ | 401,669 |
|
| | | | | | | |
Earnings per share of common stock attributable to EQT Corporation: | |
| | |
| | |
| | |
|
Basic: | |
| | |
| | |
| | |
|
Weighted average common stock outstanding | 152,551 |
| | 151,557 |
| | 152,326 |
| | 151,533 |
|
Income from continuing operations | $ | 0.27 |
| | $ | 0.65 |
| | $ | 1.44 |
| | $ | 2.64 |
|
Income from discontinued operations, net of tax | — |
| | — |
| | — |
| | 0.01 |
|
Net income | $ | 0.27 |
| | $ | 0.65 |
| | $ | 1.44 |
| | $ | 2.65 |
|
Diluted: | |
| | |
| | |
| | |
|
Weighted average common stock outstanding | 152,854 |
| | 152,330 |
| | 152,789 |
| | 152,468 |
|
Income from continuing operations | $ | 0.27 |
| | $ | 0.65 |
| | $ | 1.44 |
| | $ | 2.62 |
|
Income from discontinued operations, net of tax | — |
| | — |
| | — |
| | 0.01 |
|
Net income | $ | 0.27 |
| | $ | 0.65 |
| | $ | 1.44 |
| | $ | 2.63 |
|
Dividends declared per common share | $ | 0.03 |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.09 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Statements of Consolidated Comprehensive Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (Thousands) |
Net income | $ | 100,233 |
| | $ | 132,294 |
| | $ | 385,148 |
| | $ | 481,493 |
|
| | | | | | | |
Other comprehensive (loss) income, net of tax: | |
| | |
| | |
| | |
|
Net change in cash flow hedges: | |
| | |
| | |
| | |
|
Natural gas, net of tax (benefit) expense of $(26,093), $11,844, $(81,279) and $(16,036) | (39,346 | ) | | 17,820 |
| | (122,678 | ) | | (23,418 | ) |
Interest rate, net of tax expense of $25, $25, $75 and $75 | 36 |
| | 36 |
| | 108 |
| | 108 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $127, $113, $382 and $340 | 202 |
| | 175 |
| | 606 |
| | 527 |
|
Other comprehensive (loss) income | (39,108 | ) | | 18,031 |
| | (121,964 | ) | | (22,783 | ) |
Comprehensive income | 61,125 |
| | 150,325 |
| | 263,184 |
| | 458,710 |
|
Less: Comprehensive income attributable to noncontrolling interests | 59,446 |
| | 33,739 |
| | 165,398 |
| | 79,824 |
|
Comprehensive income attributable to EQT Corporation | $ | 1,679 |
| | $ | 116,586 |
| | $ | 97,786 |
| | $ | 378,886 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Statements of Condensed Consolidated Cash Flows (Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
| (Thousands) |
Cash flows from operating activities: | |
Net income | $ | 385,148 |
| | $ | 481,493 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Deferred income tax (benefit) expense | (78,958 | ) | | 102,301 |
|
Depreciation, depletion and amortization | 599,791 |
| | 484,908 |
|
Asset impairments | 35,004 |
| | 8,729 |
|
Gain on sale / exchange of assets | — |
| | (37,749 | ) |
Gain on dispositions | — |
| | (3,598 | ) |
(Recoveries of) provision for losses on accounts receivable | (2,262 | ) | | 1,753 |
|
Other income | (6,276 | ) | | (6,134 | ) |
Stock-based compensation expense | 41,622 |
| | 33,072 |
|
Loss recognized in operating revenues for hedging ineffectiveness | — |
| | (13,075 | ) |
(Gain) loss on derivatives not designated as hedges | (209,114 | ) | | 16,058 |
|
Cash settlements received (paid) on derivatives not designated as hedges | 70,874 |
| | (9,232 | ) |
Changes in other assets and liabilities: | |
| | |
|
Dividend from Nora Gathering, LLC | — |
| | 9,463 |
|
Excess tax benefits on stock-based compensation | (21,176 | ) | | (28,592 | ) |
Accounts receivable | 161,118 |
| | 34,419 |
|
Accounts payable | (84,262 | ) | | (15,201 | ) |
Accrued interest | 22,935 |
| | 30,860 |
|
Other items, net | (14,226 | ) | | 52,470 |
|
Net cash provided by operating activities | 900,218 |
| | 1,141,945 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Capital expenditures from continuing operations | (1,899,338 | ) | | (1,606,307 | ) |
Capital expenditures associated with Range Resources Corporation asset exchange | — |
| | (163,251 | ) |
Capital contributions to Mountain Valley Pipeline, LLC | (75,838 | ) | | — |
|
Restricted cash, net | — |
| | (338,561 | ) |
Proceeds from sale of assets | — |
| | 7,444 |
|
Net cash used in investing activities | (1,975,176 | ) | | (2,100,675 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Proceeds from the issuance of common units of EQT Midstream Partners, LP, net of issuance costs | 758,812 |
| | 902,467 |
|
Proceeds from the sale of common units of EQT GP Holdings, LP, net of sale costs | 674,010 |
| | — |
|
Proceeds from issuance of EQT Midstream Partners, LP debt | — |
| | 500,000 |
|
Increase in short-term loans | 561,500 |
| | 450,000 |
|
Decrease in short-term loans | (211,500 | ) | | (450,000 | ) |
Dividends paid | (13,725 | ) | | (13,653 | ) |
Distributions to noncontrolling interests | (85,218 | ) | | (46,155 | ) |
Repayments and retirements of long-term debt | (9,004 | ) | | (6,162 | ) |
Proceeds and excess tax benefits from exercises under employee compensation plans | 35,196 |
| | 42,181 |
|
Cash paid for taxes related to net settlement of share-based incentive awards | (46,492 | ) | | (49,013 | ) |
Debt issuance costs and revolving credit facility origination fees | — |
| | (12,690 | ) |
Repurchase and retirement of common stock | (3,375 | ) | | (32,368 | ) |
Net cash provided by financing activities | 1,660,204 |
| | 1,284,607 |
|
Net change in cash and cash equivalents | 585,246 |
| | 325,877 |
|
Cash and cash equivalents at beginning of period | 1,077,429 |
| | 845,641 |
|
Cash and cash equivalents at end of period | $ | 1,662,675 |
| | $ | 1,171,518 |
|
| | | |
Cash paid during the period for: | |
| | |
|
Interest, net of amount capitalized | $ | 87,661 |
| | $ | 68,698 |
|
Income taxes, net | $ | 100,987 |
| | $ | 127,858 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| (Thousands) |
Assets | |
| | |
|
| | | |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 1,662,675 |
| | $ | 1,077,429 |
|
Accounts receivable (less accumulated provision for doubtful accounts: $2,685 at September 30, 2015 and $5,311 at December 31, 2014) | 147,229 |
| | 306,085 |
|
Derivative instruments, at fair value | 395,264 |
| | 458,460 |
|
Prepaid expenses and other | 57,653 |
| | 62,349 |
|
Total current assets | 2,262,821 |
| | 1,904,323 |
|
| | | |
Property, plant and equipment | 15,364,032 |
| | 13,608,151 |
|
Less: accumulated depreciation and depletion | 4,091,834 |
| | 3,531,337 |
|
Net property, plant and equipment | 11,272,198 |
| | 10,076,814 |
|
| | | |
Other assets | 205,087 |
| | 83,763 |
|
Total assets | $ | 13,740,106 |
| | $ | 12,064,900 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| (Thousands) |
Liabilities and Stockholders’ Equity | |
| | |
|
| | | |
Current liabilities: | |
| | |
|
Current portion of long-term debt | $ | 160,000 |
| | $ | 166,011 |
|
Short-term loans | 350,000 |
| | — |
|
Accounts payable | 265,407 |
| | 444,077 |
|
Other current liabilities | 215,709 |
| | 223,391 |
|
Total current liabilities | 991,116 |
| | 833,479 |
|
| | | |
Long-term debt | 2,818,200 |
| | 2,822,889 |
|
Deferred income taxes | 1,875,552 |
| | 1,750,870 |
|
Other liabilities and credits | 302,965 |
| | 284,599 |
|
Total liabilities | 5,987,833 |
| | 5,691,837 |
|
| | | |
Equity: | |
| | |
|
Stockholders’ equity: | |
| | |
|
Common stock, no par value, authorized 320,000 shares, shares issued: 175,347 at September 30, 2015 and 175,384 at December 31, 2014 | 2,384,312 |
| | 1,895,632 |
|
Treasury stock, shares at cost: 22,807 at September 30, 2015 and 23,788 at December 31, 2014 | (411,701 | ) | | (429,440 | ) |
Retained earnings | 3,121,376 |
| | 2,917,129 |
|
Accumulated other comprehensive income | 77,530 |
| | 199,494 |
|
Total common stockholders’ equity | 5,171,517 |
| | 4,582,815 |
|
Noncontrolling interests in consolidated subsidiaries | 2,580,756 |
| | 1,790,248 |
|
Total equity | 7,752,273 |
| | 6,373,063 |
|
Total liabilities and equity | $ | 13,740,106 |
| | $ | 12,064,900 |
|
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, 2014 | 150,884 |
| | $ | 1,422,105 |
| | $ | 2,567,980 |
| | $ | 44,703 |
| | $ | 829,340 |
| | $ | 4,864,128 |
|
Comprehensive income (net of tax): | | | | | | | | | | | |
Net income | |
| | |
| | 401,669 |
| | |
| | 79,824 |
| | 481,493 |
|
Net change in cash flow hedges: | |
| | |
| | |
| | | | |
| | |
Natural gas, net of tax benefit of $(16,036) | | | | | | | (23,418 | ) | | | | (23,418 | ) |
Interest rate, net of tax expense of $75 | | | | | | | 108 |
| | | | 108 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $340 | | | | | | | 527 |
| | | | 527 |
|
Dividends ($0.09 per share) | |
| | |
| | (13,653 | ) | | |
| | |
| | (13,653 | ) |
Stock-based compensation plans, net | 922 |
| | 40,436 |
| | |
| | |
| | 1,685 |
| | 42,121 |
|
Distributions to noncontrolling interests ($1.47 per EQM common unit) | |
| | |
| | |
| | |
| | (46,155 | ) | | (46,155 | ) |
Issuance of common units of EQT Midstream Partners, LP |
|
| |
|
| |
|
| |
|
| | 902,467 |
| | 902,467 |
|
Repurchase and retirement of common stock | (300 | ) | | (12,759 | ) | | (19,609 | ) | | | | | | (32,368 | ) |
Balance, September 30, 2014 | 151,506 |
| | $ | 1,449,782 |
| | $ | 2,936,387 |
| | $ | 21,920 |
| | $ | 1,767,161 |
| | $ | 6,175,250 |
|
| | | | | | | | | | | |
Balance, January 1, 2015 | 151,596 |
| | $ | 1,466,192 |
| | $ | 2,917,129 |
| | $ | 199,494 |
| | $ | 1,790,248 |
| | $ | 6,373,063 |
|
Comprehensive income (net of tax): | | | | | | | | | | | |
Net income | |
| | |
| | 219,750 |
| | |
| | 165,398 |
| | 385,148 |
|
Net change in cash flow hedges: | |
| | |
| | |
| | | | |
| | |
Natural gas, net of tax benefit of $(81,279) | | | | | | | (122,678 | ) | | | | (122,678 | ) |
Interest rate, net of tax expense of $75 | | | | | | | 108 |
| | | | 108 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $382 | | | | | | | 606 |
| | | | 606 |
|
Dividends ($0.09 per share) | |
| | |
| | (13,725 | ) | | |
| | |
| | (13,725 | ) |
Stock-based compensation plans, net | 982 |
| | 54,238 |
| | |
| | |
| | 796 |
| | 55,034 |
|
Distributions to noncontrolling interests ($1.83 and $0.04739 per common unit from EQM and EQGP, respectively) | |
| | |
| | |
| | |
| | (85,218 | ) | | (85,218 | ) |
Issuance of common units of EQT Midstream Partners, LP | |
| | |
| | |
| | |
| | 758,812 |
| | 758,812 |
|
Sale of common units of EQT GP Holdings, LP
| | | | | | | | | 674,010 |
| | 674,010 |
|
Changes in ownership of consolidated subsidiaries | | | 453,778 |
| | | | | | (723,290 | ) | | (269,512 | ) |
Repurchase and retirement of common stock | (38 | ) | | (1,597 | ) | | (1,778 | ) | | | | | | (3,375 | ) |
Balance, September 30, 2015 | 152,540 |
| | $ | 1,972,611 |
| | $ | 3,121,376 |
| | $ | 77,530 |
| | $ | 2,580,756 |
| | $ | 7,752,273 |
|
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 September 30, 2015 and December 31, 2014, the results of its operations for the three and nine month periods ended September 30, 2015 and 2014 and its cash flows for the nine month periods ended September 30, 2015 and 2014. 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.
Certain previously reported amounts have been reclassified to conform to the current year presentation. The impact of these reclassifications was not material to any of the previously issued financial statements.
The balance sheet at December 31, 2014 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.
Amounts related to discontinued operations included within the Statements of Consolidated Income for the three and nine months ended September 30, 2014 relate to the sale of Equitable Gas Company, LLC and related transactions in 2013.
For further information, refer to the consolidated financial statements and footnotes thereto included in EQT Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 21 of this Quarterly Report on Form 10-Q.
B. Discontinued Operations
On December 17, 2013, the Company and its wholly owned subsidiary Distribution Holdco, LLC (Holdco) completed the disposition of their ownership interests in Equitable Gas Company, LLC (Equitable Gas) and Equitable Homeworks, LLC (Homeworks) to PNG Companies LLC (the Equitable Gas Transaction). Equitable Gas and Homeworks comprised substantially all of the Company’s previously reported Distribution segment. The financial information of Equitable Gas and Homeworks is reflected as discontinued operations for all periods presented in these financial statements.
During the second quarter of 2014, the Company received additional cash proceeds of $7.4 million as a result of post-closing purchase price adjustments for the Equitable Gas Transaction. The Company recognized an additional gain of $3.6 million for the nine months ended September 30, 2014, included in income from discontinued operations, net of tax, in the Statements of Consolidated Income. As consideration for the Equitable Gas Transaction, the Company received total cash proceeds of $748.0 million, select midstream assets (including the Allegheny Valley Connector) with a fair value of $140.9 million and other contractual assets with a fair value of $32.5 million.
Income from discontinued operations before income taxes was $3.1 million for the nine months ended September 30, 2014. Income from discontinued operations was $1.8 million, net of tax of $1.3 million, for the nine months ended September 30, 2014.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
C. EQT GP Holdings, LP
In January 2015, the Company formed EQT GP Holdings, LP (EQGP) (NYSE: EQGP), a Delaware limited partnership, to own partnership interests in EQT Midstream Partners, LP (EQM) (NYSE: EQM). In April 2015, EQT Midstream Investments, LLC, an indirect wholly owned subsidiary of the Company that held EQT’s EQM common units, merged with and into EQGP, and EQT Gathering Holdings, LLC (EQT Gathering Holdings), an indirect wholly owned subsidiary of EQT, contributed 100% of the outstanding limited liability company interests in EQT Midstream Services, LLC, EQM’s general partner, to EQGP. As a result of these restructuring transactions, EQGP owned the following EQM partnership interests as of September 30, 2015, which represent EQGP’s only cash-generating assets: 21,811,643 EQM common units, representing a 29.89% limited partner interest in EQM; 1,443,015 EQM general partner units, representing a 1.98% 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.
On May 15, 2015, EQGP completed an underwritten initial public offering (IPO) of 26,450,000 common units representing limited partner interests in EQGP, which represented 9.9% of EQGP’s outstanding limited partner interests. The Company retained 239,715,000 common units, which represented a 90.1% limited partner interest, and a non-economic general partner interest, in EQGP. EQT Gathering Holdings, as the selling unitholder, sold all of the EQGP common units in the offering, resulting in net proceeds to the Company of approximately $674.0 million after deducting underwriting discounts and structuring fees of approximately $2.6 million. EQGP did not receive any of the proceeds from, or incur any expenses in connection with, EQGP’s IPO.
The Company continues to consolidate the results of EQGP, but records an income tax provision only as to its ownership percentage. The Company records the noncontrolling interest of the EQGP public limited partners in its financial statements. In connection with the May 2015 EQGP IPO, the Company recorded a $321.8 million gain to additional paid-in-capital, a decrease in noncontrolling interest in consolidated subsidiary of $512.9 million and an increase to deferred tax liability of $191.1 million.
On October 20, 2015, the Board of Directors of EQGP’s general partner declared a cash distribution to EQGP’s unitholders for the third quarter of 2015 of $0.104 per common unit, or approximately $27.7 million. The distribution will be paid on November 23, 2015 to unitholders of record, including the Company, at the close of business on November 2, 2015.
Net income attributable to noncontrolling interests (i.e., to the EQGP limited partner interests not owned by the Company and the EQM limited partner interests not owned by EQGP) was $59.4 million and $165.4 million for the three and nine months ended September 30, 2015, respectively. Net income attributable to noncontrolling interests (i.e., to the EQM limited partner interests not owned by the Company) was $33.7 million and $79.8 million for the three and nine months ended September 30, 2014, respectively.
D. 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 consolidated financial statements. The Company records the noncontrolling interest of the EQM public limited partners in its financial statements.
In connection with EQM’s IPO in July 2012, EQM issued 17,339,718 subordinated units of EQM to the Company. On February 17, 2015, the subordinated units converted into common units representing limited partner interests in EQM on a one-for-one basis as a result of satisfaction of certain conditions for termination of the subordination period set forth in EQM’s partnership agreement.
On March 10, 2015, the Company and certain subsidiaries of the Company entered into a contribution and sale agreement (Contribution Agreement) with EQM and EQM Gathering Opco, LLC (EQM Gathering), an indirect wholly owned subsidiary of EQM. Pursuant to the Contribution Agreement, on March 17, 2015, a subsidiary of the Company contributed the Northern West Virginia Marcellus gathering system to EQM Gathering in exchange for total consideration of approximately $925.7 million, consisting of approximately $873.2 million in cash, 511,973 EQM common units and 178,816 EQM general partner units (the NWV Gathering Transaction). EQM Gathering is consolidated by the Company as it is still controlled by the Company. On April 15, 2015, pursuant to the Contribution Agreement, the Company transferred a preferred interest in EQT Energy Supply, LLC, a subsidiary of the Company that generates revenue from services provided to a local distribution company, to EQM in exchange for total consideration of approximately $124.3 million.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
On March 17, 2015, EQM completed an underwritten public offering of 8,250,000 common units. On March 18, 2015, the underwriters exercised their option to purchase 1,237,500 additional common units on the same terms as the offering. EQM received net proceeds of approximately $696.6 million from the offering after deducting the underwriters’ discount and offering expenses of approximately $24.5 million. In connection with the offering, the Company recorded a $122.8 million gain to additional paid-in-capital, a decrease in noncontrolling interest in consolidated subsidiary of $195.8 million and an increase to deferred tax liability of $73.0 million.
On March 30, 2015, the Company assigned 100% of the membership interests in MVP Holdco, LLC (MVP Holdco), an indirect wholly owned subsidiary of the Company that owns a majority interest (the MVP Interest) in Mountain Valley Pipeline, LLC (MVP Joint Venture), to EQM for approximately $54.2 million, which represented EQM’s reimbursement to the Company for 100% of the capital contributions made by the Company to the MVP Joint Venture as of March 30, 2015. 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 an approximately 1.3 Bcf per day firm capacity commitment by the Company. The MVP project is subject to Federal Energy Regulatory Commission (FERC) approval. The voluntary prefiling process with the FERC began in October 2014 and the pipeline is expected 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 the MVP Joint Venture has insufficient equity to finance activities during the construction stage of the MVP. 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. EQM accounted for the MVP Interest beginning on the date it was assumed from EQT as an equity method investment.
During the third quarter of 2015, EQM entered into an equity distribution agreement that established an “At the Market” (ATM) common unit offering program, pursuant to which a group of managers, acting as EQM’s sales agents, may sell EQM common units having an aggregate offering price of up to $750 million (the $750 million ATM Program). During the three months ended September 30, 2015, EQM issued 827,975 common units at an average price per unit of $76.58. EQM received net proceeds of approximately $62.2 million after deducting commissions of approximately $0.7 million and other offering expenses of approximately $0.5 million. EQM used the net proceeds from the sales for general partnership purposes. EQM’s general partner elected not to maintain its general partner ownership percentage at the previous level of 2.0%. In connection with the September offerings, the Company recorded a $9.2 million gain to additional paid-in-capital, a decrease in noncontrolling interest in consolidated subsidiary of $14.6 million and an increase to deferred tax liability of $5.4 million.
On October 20, 2015, the Board of Directors of EQM’s general partner declared a cash distribution to EQM’s unitholders for the third quarter of 2015 of $0.675 per common unit. The cash distribution will be paid on November 13, 2015 to unitholders of record, including EQGP, at the close of business on November 2, 2015. Based on the 71,870,181 EQM common units outstanding on October 22, 2015, the aggregate cash distributions to EQGP would be approximately $28.6 million consisting of: $14.7 million in respective of its limited partner interest, $1.2 million in respect of its general partner interest and $12.7 million in respect of its incentive distribution rights in EQM. The distributions in respect of EQGP's general partner interest and incentive distribution rights in EQM are subject to change if EQM issues additional common units on or prior to the record date for the third quarter 2015 distribution.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
E. 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 two segments, which reflect its lines of business. 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 in the Appalachian and Permian Basins. The EQT Midstream segment’s operations include the natural gas gathering, transmission, storage and marketing activities of the Company, including ownership and operation of 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.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (Thousands) |
Revenues from external customers: | |
| | |
| | |
| | |
|
EQT Production | $ | 381,538 |
| | $ | 411,687 |
| | $ | 1,127,319 |
| | $ | 1,297,593 |
|
EQT Midstream | 198,579 |
| | 173,856 |
| | 599,235 |
| | 502,427 |
|
Less intersegment revenues, net (a) | (3,102 | ) | | (6,820 | ) | | (7,592 | ) | | (33,504 | ) |
Total | $ | 577,015 |
| | $ | 578,723 |
| | $ | 1,718,962 |
| | $ | 1,766,516 |
|
| | | | | | | |
Operating income: | |
| | |
| | |
| | |
|
EQT Production (b) | $ | 56,360 |
| | $ | 140,036 |
| | $ | 175,317 |
| | $ | 561,930 |
|
EQT Midstream (b) | 113,010 |
| | 93,600 |
| | 350,942 |
| | 265,196 |
|
Unallocated expenses (c) | 685 |
| | (2,133 | ) | | (8,411 | ) | | (14,061 | ) |
Total operating income | $ | 170,055 |
| | $ | 231,503 |
| | $ | 517,848 |
| | $ | 813,065 |
|
| |
(a) | Eliminates intercompany natural gas sales from EQT Production to EQT Midstream. |
| |
(b) | Gains on sales / exchanges of assets of $31.0 million and $6.8 million are included in EQT Production and EQT Midstream operating income, respectively, for the nine months ended September 30, 2014. |
| |
(c) | Unallocated expenses consist primarily of incentive compensation expense and administrative costs. |
Reconciliation of operating income to income from continuing operations: |
| | | | | | | | | | | | | | | |
Other income | 2,661 |
| | 1,004 |
| | 6,289 |
| | 6,134 |
|
Interest expense | 36,547 |
| | 35,717 |
| | 110,596 |
| | 99,558 |
|
Income taxes | 35,936 |
| | 64,496 |
| | 28,393 |
| | 239,920 |
|
Income from continuing operations | $ | 100,233 |
| | $ | 132,294 |
| | $ | 385,148 |
| | $ | 479,721 |
|
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| As of September 30, 2015 | | As of December 31, 2014 |
| (Thousands) |
Segment assets: | |
| | |
|
EQT Production | $ | 8,842,653 |
| | $ | 8,153,199 |
|
EQT Midstream | 3,134,036 |
| | 2,709,052 |
|
Total operating segments | 11,976,689 |
| | 10,862,251 |
|
Headquarters assets, including cash and short-term investments | 1,763,417 |
| | 1,202,649 |
|
Total assets | $ | 13,740,106 |
| | $ | 12,064,900 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (Thousands) |
Depreciation, depletion and amortization: | |
| | |
| | |
| | |
|
EQT Production | $ | 184,277 |
| | $ | 154,031 |
| | $ | 529,071 |
| | $ | 421,521 |
|
EQT Midstream | 23,830 |
| | 21,709 |
| | 70,417 |
| | 63,848 |
|
Other | 120 |
| | (162 | ) | | 303 |
| | (461 | ) |
Total | $ | 208,227 |
| | $ | 175,578 |
| | $ | 599,791 |
| | $ | 484,908 |
|
| | | | | | | |
Expenditures for segment assets (d): | |
| | |
| | |
| | |
|
EQT Production (e) | $ | 451,358 |
| | $ | 511,971 |
| | $ | 1,453,647 |
| | $ | 1,855,518 |
|
EQT Midstream | 130,902 |
| | 136,589 |
| | 368,019 |
| | 333,813 |
|
Other | 437 |
| | 805 |
| | 2,046 |
| | 2,167 |
|
Total | $ | 582,697 |
| | $ | 649,365 |
| | $ | 1,823,712 |
| | $ | 2,191,498 |
|
| |
(d) | Includes non-cash capital expenditures of $5.9 million and $5.6 million for the three months ended September 30, 2015 and 2014, respectively, and $18.5 million and $13.7 million for the nine months ended September 30, 2015 and 2014, respectively, for certain labor overhead costs including a portion of non-cash stock-based compensation expense. The Company also had accrued capital expenditures which had not yet been paid of $164.1 million and $233.3 million as of September 30, 2015 and 2014, respectively. |
(e) Includes $159.0 million of cash capital expenditures and $353.1 million of non-cash capital expenditures for the exchange of assets with Range Resources Corporation (Range) (described in Note L) for the nine months ended September 30, 2014. Expenditures for segment assets in the EQT Production segment include $41.8 million and $37.2 million for property acquisitions during the three months ended September 30, 2015 and 2014, respectively, and $180.9 million and $646.9 million for property acquisitions during the nine months ended September 30, 2015 and 2014, respectively.
F. 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 primarily placed with financial institutions and the creditworthiness of all counterparties is regularly monitored. The Company also uses exchange traded futures contracts that obligate the Company to buy or sell a designated commodity at a future date for a specified price and quantity at a specified location. 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 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 call options.
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. The assets are reported as derivative instruments at fair value in the Condensed Consolidated Balance Sheets and liabilities are reported within other current liabilities in the Condensed Consolidated Balance Sheets. 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.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The accounting for the changes in fair value of the Company’s derivative instruments depends on the use of the derivative instruments. To the extent that a derivative instrument had been designated and qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive income (OCI), net of tax, and is subsequently reclassified into the Statements of Consolidated Income in the same period or periods during which the forecasted transaction affects earnings. In conjunction with the exchange of assets with Range that closed in June 2014 (see Note L), the Company de-designated certain derivative instruments that were previously designated as cash flow hedges because it was probable that the forecasted transactions would not occur, resulting in a pre-tax gain of $28.0 million recorded within gain on sale / exchange of assets in the Statements of Consolidated Income for the nine months ended September 30, 2014. Any subsequent changes in fair value of these derivative instruments are recognized within operating revenues in the Statements of Consolidated Income each period.
Historically, 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 equity production and forecasted natural gas purchases and sales were designated and qualified as cash flow hedges. As of September 30, 2015 and December 31, 2014, the Company deferred net gains of $94.4 million and $217.1 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. Effective December 31, 2014, the Company elected to de-designate all cash flows hedges and discontinue the use of cash flow hedge accounting. As of September 30, 2015 and December 31, 2014, the forecasted transactions remained probable of occurring and as such, the amounts in accumulated 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 Company estimates that approximately $73.8 million of net gains on its derivative commodity instruments reflected in accumulated OCI, net of tax, as of September 30, 2015 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions. As a result of the discontinuance of cash flow hedge accounting, beginning in 2015, all changes in fair value of the Company’s derivative instruments are recognized in the Statements of Consolidated Income.
The Company also enters into fixed price natural gas sales agreements that are satisfied by physical delivery. These physical commodity contracts qualify for the normal purchases and sales exception and are not subject to derivative instrument accounting.
Exchange-traded instruments are generally settled with offsetting positions. 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 September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Commodity derivatives designated as cash flow hedges | (Thousands) |
Amount of gain (loss) recognized in OCI (effective portion), net of tax | $ | — |
| | $ | 23,160 |
| | $ | — |
| | $ | (29,489 | ) |
Amount of gain reclassified from accumulated OCI, net of tax, into gain on sale / exchange of assets due to forecasted transactions probable to not occur | — |
| | — |
| | — |
| | 16,735 |
|
Amount of gain (loss) reclassified from accumulated OCI, net of tax, into operating revenues (effective portion) | 39,346 |
| | 5,340 |
| | 122,678 |
| | (22,806 | ) |
Amount of gain recognized in operating revenues (ineffective portion) (a) | — |
| | 34,348 |
| | — |
| | 13,075 |
|
| | | | | | | |
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 | ) | | $ | (108 | ) | | $ | (108 | ) |
| | | | | | | |
Derivatives not designated as hedging instruments | |
| | |
| | |
| | |
|
Amount of gain (loss) recognized in gain (loss) on derivatives not designated as hedges | $ | 161,263 |
| | $ | 1,821 |
| | $ | 209,114 |
| | $ | (16,058 | ) |
(a) No amounts were excluded from effectiveness testing of cash flow hedges.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The absolute quantities of the Company’s derivative commodity instruments totaled 585 Bcf and 624 Bcf as of September 30, 2015 and December 31, 2014, respectively, and were primarily related to natural gas swaps and collars. The open positions at September 30, 2015 and December 31, 2014 had maturities extending through December 2018.
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. Margin deposits remitted to financial counterparties or received from financial counterparties related to OTC natural gas swap agreements and options and any funds remitted to or deposits received from the Company’s brokers are recorded on a gross basis. 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 September 30, 2015 and December 31, 2014.
|
| | | | | | | | | | | | | | | | |
As of September 30, 2015 | | 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 | | $ | 395,264 |
| | $ | (15,411 | ) | | $ | — |
| | $ | 379,853 |
|
| | | | | | | | |
Liability derivatives: | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value (included in other current liabilities) | | $ | 26,057 |
| | $ | (15,411 | ) | | $ | — |
| | $ | 10,646 |
|
|
| | | | | | | | | | | | | | | | |
As of December 31, 2014 | | 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 | | $ | 458,460 |
| | $ | (22,810 | ) | | $ | — |
| | $ | 435,650 |
|
| | | | | | | | |
Liability derivatives: | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value (included in other current liabilities) | | $ | 22,942 |
| | $ | (22,810 | ) | | $ | (132 | ) | | $ | — |
|
Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings by Standard & Poor’s Ratings Services (S&P) or Moody’s Investors Services (Moody’s) are lowered below investment grade, additional collateral may be required to be deposited with the counterparty. The additional collateral can be up to 100% of the derivative liability. As of September 30, 2015, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $15.7 million, for which the Company had no collateral posted on September 30, 2015. If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade on September 30, 2015, the Company would not have been required to post any additional collateral under the agreements with the respective counterparties. 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 September 30, 2015. 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. Having a non-investment grade rating may result in greater borrowing costs and collateral requirements than would be available if all credit ratings were investment grade.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
G. 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 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 included in Level 1 include the Company’s futures contracts. Assets and liabilities in Level 2 primarily include the Company’s swap and collar agreements. There were no transfers between Level 1 and 2 during the periods presented. There were no transfers into or out of Level 3 during the periods presented. The Company recognizes transfers between Levels as of the actual date of the event or change in circumstances that caused the transfer.
The fair value of the assets and liabilities included in Level 2 is based on standard industry income approach models that use significant observable inputs, including New York Mercantile Exchange (NYMEX) forward curves, LIBOR-based discount rates and basis forward curves. The Company’s collars, swaptions and options 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 Company uses NYMEX forward curves to value futures, commodity swaps, collars, swaptions and options. The NYMEX 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 September 30, 2015 | | 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 | | $ | 395,264 |
| | $ | — |
| | $ | 395,264 |
| | $ | — |
|
| | | | | | | | |
Liabilities | | |
| | |
| | | | |
|
Derivative instruments, at fair value (included in other current liabilities) | | $ | 26,057 |
| | $ | — |
| | $ | 26,057 |
| | $ | — |
|
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | | | Fair value measurements at reporting date using |
Description | | As of December 31, 2014 | | 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 | | $ | 458,460 |
| | $ | — |
| | $ | 458,460 |
| | $ | — |
|
| | | | | | | | |
Liabilities | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value (included in other current liabilities) | | $ | 22,942 |
| | $ | 132 |
| | $ | 22,810 |
| | $ | — |
|
The carrying value of cash and cash equivalents, accounts receivable, amounts due to/from related parties and accounts payable approximate fair value due to the short maturity of the instruments. The carrying value of short-term loans under EQM’s credit facility approximates fair value as the interest rates are based on prevailing market rates.
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 long-term debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.1 billion and $3.3 billion at September 30, 2015 and December 31, 2014, respectively. The carrying value of long-term debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.0 billion at September 30, 2015 and December 31, 2014.
H. Income Taxes
The Company estimates an annual effective income tax rate based on projected results for the year and applies this rate to income before taxes to calculate income tax expense. All of EQGP’s earnings are included in the Company’s net income. However, the Company is not required to record income tax expense with respect to the portion of EQGP’s earnings allocated to the noncontrolling public limited partners of EQGP and EQM, which reduces the Company’s effective tax rate. Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period.
The Company’s effective income tax rate for the nine months ended September 30, 2015 was 6.9%, compared to 33.3% for the nine months ended September 30, 2014. Excluding the impact of recent Internal Revenue Service (IRS) guidance received by the Company (discussed below), the effective income tax rate for the nine months ended September 30, 2015 was 15.5%. The decrease in the effective income tax rate was primarily attributable to an increase in income allocated to the noncontrolling limited partners of EQGP and EQM, a decrease in state taxes in 2015 as a result of lower pre-tax income on state tax paying entities and increased tax credits recorded in 2015. The increase to noncontrolling limited partners income was primarily the result of higher net income at EQM and increased noncontrolling interests as a result of EQM’s March 2015 underwritten public offering of common units, issuances of EQM common units under the $750 million ATM Program and EQGP’s May 2015 IPO.
The Company’s income tax expense was lower for the nine months ended September 30, 2015 due to a realized $35.5 million tax benefit in connection with recent IRS guidance received by the Company regarding the Company’s sale of Equitable Gas Company, LLC, a regulated entity, in 2013. The transaction included a partial like-kind exchange of assets that resulted in tax deferral for the Company. However, in order to be in compliance with the normalization rules of the Internal Revenue Code, the IRS guidance held that the deferred tax liability associated with the exchanged regulatory assets should not be considered for ratemaking purposes. As a result, during the second quarter of 2015, the Company recorded a regulatory asset equal to the taxes deferred from the exchange and an associated income tax benefit. The regulatory asset and deferred taxes will be reversed when the assets are disposed of in a taxable transaction such as a sale of assets or amortized over the 32-year remaining life of the assets received in the exchange, in either event increasing tax expense at that time.
There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended September 30, 2015. The Company believes that it is appropriately reserved for uncertain tax positions.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
I. Revolving Credit Facilities
The Company has a $1.5 billion credit facility that expires in February 2019. The Company had no loans or letters of credit outstanding under its revolving credit facility as of September 30, 2015 or December 31, 2014 or at any time during the three and nine months ended September 30, 2015 and 2014.
EQM has a $750 million credit facility that expires in February 2019, and EQM had $350.0 million of loans and no letters of credit outstanding under its revolving credit facility as of September 30, 2015. As of December 31, 2014, EQM had no loans or letters of credit outstanding under its revolving credit facility. The maximum amount of outstanding short-term loans under EQM’s revolving credit facility at any time during the three and nine months ended September 30, 2015 was $404 million. The maximum amount of outstanding short-term loans under EQM’s revolving credit facility at any time during the three and nine months ended September 30, 2014 was $330 million and $450 million, respectively. The average daily balance of loans outstanding under EQM’s credit facility was approximately $357 million and $241 million during the three and nine months ended September 30, 2015, respectively. The average daily balance of loans outstanding under EQM’s credit facility was approximately $133 million and $159 million during the three and nine months ended September 30, 2014, respectively. Interest was incurred on the loans at a weighted average annual interest rate of approximately 1.7% for the three and nine months ended September 30, 2015 and 2014.
The Company incurred commitment fees averaging approximately 6 basis points for each of the three months ended September 30, 2015 and 2014, and approximately 17 basis points for each of the nine months ended September 30, 2015 and 2014, to maintain credit availability under its revolving credit facility. EQM incurred commitment fees averaging approximately 6 basis points for each of the three months ended September 30, 2015 and 2014, and 17 basis points and 18 basis points for the nine months ended September 30, 2015 and 2014, respectively, to maintain credit availability under its revolving credit facility.
J. Earnings Per Share
Potentially dilutive securities, consisting of options and restricted stock awards, which were included in the calculation of diluted earnings per share, totaled 302,550 and 772,873 for the three months ended September 30, 2015 and 2014, respectively, and 462,317 and 935,027 for the nine months ended September 30, 2015 and 2014, respectively. Options to purchase common stock which were excluded from potentially dilutive securities because they were anti-dilutive totaled 291,700 and 133,500 for the three and nine months ended September 30, 2015, respectively. No options to purchase common stock were excluded from potentially dilutive securities because they were anti-dilutive for the three and nine months ended September 30, 2014. 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.
K. 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 September 30, 2015 |
| 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 July 1, 2015 | $ | 133,789 |
| | $ | (915 | ) | | $ | (16,236 | ) | | $ | 116,638 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (39,346 | ) | (a) | 36 |
| (a) | 202 |
| (b) | (39,108 | ) |
Accumulated OCI (loss), net of tax, as of September 30, 2015 | $ | 94,443 |
| | $ | (879 | ) | | $ | (16,034 | ) | | $ | 77,530 |
|
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2014 |
| 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 July 1, 2014 | $ | 20,461 |
| | $ | (1,060 | ) | | $ | (15,512 | ) | | $ | 3,889 |
|
Gains recognized in accumulated OCI, net of tax | 23,160 |
| (a) | — |
| | — |
| | 23,160 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (5,340 | ) | (a) | 36 |
| (a) | 175 |
| (b) | (5,129 | ) |
Change in accumulated OCI, net of tax | 17,820 |
| | 36 |
| | 175 |
| | 18,031 |
|
Accumulated OCI (loss), net of tax, as of September 30, 2014 | $ | 38,281 |
| | $ | (1,024 | ) | | $ | (15,337 | ) | | $ | 21,920 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2015 |
| 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 (loss), net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of January 1, 2015 | $ | 217,121 |
| | $ | (987 | ) | | $ | (16,640 | ) | | $ | 199,494 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (122,678 | ) | (a) | 108 |
| (a) | 606 |
| (b) | (121,964 | ) |
Accumulated OCI (loss), net of tax, as of September 30, 2015 | $ | 94,443 |
| | $ | (879 | ) | | $ | (16,034 | ) | | $ | 77,530 |
|
| | | | | | | |
| Nine Months Ended September 30, 2014 |
| 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 (loss), net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of January 1, 2014 | $ | 61,699 |
| | $ | (1,132 | ) | | $ | (15,864 | ) | | $ | 44,703 |
|
Losses recognized in accumulated OCI, net of tax | (29,489 | ) | (a) | — |
| | — |
| | (29,489 | ) |
Gain reclassified from accumulated OCI, net of tax, into gain on sale / exchange of assets | (16,735 | ) | (a) | — |
| | — |
| | (16,735 | ) |
Losses reclassified from accumulated OCI, net of tax | 22,806 |
| (a) | 108 |
| (a) | 527 |
| (b) | 23,441 |
|
Change in accumulated OCI (loss), net of tax | (23,418 | ) | | 108 |
| | 527 |
| | (22,783 | ) |
Accumulated OCI (loss), net of tax, as of September 30, 2014 | $ | 38,281 |
| | $ | (1,024 | ) | | $ | (15,337 | ) | | $ | 21,920 |
|
(a) See Note F for additional information.
(b) This accumulated OCI reclassification 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 13 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
L. Sale and Exchange of Properties
In June 2014, the Company exchanged assets with Range. The Company received approximately 73,000 net acres and approximately 900 producing wells, most of which are vertical wells, in the Permian Basin of Texas. In exchange, Range received approximately 138,000 net acres in the Nora field of Virginia (Nora), the Company’s working interest in approximately 2,000 producing vertical wells in Nora, the Company’s 50% ownership interest in Nora Gathering, LLC (Nora LLC), which owned the supporting gathering system in Nora, and $167.3 million in cash. The Company previously recorded its 50% ownership interest in Nora LLC as a nonconsolidated investment in its consolidated financial statements.
The fair value of the assets exchanged by the Company was approximately $516.5 million. Fair value of $318.3 million was allocated to the acquired acreage and $198.2 million was allocated to the acquired wells. The Company recorded a pre-tax gain of $34.1 million, which is included in gain on sale / exchange of assets in the Statements of Consolidated Income. The gain on sale / exchange of assets includes a $28.0 million pre-tax gain related to the de-designation of certain derivative instruments that were previously designated as cash flow hedges because it was probable that the forecasted transactions would not occur.
As the asset exchange qualified as a business combination under United States GAAP, the fair value of the acquired assets was determined using a discounted cash flow model under the market approach. Significant unobservable inputs used in the analysis included the determination of estimated developed reserves, NYMEX forward pricing and comparable sales transactions, which classify the acquired assets as a Level 3 measurement.
M. Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. ASU No. 2014-09 will supersede most of the existing revenue recognition requirements in United States GAAP when it becomes effective and is required to be adopted using one of two retrospective application methods. 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 2014-09 for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted as of the original effective date for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related disclosures.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation. The standard changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The ASU will be effective for public entities for annual reporting periods beginning after December 15, 2015, including interim periods therein. The Company has evaluated this standard and determined that the adoption of it will have no significant impact on reported results.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest. The standard requires an entity to present the debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest. The standard added Securities and Exchange Commission (SEC) paragraphs to clarify the applicability of ASU No. 2015-03 to debt issuance costs related to line-of-credit arrangements. The guidance in ASU No. 2015-03 is effective for public entities for annual reporting periods beginning after December 15, 2015, including interim periods therein. Early adoption is permitted. The Company is currently evaluating the timing of adoption and impact this standard will have on its financial statements and related disclosures.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The ASU adds guidance that will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The ASU will be effective for annual reporting periods beginning after December 15, 2015. 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
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 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 transmission and gathering expansion projects); the timing, cost, capacity and expected interconnects with facilities and pipelines of the Ohio Valley Connector (OVC) and Mountain Valley Pipeline (MVP) projects; the ultimate terms, partners and structure of the MVP joint venture; technology (including drilling techniques); monetization transactions, including midstream asset sales (dropdowns) to EQT Midstream Partners, LP (EQM) and other asset sales, joint ventures or other transactions involving the Company’s assets; natural gas prices and changes in basis; reserves; projected capital expenditures; 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, 2014.
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 September 30, 2015 vs. Three Months Ended September 30, 2014
Income from continuing operations attributable to EQT Corporation for the three months ended September 30, 2015 was $40.8 million, $0.27 per diluted share, compared with $98.6 million, $0.65 per diluted share, for the three months ended September 30, 2014. The $57.8 million decrease in income from continuing operations attributable to EQT Corporation between periods was primarily attributable to a 42% decrease in the average realized price for production sales volumes, higher operating expenses and higher net income attributable to noncontrolling interests, partially offset by increased gains on derivatives not designated as hedges, increased production sales volumes, lower income tax expense and increased gathering and transmission firm reservation revenues.
The average realized price to EQT Corporation for production sales volumes was $2.12 per Mcfe for the three months ended September 30, 2015 compared to $3.63 per Mcfe for the three months ended September 30, 2014. The decrease in the average realized price was driven by lower New York Mercantile Exchange (NYMEX) natural gas prices net of cash settled derivatives, a lower average differential and lower natural gas liquids (NGLs) prices.
The average NYMEX natural gas index price was $2.77 per MMBtu during the third quarter of 2015, 32% lower than the average index price of $4.06 per MMBtu during the third quarter of 2014. In addition, the average differential decreased $0.13 per Mcf primarily due to lower recoveries. Recoveries represent differences in natural gas prices between the Appalachian Basin and the sales points of other markets reached by utilizing transportation capacity, differences in natural gas prices between Appalachian Basin and fixed price sales contracts, term sales with fixed differentials to NYMEX and other marketing activity, including the resale of unused pipeline capacity. The average NGL price was $8.10 per barrel for the three months ended September 30, 2015 compared to $42.27 per barrel for the three months ended September 30, 2014.
Net income attributable to noncontrolling interests of EQT GP Holdings, LP (EQGP) and EQM was $59.4 million for the three months ended September 30, 2015 compared to $33.7 million for the three months ended September 30, 2014. The $25.7 million increase was primarily the result of increased net income at EQM and increased noncontrolling interests as a result of EQM’s March 2015 public offering of common units, EQGP’s May 2015 initial public offering (IPO), and EQM's September 2015 issuances of common units in connection with the $750 million ATM Program (as defined in Note D to the Condensed Consolidated Financial Statements). In March 2015, EQM completed a public offering of additional EQM common units in connection with the NWV Gathering Transaction (as defined in Note D to the Condensed Consolidated Financial Statements). In May 2015, EQGP completed an IPO of 26,450,000 common units representing limited partner interests in EQGP, which represented 9.9% of EQGP’s outstanding limited partner interests. The Company retained a 90.1% limited partner interest and a non-economic general partner interest in EQGP (as described in Note C to the Condensed Consolidated Financial Statements). During September 2015, EQM issued 827,975 common units pursuant to the $750 million ATM Program.
Income tax expense was $35.9 million for the three months ended September 30, 2015, compared to income tax expense of $64.5 million for the three months ended September 30, 2014. The Company's effective income tax rate was 26.4% and 32.8% for the three months ended September 30, 2015 and 2014, respectively. The decrease in the effective income tax rate was primarily attributable to an increase in income allocated to the noncontrolling limited partners of EQGP and EQM, a decrease in EQT Production’s operating income, a decrease in state taxes in 2015 as a result of lower pre-tax income on state tax paying entities and increased tax credits recorded in 2015. The Company’s effective income tax rate was reduced for both periods as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of EQGP earnings, but is not required to record an income tax provision with respect to the portion of the earnings allocated to EQGP and EQM noncontrolling public limited partners. Earnings allocated to the EQGP and EQM noncontrolling public limited partners increased in the third quarter 2015 compared to the third quarter 2014 due to higher net income at EQM and increased noncontrolling interests as a result of EQM’s March 2015 public offering of common units, EQGP’s May 2015 IPO and issuances of EQM common units under the $750 million ATM Program.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Nine Months Ended September 30, 2015 vs. Nine Months Ended September 30, 2014
Income from continuing operations attributable to EQT Corporation for the nine months ended September 30, 2015 was $219.8 million, $1.44 per diluted share, compared with $399.9 million, $2.62 per diluted share, for the nine months ended September 30, 2014. The $180.1 million decrease in income from continuing operations attributable to EQT Corporation between periods was primarily attributable to a 37% decrease in the average realized price for production sales volumes, higher operating expenses and higher net income attributable to noncontrolling interests, partially offset by increased gains on derivatives not designated as hedges, lower income tax expense, increased production sales volumes and increased gathering and transmission firm reservation revenues.
The average realized price to EQT Corporation for production sales volumes was $2.71 per Mcfe for the nine months ended September 30, 2015 compared to $4.32 per Mcfe for the nine months ended September 30, 2014. The decrease in the average realized price was driven by lower NYMEX natural gas prices net of cash settled derivatives, a lower average differential and lower NGL prices.
The average NYMEX natural gas index price was $2.80 per MMBtu during the nine months ended September 30, 2015, 38% lower than the average index price of $4.55 per MMBtu during the nine months ended September 30, 2014. In addition, the average differential decreased $0.25 per Mcf primarily due to lower Appalachian Basin basis, which was partially offset by increased recoveries. The average NGL price was $15.17 per barrel for the nine months ended September 30, 2015 compared to $46.46 per barrel for the nine months ended September 30, 2014.
Net income attributable to noncontrolling interests of EQGP and EQM was $165.4 million for the nine months ended September 30, 2015 compared to $79.8 million for the nine months ended September 30, 2014. The $85.6 million increase was primarily the result of increased net income at EQM and increased noncontrolling interests as a result of EQM’s March 2015 public offering of common units, EQGP’s May 2015 IPO, and EQM's September 2015 issuances of common units in connection with the $750 million ATM Program. Additionally, during May of 2014, EQM completed a public offering of common units in connection with its acquisition of the Jupiter gathering system from the Company.
Interest expense increased $11.0 million during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily as a result of EQM’s 4.00% Senior Notes due 2024 issued during the third quarter of 2014.
Income tax expense decreased $211.5 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily as a result of lower pre-tax income and a realized $35.5 million tax benefit in connection with recent Internal Revenue Service (IRS) guidance received by the Company in connection with the Company’s sale of Equitable Gas Company, LLC in 2013 (discussed below). The Company’s effective income tax rate decreased to 6.9% in 2015 from 33.3% in 2014. The decrease in the effective income tax rate from the nine months of 2014 is primarily attributable to the effects of the IRS guidance, an increase in earnings allocated to noncontrolling limited partners of EQGP and EQM, a decrease in EQT Production’s operating income, a decrease in state taxes in 2015 as a result of lower pre-tax income on state paying entities and increased tax credits in 2015. The overall rate was lower for both periods as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of EQGP earnings, but is not required to record an income tax provision with respect to the portion of the earnings allocated to EQM and EQGP noncontrolling public limited partners. Earnings allocated to the EQM and EQGP noncontrolling public limited partners increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to higher net income at EQM and increased noncontrolling interests as a result of EQM’s March 2015 public offering of common units, EQGP’s May 2015 IPO and issuances of EQM common units under the $750 million ATM Program.
For the nine months ended September 30, 2015, the Company realized a $35.5 million tax benefit in connection with recent IRS guidance received by the Company regarding the Company’s sale of Equitable Gas Company, LLC, a regulated entity, in 2013. The transaction included a partial like-kind exchange of assets that resulted in tax deferral for the Company. However, in order to be in compliance with the normalization rules of the Internal Revenue Code, the IRS guidance held that the deferred tax liability associated with the exchanged regulatory assets should not be considered for ratemaking purposes. As a result, during the second quarter of 2015, the Company recorded a regulatory asset equal to the taxes deferred from the exchange and an associated income tax benefit. The regulatory asset and deferred taxes will be reversed when the assets are disposed of in a taxable transaction such as a sale of assets or amortized over the 32-year remaining life of the assets received in the exchange, in either event increasing tax expense at that time.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
See “Business Segment Results of Operations” for a discussion of production sales volumes and gathering and transmission firm reservation revenues.
See “Investing Activities” under the caption “Capital Resources and Liquidity” for a discussion of capital expenditures.
Consolidated Operational Data
Revenues earned by the Company from the sale of natural gas, NGLs and oil are split between EQT Production and EQT Midstream. The split is reflected in the calculation of EQT Production’s average realized price. The following operational information presents detailed gross liquid and natural gas operational information as well as midstream deductions to assist in the understanding of the Company’s consolidated operations.
The operational information in the table below presents an average realized price ($/Mcfe) to EQT Production and EQT Corporation, which is based on EQT Production adjusted net operating revenues, a non-GAAP supplemental financial measure. EQT Production adjusted net 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 net operating revenues should not be considered as an alternative to EQT Corporation total operating revenues as reported in the Statements of Consolidated Income, the most directly comparable GAAP financial measure. See “Reconciliation of Non-GAAP Measures” for a reconciliation of EQT Production adjusted net 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 September 30, | | Nine Months Ended September 30, |
in thousands (unless noted) | | 2015 | | 2014 | | % | | 2015 | | 2014 | | % |
LIQUIDS | | | | | | |
| | | | | | |
|
NGLs: | | | | | | |
| | | | | | |
|
Sales volume (MMcfe) (a) | | 13,827 |
| | 12,047 |
| | 14.8 |
| | 39,552 |
| | 27,768 |
| | 42.4 |
|
Sales volume (Mbbls) | | 2,304 |
| | 2,008 |
| | 14.7 |
| | 6,592 |
| | 4,628 |
| | 42.4 |
|
Gross price ($/Bbl) | | $ | 8.10 |
| | $ | 42.27 |
| | (80.8 | ) | | $ | 15.17 |
| | $ | 46.46 |
| | (67.3 | ) |
Gross NGL sales | | $ | 18,665 |
| | $ | 84,868 |
| | (78.0 | ) | | $ | 99,983 |
| | $ | 215,016 |
| | (53.5 | ) |
Third-party processing | | (19,970 | ) | | (17,883 | ) | | 11.7 |
| | (57,084 | ) | | (45,456 | ) | | 25.6 |
|
Net NGL sales | | $ | (1,305 | ) | | $ | 66,985 |
| | (101.9 | ) | | $ | 42,899 |
| | $ | 169,560 |
| | (74.7 | ) |
Oil: | | | | | | |
| | | | | | |
|
Sales volume (MMcfe) (a) | | 1,102 |
| | 933 |
| | 18.1 |
| | 3,250 |
| | 1,632 |
| | 99.1 |
|
Sales volume (Mbbls) | | 184 |
| | 155 |
| | 18.7 |
| | 542 |
| | 272 |
| | 99.3 |
|
Net price ($/Bbl) | | $ | 39.13 |
| | $ | 87.91 |
| | (55.5 | ) | | $ | 41.02 |
| | $ | 87.46 |
| | (53.1 | ) |
Net oil sales | | $ | 7,187 |
| | $ | 13,668 |
| | (47.4 | ) | | $ | 22,221 |
| | $ | 23,785 |
| | (6.6 | ) |
| | | | | | | | | | | | |
Net liquids sales | | $ | 5,882 |
| | $ | 80,653 |
| | (92.7 | ) | | $ | 65,120 |
| | $ | 193,345 |
| | (66.3 | ) |
| | | | | | | | | | | | |
NATURAL GAS | | | | | | |
| | | | | | |
|
Sales volume (MMcf) | | 141,367 |
| | 110,362 |
| | 28.1 |
| | 405,743 |
| | 310,201 |
| | 30.8 |
|
NYMEX price ($/MMBtu) (b) | | $ | 2.77 |
| | $ | 4.05 |
| | (31.6 | ) | | $ | 2.80 |
| | $ | 4.52 |
| | (38.1 | ) |
Btu uplift | | $ | 0.28 |
| | $ | 0.41 |
| | (31.7 | ) | | $ | 0.26 |
| | $ | 0.38 |
| | (31.6 | ) |
Gross natural gas price ($/Mcf) | | $ | 3.05 |
| | $ | 4.46 |
| | (31.6 | ) | | $ | 3.06 |
| | $ | 4.90 |
| | (37.6 | ) |
| | | | | | | | | | | | |
Basis ($/Mcf) | | $ | (1.54 | ) | | $ | (1.54 | ) | | — |
| | $ | (1.26 | ) | | $ | (0.90 | ) | | 40.0 |
|
Recoveries ($/Mcf) (c) | | 0.64 |
| | 0.80 |
| | (20.0 | ) | | 0.88 |
| | 0.79 |
| | 11.4 |
|
Cash settled basis swaps (not designated as hedges) ($/Mcf) | | 0.01 |
| | (0.02 | ) | | 150.0 |
| | (0.02 | ) | | (0.04 | ) | | (50.0 | ) |
Average differential ($/Mcf) | | $ | (0.89 | ) | | $ | (0.76 | ) | | 17.1 |
| | $ | (0.40 | ) | | $ | (0.15 | ) | | 166.7 |
|
| | | | | | | | | | | | |
Average adjusted price - unhedged ($/Mcf) | | $ | 2.16 |
| | $ | 3.70 |
| | (41.6 | ) | | $ | 2.66 |
| | $ | 4.75 |
| | (44.0 | ) |
Cash settled derivatives (cash flow hedges) ($/Mcf) | | 0.46 |
| | 0.08 |
| | 475.0 |
| | 0.50 |
| | (0.12 | ) | | 516.7 |
|
Cash settled derivatives (not designated as hedges) ($/Mcf) | | 0.21 |
| | 0.05 |
| | 320.0 |
| | 0.19 |
| | 0.02 |
| | 850.0 |
|
Average adjusted price, including cash settled derivatives ($/Mcf) | | $ | 2.83 |
| | $ | 3.83 |
| | (26.1 | ) | | $ | 3.35 |
| | $ | 4.65 |
| | (28.0 | ) |
| | | | | | | | | | | | |
Net natural gas sales, including cash settled derivatives | | $ | 401,382 |
| |