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 SEPTEMBER 30, 2016 |
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, 2016, 172,758 (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 September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Thousands, except per share amounts) |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 403,939 |
| | $ | 365,940 |
| | $ | 1,072,898 |
| | $ | 1,326,104 |
|
Pipeline and marketing services | 59,431 |
| | 56,775 |
| | 188,770 |
| | 203,164 |
|
Gain (loss) on derivatives not designated as hedges | 93,356 |
| | 161,263 |
| | (32,342 | ) | | 209,114 |
|
Total operating revenues | 556,726 |
| | 583,978 |
| | 1,229,326 |
| | 1,738,382 |
|
| | | | | | | |
Operating expenses: | |
| | |
| | |
| | |
|
Transportation and processing | 89,883 |
| | 71,996 |
| | 251,283 |
| | 207,129 |
|
Operation and maintenance | 31,185 |
| | 32,385 |
| | 91,921 |
| | 92,693 |
|
Production | 26,058 |
| | 32,505 |
| | 85,998 |
| | 95,353 |
|
Exploration | 2,671 |
| | 8,177 |
| | 9,385 |
| | 32,153 |
|
Selling, general and administrative | 61,384 |
| | 60,633 |
| | 196,625 |
| | 189,163 |
|
Depreciation, depletion and amortization | 237,088 |
| | 208,227 |
| | 682,948 |
| | 599,791 |
|
Impairment of long-lived assets | — |
| | — |
| | — |
| | 4,252 |
|
Total operating expenses | 448,269 |
| | 413,923 |
| | 1,318,160 |
| | 1,220,534 |
|
| | | | | | | |
Operating income (loss) | 108,457 |
| | 170,055 |
| | (88,834 | ) | | 517,848 |
|
| | | | | | | |
Other income | 10,715 |
| | 2,661 |
| | 23,199 |
| | 6,289 |
|
Interest expense | 35,984 |
| | 36,547 |
| | 108,469 |
| | 110,596 |
|
Income (loss) before income taxes | 83,188 |
| | 136,169 |
| | (174,104 | ) | | 413,541 |
|
Income tax expense (benefit) | 13,084 |
| | 35,936 |
| | (151,826 | ) | | 28,393 |
|
Net income (loss) | 70,104 |
| | 100,233 |
| | (22,278 | ) | | 385,148 |
|
Less: Net income attributable to noncontrolling interests | 78,120 |
| | 59,446 |
| | 238,747 |
| | 165,398 |
|
Net (loss) income attributable to EQT Corporation | $ | (8,016 | ) | | $ | 40,787 |
| | $ | (261,025 | ) | | $ | 219,750 |
|
| | | | | | | |
Earnings per share of common stock attributable to EQT Corporation: | |
| | |
| | |
| | |
|
Basic: | |
| | |
| | |
| | |
|
Weighted average common stock outstanding | 172,867 |
| | 152,551 |
| | 165,197 |
| | 152,326 |
|
Net (loss) income | $ | (0.05 | ) | | $ | 0.27 |
| | $ | (1.58 | ) | | $ | 1.44 |
|
Diluted: | |
| | |
| | |
| | |
|
Weighted average common stock outstanding | 172,867 |
| | 152,854 |
| | 165,197 |
| | 152,789 |
|
Net (loss) income | $ | (0.05 | ) | | $ | 0.27 |
| | $ | (1.58 | ) | | $ | 1.44 |
|
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 (Loss) Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Thousands) |
Net income (loss) | $ | 70,104 |
| | $ | 100,233 |
| | $ | (22,278 | ) | | $ | 385,148 |
|
| | | | | | | |
Other comprehensive (loss) income, net of tax: | |
| | |
| | |
| | |
|
Net change in cash flow hedges: | |
| | |
| | |
| | |
|
Natural gas, net of tax benefit of $(9,894), $(26,093), $(28,934), and $(81,279) | (14,740 | ) | | (39,346 | ) | | (43,104 | ) | | (122,678 | ) |
Interest rate, net of tax expense of $26, $25, $78, and $75 | 36 |
| | 36 |
| | 108 |
| | 108 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $52, $127, $6,287, and $382 | 82 |
| | 202 |
| | 9,917 |
| | 606 |
|
Other comprehensive loss | (14,622 | ) | | (39,108 | ) | | (33,079 | ) | | (121,964 | ) |
Comprehensive income (loss) | 55,482 |
| | 61,125 |
| | (55,357 | ) | | 263,184 |
|
Less: Comprehensive income attributable to noncontrolling interests | 78,120 |
| | 59,446 |
| | 238,747 |
| | 165,398 |
|
Comprehensive (loss) income attributable to EQT Corporation | $ | (22,638 | ) | | $ | 1,679 |
| | $ | (294,104 | ) | | $ | 97,786 |
|
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, |
| 2016 | | 2015 |
| (Thousands) |
Cash flows from operating activities: | |
Net (loss) income | $ | (22,278 | ) | | $ | 385,148 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
| | |
|
Deferred income tax benefit | (145,739 | ) | | (78,958 | ) |
Depreciation, depletion and amortization | 682,948 |
| | 599,791 |
|
Asset and lease impairments | 5,498 |
| | 35,004 |
|
Provision for losses on (recoveries of) accounts receivable | 1,165 |
| | (2,262 | ) |
Other income | (23,199 | ) | | (6,276 | ) |
Stock-based compensation expense | 34,551 |
| | 41,622 |
|
Loss (gain) on derivatives not designated as hedges | 32,342 |
| | (209,114 | ) |
Cash settlements received on derivatives not designated as hedges | 222,516 |
| | 70,874 |
|
Pension settlement charge | 9,403 |
| | — |
|
Changes in other assets and liabilities: | |
| | |
|
Excess tax benefits on stock-based compensation | — |
| | (21,176 | ) |
Accounts receivable | (11,521 | ) | | 161,118 |
|
Accounts payable | (12,916 | ) | | (84,262 | ) |
Other items, net | (5,071 | ) | | 8,709 |
|
Net cash provided by operating activities | 767,699 |
| | 900,218 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (1,193,321 | ) | | (1,899,338 | ) |
Consideration paid for Statoil acquisition | (412,348 | ) | | — |
|
Capital contributions to Mountain Valley Pipeline, LLC | (76,297 | ) | | (84,182 | ) |
Sales of interests in Mountain Valley Pipeline, LLC | 12,533 |
| | 8,344 |
|
Net cash used in investing activities | (1,669,433 | ) | | (1,975,176 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Proceeds from the issuance of common shares of EQT Corporation, net of issuance costs | 1,225,999 |
| | — |
|
Proceeds from the issuance of common units of EQT Midstream Partners, LP, net of issuance costs | 217,102 |
| | 758,812 |
|
Proceeds from the sale of common units of EQT GP Holdings, LP, net of sale costs | — |
| | 674,010 |
|
Increase in borrowings on EQT Midstream Partners, LP credit facility | 430,000 |
| | 561,500 |
|
Repayment of borrowings on EQT Midstream Partners, LP credit facility | (638,000 | ) | | (211,500 | ) |
Dividends paid | (14,966 | ) | | (13,725 | ) |
Distributions to noncontrolling interests | (137,719 | ) | | (85,218 | ) |
Repayments and retirements of long-term debt | — |
| | (9,004 | ) |
Proceeds and excess tax benefits from awards under employee compensation plans | 2,040 |
| | 35,196 |
|
Cash paid for taxes related to net settlement of share-based incentive awards | (26,517 | ) | | (46,492 | ) |
Repurchase of common stock | (23 | ) | | (3,375 | ) |
Net cash provided by financing activities | 1,057,916 |
| | 1,660,204 |
|
Net change in cash and cash equivalents | 156,182 |
| | 585,246 |
|
Cash and cash equivalents at beginning of period | 1,601,232 |
| | 1,077,429 |
|
Cash and cash equivalents at end of period | $ | 1,757,414 |
| | $ | 1,662,675 |
|
| | | |
Cash paid during the period for: | |
| | |
|
Interest, net of amount capitalized | $ | 88,281 |
| | $ | 87,661 |
|
Income taxes, net | $ | 1,294 |
| | $ | 100,987 |
|
| | | |
Non-cash activity during the period for: | | | |
Increase in Mountain Valley Pipeline, LLC investment/payable for capital contributions | $ | 13,095 |
| | $ | — |
|
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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| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
| (Thousands) |
Assets | |
| | |
|
| | | |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 1,757,414 |
| | $ | 1,601,232 |
|
Accounts receivable (less accumulated provision for doubtful accounts: $4,231 at September 30, 2016 and $3,018 at December 31, 2015) | 189,416 |
| | 176,957 |
|
Derivative instruments, at fair value | 134,698 |
| | 417,397 |
|
Prepaid expenses and other | 64,541 |
| | 55,433 |
|
Total current assets | 2,146,069 |
| | 2,251,019 |
|
| | | |
Property, plant and equipment | 17,238,045 |
| | 15,635,549 |
|
Less: accumulated depreciation and depletion | 4,830,265 |
| | 4,163,528 |
|
Net property, plant and equipment | 12,407,780 |
| | 11,472,021 |
|
| | | |
Investment in nonconsolidated entity | 160,326 |
| | 77,025 |
|
Other assets | 175,809 |
| | 176,107 |
|
Total assets | $ | 14,889,984 |
| | $ | 13,976,172 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EQT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
| (Thousands) |
Liabilities and Stockholders’ Equity | |
| | |
|
| | | |
Current liabilities: | |
| | |
|
Credit facility borrowings | $ | 91,000 |
| | $ | 299,000 |
|
Accounts payable | 264,782 |
| | 291,550 |
|
Derivative instruments, at fair value | 67,871 |
| | 23,434 |
|
Other current liabilities | 194,973 |
| | 181,835 |
|
Total current liabilities | 618,626 |
| | 795,819 |
|
| | | |
Long-term debt | 2,796,759 |
| | 2,793,343 |
|
Deferred income taxes | 1,817,894 |
| | 1,972,170 |
|
Other liabilities and credits | 382,426 |
| | 386,798 |
|
Total liabilities | 5,615,705 |
| | 5,948,130 |
|
| | | |
Equity: | |
| | |
|
Stockholders’ equity: | |
| | |
|
Common stock, no par value, authorized 320,000 shares, shares issued: 177,897 at September 30, 2016 and 158,347 at December 31, 2015 | 3,418,979 |
| | 2,153,280 |
|
Treasury stock, shares at cost: 5,139 at September 30, 2016 (including 226 held in rabbi trust) and 5,793 at December 31, 2015 (including 292 held in rabbi trust) | (92,275 | ) | | (104,079 | ) |
Retained earnings | 2,706,221 |
| | 2,982,212 |
|
Accumulated other comprehensive income | 13,299 |
| | 46,378 |
|
Total common stockholders’ equity | 6,046,224 |
| | 5,077,791 |
|
Noncontrolling interests in consolidated subsidiaries | 3,228,055 |
| | 2,950,251 |
|
Total equity | 9,274,279 |
| | 8,028,042 |
|
Total liabilities and equity | $ | 14,889,984 |
| | $ | 13,976,172 |
|
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, 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 EQT Midstream Partners, LP and EQT GP Holdings, LP, 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 subsidiary, net |
|
| | 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 |
|
| | | | | | | | | | | |
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 | |
| | |
| | (261,025 | ) | | |
| | 238,747 |
| | (22,278 | ) |
Net change in cash flow hedges: | |
| | |
| | |
| | | | |
| | |
Natural gas, net of tax benefit of $(28,934) | | | | | | | (43,104 | ) | | | | (43,104 | ) |
Interest rate, net of tax expense of $78 | | | | | | | 108 |
| | | | 108 |
|
Pension and other post-retirement benefits liability adjustment, net of tax expense of $6,287 | | | | | | | 9,917 |
| | | | 9,917 |
|
Dividends ($0.09 per share) | |
| | |
| | (14,966 | ) | | |
| | |
| | (14,966 | ) |
Stock-based compensation plans, net | 654 |
| | 26,211 |
| | |
| | |
| | 161 |
| | 26,372 |
|
Distributions to noncontrolling interests ($2.235 and $0.406 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively) | |
| | |
| | |
| | |
| | (137,719 | ) | | (137,719 | ) |
Issuance of common shares of EQT Corporation | 19,550 |
| | 1,225,999 |
| | | | | |
|
| | 1,225,999 |
|
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, September 30, 2016 | 172,758 |
| | $ | 3,326,704 |
| | $ | 2,706,221 |
| | $ | 13,299 |
| | $ | 3,228,055 |
| | $ | 9,274,279 |
|
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, 2016 and December 31, 2015, the results of its operations for the three and nine month periods ended September 30, 2016 and 2015 and its cash flows for the nine month periods ended September 30, 2016 and 2015. 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, 2015 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.
On May 2, 2016, the Company entered into an Underwriting Agreement with Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC, as representatives of the several underwriters named in the Underwriting Agreement (the Underwriters), under which the Company sold to the Underwriters 10,500,000 shares of the Company's common stock, no par value (common stock), at a price to the public of $67.00 per share (the May Offering). On May 3, 2016, the Underwriters exercised their option within the Underwriting Agreement to purchase an additional 1,575,000 shares of common stock on the same terms. The May Offering closed on May 6, 2016, and the Company received net proceeds of approximately $795.6 million after deducting underwriting discounts and commissions and offering expenses. The Company used a portion of the net proceeds from the May Offering to fund the Statoil Acquisition discussed in Note N, and intends to use the remainder to fund the acquisitions discussed in Note O and for general corporate purposes.
On February 19, 2016, the Company entered into an Underwriting Agreement with Goldman, Sachs & Co. (Goldman) under which the Company sold to Goldman 6,500,000 shares of common stock, at a price to the public of $58.50 per share (the February Offering). On February 22, 2016, Goldman exercised its option within the Underwriting Agreement to purchase an additional 975,000 shares of common stock on the same terms. The February Offering closed on February 24, 2016, and the Company received net proceeds of approximately $430.4 million, after deducting underwriting discounts and commissions and offering expenses. The Company intends to use the net proceeds from the February Offering for general corporate purposes.
For further information, 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, 2015 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 23 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 September 30, 2016, 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.
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, LLC, an indirect wholly owned subsidiary of the Company, was the selling unitholder and sold all of the EQGP common units in the offering. The IPO resulted in net proceeds to the Company of approximately $674.0 million after deducting the underwriters' discount of approximately $37.5 million and structuring fees of approximately $2.7 million. EQGP did not receive any of the proceeds from, or incur any expenses in connection with, the IPO.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
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 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 October 25, 2016, the Board of Directors of EQGP’s general partner declared a cash distribution to EQGP’s unitholders for the third quarter of 2016 of $0.165 per common unit, or approximately $43.9 million. The distribution will be paid on November 22, 2016 to unitholders of record, including the Company, at the close of business on November 4, 2016.
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 consolidated financial statements. The Company records the noncontrolling interest of the EQM public limited partners (i.e., the EQM limited partner interests not owned by EQGP) in its financial statements.
On March 30, 2015, the Company assigned 100% of the membership interest in MVP Holdco, LLC (MVP Holdco), which at the time was its indirect wholly owned subsidiary, to EQM and received $54.2 million, which represented EQM's reimbursement to EQT of 100% of the capital contributions made by EQT to Mountain Valley Pipeline, LLC (MVP Joint Venture) as of March 30, 2015. As of September 30, 2016, MVP Holdco owned a 45.5% interest (MVP Interest) in the 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. The MVP project is subject to Federal Energy Regulatory Commission (FERC) approval. The MVP Joint Venture submitted the MVP certificate application to the FERC in October 2015, and the FERC issued the Notice of Schedule for Environmental Review (NOS) and the Draft Environmental Impact Statement on June 28, 2016 and September 16, 2016, respectively. Based on the schedule provided in the NOS, the MVP Joint Venture anticipates receiving the certificate in mid-year 2017. The pipeline is targeted to be in-service during the fourth quarter of 2018.
During 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 second quarter of 2016, EQM issued 2,949,309 common units at an average price per unit of $74.42 under this program and received net proceeds of $217.1 million after deducting commissions of $2.2 million and other offering expenses of $0.2 million. EQM used the net proceeds for general partnership purposes. In connection with the sales during the second quarter of 2016, the Company recorded a $24.9 million gain to additional paid-in-capital, a decrease in noncontrolling interest in consolidated subsidiary of $39.9 million and an increase to deferred tax liability of $15.0 million. No ATM sales occurred during the three months ended September 30, 2016.
On October 25, 2016, the Board of Directors of EQM’s general partner declared a cash distribution to EQM’s unitholders for the third quarter of 2016 of $0.815 per common unit. The cash distribution will be paid on November 14, 2016 to unitholders of record, including EQGP, at the close of business on November 4, 2016. Based on the 80,581,758 EQM common units outstanding on October 27, 2016, the aggregate cash distributions by EQM to EQGP will be approximately $44.3 million consisting of: $17.8 million in respect of its limited partner interest, $1.6 million in respect of its general partner interest and $24.9 million in respect of its IDRs. However, the distributions to EQGP in respect of 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 third quarter 2016 distribution.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
D. Equity in Nonconsolidated Investments
The Company, through its ownership interest in EQM, has a noncontrolling ownership interest in the MVP Joint Venture, a nonconsolidated investment that is accounted for under the equity method of accounting. The following table summarizes the Company's equity in the nonconsolidated investment:
|
| | | | | | | | | | | | | | |
| | | | Interest | | Ownership % as of | | Equity as of | | Equity as of |
Investee | | Location | | Type | | September 30, 2016 | | September 30, 2016 | | December 31, 2015 |
| | | | | | | | (Thousands) |
MVP Joint Venture | | USA | | Joint | | 45.5% | | $ | 160,326 |
| | $ | 77,025 |
|
The Company’s ownership share of the earnings for the three months ended September 30, 2016 and 2015 related to the total investments accounted for under the equity method was $2.7 million and $0.7 million, respectively. The Company’s ownership share of the earnings for the nine months ended September 30, 2016 and 2015 related to the total investments accounted for under the equity method was $6.1 million and $1.3 million, respectively. These earnings are reported in other income on the Statements of Consolidated Operations for the periods presented.
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 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, including, but not limited to: decisions with respect to operating and construction budgets, project construction schedule, material contracts or precedent agreements, indebtedness, significant acquisitions or dispositions, material regulatory filings and strategic 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.
On January 21, 2016, affiliates of Consolidated Edison, Inc. (ConEd) acquired a 12.5% interest in the MVP Joint Venture and entered into 20-year firm capacity commitments for approximately 0.25 Bcf per day on both the MVP and EQM’s transmission system (ConEd Transaction). As a result of the ConEd Transaction, EQM’s interest in the MVP Joint Venture decreased by 8.5% to 45.5%, and during the first quarter of 2016 ConEd reimbursed EQM $12.5 million, which represented EQM's proportional capital contributions to the MVP Joint Venture through the date of the transaction. ConEd has the right to terminate its purchase of the interest in the MVP Joint Venture and be reimbursed for the purchase price and all capital contributions made to the MVP Joint Venture for a period ending no later than December 31, 2016.
As of September 30, 2016, 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 September 30, 2016, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $251 million, which included the investment balance of $160 million on the Condensed Consolidated Balance Sheet as of September 30, 2016 and amounts which could have become due under the performance guarantee as of that date.
E. Consolidated Variable Interest Entities
The Company adopted Accounting Standard Update (ASU) No. 2015-02, Consolidation in the first quarter of 2016 and, as a result, EQT 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 general partner interest and 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. Therefore, EQT has a controlling financial interest in EQGP and EQM, is the primary beneficiary of EQGP and EQM and consolidates EQGP and EQM.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 2015 and Quarterly Reports on Form 10-Q for the quarter ended September 30, 2016. See further discussion of the impact that EQT's involvement in 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, 2015, 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.
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 September 30, 2016 and December 31, 2015.
|
| | | | | | | | |
Classification | | September 30, 2016 | | December 31, 2015 |
| | (Thousands) |
Assets: | | |
| | |
|
Cash and cash equivalents | | $ | 263 |
| | $ | 350,815 |
|
Accounts receivable | | 14,752 |
| | 17,131 |
|
Prepaid expenses and other | | 2,880 |
| | 2,111 |
|
Property, plant and equipment, net | | 2,429,448 |
| | 1,969,993 |
|
Other assets | | 180,447 |
| | 91,975 |
|
Liabilities: | | | | |
Accounts payable | | $ | 71,600 |
| | $ | 35,909 |
|
Credit facility borrowings | | 91,000 |
| | 299,000 |
|
Other current liabilities | | 23,641 |
| | 15,722 |
|
Long-term debt | | 493,978 |
| | 493,401 |
|
Other liabilities and credits | | 8,910 |
| | 7,834 |
|
The following table summarizes EQGP's Statements of Consolidated Operations and Cash Flows for the three and nine months ended September 30, 2016 and 2015, inclusive of affiliate amounts.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Thousands) |
Operating revenues | $ | 170,836 |
| | $ | 148,789 |
| | $ | 523,441 |
| | $ | 448,213 |
|
Operating expenses | (50,061 | ) | | (46,212 | ) | | (147,916 | ) | | (132,526 | ) |
Other income (expenses) | 5,219 |
| | (8,797 | ) | | 2,568 |
| | (55,387 | ) |
Net income | $ | 125,994 |
| | $ | 93,780 |
| | $ | 378,093 |
| | $ | 260,300 |
|
| | | | | | | |
Net cash provided by operating activities | $ | 100,951 |
| | $ | 79,719 |
| | $ | 368,377 |
| | $ | 318,821 |
|
Net cash used in investing activities | $ | (190,172 | ) | | (125,829 | ) | | $ | (494,130 | ) | | (891,712 | ) |
Net cash provided by (used in) financing activities | $ | 5,128 |
| | $ | 46,342 |
| | $ | (224,799 | ) | | $ | 402,842 |
|
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 two segments, which reflect its lines of business. The EQT Production segment includes the Company’s exploration for, development and production of and sales of, natural gas and natural gas liquids (NGLs) in the Appalachian and Permian Basins. The EQT Midstream segment’s operations include the natural gas gathering, transmission and storage activities of the Company, including ownership and operation of EQGP and EQM. EQT Midstream also provides marketing services for the benefit of EQT Production.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
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, 2016 | EQT Production | | EQT Midstream | | Intersegment Eliminations | | EQT Corporation |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 403,939 |
| | $ | — |
| | $ | — |
| | $ | 403,939 |
|
Pipeline and marketing services | 5,251 |
| | 214,335 |
| | (160,155 | ) | | 59,431 |
|
Gain on derivatives not designated as hedges | 93,356 |
| | — |
| | — |
| | 93,356 |
|
Total operating revenues | $ | 502,546 |
| | $ | 214,335 |
| | $ | (160,155 | ) | | $ | 556,726 |
|
|
| | | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | EQT Production (a) | | EQT Midstream | | Intersegment Eliminations (a) | | EQT Corporation |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 365,940 |
| | $ | — |
| | $ | — |
| | $ | 365,940 |
|
Pipeline and marketing services | 4,886 |
| | 197,774 |
| | (145,885 | ) | | 56,775 |
|
Gain on derivatives not designated as hedges | 160,458 |
| | 805 |
| | — |
| | 161,263 |
|
Total operating revenues | $ | 531,284 |
| | $ | 198,579 |
| | $ | (145,885 | ) | | $ | 583,978 |
|
|
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | EQT Production | | EQT Midstream | | Intersegment Eliminations | | EQT Corporation |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 1,072,898 |
| | $ | — |
| | $ | — |
| | $ | 1,072,898 |
|
Pipeline and marketing services | 11,960 |
| | 653,362 |
| | (476,552 | ) | | 188,770 |
|
Loss on derivatives not designated as hedges | (32,342 | ) | | — |
| | — |
| | (32,342 | ) |
Total operating revenues | $ | 1,052,516 |
| | $ | 653,362 |
| | $ | (476,552 | ) | | $ | 1,229,326 |
|
|
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2015 | EQT Production (a) | | EQT Midstream | | Intersegment Eliminations (a) | | EQT Corporation |
Revenues: | | | | | | | |
Sales of natural gas, oil and NGLs | $ | 1,326,104 |
| | $ | — |
| | $ | — |
| | $ | 1,326,104 |
|
Pipeline and marketing services | 27,845 |
| | 600,002 |
| | (424,683 | ) | | 203,164 |
|
Gain (loss) on derivatives not designated as hedges | 209,881 |
| | (767 | ) | | — |
| | 209,114 |
|
Total operating revenues | $ | 1,563,830 |
| | $ | 599,235 |
| | $ | (424,683 | ) | | $ | 1,738,382 |
|
| |
(a) | For the three and nine months ended September 30, 2016, EQT Production presented affiliated gathering and transmission costs as operating expenses for consistency with the presentation of third-party costs. Historically, these affiliated costs have been presented as revenue deductions. Certain previously reported amounts have been reclassified to conform with current year presentation. |
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Thousands) |
Operating income (loss): | |
| | |
| | |
| | |
|
EQT Production | $ | (22,010 | ) | | $ | 56,360 |
| | $ | (477,264 | ) | | $ | 175,317 |
|
EQT Midstream | 132,727 |
| | 113,010 |
| | 399,114 |
| | 350,942 |
|
Unallocated expenses (b) | (2,260 | ) | | 685 |
| | (10,684 | ) | | (8,411 | ) |
Total operating income (loss) | $ | 108,457 |
| | $ | 170,055 |
| | $ | (88,834 | ) | | $ | 517,848 |
|
| |
(b) | Unallocated expenses consist primarily of incentive compensation expense and administrative costs. |
Reconciliation of operating income (loss) to net income (loss): |
| | | | | | | | | | | | | | | |
Total operating income (loss) | $ | 108,457 |
| | $ | 170,055 |
| | $ | (88,834 | ) | | $ | 517,848 |
|
Other income | 10,715 |
| | 2,661 |
| | 23,199 |
| | 6,289 |
|
Interest expense | 35,984 |
| | 36,547 |
| | 108,469 |
| | 110,596 |
|
Income tax expense (benefit) | 13,084 |
| | 35,936 |
| | (151,826 | ) | | 28,393 |
|
Net income (loss) | $ | 70,104 |
| | $ | 100,233 |
| | $ | (22,278 | ) | | $ | 385,148 |
|
|
| | | | | | | |
| As of September 30, 2016 | | As of December 31, 2015 |
| (Thousands) |
Segment assets: | |
| | |
|
EQT Production | $ | 9,222,067 |
| | $ | 8,995,853 |
|
EQT Midstream | 3,753,924 |
| | 3,226,138 |
|
Total operating segments | 12,975,991 |
| | 12,221,991 |
|
Headquarters assets, including cash and short-term investments | 1,913,993 |
| | 1,754,181 |
|
Total assets | $ | 14,889,984 |
| | $ | 13,976,172 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Thousands) |
Depreciation, depletion and amortization: | |
| | |
| | |
| | |
|
EQT Production | $ | 210,066 |
| | $ | 184,277 |
| | $ | 602,766 |
| | $ | 529,071 |
|
EQT Midstream | 26,937 |
| | 23,830 |
| | 79,948 |
| | 70,417 |
|
Other | 85 |
| | 120 |
| | 234 |
| | 303 |
|
Total | $ | 237,088 |
| | $ | 208,227 |
| | $ | 682,948 |
| | $ | 599,791 |
|
| | | | | | | |
Expenditures for segment assets (c): | |
| | |
| | |
| | |
|
EQT Production (d) | $ | 621,377 |
| | $ | 451,358 |
| | $ | 1,090,033 |
| | $ | 1,453,647 |
|
EQT Midstream | 171,645 |
| | 130,902 |
| | 513,776 |
| | 368,019 |
|
Other | 857 |
| | 437 |
| | 3,045 |
| | 2,046 |
|
Total | $ | 793,879 |
| | $ | 582,697 |
| | $ | 1,606,854 |
| | $ | 1,823,712 |
|
| |
(c) | Includes the capitalized portion of non-cash stock-based compensation expense and the impact of capital accruals. |
| |
(d) | Expenditures for segment assets in the EQT Production segment include $448.7 million and $41.8 million for property acquisitions during the three months ended September 30, 2016 and 2015, respectively, and $516.8 million and $180.9 million for property acquisitions during the nine months ended September 30, 2016 and 2015, respectively. |
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 primarily 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 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 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 Operations in the same period or periods during which the forecasted transaction affects earnings. 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 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 September 30, 2016 and December 31, 2015, the Company deferred net gains of $21.7 million and $64.8 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 flow hedges and discontinue the use of cash flow hedge accounting. As of September 30, 2016 and December 31, 2015, the forecasted transactions that were hedged as of December 31, 2014 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 forecasted transactions extend through December 2018. The Company estimates that approximately $15.6 million of net gains on its derivative commodity instruments reflected in accumulated OCI, net of tax, as of September 30, 2016 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions.
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.
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.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Thousands) |
Commodity derivatives designated as cash flow hedges | |
Amount of gain reclassified from accumulated OCI, net of tax, into sales of natural gas, oil and NGLs (effective portion) | $ | 14,740 |
| | $ | 39,346 |
| | $ | 43,104 |
| | $ | 122,678 |
|
| | | | | | | |
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 recognized in gain (loss) on derivatives not designated as hedges | $ | 93,356 |
| | $ | 161,263 |
| | $ | (32,342 | ) | | $ | 209,114 |
|
The absolute quantities of the Company’s derivative commodity instruments totaled 677 Bcf and 676 Bcf as of September 30, 2016 and December 31, 2015, respectively, and were primarily related to natural gas swaps, basis swaps and collars. The open natural gas positions at September 30, 2016 and December 31, 2015 had maturities extending through December 2020 and December 2019, respectively. The Company also had 913 Mbbls of propane swaps as of September 30, 2016, which had maturities extending through December 2018.
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, 2016 and December 31, 2015.
|
| | | | | | | | | | | | | | | | |
As of September 30, 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 | | $ | 134,698 |
| | $ | (63,823 | ) | | $ | — |
| | $ | 70,875 |
|
| | | | | | | | |
Liability derivatives: | | | | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 67,871 |
| | $ | (63,823 | ) | | $ | — |
| | $ | 4,048 |
|
|
| | | | | | | | | | | | | | | | |
As of December 31, 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 | | $ | 417,397 |
| | $ | (19,909 | ) | | $ | — |
| | $ | 397,488 |
|
| | | | | | | | |
Liability derivatives: | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 23,434 |
| | $ | (19,909 | ) | | $ | — |
| | $ | 3,525 |
|
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
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, 2016, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $8.0 million, for which the Company had no collateral posted on September 30, 2016. If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade on September 30, 2016, 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, 2016. 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 would result in greater borrowing costs and collateral requirements than would be available if all credit ratings were 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 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. There were no transfers between Levels 1, 2 and 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 commodity swaps 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, basis forward curves and propane forward curves. The Company’s collars 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 NYMEX forward curves, LIBOR-based discount rates, natural gas volatilities, basis forward curves and propane 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, 2016 | | 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 | | $ | 134,698 |
| | $ | — |
| | $ | 134,698 |
| | $ | — |
|
| | | | | | | | |
Liabilities | | |
| | |
| | | | |
|
Derivative instruments, at fair value | | $ | 67,871 |
| | $ | — |
| | $ | 67,871 |
| | $ | — |
|
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | | | Fair value measurements at reporting date using |
Description | | As of December 31, 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 | | $ | 417,397 |
| | $ | — |
| | $ | 417,397 |
| | $ | — |
|
| | | | | | | | |
Liabilities | | |
| | |
| | |
| | |
|
Derivative instruments, at fair value | | $ | 23,434 |
| | $ | — |
| | $ | 23,434 |
| | $ | — |
|
The carrying value of cash equivalents, accounts receivable, amounts due to/from related parties and accounts payable approximate fair value due to the short-term maturity of the instruments. The carrying value of borrowings 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 total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.1 billion at September 30, 2016 and $2.8 billion at December 31, 2015. The carrying value of total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $2.8 billion at September 30, 2016 and December 31, 2015.
I. Income Taxes
Prior to 2016, the Company had historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring items) for the reporting period. The Company determined that the historical method would not provide a reliable estimate for the nine month period ended September 30, 2016, as small fluctuations in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate. As a consequence, the Company used a discrete effective tax rate method to calculate taxes for the nine month period ended September 30, 2016.
All of EQGP’s income is 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 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 pretax income and increases the Company's effective tax rate in periods when the Company has consolidated pretax loss.
The Company’s effective income tax rate for the nine months ended September 30, 2016 was 87.2%, compared to 6.9% for the nine months ended September 30, 2015. The effective income tax rate for the nine months ended September 30, 2016 was higher than the U.S. federal statutory rate of 35% primarily driven by the effect of income allocated to the noncontrolling limited partners of EQGP and EQM. Due to the Company's consolidated pretax loss for the nine months ended September 30, 2016, primarily caused by lower realized commodity prices and losses on derivatives not designated as hedges at the EQT Production segment, EQGP's income allocated to the noncontrolling limited partners increased the effective income tax rate for the period. The increase in the effective income tax rate was also partly attributable to the tax benefit generated from a pre-tax loss on state income tax paying entities.
Excluding the impact of the 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 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily as a result of income allocated to the noncontrolling limited partners of EQGP and EQM, a state income tax benefit as a result of lower pre-tax income on state tax paying entities and increased tax credits recorded in 2015. Noncontrolling limited partners income increased in 2015 primarily as a result of higher net income at EQM and increased noncontrolling interests as a result of sales of EQGP and EQM limited partner interests to the public.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The Company’s income tax expense was lower for the three and nine months ended September 30, 2015 due to a $35.5 million tax benefit recorded in connection with IRS guidance received by the Company in 2015 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 tax benefit will reverse during the fourth quarter of 2016 as a result of the disposal of certain regulated assets as part of the October 2016 Sale discussed in Note O.
There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended September 30, 2016. The Company believes that it is appropriately reserved for uncertain tax positions.
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 September 30, 2016 or December 31, 2015 or at any time during the three and nine months ended September 30, 2016 and 2015.
EQM has a $750 million credit facility that expires in February 2019, and EQM had $91 million of borrowings and no letters of credit outstanding under its revolving credit facility as of September 30, 2016. As of December 31, 2015, EQM had $299 million of borrowings and no letters of credit outstanding under its revolving credit facility. The maximum amount of outstanding borrowings under EQM’s revolving credit facility at any time during the three and nine months ended September 30, 2016 was $91 million and $299 million, respectively. The maximum amount of outstanding borrowings under EQM’s revolving credit facility at any time during the three and nine months ended September 30, 2015 was $404 million for both periods. The average daily balance of loans outstanding under EQM’s credit facility was approximately $34 million and $67 million at a weighted average annual interest rate of 2.0% and 1.9% for the three and nine months ended September 30, 2016, 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, at a weighted average annual interest rate of 1.7% for both periods.
The Company incurred commitment fees averaging approximately 6 basis points for each of the three months ended September 30, 2016 and 2015, and 17 basis points for each of the nine months ended September 30, 2016 and 2015, 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, 2016 and 2015, and 17 basis points for each of the nine months ended September 30, 2016 and 2015, to maintain credit availability under its revolving credit facility.
K. Earnings Per Share
In periods when the Company reports a net loss, all options and restricted stock are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on loss per share. As a result, options and restricted stock totaling 1,712,527 and 1,812,142 shares were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2016, respectively. Potentially dilutive securities, consisting of options and restricted stock, which were included in the calculation of diluted earnings per share totaled 302,550 and 462,317 for the three and nine months ended September 30, 2015, 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. 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.
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
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 September 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 June 30, 2016 | $ | 36,398 |
| | $ | (771 | ) | | $ | (7,706 | ) | | $ | 27,921 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (14,740 | ) | (a) | 36 |
| (a) | 82 |
| (b) | (14,622 | ) |
Accumulated OCI (loss), net of tax, as of September 30, 2016 | $ | 21,658 |
| | $ | (735 | ) | | $ | (7,624 | ) | | $ | 13,299 |
|
|
| | | | | | | | | | | | | | | |
| 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 June 30, 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 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 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 December 31, 2015 | $ | 64,762 |
| | $ | (843 | ) | | $ | (17,541 | ) | | $ | 46,378 |
|
(Gains) losses reclassified from accumulated OCI, net of tax | (43,104 | ) | (a) | 108 |
| (a) | 9,917 |
| (b) | (33,079 | ) |
Accumulated OCI (loss), net of tax, as of September 30, 2016 | $ | 21,658 |
| | $ | (735 | ) | | $ | (7,624 | ) | | $ | 13,299 |
|
|
| | | | | | | | | | | | | | | |
| 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, net of tax |
| (Thousands) |
Accumulated OCI (loss), net of tax, as of December 31, 2014 | $ | 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 |
|
(a) See Note G 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 14 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and Note M for additional information.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
M. Pension Termination
The Company terminated the EQT Corporation Retirement Plan for Employees (Retirement Plan) effective December 31, 2014. On March 2, 2016, the IRS issued a favorable determination letter for the termination of the Retirement Plan. On June 28, 2016, the Company purchased annuities from, and transferred the Retirement Plan assets and liabilities to, American General Life Insurance Company (AGL). As a result, during the second quarter of 2016, the Company reclassified actuarial loss remaining in accumulated other comprehensive loss of approximately $9.4 million to earnings and approximately $5.1 million to a regulatory asset that will be amortized for rate recovery purposes over a period of 16 years. In connection with the purchase of annuities, the Company made a cash payment of approximately $5.4 million to fully fund the Retirement Plan upon liquidation during the second quarter of 2016.
N. Statoil Acquisition
On July 8, 2016, the Company acquired approximately 62,500 net acres from Statoil USA Onshore Properties, Inc. (Statoil) which included current natural gas production of approximately 50 MMcfe per day (the Statoil Acquisition). The net acres acquired are primarily located in Wetzel, Tyler and Harrison Counties of West Virginia. The purchase and sale agreement included an economic adjustment to put the parties in the same economic position as if the closing date for the acquisition had occurred on December 1, 2015, and the Company paid $412.3 million in the third quarter of 2016, inclusive of an estimate for this adjustment.
The purchase and sale agreement also included provisions for potential title defects which result in a decrease to the aggregate purchase price at an agreed upon value per defected acre or allow Statoil to replace the defected acreage subject to acceptance by the Company. The Company is currently unable to determine the ultimate adjustments to the aggregate purchase price at September 30, 2016; however, the Company believes that such adjustments will not have a material effect on the Company's financial statements.
O. Subsequent Events
October 2016 Sale
On October 13, 2016, EQT entered into a Purchase and Sale Agreement with EQM pursuant to which EQM acquired from EQT (i) 100% of the outstanding limited liability company interests of Allegheny Valley Connector, LLC and Rager Mountain Storage Company LLC and (ii) certain gathering assets located in southwestern Pennsylvania and West Virginia (collectively, the October 2016 Sale). The closing of the October 2016 Sale occurred on October 13, 2016 and was effective as of October 1, 2016. The aggregate consideration paid by EQM to EQT in connection with the October 2016 Sale was $275 million, which was funded with borrowings under EQM's $750 million revolving credit facility.
Trans Energy / Republic Energy Acquisitions
On October 24, 2016, the Company entered into a Purchase and Sale Agreement with Republic Energy Ventures, LLC and certain of its affiliates (collectively, the Republic Parties) pursuant to which the Company will acquire Marcellus acres from the Republic Parties for $319.8 million in cash, subject to purchase price adjustments and customary closing conditions (the Republic Transaction).
Also on October 24, 2016, EQT and one of its wholly owned subsidiaries entered into an Agreement and Plan of Merger with Trans Energy, Inc. (the Merger Agreement). Under the terms of the Merger Agreement, the Company has agreed to commence a tender offer, through its wholly owned subsidiary, to acquire all of the outstanding shares of common stock of Trans Energy, Inc. (Trans Energy) for cash of $3.58 per share. The closing of the tender offer is subject to certain conditions, including the tender of a number of Trans Energy shares that, together with shares owned by the Company and its affiliates, represents at least a majority of the total number of Trans Energy outstanding shares. The closing is also subject to the consummation of the Republic Transaction and other customary conditions. The boards of directors of both the Company and Trans Energy have unanimously approved the terms of the Merger Agreement, and the board of directors of Trans Energy has resolved to recommend that Trans Energy’s stockholders accept the offer, once it is commenced. Following the completion of the tender offer, the Company will merge its wholly owned subsidiary into Trans Energy, and Trans Energy will survive as a wholly owned subsidiary of the Company (the Trans Energy Merger).
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Republic Transaction and the Trans Energy Merger are expected to close during the fourth quarter of 2016. Through the Republic Transaction and the Trans Energy Merger, the Company will acquire approximately 42,600 net Marcellus acres and 42 Marcellus wells, 33 of which are currently producing, in Wetzel, Marshall and Marion Counties, West Virginia. The Company estimates that, as of October 25, 2016, production from the Marcellus wells was approximately 42 MMcfe per day.
Pennsylvania Acquisition
On October 25, 2016, the Company entered into a Purchase and Sale Agreement with a third party pursuant to which the Company will acquire approximately 17,000 net Marcellus acres located in Washington, Westmoreland and Greene Counties, Pennsylvania, and two related Marcellus producing wells, for $170 million in cash, subject to purchase price adjustments (the Pennsylvania Acquisition). The closing of the Pennsylvania Acquisition, which is subject to customary closing conditions, is also expected to occur during the fourth quarter 2016.
The Company will finance the Republic Transaction, the Trans Energy Merger and the Pennsylvania acquisition with cash on hand.
P. 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. 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 No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which improves the understandability of the implementation guidance on principal versus agent considerations. In March 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance. Early application of these ASUs is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company expects to adopt using the modified retrospective method of adoption on January 1, 2018 and is currently evaluating the impact this standard will have on its financial statements and 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 promulgated by this standard primarily affect the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. 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 does not anticipate this standard 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. While the Company is currently evaluating the provisions of this ASU to determine the impact this standard will have on its financial statements and related disclosures, the primary effect of adopting the new standard will be to record assets and obligations for contracts currently recognized as operating leases.
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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 ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company does not anticipate this standard will have a material impact on its financial statements and related 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 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 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 does not anticipate this standard will have a material impact 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 Mountain Valley Pipeline (MVP) project; the ultimate terms, partners and structure of Mountain Valley Pipeline, LLC (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; acquisition transactions; natural gas prices and changes in basis; potential future impairments of the Company's assets; reserves; projected capital expenditures; the expected use of proceeds from equity offerings; 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, 2015.
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, 2016 vs. Three Months Ended September 30, 2015
Net loss attributable to EQT Corporation for the three months ended September 30, 2016 was $8.0 million, a loss of $0.05 per diluted share, compared with net income attributable to EQT Corporation of $40.8 million, $0.27 per diluted share, for the three months ended September 30, 2015. The $48.8 million decrease between periods was primarily attributable to a 14% decrease in the average realized price for production sales volumes, decreased gains on derivatives not designated as hedges, higher operating expenses and higher net income attributable to noncontrolling interests, partially offset by increased production sales volumes, lower income tax expense and increased gathering and transmission revenues.
The average realized price to EQT Corporation for production sales volumes was $2.20 per Mcfe for the three months ended September 30, 2016 compared to $2.55 per Mcfe for the three months ended September 30, 2015. The decrease in the average realized price was driven by lower cash settled derivatives net of an increase in average New York Mercantile Exchange (NYMEX) natural gas prices and a decrease in average differential to NYMEX partly offset by higher natural gas liquids (NGLs) prices.
The average NYMEX natural gas index price was $2.81 per MMBtu during the third quarter of 2016, 1% higher than the average index price of $2.77 per MMBtu during the third quarter of 2015. Cash settled derivatives decreased by $0.38 per Mcf as a result of lower average NYMEX hedge prices, and the average natural gas differential decreased $0.06 per Mcf between periods. The average NGL price was $17.13 per barrel for the three months ended September 30, 2016 compared to $11.12 per barrel for the three months ended September 30, 2015.
Gains on derivatives not designated as hedges were $93.4 million for the third quarter of 2016, a decrease of $67.9 million compared to the third quarter of 2015. The $93.4 million gain for 2016 primarily related to favorable changes in the fair market value of EQT Production's NYMEX and basis swaps due to a decrease in forward prices during the third quarter of 2016.
Net income attributable to noncontrolling interests of EQT GP Holdings, LP (EQGP) and EQM was $78.1 million for the three months ended September 30, 2016 compared to $59.4 million for the three months ended September 30, 2015. The $18.7 million increase was primarily the result of increased net income at EQM and increased noncontrolling interests as a result of EQM’s issuances of limited partner units to the public in 2015 and 2016.
Income tax expense was $13.1 million for the three months ended September 30, 2016, compared to income tax expense of $35.9 million for the three months ended September 30, 2015. The decrease in the income tax expense was primarily attributable to the reduction in EQT Production segment operating income resulting primarily from lower realized commodity prices, reduced gains on derivatives not designated as hedges and a pre-tax loss recorded on state income tax paying entities subject to higher state income tax rates. The Company’s effective income tax rate differed from the U.S. Federal statutory rate of 35% for both periods primarily because the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of EQGP income, but is not required to record an income tax provision with respect to the portion of the income allocated to EQGP and EQM noncontrolling public limited partners.
Nine Months Ended September 30, 2016 vs. Nine Months Ended September 30, 2015
Net loss attributable to EQT Corporation for the nine months ended September 30, 2016 was $261.0 million, a loss of $1.58 per diluted share, compared with net income attributable to EQT Corporation for the nine months ended September 30, 2015 of $219.8 million, $1.44 per diluted share. The $480.8 million decrease between periods was primarily attributable to a 26% decrease in the average realized price for production sales volumes, losses on derivatives not designated as hedges in the current year compared to gains on derivatives not designated as hedges in the prior year, higher operating expenses and higher net income attributable to noncontrolling interests partially offset by increased production sales volumes, an income tax benefit in 2016 and higher gathering and transmission revenues.
The average realized price to EQT Corporation for production sales volumes was $2.31 per Mcfe for the nine months ended September 30, 2016 compared to $3.11 per Mcfe for the nine months ended September 30, 2015. The decrease in the average realized price was driven by lower NYMEX natural gas prices including the impact of cash settled derivatives, a lower average differential to NYMEX and lower NGL prices.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The average NYMEX natural gas index price was $2.29 per MMBtu during the nine months ended September 30, 2016, 18% lower than the average index price of $2.80 per MMBtu during the nine months ended September 30, 2015. In addition, the average natural gas differential decreased $0.09 per Mcf between periods. The average NGL price was $16.42 per barrel for the nine months ended September 30, 2016 compared to $18.11 per barrel for the nine months ended September 30, 2015.
Losses on derivatives not designated as hedges were $32.3 million for the nine months ended September 30, 2016, a decrease of $241.5 million compared to the nine months ended September 30, 2015. The $32.3 million loss for 2016 primarily related to unfavorable changes in the fair market value of EQT Production's NYMEX swaps partly offset by favorable changes in the fair market value of basis swaps. During the nine months ended September 30, 2016, forward NYMEX prices increased while basis prices decreased.
Net income attributable to noncontrolling interests of EQGP and EQM was $238.7 million for the nine months ended September 30, 2016 compared to $165.4 million for the nine months ended September 30, 2015. The $73.3 million increase was primarily the result of increased net income at EQM and increased noncontrolling interests as a result of EQM and EQGP issuances of common and limited partner units in 2015 and 2016.
Income tax benefit was $151.8 million for the nine months ended September 30, 2016, compared to income tax expense of $28.4 million for the nine months ended September 30, 2015. The Company’s effective income tax rate was 87.2% and 6.9% for the nine months ended September 30, 2016 and 2015, respectively. The increase in income tax benefit was primarily attributable to the effect of income allocated to the noncontrolling limited parters of EQGP and EQM, a reduction in EQT Production segment operating income primarily resulting from lower realized commodity prices and a loss on derivatives not designated as hedges. The Company’s effective tax rate differed from the U.S Federal statutory rate of 35% for both periods as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of EQGP income, but is not required to record an income tax provision with respect to the portion of the income allocated to EQGP and EQM noncontrolling public limited partners. A $35.5 million income tax benefit reduced income tax expense during the nine months ended September 30, 2015 related to Internal Revenue Service guidance received by the Company in 2015 in connection with the Company’s 2013 sale of Equitable Gas Company, LLC, a regulated entity. The deferred tax benefit will reverse during the fourth quarter of 2016 as a result of the disposal of certain regulated assets as part of the October 2016 Sale discussed in Note O.
On May 2, 2016, the Company entered into an Underwriting Agreement with Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC, as representatives of the several underwriters named in the Underwriting Agreement (the Underwriters), under which the Company sold to the Underwriters 10,500,000 shares of the Company's common stock, no par value (common stock), at a price to the public of $67.00 per share (the May Offering). On May 3, 2016, the Underwriters exercised their option within the Underwriting Agreement to purchase an additional 1,575,000 shares of common stock on the same terms. The May Offering closed on May 6, 2016, and the Company received net proceeds of approximately $795.6 million, after deducting underwriting discounts and commissions and offering expenses. The Company used a portion of the net proceeds from the offering to fund the Statoil Acquisition (as defined in Note N to the Condensed Consolidated Financial Statements), and intends to use the remainder to fund the acquisitions discussed in Note O and for general corporate purposes.
On February 19, 2016, the Company entered into an Underwriting Agreement with Goldman, Sachs & Co. (Goldman), under which the Company sold to Goldman 6,500,000 shares of common stock, at a price to the public of $58.50 per share (the February Offering). On February 22, 2016, Goldman exercised its option within the Underwriting Agreement to purchase an additional 975,000 shares of common stock on the same terms. The February Offering closed on February 24, 2016, and the Company received net proceeds of approximately $430.4 million, after deducting underwriting discounts and commissions and offering expenses. The Company intends to use the net proceeds from the offering for general corporate purposes.
As a result of declining production volumes in the Company’s non-core Huron play and the depressed commodity price environment, the Company consolidated its Huron operations in Kentucky, Virginia, and southern West Virginia during the first quarter of 2016. The consolidation is expected to improve the Company’s cost structure for its Huron operations. The Company recorded restructuring charges of $4.2 million related to the Huron operations consolidation in March 2016.
See “Business Segment Results of Operations” for a discussion of production sales volumes and gathering and transmission firm reservation revenues.
See “Investing Activities” under the caption “Capital Resources and Liquidity” for a discussion of capital expenditures.
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Operational Data
The following operational information presents detailed liquid and natural gas operational information to assist in the understanding of the Company’s consolidated operations. The operational information in the table below presents an average realized price ($/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 September 30, | | Nine Months Ended September 30, |
in thousands (unless noted) | | 2016 | | 2015 | | % | | 2016 | | 2015 | | % |
NATURAL GAS | | | | | | |
| | | | | | |
Sales volume (MMcf) | | 175,191 |
| | 141,367 |
| | 23.9 |
| | 508,206 |
| | 405,743 |
| | 25.3 |
|
NYMEX price ($/MMBtu) (a) | | $ | 2.81 |
| | $ | 2.77 |
| | 1.4 |
| | $ | 2.29 |
| | $ | 2.80 |
| | (18.2 | ) |
Btu uplift | | $ | 0.27 |
| | $ | 0.28 |
| | (3.6 | ) | | $ | 0.21 |
| | $ | 0.26 |
| | (19.2 | ) |
Natural gas price ($/Mcf) | | $ | 3.08 |
| | $ | 3.05 |
| | 1.0 |
| | $ | 2.50 |
| | $ | 3.06 |
| | (18.3 | ) |
| | | | | | | | | | | | |
Basis ($/Mcf) (b) | | $ | (1.21 | ) | | $ | (1.16 | ) | | 4.3 |
| | $ | (0.80 | ) | | $ | (0.64 | ) | | 25.0 |
|
Cash settled basis swaps (not designated as hedges) ($/Mcf) | | — |
| | 0.01 |
| | (100.0 | ) | | 0.05 |
| | (0.02 | ) | | (350.0 | ) |
Average differential, including cash settled basis swaps ($/Mcf) | | $ | (1.21 | ) | | $ | (1.15 | ) | | 5.2 |
| | $ | (0.75 | ) | | $ | (0.66 | ) | | 13.6 |
|
| | | | | | | | | | | | |
Average adjusted price ($/Mcf) | | |