Document
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM                TO               
 
 
 
COMMISSION FILE NUMBER 001-03551
 
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 every Interactive Data File required to be submitted 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 such files).  Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   x
 
 
Accelerated Filer                  ¨
 
Emerging Growth Company       ¨
Non-Accelerated Filer     ¨
 
 
Smaller Reporting Company  ¨
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
 
As of June 30, 2018, 264 (in millions) shares of common stock, no par value, of the registrant were outstanding.

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Index
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Operations (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
991,365

 
$
576,714

 
$
2,217,739

 
$
1,250,179

Pipeline, water and net marketing services
117,203

 
65,702

 
261,820

 
145,664

(Loss) gain on derivatives not designated as hedges
(53,897
)
 
46,326

 
8,695

 
187,068

Total operating revenues
1,054,671

 
688,742

 
2,488,254

 
1,582,911

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Transportation and processing
200,050

 
134,818

 
390,190

 
268,524

Operation and maintenance
25,302

 
18,315

 
52,326

 
35,132

Production
47,881

 
44,276

 
106,720

 
89,948

Exploration
21,182

 
3,481

 
26,286

 
6,603

Selling, general and administrative
77,813

 
52,670

 
130,428

 
124,628

Depreciation and depletion
417,672

 
240,817

 
855,565

 
472,735

Impairment/loss on sale of long-lived assets
118,114

 
—

 
2,447,159

 
—

Transaction costs
25,959

 
4,238

 
61,670

 
4,238

Amortization of intangible assets
20,729

 
—

 
41,457

 
—

Total operating expenses
954,702

 
498,615

 
4,111,801

 
1,001,808

 
 
 
 
 
 
 
 
Operating income (loss)
99,969

 
190,127

 
(1,623,547
)
 
581,103

 
 
 
 
 
 
 
 
Other income
11,752

 
6,305

 
21,337

 
9,354

Interest expense
77,004

 
44,078

 
147,017

 
86,733

Income (loss) before income taxes
34,717

 
152,354

 
(1,749,227
)
 
503,724

Income tax (benefit) expense
(101,629
)
 
29,709

 
(440,594
)
 
130,374

Net income (loss)
136,346

 
122,645

 
(1,308,633
)
 
373,350

Less: Net income attributable to noncontrolling interests
118,540

 
81,519

 
259,555

 
168,232

Net income (loss) attributable to EQT Corporation
$
17,806

 
$
41,126

 
$
(1,568,188
)
 
$
205,118

 
 
 
 
 
 
 
 
Earnings per share of common stock attributable to EQT Corporation:
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Weighted average common stock outstanding
265,030

 
173,462

 
264,920

 
173,320

Net income (loss)
$
0.07

 
$
0.24

 
$
(5.92
)
 
$
1.18

Diluted:
 

 
 

 
 

 
 

Weighted average common stock outstanding
265,154

 
173,582

 
264,920

 
173,525

Net income (loss)
$
0.07

 
$
0.24

 
$
(5.92
)
 
$
1.18

Dividends declared per common share
$
0.03

 
$
0.03

 
$
0.06

 
$
0.06

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Comprehensive Income (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Thousands)
Net income (loss)
$
136,346

 
$
122,645

 
$
(1,308,633
)
 
$
373,350

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Net change in cash flow hedges:
 

 
 

 
 

 
 

Natural gas, net of tax benefit of $(163), $(1,101), $(263), and $(1,685)
(466
)
 
(1,672
)
 
(753
)
 
(2,560
)
Interest rate, net of tax expense of $26, $27, $44, and $52
36

 
36

 
80

 
72

Other post-retirement benefits liability adjustment, net of tax expense of $30, $49, $60, and $98
86

 
77

 
172

 
153

Other comprehensive loss
(344
)
 
(1,559
)
 
(501
)
 
(2,335
)
Comprehensive income (loss)
136,002

 
121,086

 
(1,309,134
)
 
371,015

Less: Comprehensive income attributable to noncontrolling interests
118,540

 
81,519

 
259,555

 
168,232

Comprehensive income (loss) attributable to EQT Corporation
$
17,462

 
$
39,567

 
$
(1,568,689
)
 
$
202,783

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 

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EQT CORPORATION AND SUBSIDIARIES

Statements of Condensed Consolidated Cash Flows (Unaudited)

 
Six Months Ended June 30,
 
2018
 
2017
 
(Thousands)
Cash flows from operating activities:
 
Net (loss) income
$
(1,308,633
)
 
$
373,350

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Deferred income taxes
(440,342
)
 
130,088

Depreciation and depletion
855,565

 
472,735

Amortization of intangibles
41,457

 
—

Amortization of financing costs
5,805

 
—

Asset and lease impairments
2,470,567

 
4,101

Provision for losses on accounts receivable
(191
)
 
(962
)
Other income
(21,337
)
 
(9,354
)
Stock-based compensation expense
14,548

 
21,297

Gain on derivatives not designated as hedges
(8,695
)
 
(187,068
)
Cash settlements paid on derivatives not designated as hedges
(13,116
)
 
(20,158
)
Changes in other assets and liabilities:
 

 
 

Accounts receivable
46,741

 
32,013

Accounts payable
(18,368
)
 
5,759

Other items, net
(82,877
)
 
(12,807
)
Net cash provided by operating activities
1,541,124

 
808,994

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(1,697,090
)
 
(680,456
)
Capital expenditures for acquisitions
—

 
(811,207
)
Deposit received for Huron Divestiture (see Note Q)
57,500

 
—

Sales of investments in trading securities
—

 
283,758

Capital contributions to Mountain Valley Pipeline, LLC
(182,805
)
 
(59,940
)
Proceeds from sale of Permian Basin assets
60,157

 
—

Net cash used in investing activities
(1,762,238
)
 
(1,267,845
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of EQT Midstream Partners, LP Senior Notes
2,500,000

 
—

Increase in borrowings on credit facilities
4,377,500

 
—

Repayment of borrowings on credit facilities
(5,638,500
)
 
—

Dividends paid
(15,898
)
 
(10,413
)
Distributions to noncontrolling interests
(180,745
)
 
(111,994
)
Repayments and retirements of Senior Notes
(7,999
)
 
—

Proceeds from awards under employee compensation plans
1,946

 
—

Cash paid for taxes related to net settlement of share-based incentive awards
(20,483
)
 
(17,573
)
Debt discount and issuance costs for EQT Midstream Partners, LP Senior Notes
(30,295
)
 
—

Bridge facility structuring and related fees
—

 
(7,350
)
Acquisition of 25% of Strike Force Midstream LLC
(175,000
)
 
—

Repurchase and retirement of common stock
(38,677
)
 
—

Repurchase of common stock
(18
)
 
(15
)
Net cash provided by (used in) financing activities
771,831

 
(147,345
)
Net change in cash, cash equivalents and restricted cash
550,717

 
(606,196
)
Cash, cash equivalents and restricted cash at beginning of period
147,315

 
1,178,540

Cash and cash equivalents at end of period
$
698,032

 
$
572,344

 
 
 
 
Cash paid during the period for:
 

 
 

Interest, net of amount capitalized
$
145,334

 
$
89,554

Income taxes, net
$
156

 
$
9,702

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
June 30, 2018
 
December 31, 2017
 
(Thousands)
Assets
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
698,032

 
$
147,315

Accounts receivable (less accumulated provision for doubtful accounts:
$8,036 at June 30, 2018 and $8,226 at December 31, 2017)
774,702

 
725,236

Derivative instruments, at fair value
270,288

 
241,952

Prepaid expenses and other
37,790

 
48,552

Total current assets
1,780,812

 
1,163,055

 
 
 
 
Property, plant and equipment
27,722,025

 
30,990,309

Less: accumulated depreciation and depletion
4,557,359

 
6,105,294

Net property, plant and equipment
23,164,666

 
24,885,015

 
 
 
 
Intangible assets, net
694,903

 
736,360

Goodwill
1,998,726

 
1,998,726

Investment in nonconsolidated entity
1,003,299

 
460,546

Other assets
320,822

 
278,902

Total assets
$
28,963,228

 
$
29,522,604

  
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)
 
June 30, 2018

December 31, 2017
 
(Thousands)
Liabilities and Shareholders’ Equity
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current portion of Senior Notes
$
699,324

 
$
7,999

Accounts payable
754,120

 
654,624

Derivative instruments, at fair value
146,061

 
139,089

Other current liabilities
756,738

 
430,525

Total current liabilities
2,356,243

 
1,232,237

 
 
 
 
Credit facility borrowings
500,000

 
1,761,000

Senior Notes
7,333,587

 
5,562,555

Deferred income taxes
1,324,352

 
1,768,900

Other liabilities and credits
746,427

 
783,299

Total liabilities
12,260,609

 
11,107,991

 
 
 
 
Equity:
 

 
 

Shareholders’ equity:
 

 
 

Common stock, no par value, authorized 320,000 shares, shares issued:
267,171 at June 30, 2018 and 267,871 at December 31, 2017
9,316,209

 
9,388,903

Treasury stock, shares at cost: 2,840 at June 30, 2018 (including 298 held in
rabbi trust) and 3,551 at December 31, 2017 (including 253 held in rabbi trust)
(50,769
)
 
(63,602
)
Retained earnings
2,416,802

 
3,996,775

Accumulated other comprehensive loss
(2,959
)
 
(2,458
)
Total common shareholders’ equity
11,679,283

 
13,319,618

Noncontrolling interests in consolidated subsidiaries
5,023,336

 
5,094,995

Total equity
16,702,619

 
18,414,613

Total liabilities and equity
$
28,963,228

 
$
29,522,604


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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Table of Contents



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, 2017
172,827

 
$
3,349,166

 
$
2,509,073

 
$
2,042

 
$
3,258,966

 
$
9,119,247

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
 

 
205,118

 
 

 
168,232

 
373,350

Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(1,685)
 
 
 
 
 
 
(2,560
)
 
 
 
(2,560
)
Interest rate, net of tax expense of $52
 
 
 
 
 
 
72

 
 
 
72

Other post-retirement benefits liability adjustment, net of tax expense of $98
 
 
 
 
 
 
153

 
 
 
153

Dividends ($0.06 per share)
 

 
 

 
(10,413
)
 
 

 
 

 
(10,413
)
Stock-based compensation plans, net
500

 
9,525

 
 

 
 

 
190

 
9,715

Distributions to noncontrolling interests ($1.74 and $0.368 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively)
 

 
 

 
 

 
 

 
(111,994
)
 
(111,994
)
Balance, June 30, 2017
173,327

 
$
3,358,691

 
$
2,703,778

 
$
(293
)
 
$
3,315,394

 
$
9,377,570

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
264,320

 
$
9,325,301

 
$
3,996,775

 
$
(2,458
)
 
$
5,094,995

 
$
18,414,613

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 

 
 

 
(1,568,188
)
 
 

 
259,555

 
(1,308,633
)
Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(263)
 
 
 
 
 
 
(753
)
 
 
 
(753
)
Interest rate, net of tax expense of $44
 
 
 
 
 
 
80

 
 
 
80

Other post-retirement benefit liability adjustment, net of tax expense of $60
 
 
 
 
 
 
172

 
 
 
172

Dividends ($0.06 per share)
 

 
 

 
(15,898
)
 
 

 
 

 
(15,898
)
Stock-based compensation plans, net
711

 
(3,279
)
 
 

 
 

 
491

 
(2,788
)
Distributions to noncontrolling interests ($2.09, $0.502 and $0.5966 per common unit from EQT Midstream Partners, LP, EQT GP Holdings, LP, and Rice Midstream Partners LP, respectively)
 

 
 

 
 

 
 

 
(180,745
)
 
(180,745
)
Change in accounting principle (a)
 
 
 
 
4,113

 
 
 
 
 
4,113

Repurchase and retirement of common stock
(700
)
 
(38,677
)
 
 
 
 
 
 
 
(38,677
)
Purchase of Strike Force Midstream LLC noncontrolling interests
 
 
1,818

 
 
 
 
 
(176,818
)
 
(175,000
)
Change in ownership of consolidated subsidiaries
 
 
(19,723
)
 
 
 
 
 
25,858

 
6,135

Balance, June 30, 2018
264,331

 
$
9,265,440

 
$
2,416,802

 
$
(2,959
)
 
$
5,023,336

 
$
16,702,619

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

(a) Related to adoption of ASU No. 2016-01. See Notes K and S for additional information.


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Table of Contents
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 Quarterly Report on Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and subsidiaries as of June 30, 2018 and December 31, 2017, the results of its operations for the three and six month periods ended June 30, 2018 and 2017 and its cash flows and equity for the six month periods ended June 30, 2018 and 2017.  Certain previously reported amounts have been reclassified to conform to the current year presentation. 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.

The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and related footnotes as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

On November 13, 2017, the Company completed its previously announced acquisition of Rice Energy Inc. (Rice) pursuant to the Agreement and Plan of Merger, dated June 19, 2017 (as amended, the Rice Merger Agreement), by and among the Company, Rice and a wholly owned indirect subsidiary of the Company (RE Merger Sub). Pursuant to the terms of the Rice Merger Agreement, on November 13, 2017, RE Merger Sub merged with and into Rice (the Rice Merger) with Rice continuing as the surviving corporation and a wholly owned indirect subsidiary of the Company. Immediately thereafter, Rice merged with and into another wholly owned indirect subsidiary of the Company. As a result of the Rice Merger, the Company also acquired Rice's interests in Rice Midstream Partners LP (RMP). See Note E.

Unaudited Pro Forma Information

The following unaudited pro forma combined financial information presents the Company’s results as though the Rice Merger had been completed at January 1, 2017. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Rice Merger taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.

(in thousands, except per share data) (unaudited)
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Pro forma operating revenues
$
1,183,044

 
$
2,449,427

Pro forma net income
$
246,313

 
$
482,383

Pro forma net income attributable to noncontrolling interests
$
(111,108
)
 
$
(220,193
)
Pro forma net income attributable to EQT
$
135,205

 
$
262,190

Pro forma income per share (basic)
$
0.51

 
$
0.99

Pro forma income per share (diluted)
$
0.51

 
$
0.99


B.                        Midstream Streamlining Transactions and Financing

In February 2018, the Company's Board of Directors unanimously approved a plan to separate its upstream and midstream businesses, creating a standalone publicly traded corporation (SpinCo) that will focus on midstream operations (the Separation). SpinCo will own the midstream interests held by EQT. The Separation is intended to qualify as tax-free to EQT shareholders for U.S. federal income tax purposes. Under the Separation plan, EQT shareholders will retain their shares of the Company's stock and receive a pro-rata distribution of 80.1% of the outstanding shares of SpinCo common stock. In connection with announcing the planned Separation, the Company also announced its plans to pursue (i) a sale of Rice retained midstream assets acquired by EQT in connection with the Rice Merger to EQT Midstream Partners, LP (EQM) (NYSE: EQM); (ii) a merger of EQM and RMP;

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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




and (iii) a sale of RMP’s incentive distribution rights (IDRs) to EQT GP Holdings, LP (EQGP) (NYSE: EQGP)((i), (ii) and (iii) collectively, the Midstream Streamlining Transactions).

On April 25, 2018, EQT, Rice Midstream Holdings LLC (Rice Midstream), a wholly owned subsidiary of the Company, EQM and EQM Gathering Holdings, LLC (EQM Gathering), a wholly owned subsidiary of EQM, entered into a contribution and sale agreement pursuant to which EQM Gathering agreed to acquire all the outstanding limited liability company interests in each of (i) Rice West Virginia Midstream LLC (Rice West Virginia), (ii) Rice Olympus Midstream LLC (Rice Olympus) and (iii) Strike Force Midstream Holdings LLC (Strike Force Holdings), which owns a 75% limited liability company interest in Strike Force Midstream LLC (Strike Force Midstream), in exchange for an aggregate of 5,889,282 EQM common units and cash consideration of $1.15 billion, plus working capital adjustments (the Drop-Down Transaction). The Drop-Down Transaction was completed on May 22, 2018 with an effective date of May 1, 2018. In connection with the Drop-Down Transaction, the Company recorded a $15.5 million gain to additional paid-in-capital, a decrease in noncontrolling interest in consolidated subsidiary of $20.3 million and an increase to deferred tax liability of $4.8 million.

On May 1, 2018, pursuant to the Purchase and Sale Agreement dated April 25, 2018, by and among EQM, EQM Gathering, Gulfport Energy Corporation (Gulfport) and an affiliate of Gulfport, EQM Gathering acquired the remaining 25% limited liability company interest in Strike Force Midstream not owned by Strike Force Holdings for $175 million (the Gulfport Transaction). As a result, EQM has owned 100% of Strike Force Midstream since May 1, 2018.

On May 22, 2018, pursuant to an Incentive Distribution Rights Purchase and Sale agreement dated April 25, 2018, by and among the Company, Rice Midstream GP Holdings (Rice Midstream GP Holdings), a wholly owned subsidiary of the Company that owned the RMP IDRs, and EQGP, EQGP acquired all of the issued and outstanding RMP IDRs in exchange for 36,293,766 EQGP common units (the RMP IDR Purchase). As a result of the RMP IDR Purchase, EQT's percentage ownership of the outstanding EQGP common units increased from approximately 90.1% to approximately 91.3%. In connection with the RMP IDR Purchase, the Company recorded a $35.1 million loss to additional paid-in-capital, an increase in noncontrolling interest in consolidated subsidiary of $46.1 million and a decrease to deferred tax liability of $11.0 million.

On April 25, 2018, EQM entered into an Agreement and Plan of Merger (the Midstream Merger Agreement) with RMP, Rice Midstream Management LLC, the general partner of RMP (the RMP General Partner), EQT Midstream Services, LLC, the general partner of EQM (the EQM General Partner), EQM Acquisition Sub, LLC, a wholly owned subsidiary of EQM (Merger Sub), EQM GP Acquisition Sub, LLC, a wholly owned subsidiary of EQM (GP Merger Sub), and, solely for certain limited purposes set forth therein, the Company. Pursuant to the Midstream Merger Agreement, on July 23, 2018, Merger Sub and GP Merger Sub merged with and into RMP and the RMP General Partner, respectively, with RMP and the RMP General Partner surviving as wholly owned subsidiaries of EQM (the Midstream Mergers). Pursuant to the Midstream Merger Agreement, each RMP common unit issued and outstanding immediately prior to the effective time of the Midstream Mergers was converted into the right to receive 0.3319 EQM common units (the Midstream Mergers Consideration), the issued and outstanding RMP IDRs were canceled and each outstanding award of phantom units in respect of RMP common units fully vested and converted into the right to receive the Midstream Mergers Consideration, less applicable tax withholding, in respect of each RMP common unit subject thereto. The aggregate Midstream Mergers Consideration consisted of approximately 34 million EQM common units. As a result of the Midstream Mergers, RMP's common units are no longer publicly traded.

Also in connection with the completion of the Midstream Mergers, on July 23, 2018, EQM repaid approximately $260 million of borrowings outstanding under the Credit Agreement, dated as of December 22, 2014, by and among RMP, as parent guarantor, Rice Midstream OpCo LLC, a wholly owned subsidiary of RMP (RMP OpCo), as borrower, Wells Fargo Bank, N.A., as administrative agent, and the lenders and other parties from time to time party thereto (the RMP Credit Agreement), and the RMP Credit Agreement was terminated.

On April 25, 2018, EQM entered a $2.5 billion unsecured multi-draw 364-day term loan facility with a syndicate of lenders (the EQM Term Loan Facility). The EQM Term Loan Facility was used to fund the cash consideration for the Drop-Down Transaction, to repay borrowings under EQM’s $1 billion credit facility, and for other general partnership purposes. During the second quarter of 2018, the balance outstanding under the EQM Term Loan Facility was repaid, and the EQM Term Loan Facility was terminated on June 25, 2018 in connection with EQM's issuance of the EQM 2018 Senior Notes (described in the following section). As a result of the termination of the EQM Term Loan Facility, EQM expensed $3 million of deferred issuance costs. From April 25, 2018 through June 25, 2018, the maximum amount of EQM's outstanding borrowings under the EQM Term Loan Facility at any time was $1,825 million and the average daily balance was approximately $1,231 million. EQM incurred interest at a weighted average annual interest rate of approximately 3.3% for the period from April 25, 2018 through June 25, 2018.


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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




During the second quarter of 2018, EQM issued 4.75% senior notes due July 15, 2023 in the aggregate principal amount of $1.1 billion, 5.50% senior notes due July 15, 2028 in the aggregate principal amount of $850 million and 6.50% senior notes due July 15, 2048 in the aggregate principal amount of $550 million (collectively, the EQM 2018 Senior Notes). The offering of the EQM 2018 Senior Notes resulted in net proceeds of approximately $2,465.8 million, inclusive of a discount of $11.8 million and estimated debt issuance costs of $22.4 million. The net proceeds were used to repay the balance outstanding under the EQM Term Loan Facility and the RMP Credit Agreement and the remainder is expected to be used for general partnership purposes. The EQM 2018 Senior Notes were issued pursuant to new supplemental indentures to EQM's existing indenture dated August 1, 2014. The EQM 2018 Senior Notes contain covenants that limit EQM's ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all of substantially all of EQM's assets.

As a result of the Midstream Mergers, on July 23, 2018, an indirect wholly owned subsidiary of the Company received 9,554,530 EQM common units as Midstream Mergers Consideration.

C.                        EQT GP Holdings, LP

In January 2015, the Company formed EQGP to own the Company's partnership interests in EQM. EQGP issued an additional 36,293,766 common units to Rice Midstream GP Holdings in the RMP IDR Purchase, which increased EQT's limited partner interest in EQGP. As of June 30, 2018, EQT owns 276,008,766 EQGP common units, which represent a 91.3% limited partner interest, and the entire non-economic general partner interest in EQGP. EQGP owned the following EQM partnership interests as of June 30, 2018, which represent EQGP’s only cash-generating assets: 21,811,643 EQM common units, representing a 24.8% limited partner interest in EQM; 1,443,015 EQM general partner units, representing a 1.6% general partner interest in EQM; and all of EQM’s 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. Through EQGP's general partner interest, limited partner interest and IDRs in EQM, EQGP has a controlling financial interest in EQM; therefore, EQGP consolidates EQM. The Company is the ultimate parent company of EQGP and EQM.

On July 24, 2018, the Board of Directors of EQGP's general partner declared a cash distribution to EQGP’s unitholders for the second quarter of 2018 of $0.306 per common unit, or approximately $92.6 million. The distribution will be paid on August 23, 2018 to unitholders of record, including the Company, at the close of business on August 3, 2018. Based on the EQGP common units outstanding on July 26, 2018, the cash distributions by EQGP to EQT for the second quarter 2018 will be approximately $84.5 million.

D.                        EQT Midstream Partners, LP
 
In January 2012, the Company formed EQM to own, operate, acquire and develop midstream assets in the Appalachian Basin. EQM provides midstream services to the Company and third parties. EQM is consolidated in the Company’s financial statements. The Company records the noncontrolling interest of the EQM public limited partners in its financial statements.

As a result of the Drop-Down Transaction, in addition to the EQM common units owned by EQGP, as of June 30, 2018, EQT owned 5,889,282 EQM common units representing an additional 6.7% limited partner interest in EQM.

On July 24, 2018, the Board of Directors of EQM's general partner declared a cash distribution to EQM’s unitholders for the second quarter of 2018 of $1.09 per common unit. The cash distribution will be paid on August 14, 2018 to unitholders of record, including EQGP, at the close of business on August 3, 2018. Based on the EQM common units outstanding on July 26, 2018, the cash distributions by EQM to EQGP for the second quarter 2018 will be approximately $94.3 million consisting of: $23.8 million in respect of its limited partner interest, $2.4 million in respect of its general partner interest and $68.1 million in respect of its IDRs. The distribution amounts to EQGP related to its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the second quarter 2018 distribution. Based on the EQM common units outstanding on July 26, 2018, the cash distributions by EQM to EQT for the second quarter 2018 will be approximately $16.8 million.

E.                        Rice Midstream Partners LP

In connection with the Rice Merger, the Company acquired a 28.1% limited partner interest, all of the IDRs and the entire non-economic general partner interest in RMP. See the discussion of the RMP IDR Purchase and Midstream Mergers in Note B. Due to the timing of the Midstream Mergers, RMP did not declare a cash distribution for the second quarter 2018.

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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)





F.        Revenue from Contracts with Customers

As discussed in Note S, the Company adopted Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not materially change the Company's amount and timing of revenues. The Company applied the ASU only to contracts that were not completed as of January 1, 2018. The Company has elected to exclude all taxes from the measurement of transaction price.

For the sale of natural gas, oil and natural gas liquids (NGLs), the Company generally considers the delivery of each unit (MMBtu or Bbl) to be a separate performance obligation that is satisfied upon delivery. These contracts typically require payment within 25 days of the end of the calendar month in which the gas is delivered. A significant number of these contracts contain variable consideration because the payment terms refer to market prices at future delivery dates. In these situations, the Company has not identified a standalone selling price because the terms of the variable payments relate specifically to the Company’s efforts to satisfy the performance obligations. Other contracts contain fixed consideration (i.e. fixed price contracts or contracts with a fixed differential to NYMEX or index prices). The fixed consideration is allocated to each performance obligation on a relative standalone selling price basis, which requires judgment from management. For these contracts, the Company generally concludes that the fixed price or fixed differentials in the contracts are representative of the standalone selling price.

Based on management’s judgment, the performance obligations for the sale of natural gas, oil and NGLs are satisfied at a point in time because the customer obtains control and legal title of the asset when the natural gas, oil or NGL is delivered to the designated sales point.

The sales of natural gas, oil and NGLs as presented on the Statements of Consolidated Operations represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling natural gas, oil and NGLs on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis.

The Company provides gathering, transmission and storage services in two manners: firm service and interruptible service. Firm service contracts are typically long term and include firm reservation fees, which are fixed, monthly charges for the guaranteed reservation of pipeline or storage capacity. Volumetric based fees under firm contracts include usage fees and charges for actual volumes transported, gathered or stored in excess of firm contracted volume. Interruptible service contracts include volumetric based fees, which are charges for the volume of gas actually gathered, transported or stored and do not guarantee access to the pipeline or storage facility. These contracts can be short or long term. Firm and interruptible contracts are billed at the end of each calendar month, with payment typically due within 21 days.

Based on total projected contractual revenues and including contracts associated with expected future capacity from expansion projects that are not yet fully constructed but for which EQM has entered into firm contracts, EQM's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately 8 and 15 years, respectively, as of December 31, 2017.

Under a firm contract, the Company has a stand-ready obligation to provide the service over the life of the contract. The performance obligation for firm reservation fee revenue is satisfied over time as the pipeline capacity is made available to the customer. As such, the Company recognizes firm reservation fee revenue evenly over the contract period, using a time-elapsed output method to measure progress. The performance obligation for volumetric based fee revenues for usage fees under firm and interruptible contracts is generally satisfied upon the Company's monthly billing to the customer for actual volumes gathered, transported or stored during the month. The amount billed corresponds directly to the value of the Company’s performance to date as the customer obtains value as each volume is gathered, transported or stored.

Certain of EQM's gas gathering agreements are structured with minimum volume commitments (MVC), which specify quantities for which a customer will be charged regardless of actual quantities gathered under the contract. Revenue is recognized for MVCs when the performance obligation has been met, which is the earlier of when the gas is gathered or when it is remote that the producer will be able to meet its MVC.

Water services revenues primarily represent fees charged by RMP for the delivery of fresh water to a customer at a specified delivery point. All of RMP’s water services revenues are generated pursuant to variable price per volume contracts with customers in the Appalachian Basin. For water services contracts, the only performance obligation in each contract is for RMP to provide water (usually a minimum daily volume) to the customer at any designated delivery point. This performance obligation is generally

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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




satisfied upon RMP’s monthly billing to the customer for the volume of water provided during the month. For water services arrangements, the customer is typically invoiced on a monthly basis with payment due 21 days after the receipt of the invoice.
Because the Company's performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company has recognized amounts due from contracts with customers of $441.1 million as accounts receivable within the Condensed Consolidated Balance Sheet.

The table below provides disaggregated information regarding the Company’s revenues, presented consistently with the Company’s segment reporting. Certain contracts that provide for the release of capacity that is not used to transport the Company’s produced volumes were deemed to be outside the scope of Revenue from Contracts with Customers. The cost of, and recoveries on, that capacity are reported within pipeline and net marketing services at EQT Production. Derivative contracts are also outside the scope of Revenue from Contracts with Customers.

Three Months Ended June 30, 2018
 
Revenues from contracts with customers
 
Other sources of revenue
 
Total
 
 
(Thousands)
Natural gas sales
 
$
855,924

 
$
—

 
$
855,924

NGLs sales
 
125,657

 
—

 
125,657

Oil sales
 
9,784

 
—

 
9,784

Sales of natural gas, oil and NGLs
 
$
991,365

 
$
—

 
$
991,365

 
 
 
 
 
 
 
Pipeline and net marketing services at EQT Production
 
$
9,391

 
$
3,789

 
$
13,180

EQM Gathering:
 
 
 
 
 
 
  Firm reservation fee revenues
 
111,702

 
—

 
111,702

  Volumetric based fee revenues:
 
 
 
 
 
 
       Usage fees under firm contracts
 
9,956

 
—

 
9,956

       Usage fees under interruptible contracts
 
58,958

 
—

 
58,958

EQM Transmission:
 
 
 
 
 
 
  Firm reservation fee revenues
 
82,222

 
—

 
82,222

  Volumetric based fee revenues:
 
 
 
 
 
 
       Usage fees under firm contracts
 
4,828

 
—

 
4,828

       Usage fees under interruptible contracts
 
2,095

 
—

 
2,095

RMP Gathering:
 
 
 
 
 


  Gathering revenues
 
52,966

 
—

 
52,966

  Compression revenues
 
9,315

 
—

 
9,315

Water services at RMP Water
 
42,655

 
—

 
42,655

Intersegment eliminations
 
(270,674
)
 
—

 
(270,674
)
Pipeline, water and net marketing services
 
$
113,414

 
$
3,789

 
$
117,203

 
 
 
 
 
 
 
Loss on derivatives not designated as hedges
 
$
—

 
$
(53,897
)
 
$
(53,897
)

 
 
 
 
 
 
Total operating revenues
 
$
1,104,779

 
$
(50,108
)
 
$
1,054,671



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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




Six Months Ended June 30, 2018
 
Revenues from contracts with customers
 
Other sources of revenue
 
Total
 
 
(Thousands)
Natural gas sales
 
$
1,945,684

 
$
—

 
$
1,945,684

NGLs sales
 
251,125

 
—

 
251,125

Oil sales
 
20,930

 
—

 
20,930

Sales of natural gas, oil and NGLs
 
$
2,217,739

 
$
—

 
$
2,217,739

 
 
 
 
 
 
 
Pipeline and net marketing services at EQT Production
 
$
11,668

 
$
24,582

 
$
36,250

EQM Gathering:
 
 
 
 
 
 
  Firm reservation fee revenues
 
221,635

 
—

 
221,635

  Volumetric based fee revenues:
 
 
 
 
 
 
       Usage fees under firm contracts
 
22,064

 
—

 
22,064

       Usage fees under interruptible contracts
 
116,545

 
—

 
116,545

EQM Transmission:
 
 
 
 
 
 
  Firm reservation fee revenues
 
179,997

 
—

 
179,997

  Volumetric based fee revenues:
 
 
 
 
 
 
       Usage fees under firm contracts
 
8,650

 
—

 
8,650

       Usage fees under interruptible contracts
 
7,432

 
—

 
7,432

RMP Gathering:
 
 
 
 
 
 
  Gathering revenues
 
105,696

 
—

 
105,696

  Compression revenues
 
18,086

 
—

 
18,086

Water services at RMP Water
 
65,618

 
—

 
65,618

Intersegment eliminations
 
(520,153
)
 
—

 
(520,153
)
Pipeline, water and net marketing services
 
$
237,238

 
$
24,582

 
$
261,820

 
 
 
 
 
 
 
Gain on derivatives not designated as hedges
 
$
—

 
$
8,695

 
$
8,695


 
 
 
 
 
 
Total operating revenues
 
$
2,454,977

 
$
33,277

 
$
2,488,254


The following table includes the transaction price allocated to the Company's remaining performance obligations on all contracts with fixed consideration. The table excludes all contracts that qualified for the exception to the relative standalone selling price method. Gathering firm reservation fees and transmission and storage firm reservation fees include amounts related to affiliate contracts.
 
2018 (a)
2019
2020
2021
2022
Thereafter
Total
 
(Thousands)
Natural gas sales
$
36,865

$
24,841

$
1,275

$
—

$
—

$
—

$
62,981

Gathering firm reservation fees
$
227,675

$
476,730

$
552,308

$
562,307

$
561,019

$
2,841,280

$
5,221,319

Gathering revenues supported by MVCs
$
—

$
65,700

$
71,370

$
71,175

$
71,175

$
136,875

$
416,295

Transmission and storage firm reservation fees
$
179,786

$
347,061

$
347,261

$
341,769

$
338,010

$
2,602,572

$
4,156,459

(a)    July 1 through December 31.


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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




G.        Investment in Nonconsolidated Entity

The Mountain Valley Pipeline, LLC (MVP Joint Venture) is constructing the Mountain Valley Pipeline (MVP), an estimated 300-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. EQM is the operator of the MVP and owned a 45.5% interest in the MVP Joint Venture as of June 30, 2018. The MVP Joint Venture is a variable interest entity because it has insufficient equity to finance its activities during the construction stage of the project. EQM is not the primary beneficiary because it does not have the power to direct the activities of the MVP Joint Venture that most significantly impact its economic performance. Certain business decisions require the approval of owners holding more than a 66 2/3% interest in the MVP Joint Venture and no one member owns more than a 66 2/3% interest. The MVP Joint Venture is an equity method investment for accounting purposes as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture. The MVP Joint Venture has modified its construction schedule for the MVP and now anticipates a first quarter 2019 in-service date. As currently designed, the total cost for the MVP is expected to be $3.5 billion to $3.7 billion, excluding Allowance for Funds Used During Construction (AFUDC).

In May 2018, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for $445.9 million, of which $193.4 million was paid in July 2018 and $252.5 million is expected to be paid in the third quarter of 2018. The capital contribution payable has been reflected on the Condensed Consolidated Balance Sheet as of June 30, 2018 with a corresponding increase to the Company's investment in the MVP Joint Venture.

Equity income is primarily EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP.

As of June 30, 2018, 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. As of June 30, 2018, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $1,094 million, which consists of the investment in nonconsolidated entity balance on the Condensed Consolidated Balance Sheet as of June 30, 2018 and amounts that could have become due under EQM's performance guarantee as of that date.

In April 2018, the MVP Joint Venture announced the MVP Southgate project, a proposed 70-mile interstate pipeline that will extend from the MVP at Pittsylvania County, Virginia to new delivery points in Rockingham and Alamance Counties, North Carolina. The MVP Southgate project is anchored by a firm capacity commitment from PSNC Energy. The preliminary MVP Southgate project cost estimate is $350 million to $500 million, which is expected to be spent in 2019 and 2020. EQM is expected to have between 33% and 48% ownership in the MVP Southgate project and will operate the pipeline. Subject to approval by the FERC, the MVP Southgate has a targeted in-service date of the fourth quarter 2020.

H.     Consolidated Variable Interest Entities

As of June 30, 2018, the Company determined EQGP, EQM and RMP to be variable interest entities. Through EQT's ownership and control of EQGP's general partner, EQM's general partner and RMP's general partner, EQT has the power to direct the activities that most significantly impact the economic performance of EQGP, EQM and RMP. In addition, through EQT's limited partner interest in EQGP and EQGP's general partner interest, limited partner interest and IDRs in EQM, EQT has the obligation to absorb the losses of EQGP and EQM and the right to receive benefits from EQGP and EQM, in accordance with such interests. Furthermore, through EQT's limited partner interest and IDRs in RMP, EQT had the obligation to absorb the losses of RMP and the right to receive benefits from RMP, in accordance with such interests. As EQT has a controlling financial interest in, and is primary beneficiary of, EQGP, EQM and RMP, EQT consolidates EQGP, EQM and RMP. See Note 13 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional information related to the consolidated variable interest entities.

The risks associated with the operations of EQGP, EQM and RMP are discussed in their respective Annual Reports on Form 10-K for the year ended December 31, 2017, as updated by any Quarterly Reports on Form 10-Q. See further discussion of the impact that EQT's ownership and control of EQGP, EQM and RMP 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, 2017, including in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." See Notes C, D and E for further discussion of EQGP, EQM and RMP, 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 June 30, 2018 and December 31, 2017.

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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




Classification
 
June 30, 2018
 
December 31, 2017
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
684,456

 
$
2,857

Accounts receivable
 
47,587

 
28,804

Prepaid expenses and other
 
9,556

 
8,470

Property, plant and equipment, net
 
3,922,144

 
2,804,059

Goodwill
 
37,954

 
—

Intangible assets, net
 
596,887

 
—

Other assets
 
1,028,418

 
483,004

Liabilities:
 
 
 
 
Accounts payable
 
$
84,969

 
$
47,042

Other current liabilities
 
484,884

 
133,531

Credit facility borrowings
 
—

 
180,000

Senior Notes
 
3,453,975

 
987,352

Other liabilities and credits
 
21,442

 
20,273


The following table summarizes EQGP's Statements of Consolidated Operations and Cash Flows for the three and six months ended June 30, 2018 and 2017, inclusive of affiliate amounts.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Thousands)
Operating revenues
 
$
269,761

 
$
198,966

 
$
556,323

 
$
402,392

Operating expenses
 
89,419

 
58,463

 
166,875

 
117,988

Other expenses
 
8,777

 
1,949

 
9,768

 
3,862

Net income
 
$
171,565

 
$
138,554

 
$
379,680

 
$
280,542

 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
219,297

 
$
158,886

 
$
440,071

 
$
319,655

Net cash used in investing activities
 
(1,422,852
)
 
(125,612
)
 
(1,676,669
)
 
(207,299
)
Net cash provided by (used in) financing activities
 
1,852,799

 
(63,255
)
 
1,876,692

 
(160,022
)


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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




The following table presents amounts included in the Company’s Condensed Consolidated Balance Sheets that are for the use or obligation of RMP as of June 30, 2018 and December 31, 2017.
Classification
 
June 30, 2018
 
December 31, 2017
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
17,339

 
$
10,538

Accounts receivable
 
9,016

 
12,246

Prepaid expenses and other
 
541

 
1,327

Property, plant and equipment, net
 
1,479,671

 
1,431,802

Goodwill
 
1,346,918

 
1,346,918

Other assets
 
8,871

 
—

Liabilities:
 
 
 
 
Accounts payable
 
$
30,966

 
$
24,634

Other current liabilities
 
2,338

 
4,200

Credit facility borrowings
 
260,000

 
286,000

Other liabilities and credits
 
9,572

 
9,360


The following table summarizes RMP’s Statements of Consolidated Operations and Cash Flows for the three and six months ended June 30, 2018 and 2017, inclusive of affiliate amounts.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Thousands)
Operating revenues
 
$
104,936

 
$
—

 
$
189,400

 
$
—

Operating expenses
 
41,341

 
—

 
70,340

 
—

Other expenses
 
2,382

 
—

 
4,330

 
—

Net income
 
$
61,213

 
$
—

 
$
114,730

 
$
—

 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
118,725

 
$
—

 
$
181,261

 
$
—

Net cash used in investing activities
 
(47,358
)
 
—

 
(80,070
)
 
—

Net cash used in financing activities
 
(100,546
)
 
—

 
(94,390
)
 
—


I.                        Financial Information by Business Segment
 
Prior to the Rice Merger, the Company reported its results of operations through three business segments: EQT Production, EQT Gathering and EQT Transmission. These reporting segments reflected the Company's lines of business and were reported in the same manner in which the Company evaluated its operating performance through September 30, 2017. Following the Rice Merger, the Company adjusted its internal reporting structure to incorporate the newly acquired assets. The Company now conducts its business through five business segments: EQT Production, EQM Gathering (formerly known as EQT Gathering), EQM Transmission (formerly known as EQT Transmission), RMP Gathering and RMP Water.
Rice Olympus, Strike Force Holdings and Rice West Virginia were businesses and the Drop-Down Transaction was a transaction between entities under common control; therefore, EQM recorded the assets and liabilities of these entities at their carrying amounts to EQT on the effective date of the transaction. EQM also recast its consolidated financial statements to retrospectively reflect the pre-acquisition results as if the entities were owned by EQM from the date of the Rice Merger, November 13, 2017, as that is the date those entities came under the common control of EQT. EQT has recast its segment information consistent with the EQM recast, including recasting the $78.4 million of goodwill assigned to the Rice retained midstream assets in the purchase price accounting for the Rice Merger from EQT Production to EQM Gathering.
In addition, the assets associated with the investment in the MVP JV were included within the headquarters segment assets balance prior to June 30, 2018. The investment in the MVP JV is now included in the transmission segment as this segment classification better aligns with the ultimate operations of the MVP. Segment asset balances at December 31, 2017 have been reclassified to conform to this presentation.

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EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 


Three Months Ended June 30, 2018
EQT Production
 
EQM Gathering
 
EQM Transmission
 
RMP
Gathering
 
RMP
Water
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
991,365

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
991,365

Pipeline, water and net marketing services
13,180

 
180,616

 
89,145

 
62,281

 
42,655

 
(270,674
)
 
117,203

Loss on derivatives not designated as hedges
(53,897
)
 
—

 
—

 
—

 
—

 
—

 
(53,897
)
Total operating revenues
$
950,648

 
$
180,616

 
$
89,145

 
$
62,281

 
$
42,655

 
$
(270,674
)
 
$
1,054,671


Three Months Ended June 30, 2017
EQT Production
 
EQM Gathering
 
EQM Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
576,714

 
$
—

 
$
—

 
$
—

 
$
576,714

Pipeline and net marketing services
8,061

 
112,145

 
84,670

 
(139,174
)
 
65,702

Gain on derivatives not designated as hedges
46,326

 
—

 
—

 
—

 
46,326

Total operating revenues
$
631,101

 
$
112,145

 
$
84,670

 
$
(139,174
)
 
$
688,742

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
EQT Production
 
EQM Gathering
 
EQM Transmission
 
RMP Gathering
 
RMP Water
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
2,217,739

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,217,739

Pipeline and net marketing services
36,250

 
360,244

 
196,079

 
123,782

 
65,618

 
(520,153
)
 
261,820

Gain on derivatives not designated as hedges
8,695

 
—

 
—

 
—

 
—

 
—

 
8,695

Total operating revenues
$
2,262,684

 
$
360,244

 
$
196,079

 
$
123,782

 
$
65,618

 
$
(520,153
)
 
$
2,488,254

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
EQT Production
 
EQM Gathering
 
EQM Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
1,250,179

 
$
—

 
$
—

 
$
—

 
$
1,250,179

Pipeline and net marketing services
22,516

 
214,474

 
182,413

 
(273,739
)
 
145,664

Gain on derivatives not designated as hedges
187,068

 
—

 
—

 
—

 
187,068

Total operating revenues
$
1,459,763

 
$
214,474

 
$
182,413

 
$
(273,739
)
 
$
1,582,911


18
Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Thousands)
Operating income (loss):
 

 
 

 
 
 
 
EQT Production (a)
$
(79,846
)
 
$
52,884

 
$
(2,005,645
)
 
$
310,433

EQM Gathering
121,631

 
83,425

 
252,513

 
157,129

EQM Transmission
60,642

 
57,863

 
140,093

 
129,467

RMP Gathering
39,614

 
—

 
83,709

 
—

RMP Water
23,981

 
—

 
35,351

 
—

Unallocated expenses and intersegment eliminations (b)
(66,053
)
 
(4,045
)
 
(129,568
)
 
(15,926
)
Total operating income (loss)
$
99,969

 
$
190,127

 
$
(1,623,547
)
 
$
581,103


(a)
Impairment of long-lived assets of $0.1 billion is included in EQT Production operating income for the three months ended June 30, 2018 and $2.4 billion for the six months ended June 30, 2018. See Note Q.
(b)
Unallocated expenses consist of compensation expense and administrative costs, including transaction costs of $19.7 million for the three months ended June 30, 2018 and $54.5 million for the six months ended June 30, 2018. Intersegment eliminations include the profit on water services that are provided to EQT Production and capitalized as part of development costs of $24.9 million for the three months ended June 30, 2018 and $47.5 million for the six months ended June 30, 2018.

Reconciliation of operating income (loss) to net income (loss):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Thousands)
 
 
 
 
Total operating income (loss)
$
99,969

 
$
190,127

 
$
(1,623,547
)
 
$
581,103

Other income
11,752

 
6,305

 
21,337

 
9,354

Interest expense
77,004

 
44,078

 
147,017

 
86,733

Income tax (benefit) expense
(101,629
)
 
29,709

 
(440,594
)
 
130,374

Net income (loss)
$
136,346

 
$
122,645

 
$
(1,308,633
)
 
$
373,350


 
June 30, 2018
 
December 31, 2017
 
(Thousands)
Segment assets:
 

 
 

EQT Production
$
19,393,931

 
$
21,015,132

EQM Gathering
3,151,655

 
2,961,099

EQM Transmission
2,486,059

 
1,923,427

RMP Gathering
2,800,534

 
2,720,305

RMP Water
165,476

 
185,079

Total operating segments
27,997,655

 
28,805,042

Headquarters assets, including cash and short-term investments
965,573

 
717,562

Total assets
$
28,963,228

 
$
29,522,604



19
Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Thousands)
Depreciation and depletion: (c)
 

 
 

 
 
 
 
EQT Production
$
374,782

 
$
219,211

 
$
770,635

 
$
430,308

EQM Gathering
15,646

 
9,555

 
30,590

 
18,415

EQM Transmission
12,430

 
11,845

 
24,871

 
23,532

RMP Gathering
8,236

 
—

 
16,360

 
—

RMP Water
5,798

 
—

 
11,569

 
—

Other
780

 
206

 
1,540

 
480

Total
$
417,672

 
$
240,817

 
$
855,565

 
$
472,735

 
 
 
 
 
 
 
 
Expenditures for segment assets: (d)
 

 
 

 
 
 
 
EQT Production (e)
$
739,183

 
$
455,721

 
$
1,369,941

 
$
1,401,179

EQM Gathering
139,099

 
53,708

 
252,297

 
102,546

EQM Transmission
27,962

 
29,978

 
46,891

 
51,367

RMP Gathering
47,358

 
—

 
68,298

 
—

RMP Water
7,002

 
—

 
9,377

 
—

Other and intersegment eliminations (f)
(21,889
)
 
2,967

 
(43,112
)
 
4,595

Total
$
938,715

 
$
542,374

 
$
1,703,692

 
$
1,559,687

 
(c)
Excludes amortization of intangible assets.
(d)
Includes the capitalized portion of non-cash stock-based compensation costs, non-cash acquisitions and the impact of capital accruals. The impact of accrued capital expenditures includes the reversal of the prior period accrual as well as the current period estimate, both of which are non-cash items. The net impact of these non-cash items was $(34.3) million and $37.4 million for the three months ended June 30, 2018 and 2017, respectively, and $6.6 million and $58.4 million for the six months ended June 30, 2018 and 2017, respectively. These non-cash items are excluded from capital expenditures on the Statements of Condensed Consolidated Cash Flows. Expenditures for segment assets does not include consideration for the Rice Merger.
(e)
Expenditures for segment assets in the EQT Production segment included $41.3 million and $47.0 million for fill-ins and bolt-ons associated with legacy EQT acreage for the three months ended June 30, 2018 and 2017, respectively, and $78.1 million and $89.7 million for fill-ins and bolt-ons associated with legacy EQT acreage for the six months ended June 30, 2018 and 2017, respectively. The three and six months ended June 30, 2017 included $141.7 million and $811.2 million of cash capital expenditures, respectively, and $9.7 million of non-cash capital expenditures for the six months ended June 30, 2017, for the acquisitions discussed in Note P.
(f)
Intersegment eliminations include profit on water services that are provided to EQT Production and capitalized as part of development costs.


20
Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

J.                        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, collar and option agreements that are typically placed with financial institutions. The creditworthiness of all counterparties is regularly monitored. Swap agreements involve payments to or receipts from counterparties based on the differential between two prices for the commodity. Collar agreements require the counterparty to pay the Company if the index price falls below the floor price and the Company to pay the counterparty if the index price rises above the cap price. The Company also sells call options that require the Company to pay the counterparty if the index price rises above the strike price. The Company engages in basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to fluctuations in interest rates. The Company has also engaged in a limited number of swaptions that are recorded as derivative commodity instruments for accounting purposes.

The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature. The Company can net settle its derivative instruments at any time.
 
The Company discontinued cash flow hedge accounting in 2014; therefore, all changes in fair value of the Company’s derivative instruments are recognized within operating revenues in the Statements of Consolidated Operations.

In connection with the Rice Merger, the Company assumed all outstanding derivative commodity instruments held by Rice. The assets and liabilities assumed were recognized at fair value at the closing date and subsequent changes in fair value were recognized within operating revenues in the Statements of Consolidated Operations. The derivative commodity instruments assumed were substantially similar to instruments previously held by the Company.

Contracts which result in physical delivery of a commodity expected to be used or sold by the Company in the normal course of business are designated as normal purchases and sales and are exempt from derivative accounting.
 
OTC arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows. 

With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of equity production and portions of its basis exposure covering approximately 2,874 Bcf of natural gas and 1,012 Mbbls of NGLs as of June 30, 2018, and 2,148 Bcf of natural gas and 1,460 Mbbls of NGLs as of December 31, 2017. The open positions at June 30, 2018 and December 31, 2017 had maturities extending through December 2024 and December 2022, respectively.

The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities as of June 30, 2018 and December 31, 2017. 
As of June 30, 2018
 
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
 
$
270,288

 
$
(94,320
)
 
$
(3,105
)
 
$
172,863

Liability derivatives:
 
 
 
 
 
 

 
 

Derivative instruments, at fair value
 
$
146,061

 
$
(94,320
)
 
$
—

 
$
51,741


21
Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

As of December 31, 2017
 
Derivative
instruments,
recorded in the
Condensed
Consolidated
Balance
Sheet, gross
 
Derivative
instruments
subject to 
master
netting
agreements
 
Margin
deposits
remitted to
counterparties
 
Derivative
instruments, net
 
 
(Thousands)
Asset derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
241,952

 
$
(86,856
)
 
$
—

 
$
155,096

Liability derivatives: