Form 8-K filed by EQT CORP on 2021-09-28
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of report (Date of earliest event reported):  September 28, 2021

 

EQT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania   001-3551   25-0464690
(State or Other Jurisdiction
of Incorporation)
  (Commission File Number)   (IRS Employer
Identification Number)

 

625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania 15222

(Address of principal executive offices, including zip code)

 

(412) 553-5700

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨       Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨       Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨       Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨       Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, no par value   EQT   New York Stock Exchange

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth 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. ¨

 

 

 

 

 

 

Item 8.01.  Other Events.

 

Alta Acquisition

 

As previously reported, on July 21, 2021, EQT Corporation (EQT and, together with its consolidated subsidiaries, the Company or we) consummated the previously announced acquisition (the Alta Acquisition) of Alta Marcellus Development, LLC (ARD Marcellus) and ARD Operating, LLC (ARD and, together with ARD Marcellus, the Alta Target Entities). The following exhibits relating to the Alta Acquisition or the Alta Target Entities are attached to this Current Report on Form 8-K and incorporated herein by reference:

 

·Exhibit 99.1: Audited combined financial statements of the Alta Target Entities as of June 30, 2021 and 2020, and for the years then ended, and the notes related thereto;

 

·Exhibit 99.2: Unaudited pro forma condensed combined balance sheet of the Company as of June 30, 2021 and unaudited pro forma condensed combined statements of operations of the Company for the six months ended June 30, 2021 and the year ended December 31, 2020, and the notes related thereto; and

 

·Exhibit 99.3: Audit letter prepared by Netherland, Sewell & Associates, Inc., independent petroleum engineers, relating to ARD Marcellus’s estimated quantities of its proved natural gas and oil reserves as of June 30, 2021.

 

Update on Margin Posting Obligations, Hedge Positions and Liquidity

 

Natural gas is a commodity, and we typically receive market-based pricing for the natural gas we produce. To protect our future cash flows from the risk of unanticipated declines in commodity prices, we utilize exchange-traded and over the counter (OTC) derivative contracts to hedge a portion of our forecasted natural gas production. All of our exchange-traded derivative contracts require us to post margin deposits based on an established initial margin requirement and the net liability position, if any, of the fair value of the associated contracts. Certain of our OTC derivative contracts provide that, if EQT’s credit rating assigned by Moody’s Investors Service, Inc. (Moody’s) or S&P Global Ratings (S&P) is below an agreed-upon credit rating threshold, and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, the counterparty to such contract can require us to deposit collateral with such counterparty. Similarly, if such counterparty’s credit rating assigned by Moody’s or S&P is below the agreed-upon credit rating threshold, and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, we can require the counterparty to deposit collateral with us. The cash collateral provided to our hedge counterparties, which is interest-bearing, is returned to us in whole or in part upon an increase in EQT’s credit rating or a reduction in the derivative liability, depending on the amount of such reduction, or in whole upon settlement of the related derivative contract. The significant majority of our OTC derivative contracts provide that, upon EQT obtaining an investment grade rating (“Baa3” or higher by Moody’s and “BBB–” or higher by S&P), we are not required to post margin with the hedge counterparty. As of September 24, 2021, EQT’s senior notes were rated “Ba1” by Moody’s and “BB+” by S&P.

 

During the third quarter of 2021, we amended our agreements with six of our largest OTC hedge counterparties to permanently or temporarily reduce or eliminate our margin posting obligations associated with our OTC derivative contracts with these hedge counterparties, which serve to mitigate the amount of cash collateral that we would otherwise have been required to post based on current New York Mercantile Exchange (NYMEX) strip pricing. Additionally, during the third quarter of 2021, we entered into certain swaps, swaptions and calls to reposition our 2021 and 2022 hedge portfolio, opening up incremental upside participation in the benefits of rising natural gas prices and further mitigating potential incremental margin posting requirements. As of September 24, 2021, our margin balance on our existing hedge portfolio was approximately $0.6 billion, as compared to approximately $0.5 billion as of June 30, 2021, despite a significant increase in natural gas prices between June 30, 2021 and September 24, 2021.

 

 

 

 

The following table summarizes the approximate volume and prices of our NYMEX hedge positions through 2024 as of September 24, 2021:

 

   2021(a)   2022   2023   2024 
Swaps:                    
Volume (MMDth)   314    1,185    166    2 
Average Price ($/Dth)  $2.39   $2.69   $2.53   $2.67 
Calls – Net Short:                    
Volume (MMDth)   43    343    77    15 
Average Short Strike Price ($/Dth)  $2.92   $2.98   $2.89   $3.11 
Puts – Net Long:                    
Volume (MMDth)   53    183    69    15 
Average Long Strike Price ($/Dth)  $2.58   $2.68   $2.40   $2.45 
Fixed Price Sales (b):                    
Volume (MMDth)   17    4    3     
Average Price ($/Dth)  $2.49   $2.38   $2.38   $ 

 

(a)    October 1 through December 31.

(b)    The fixed price natural gas sales agreements can be physically or financially settled.

 

For 2021 (October 1 through December 31), 2022, 2023 and 2024, we have natural gas sales agreements for approximately 5 million dekatherm (MMDth), 18 MMDth, 88 MMDth and 11 MMDth, respectively, that include average NYMEX ceiling prices of $3.17, $3.17, $2.84 and $3.21, respectively. We have also entered into derivative instruments to hedge basis. During the third quarter, we purchased 37 MMDth total of 2022 swaptions with an average strike price of $3.75. We may use other contractual agreements to implement our commodity hedging strategy from time to time. For further discussion of our hedging program, see Item 3., “Quantitative and Qualitative Disclosures About Market Risk” and Note 3 to the Condensed Consolidated Financial Statements in EQT’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.

 

As of August 31, 2021, we had $0.6 billion in credit facility borrowings and $0.6 billion letters of credit outstanding under our $2.5 billion credit facility.

 

Item 9.01.  Financial Statements and Exhibits.

 

(d)        Exhibits.

 

Exhibit No.   Description
23.1   Consent of Moss Adams LLP.
23.2   Consent of Netherland, Sewell & Associates, Inc.
99.1   Audited combined financial statements of ARD Operating, LLC and Alta Marcellus Development, LLC as of June 30, 2021 and 2020, and for the years then ended, and the notes related thereto.
99.2   Unaudited pro forma condensed combined balance sheet of EQT Corporation and its subsidiaries as of June 30, 2021 and unaudited pro forma condensed combined statements of operations of EQT Corporation and its subsidiaries for the six months ended June 30, 2021 and the year ended December 31, 2020, and the notes related thereto.
99.3   Audit letter prepared by Netherland, Sewell & Associates, Inc., dated August 5, 2021, with respect to estimates of reserves and future revenue of Alta Marcellus Development, LLC as of June 30, 2021.
104   Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

  

  EQT CORPORATION
     
Date:  September 28, 2021 By: /s/ William E. Jordan
  Name:  William E. Jordan
  Title:  Executive Vice President, General Counsel and Corporate Secretary

 

 

 

 

Exhibit 23.1 

 

Consent of Independent Auditor

 

We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of EQT Corporation and its predecessors:

 

·Registration Statement (Form S-3 No. 333-258135) pertaining to the registration of Common Stock,
·Registration Statement (Form S-3 No. 333-234151) pertaining to the registration of Debt Securities, Preferred Stock and Common Stock,
·Registration Statement (Form S-3 No. 333-158198) pertaining to the 2009 Dividend Reinvestment and Stock Purchase Plan,
·Registration Statement (Post-Effective Amendment No. 1 on Form S-8 to Form S-4 No. 333-219508) pertaining to the Rice Energy Inc. 2014 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-221529) pertaining to the Rice Energy Inc. 2014 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-82193) pertaining to the 1999 Non-Employee Directors’ Stock Incentive Plan,
·Registration Statement (Form S-8 No. 333-32410) pertaining to the Deferred Compensation Plan and the Directors’ Deferred Compensation Plan,
·Registration Statement (Form S-8 No. 333-122382) pertaining to the 2005 Employee Deferred Compensation Plan and the 2005 Directors’ Deferred Compensation Plan,
·Registration Statement (Form S-8 No. 333-152044) pertaining to the 2008 Employee Stock Purchase Plan,
·Registration Statement (Form S-8 No. 333-158682) pertaining to the 2009 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-195625) pertaining to the 2014 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-232657) pertaining to the 2019 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-237953) pertaining to the 2020 Long-Term Incentive Plan, and
·Registration Statement (Form S-8 No. 333-230969) pertaining to the Stock Option Inducement Award Agreement, dated April 22, 2019; the Performance Share Unit Inducement Award Agreement, dated April 22, 2019; the Restricted Stock Inducement Award Agreement (Cliff Vesting), dated April 22, 2019; and the Restricted Stock Inducement Award Agreement (Ratable Vesting), dated April 22, 2019;

 

of our report dated September 24, 2021 with respect to the combined financial statements of ARD Operating, LLC and Alta Marcellus Development, LLC as of June 30, 2021 and 2020, and for the years then ended, included in or made a part of this Current Report on Form 8-K.

 

/s/ Moss Adams LLP

 

Houston, Texas
September 28, 2021

 

 

 

 

Exhibit 23.2

 

 

 

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS

 

We hereby consent to the incorporation by reference in the following Registration Statements and related Prospectuses (collectively, the "SEC Filings"):

 

·Registration Statement (Form S-3 No. 333-258135) pertaining to the registration of Common Stock,
·Registration Statement (Form S-3 No. 333-234151) pertaining to the registration of Debt Securities, Preferred Stock and Common Stock,
·Registration Statement (Form S-3 No. 333-158198) pertaining to the 2009 Dividend Reinvestment and Stock Purchase Plan,
·Registration Statement (Post-Effective Amendment No. 1 on Form S-8 to Form S-4 No. 333-219508) pertaining to the Rice Energy Inc. 2014 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-221529) pertaining to the Rice Energy Inc. 2014 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-82193) pertaining to the 1999 Non-Employee Directors' Stock Incentive Plan,
·Registration Statement (Form S-8 No. 333-32410) pertaining to the Deferred Compensation Plan and the Directors' Deferred Compensation Plan,
·Registration Statement (Form S-8 No. 333-122382) pertaining to the 2005 Employee Deferred Compensation Plan and the 2005 Directors' Deferred Compensation Plan,
·Registration Statement (Form S-8 No. 333-152044) pertaining to the 2008 Employee Stock Purchase Plan,
·Registration Statement (Form S-8 No. 333-158682) pertaining to the 2009 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-195625) pertaining to the 2014 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-232657) pertaining to the 2019 Long-Term Incentive Plan,
·Registration Statement (Form S-8 No. 333-237953) pertaining to the 2020 Long-Term Incentive Plan, and
·Registration Statement (Form S-8 No. 333-230969) pertaining to the Stock Option Inducement Award Agreement, dated April 22, 2019; the Performance Share Unit Inducement Award Agreement, dated April 22, 2019; the Restricted Stock Inducement Award Agreement (Cliff Vesting), dated April 22, 2019; and the Restricted Stock Inducement Award Agreement (Ratable Vesting), dated April 22, 2019;

 

of our audit letter dated August 5, 2021 with respect to estimates of reserves and future revenue of Alta Marcellus Development, LLC as of June 30, 2021, included in or made a part of this Current Report on Form 8-K.

 

We have no interest of a substantial or material nature in EQT Corporation or any of its affiliates. We have not been employed on a contingent basis, and we are not connected with EQT Corporation, or any affiliate, as a promoter, underwriter, voting trustee, director, officer, employee or affiliate.

 

  Sincerely,
   
  NETHERLAND, SEWELL & ASSOCIATES, INC.
     
  By: /s/ Richard B. Talley, Jr.
    Richard B. Talley, Jr., P.E.
    Senior Vice President

 

Houston, Texas

September 28, 2021

 

Please be advised that the digital document you are viewing is provided by Netherland, Sewell & Associates, Inc. (NSAI) as a convenience to our clients. The digital document is intended to be substantively the same as the original signed document maintained by NSAI. The digital document is subject to the parameters, limitations, and conditions stated in the original document. In the event of any differences between the digital document and the original document, the original document shall control and supersede the digital document.

 

 

 

  

 

Exhibit 99.1 

 

 

 

Report of Independent Auditors

 

To the Management of EQT Corporation

 

Report on the Financial Statements

 

We have audited the accompanying combined financial statements of ARD Operating, LLC and Alta Marcellus Development, LLC (collectively, the “Company”), which comprise the combined balance sheets as of June 30, 2021 and 2020, and the related combined statements of operations, changes in equity and cash flows for the years then ended, and the related notes to the combined financial statements (collectively, the “financial statements”).

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

  1

 

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of ARD Operating, LLC and Alta Marcellus Development, LLC as of June 30, 2021 and 2020, and the combined results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Moss Adams LLP

 

Houston, Texas

September 24, 2021

 

2

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Combined Balance Sheets

 

ASSETS

 

   June 30, 
   2021   2020 
           
   (Amounts in thousands) 
CURRENT ASSETS:          
Cash and cash equivalents  $14,501   $11,986 
Accounts receivable:          
Natural gas sales receivables   82,445    35,672 
Joint interest billings and other   19,069    3,394 
Assets from risk management activities   26,031    37,544 
Advance to affiliates   239    609 
Prepaid expenses and other current assets   1,790    1,952 
Total current assets   144,075    91,157 
           
PROPERTY AND EQUIPMENT:          
Natural gas properties – full cost method:          
Evaluated properties   2,337,796    2,074,787 
Unevaluated properties   10,968    8,146 
Less: accumulated depreciation, depletion, amortization and impairment   (1,470,826)   (661,327)
Net natural gas properties   877,938    1,421,606 
           
Other property and equipment – net of accumulated depreciation of $2,502 and $2,166 as of June 30, 2021 and 2020, respectively   903    1,231 
Net property and equipment   878,841    1,422,837 
           
NON-CURRENT ASSETS:          
Assets from risk management activities   7,961    290 
Note receivable from affiliates and other   2,548    2,439 
Total non-current assets   10,509    2,729 
           
TOTAL ASSETS  $1,033,425   $1,516,723 

 

The accompanying notes are an integral part of these combined financial statements.3

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Combined Balance Sheets

 

LIABILITIES AND EQUITY

 

   June 30, 
   2021   2020 
         
   (Amounts in thousands) 
CURRENT LIABILITIES:          
Accounts payable  $30,260   $22,822 
Accrued capital expenditures   25,418    49,193 
Accrued liabilities   17,745    13,969 
Revenue-related payables   41,640    29,775 
Liabilities from risk management activities   128,149    7,811 
Total current liabilities   243,212    123,570 
           
NON-CURRENT LIABILITIES:          
Long-term debt, net   471,374    604,155 
Asset retirement obligations   24,090    21,526 
Liabilities from risk management activities   30,071    22,551 
Other liabilities   2,170    2,405 
Total non-current liabilities   527,705    650,637 
Total liabilities   770,917    774,207 
           
COMMITMENTS AND CONTINGENCIES (Note 4)          
           
EQUITY:          
Parent investment, net   262,508    742,516 
Total equity   262,508    742,516 
           
TOTAL LIABILITIES AND EQUITY  $1,033,425   $1,516,723 

 

The accompanying notes are an integral part of these combined financial statements.4

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Combined Statements of Operations

 

   Years Ended June 30, 
   2021   2020 
         
   (Amounts in thousands) 
REVENUES:          
Natural gas revenues  $622,754   $448,076 
Other operating revenues   21,538    15,217 
Net (loss) gain on commodity risk management activities   (58,326)   103,716 
Total revenues   585,966    567,009 
           
COSTS AND EXPENSES:          
Gathering, transportation and compression   140,714    109,670 
Direct operating   62,220    55,799 
Depreciation, depletion and amortization   178,193    171,562 
Impairment of natural gas properties   631,641    139,063 
General and administrative   5,540    8,631 
Accretion of asset retirement obligations   1,780    1,618 
Total costs and expenses   1,020,088    486,343 
           
OTHER (EXPENSE) INCOME:          
Interest expense, net and other   (29,011)   (35,048)
Net gain (loss) on interest rate derivatives   2,125    (12,786)
Total other expense   (26,886)   (47,834)
           
NET (LOSS) INCOME  $(461,008)  $32,832 

 

The accompanying notes are an integral part of these combined financial statements.5

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Combined Statements of Changes in Equity

 

   Parent Investment,
Net
 
    (Amounts in
thousands)
 
Balance at June 30, 2019  $792,184 
      
Distributions to Parent   (82,500)
Net income   32,832 
      
Balance at June 30, 2020   742,516 
      
Distributions to Parent   (19,000)
Net loss   (461,008)
      
Balance at June 30, 2021  $262,508 

 

The accompanying notes are an integral part of these combined financial statements.6

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Combined Statements of Cash Flows

 

   Years Ended June 30, 
   2021   2020 
         
   (Amounts in Thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss) income  $(461,008)  $32,832 
Adjustments to reconcile net (loss) income to cash provided by operating activities:          
Depreciation, depletion and amortization   178,193    171,562 
Impairment of natural gas properties   631,641    139,063 
Accretion of asset retirement obligations   1,780    1,618 
Amortization of deferred financing costs   2,959    2,967 
Unrealized loss (gain) on commodity risk management activities   149,530    (7,276)
Unrealized (gain) loss on interest rate derivatives   (17,830)   11,157 
Changes in operating assets and liabilities:          
Accounts receivable   (62,448)   12,778 
Prepaid expenses, advance to affiliates and other assets   532    (817)
Note receivable from affiliates and other   -    (2,400)
Accounts payable, accrued liabilities and other liabilities   22,846    (4,337)
Settlement of asset retirement obligations   (341)   (160)
Net cash provided by operating activities   445,854    356,987 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Additions to natural gas properties and other property and equipment   (288,707)   (269,627)
Net cash used in investing activities   (288,707)   (269,627)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from long-term debt   356,288    350,214 
Payments of long-term debt   (492,028)   (370,152)
Distributions to parent   (19,000)   (82,500)
Deferred financing costs and other   108    (39)
Net cash used in financing activities   (154,632)   (102,477)
NET CHANGE IN CASH AND CASH EQUIVALENTS   2,515    (15,117)
CASH AND CASH EQUIVALENTS, beginning of year   11,986    27,103 
CASH AND CASH EQUIVALENTS, end of year  $14,501   $11,986 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for interest  $25,986   $32,487 
           
NON-CASH ACTIVITIES:          
Accrual for capital expenditures  $25,418   $49,193 
Asset retirement obligations incurred  $1,125   $1,107 

 

The accompanying notes are an integral part of these combined financial statements.7

 

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Basis of Combination

 

Organization and Basis of Combination

 

Alta Resources Development, LLC (ARD or Parent) is a Delaware limited liability company formed on July 22, 2015, together with its subsidiaries to engage in the acquisition, exploration and development of onshore oil and natural gas assets in North America. Until the closing of the Acquisition (as defined below) on July 21, 2021, ARD Operating, LLC (ARDO) and Alta Marcellus Development, LLC (AMD) were wholly-owned direct subsidiaries of ARD and Alta Marcellus Midstream, LLC (AMM) and Alta Energy Marketing, LLC (AEM), were wholly-owned direct subsidiaries of AMD.

 

On July 21, 2021, EQT Acquisition HoldCo LLC (a wholly-owned indirect subsidiary of EQT Corporation (EQT)) acquired, directly or indirectly, all of the issued and outstanding equity interests of the Company (as defined below) pursuant to the Membership Interest Purchase Agreement (the Purchase Agreement) dated May 5, 2021 (the Acquisition). The purchase price for the Acquisition consisted of $1.0 billion in cash and 98,789,388 shares of EQT common stock, as adjusted pursuant to customary closing purchase price adjustments set forth in the Purchase Agreement. The Purchase Agreement contains customary representations and warranties, covenants, indemnification and termination provisions and has an effective date of January 1, 2021. The Purchase Agreement included the assignment of all material contracts to EQT other than those specifically settled at closing.

 

Following the closing of the Acquisition on July 21, 2021, EQT Acquisition HoldCo LLC became the sole owner of all of the equity interests of ARDO and AMD, and the Parent ceased to hold any interest in the Company. AMD continued to own all of the equity interests in its subsidiaries, AMM and AEM; however, on August 1, 2021, AEM merged into EQT Energy, LLC, a wholly-owned indirect subsidiary of EQT. Further, the names of AMD, ARDO and AMM have subsequently been changed to EQT AMD LLC, EQT ARO LLC and EQT AMM LLC, respectively.

 

The combined financial statements and related notes presented herein include the accounts of ARDO and AMD and its wholly-owned subsidiaries, AMM and AEM (collectively, the Company). Until the closing of the Acquisition, the Company collectively held and operated all of the Parent’s upstream and midstream assets. Unless expressly provided otherwise herein, all statements regarding the Company refer to the status of the Company as of June 30, 2021 and 2020 – during such time as it was wholly-owned by the Parent.

 

The Company operates in one segment, natural gas and oil development, exploitation, exploration and production in North America. The Company’s corporate office is located in Houston, Texas, its field office is located in Williamsport, Pennsylvania and its operations are principally located in seven counties in Pennsylvania.

 

Basis of Presentation

 

The combined financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial statements have been presented on a combined basis as ARDO and AMD and its subsidiaries were under common ownership and management. Material intercompany accounts and transactions have been eliminated. The combined financial statements of the Company, as presented, are materially the same as the consolidated financial statements of the Parent.

 

8

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies (continued)

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB Issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet. The provisions of ASU 2016-02 also modify the definition of a lease and outline the requirements for recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. This ASU is to be adopted using a modified retrospective approach. In May 2020, the FASB elected to defer the effective date for private companies to fiscal years beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the effect that adopting this guidance will have on its combined financial statements.

 

Accounting Estimates

 

The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and the accompanying notes. The most significant estimates pertain to natural gas reserve quantities and related cash flow estimates that form the basis for (i) the allocation of purchase price to evaluated and unevaluated properties, (ii) calculation of depreciation, depletion and amortization (DD&A) of natural gas properties, and (iii) the full cost ceiling test. Management emphasizes that reserve estimates are inherently imprecise and that estimates of reserves of non-producing properties and more recent discoveries are more imprecise than those for properties with long production histories. Other significant estimates include (a) estimated quantities and prices of natural gas sold but not collected, as of period-end; (b) accruals of capital and operating costs; (c) current asset retirement costs, settlement date, inflation rate and credit-adjusted-risk-free rate used in estimating asset retirement obligations; (d) assumptions and calculation techniques used in estimating the fair value of derivative financial instruments, as considered in Note 5; and (e) estimates of expenses related to legal, environmental and other contingencies, as considered in Note 4. Actual results could differ from the estimates and assumptions used in the preparation of the Company’s combined financial statements.

 

Significant Accounting Policies

 

Cash and Cash Equivalents

 

The Company considers cash equivalents to include all cash items, such as time deposits and short-term investments, including money market accounts, which mature in three months or less from the time of purchase.

 

Accounts Receivable

 

Accounts receivable consist of uncollateralized natural gas revenues due under normal trade terms, as well as joint interest billings due from working interest owners of natural gas properties for their share of expenses paid on their behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. There was no valuation allowance as of June 30, 2021 and 2020.

 

9

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies (continued)

 

Natural Gas Producing Activities

 

The Company follows the full cost method of accounting for natural gas properties. Under the full cost method, all costs associated with property acquisition, exploration, and development activities are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, delay rentals, cost of drilling, completing and equipping successful and unsuccessful natural gas wells and direct internal costs. Sales or other dispositions of natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would significantly change.

 

The capitalized costs of natural gas properties, plus estimated future development costs relating to proved reserves and estimated cost of dismantlement and abandonment are amortized on a unit-of-production method over the estimated productive life of the proved natural gas reserves. Unevaluated natural gas properties are excluded from this calculation. DD&A expense for the Company’s natural gas properties totaled approximately $177.9 million and $170.9 million for the years ended June 30, 2021 and 2020, respectively.

 

Capitalized natural gas property costs are limited to an amount (the ceiling limitation) equal to the sum of the following:

 

a)The present value of estimated future net revenues from the projected production of proved natural gas reserves, calculated using the twelve-month average of the first-day-of-the-month prices adjusted for location and quality differentials during the fiscal year (with consideration of price changes only to the extent provided by contractual arrangements) and a discount factor of 10%;

b)The cost of investments in unevaluated properties excluded from the costs being amortized; and

c)The lower of cost or estimated fair value of unevaluated properties included in the costs being amortized.

 

When it is determined that natural gas property costs exceed the ceiling limitation, an impairment charge is recorded to reduce carrying value to the ceiling limitation. For the year ended June 30, 2021 and 2020, the Company recorded an impairment expense of approximately $631.6 million and $139.1 million, respectively, due primarily to decreases in prices.

 

The costs of certain unevaluated leasehold acreage and certain wells being drilled are not amortized. The Company excludes all costs until proved reserves are found or until it is determined that the costs are impaired. Costs not amortized are periodically assessed for possible impairments or reductions in value. If an impairment is indicated, the amount is charged to the full cost pool, where it is subject to depletion and the ceiling limitation. Sales or other dispositions of unevaluated leasehold acreage are accounted for as adjustments to capitalized costs, with no gain recorded unless the proceeds exceed the carrying value of the related property.

 

10

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies (continued)

 

Other Property and Equipment

 

Other property and equipment are carried at cost. Depreciation is calculated using the straight-line method over estimated useful lives that range between 3 to 15 years. Gain or loss on retirement, sale, or other disposition of these assets is included in income in the period of disposition. Costs of major repairs that extend the useful life are capitalized and depreciated over the estimated remaining useful life of the asset. Costs for maintenance and repairs are expensed as incurred. Depreciation and amortization expense for the Company’s other property and equipment totaled approximately $0.3 million and $0.6 million for the years ended June 30, 2021 and 2020, respectively.

 

Asset Retirement Obligations

 

The fair value of asset retirement obligations is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made, and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The fair value of the asset retirement obligations is measured using expected future cash outflows adjusted for inflation and discounted to net present value at the Company’s credit-adjusted risk-free interest rate. Given the unobservable nature of the inputs, the initial measurement of the obligation is considered to be a non-recurring Level 3 fair value estimate. As discussed in “Fair Value Measurements and Fair Value of Financial Instruments,” Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. The liability is accreted to its then present value each period, and the capitalized cost is depleted or amortized over the estimated recoverable reserves using the units-of-production method. If the liability is settled for an amount other than the recorded amount, the variance is recorded to the full cost pool.

 

The following table is a reconciliation of the asset retirement obligations for the years ended June 30, 2021 and 2020 included in the combined balance sheets:

 

   (Amounts in
Thousands)
 
Asset retirement obligations at June 30, 2019  $18,961 
      
Liabilities incurred   1,107 
Liabilities settled   (160)
Accretion expense   1,618 
      
Asset retirement obligations at June 30, 2020   21,526 
      
Liabilities incurred   1,125 
Liabilities settled   (341)
Accretion expense   1,780 
      
Asset retirement obligations at June 30, 2021  $24,090 

 

11

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies (continued)

 

Deferred Financing Costs

 

The Company capitalizes certain direct costs incurred with the issuance of long-term debt, which is then amortized over the life of the debt. These amounts are presented as a reduction from the carrying amount of long-term debt in the combined balance sheets and the amortization is recognized in interest expense, net and other in the Company’s combined statements of operations.

 

Fair Value Measurements and Fair Value of Financial Instruments

 

GAAP defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. GAAP indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

 

Accounting Standards Codification (ASC) 820, Fair Value Measurement, establishes a three-level hierarchy for disclosure of the inputs to valuation used to measure fair value based on priority of the inputs to the valuation technique. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and derivative instruments. The recorded value of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value based on their short-term nature. The carrying value of long-term debt approximates fair value as the associated interest rate approximates current market rates. The estimated fair values of the derivatives have been determined using available market data and valuation methodologies (see Note 5).

 

Concentration and Credit Risk

 

The Company’s operations are concentrated in the Marcellus shale formation of the Appalachian Basin. This concentration of purchasers and joint interest owners may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. Additionally, factors adversely affecting the oil and gas exploration and production industry could adversely affect the Company and its customers. The Company does not anticipate any material impact on its financial results due to non-performance by the third parties.

 

12

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies (continued)

 

The purchasers of the Company’s marketed natural gas production consist primarily of independent marketers, major and independent oil and natural gas companies and gas pipeline companies. During the year ended June 30, 2021, two individual purchasers each accounted for more than 10% of the Company’s total marketed sales for the year: Sequent Energy Management, L.P. (17%) and PSEG Energy Resources & Trade LLC (12%). During the year ended June 30, 2020, two individual purchasers each accounted for more than 10% of the Company’s total marketed sales for the year: Sequent Energy Management, L.P. (15%) and PSEG Energy Resources & Trade LLC (12%). Natural gas sales receivable due from two purchasers individually accounted for more than 10% of the Company’s natural gas sales receivables as of June 30, 2021: Sequent Energy Management, L.P. (16%) and PSEG Energy Resources & Trade LLC (13%). Natural gas sales receivable due from two purchasers individually accounted for more than 10% of the Company’s natural gas sales receivable as of June 30, 2020: Sequent Energy Management, L.P. (16%) and PSEG Energy Resources & Trade LLC (13%).

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable and derivative financial instruments. The credit risk associated with the receivables and derivative financial instruments are mitigated by monitoring customers’ and counterparties’ creditworthiness. The Company does not believe that the loss of any of these customers would have a material adverse effect because alternative customers are readily available.

 

Additionally, the Company places cash and cash equivalents with high quality financial institutions and at times may exceed the federally insured limits. The Company has not experienced a loss in such accounts nor does it expect any related losses in the near-term.

 

Revenue Recognition

 

On July 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of July 1, 2019. Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the new revenue standard. Results for reporting periods beginning after July 1, 2019 are presented under the new revenue standard.

 

Natural Gas Sales

 

The Company applies the sales method of accounting for natural gas revenue. Natural gas sales revenues are generally recognized when control of the product is transferred to the customer and collectability is reasonably assured. The Company markets the majority of its natural gas production, both operated and non-operated taken in kind. An immaterial portion of its non-operated production not taken in kind is marketed by third party operators.

 

The Company delivers product to the ultimate third-party purchaser at a contractually agreed-upon delivery point. Consideration received is typically priced at or near the applicable published natural gas index price for the producing area from the purchaser, or, when applicable, at various delivered locations applicable to Company’s natural gas transportation contracts. Revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. The Company evaluated whether it was the principal or the agent in the transaction and concluded the Company is the principal as the ultimate third party is its customer and revenue is recognized on a gross basis, with gathering, compression and transportation fees presented as an expense.

 

13

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 1 – Organization and Summary of Significant Accounting Policies (continued)

 

Under the sales method, revenues are recognized based on the actual volume of natural gas sold to purchasers. The Company and other joint owners may sell more or less than their entitled share of production. Production volume is monitored to minimize these natural gas imbalances. Over and under deliveries are recorded when future estimated reserves are not adequate to cover the imbalance. As of June 30, 2021 and 2020, there is no asset or liability recorded for imbalances.

 

Marketing

 

AEM buys natural gas utilizing separate purchase transactions, generally with separate counterparties and subsequently sells that natural gas under separate contracts or under its existing contracts. In these arrangements, AEM takes control of the natural gas purchased prior to delivery. Revenues and expenses related to these transactions are reported gross in accordance with applicable accounting standards. Revenues related to these activities are presented in marketing revenues.

 

Midstream

 

AMM has interests in certain gathering systems that provide gathering, transportation and compression services to AEM as well as third parties. AMM receives and gathers shipper (customer) gas from specified receipt points to the delivery point(s) specified under each agreement. In addition, compression services may be provided on an as needed basis. These agreements are typically interruptible and usage- based such that third-party customers pay an agreed upon rate per MMBtu subject to gathering or compression, which are accounted for as midstream revenues.

 

Certain of the gathering systems which serve the Company’s operating area are operated by the Company but are not wholly-owned. AMM owns 50% of these certain gathering systems and does not receive additional revenues as operator of these gathering systems. AMM and the other co-owners in these systems share in revenues, operating costs and capital expenditures in proportion to their respective ownership interests. Revenues related to these activities are presented in midstream revenues. The gathering, compression and transportation fees are presented as gathering, transportation and compression expense. Any amounts recovered from co-owners in respect of their share of operating or capital costs are offset against the related expense such that Alta reports only its net share, consistent with proportionate consolidation guidance.

 

Income Taxes

 

The Parent elected to be taxed as a partnership for federal income tax purposes and therefore is not subject to federal income taxes. The members of the Parent are liable for the federal income taxes attributable to their allocable share of the consolidated taxable income of the Parent. The Company is a disregarded entity for federal and state income tax purposes.

 

14

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 2 – Long-Term Debt

 

Long-term debt consisted of the following:

 

   June 30, 
   2021   2020 
          
   (Amounts in Thousands) 
Revolving line of credit  $384,731   $509,355 
Senior secured second lien notes   91,158    102,274 
           
Total long-term debt   475,889    611,629 
Less: deferred financing costs   (4,515)   (7,474)
Long-term debt, net  $471,374   $604,155 

 

The table below summarizes maturities of long-term debt as of June 30, 2021 (in thousands):

 

2022  $- 
2023   - 
2024   475,889 
Total  $475,889 

 

Credit Agreement

 

Effective April 24, 2020, AMD amended its secured revolving credit agreement (the Revolving Credit Facility) to increase the range of applicable margins for ABR Loans and Eurodollar Loans and modify certain covenants. The Revolving Credit Facility provides a facility with a $1.25 billion commitment and a borrowing base of $800.0 million as of June 30, 2021. The borrowing base can be re-determined on a semi-annual basis, October and April, (a Scheduled Redetermination) or as may be requested one time in between each Scheduled Redetermination by the Lenders or the Company. To the extent that the borrowing base is re-determined at an amount that is below the amount currently outstanding, AMD has options under the Revolving Credit Facility including repayment of the amount borrowed above the re-determined borrowing base over a period of up to six months, provision of additional collateral equal to the amount borrowed above the re-determined borrowing base, or other alternatives as negotiated with the Lenders. The Revolving Credit Facility has a maturity date of the earlier of (a) March 31, 2024 or (b) to the extent any Permitted Second Lien Debt is outstanding as of such date, the date that is one hundred eighty (180) days prior to the earliest maturity date in respect of any such Permitted Second Lien Debt.

 

15

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 2 – Long-Term Debt (continued)

 

The obligations under the Revolving Credit Facility and guarantees of those obligations are secured by substantially all of AMD’s assets. Under the Revolving Credit Facility, AMD may also obtain letters of credit, the issuance of which would reduce a corresponding amount available for borrowing. As of June 30, 2021 and 2020, the amount borrowed under the Revolving Credit Facility was $384.7 million and $509.4 million, the value of letters of credit issued under the Revolving Credit Facility was $23.6 million and $25.9 million, and the amount remaining available for borrowing was $391.7 million and $264.8 million, respectively.

 

Pursuant to the Revolving Credit Facility agreement, interest on borrowings are calculated using either the Alternate Base Rate plus an applicable margin for Alternate Base Rate Loans (ABR Loans) or the adjusted London Interbank Offered Rate (LIBOR) over a term elected by AMD plus an applicable margin for Eurodollar Loans. The Alternate Base Rate is defined as the greater of (a) the prime rate established by the Administrative Agent, (b) the federal funds rate in effect plus 0.50% and (c) the daily one-month LIBOR plus 1.00%. The amendment increased the range of applicable margins for ABR Loans and Eurodollar Loans to a range of 2.50% to 3.50% from a range of 2.00% to 3.00%. The specific applicable margin used to determine the rate of each loan is based upon the current utilization of the borrowing base. In addition to interest, the banks receive various fees, including a commitment fee on the unutilized borrowing base. The commitment fee was also amended to be 0.500% per annum at all times, compared to 0.500% per annum if greater than 50% of the borrowing base is utilized and 0.375% per annum if less than 50% of the borrowing base is utilized previously. The Company had no ABR Loans outstanding as of June 30, 2021 and 2020. The weighted-average interest rate on loan amounts outstanding under the Revolving Credit Facility as of June 30, 2021 and 2020, was 3.10% and 3.18%, respectively.

 

The Revolving Credit Facility contains certain financial covenants typical for these types of agreements, including current ratio and total debt to EBITDAX (as defined in the Credit Agreement) ratio. Pursuant to the amendment of the Revolving Credit Facility, certain covenants were modified or added, as follows:

 

·Maintenance of the consolidated leverage covenant was reduced from 4.0x debt / EBITDA to 3.5x debt / EBITDA.

·The restricted payments test was amended from 3.0x debt / EBITDA to 2.5x debt / EBITDA.

·Addition of certain industry anti-cash hoarding provisions, including requiring prepayment of excess cash over certain thresholds first to any ABR Borrowings outstanding then ratably to Eurodollar Borrowings then outstanding.

 

As of June 30, 2021, AMD was in compliance with all of its financial covenants under the Revolving Credit Facility.

 

At the closing of the Acquisition, the outstanding balance of the Revolving Credit Facility was paid in full using proceeds received from the Acquisition.

 

16

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 2 – Long-Term Debt (continued)

 

Senior Secured Second Lien Notes

 

On March 31, 2017, AMD closed $300 million aggregate principal amount of 7.75% Senior Secured Second-Priority Notes due March 31, 2024 (the Senior Secured Second Lien Notes) in a private offering pursuant to an indenture dated as of March 31, 2017 (the Senior Secured Second Lien Notes Indenture). The obligations under the Senior Secured Second Lien Notes and guarantees of those obligations are secured by substantially all of AMD’s assets.

 

The Senior Secured Second Lien Notes are guaranteed by AMD’s subsidiary guarantors Alta Marcellus Midstream, LLC and Alta Energy Marketing, LLC. Interest accrues at the rate of 7.75% per annum and is payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year during the term. The amount outstanding on the Senior Secured Second Lien Notes was $91.2 million and $102.3 million on June 30, 2021 and 2020, respectively. The covenants and events of default under AMD’s Senior Secured Second Lien Notes Indenture are substantially similar to the Revolving Credit Facility, with the exception of the following. In May 2019, the Company amended the Senior Secured Second Lien Notes to reduce its hedging covenant from two years to one year, for 65% of proved developed producing reserves, while the Revolving Credit Facility does not have a hedging obligation. On June 30, 2021, AMD was in compliance with all of its financial covenants under the Senior Secured Second Lien Notes Indenture.

 

On July 6, 2021, the outstanding balance of Senior Secured Second Lien Notes were paid in full, including principal payment of $91.2 million and accrued interest and premium of $4.7 million.

 

Note 3 – Equity

 

As of June 30, 2021, the Company had aggregate capital contributions from the Parent of approximately $816.0 million, with no further capital contribution commitments remaining. As of June 30, 2021, the Company had made aggregate cash distributions of approximately $539.7 million to the Parent.

 

Note 4 – Commitments and Contingencies

 

Commitments

 

Operating Leases – In July 2017, the Company entered into an office space lease in Houston, Texas under a non-cancelable operating lease, which expires in January 2029. In addition, the Company has a field office and several other leases in Pennsylvania to support its field operations; these non-cancellable operating leases have expiration dates up to December 2024.

 

17

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC 

Notes to the Combined Financial Statements

 

Note 4 – Commitments and Contingencies (continued)

 

The following table presents future minimum lease payments through 2029 under the non-cancellable operating leases as of June 30, 2021 (in thousands):

 

Years Ending June 30,    
2022  $1,634 
2023   1,444 
2024   1,465 
2025   1,359 
2026   1,250 
Thereafter   3,185 
Total  $10,337 

 

The Company recognized approximately $1.3 million in rent expense for the years ended June 30, 2021 and 2020, respectively.

 

Firm Transportation – The Company has access to firm transportation capacity to delivered pricing locations that have historically priced higher than Marcellus in-basin prices. The Company believes it will have sufficient production quantities to meet substantially all of its commitments but may be required to purchase natural gas from third parties to satisfy shortfalls should they occur.

 

The following table presents the Company’s future minimum obligations under transportation agreements as of June 30, 2021 (in thousands):

 

Years Ending June 30,     
2022  $19,277 
2023   11,985 
2024   7,159 
2025   7,159 
2026   7,159 
Thereafter   9,547 
Total  $62,286 

 

Demand Charges – The Company is obligated under certain of these firm transportation arrangements to pay a demand charge for firm capacity rights on pipeline systems regardless of the amount of pipeline capacity utilized by the Company. If the Company does not utilize the capacity, it can release it to others, thus reducing its potential liability. Pursuant to these agreements, the Company is obligated to pay annual demand charges of approximately $14.1 million for the year ending June 30, 2022 and then $12.3 million annually, until October 2028, when these agreements start to expire. These agreements expire between October 2028 and November 2033.

 

18

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 4 – Commitments and Contingencies (continued)

 

Delivery Commitments – The Company has natural gas sales agreements that have minimum delivery commitments ranging from 13,500 MMBtu per day to 54,150 MMBtu per day and expire between October 2021 and October 2033.

 

Contingencies

 

There are currently various suits and claims pending against Anadarko for which the Company owes an obligation of indemnity that has arisen in the ordinary course of business, including contract disputes, property damage claims and title disputes. Management believes that the resolution of these suits and claims will not, individually or in the aggregate, have a material effect on the Company’s combined financial position, results of operations or cash flow. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.

 

Note 5 – Risk Management Activities

 

The Company has entered into various derivative contracts to manage its exposure to natural gas price fluctuations on a portion of its anticipated future production volumes for the years 2021 through 2023. These derivatives include natural gas price swaps and basis differential swaps. The Company’s commodity derivative instruments generally serve as effective economic hedges of commodity risk exposure; however, the Company has elected not to account for the derivatives as cash flow hedges. As such, the Company recognizes all changes in fair value of its commodities derivatives in net gain (loss) on price risk management activities in revenues in its combined statements of operations. The resulting cash flows are reported as cash flows from operating activities.

 

The Company also entered into various derivative contracts to hedge the impact of market fluctuations in LIBOR, which is the floating rate that applies to the borrowings under the Revolving Credit Facility. As of June 30, 2020, the Company has $225 million LIBOR swaps outstanding, which represents a portion of the expected Revolving Credit Facility balance through its remaining term. The Company’s interest rate derivative instruments generally serve as effective economic hedges of interest rate risk exposure; however, the Company has elected not to account for the derivatives as cash flow hedges. As such, the Company recognizes all changes in fair value of its interest rate derivatives in net gain (loss) on interest rate derivatives on its combined statements of operations.

 

19

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 5 – Risk Management Activities (continued)

 

The following tables summarize assets and liabilities measured at fair value:

 

   Quoted in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Balance at June 30, 2021 
                  
   (Amounts in thousands) 
Commodity swaps  $-   $(182,103)  $-   $(182,103)
Basis swaps  $-   $57,875   $-   $57,875 

 

   Quoted in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Balance at June 30, 2020 
                  
   (Amounts in thousands) 
Commodity swaps  $-   $28,747   $-   $28,747 
Basis swaps  $-   $(3,445)  $-   $(3,445)
Interest rate swaps  $-   $(17,830)  $-   $(17,830)

 

20

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 5 – Risk Management Activities (continued)

 

The tables below summarize the Company’s commodity and interest rate derivatives outstanding:

 

   Asset Derivatives    Liability Derivatives  
       
   Balance Sheet Location  June 30,
2021
   Balance Sheet Location  June 30,
2021
 
                       
   (Amounts in thousands)
Current                
Commodity contracts  Assets from risk management activities  $26,031   Liabilities from risk management activities  $(128,149)
                 
Non-current                
Commodity contracts  Assets from risk management activities   7,961   Liabilities from risk management activities   (30,071)
                 
Total Derivatives     $33,992      $(158,220)
                 

 

   Asset Derivatives    Liability Derivatives  
   Balance Sheet Location  June 30,
2020
   Balance Sheet Location  June 30,
2020
 
                
   (Amounts in thousands)
Current                
Commodity contracts  Assets from risk management activities  $37,544   Liabilities from risk management activities  $(2,700)
Interest rate contracts  Assets from risk management activities   -   Liabilities from risk management activities   (5,111)
       37,544       (7,811)
Non-current                
Commodity contracts  Assets from risk management activities   290   Liabilities from risk management activities   (9,832)
Interest rate contracts  Assets from risk management activities   -   Liabilities from risk management activities   (12,719)
       290       (22,551)
                 
Total Derivatives     $37,834      $(30,362)

 

21

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 5 – Risk Management Activities (continued)

 

The following tables present the gross asset and liability balances of the Company’s commodity derivative instruments, the amounts subject to master netting arrangements, and the amounts presented on a net basis:

 

   As of June 30, 
   2021   2020 
          
   (Amounts in thousands) 
Commodity Derivative Assets          
Gross amounts of recognized assets  $68,965   $107,681 
Gross amounts offset in the consolidated balance sheets   (34,973)   (69,847)
Net amount of assets presented in the consolidated balance sheets  $33,992   $37,834 
           
Commodity Derivative Liabilities          
Gross amounts of recognized liabilities  $(193,194)  $(82,379)
Gross amounts offset in the consolidated balance sheets   34,974    69,847 
Net amount of liabilities presented in the consolidated balance sheets  $(158,220)  $(12,532)
           

The following tables present the Company’s commodity and interest rate derivative activities:

 

   For the Years Ended June 30, 
Location of Gain (Loss) Recognized on Statements of Income  2021   2020 
          
   (Amounts in thousands) 
Revenue          
Cash received (paid) on settlement of derivative instruments          
Gain (loss) on derivative instruments  $91,204   $96,440 
Non-cash (loss) gain on derivative instruments          
(Loss) gain on derivative instruments   (149,530)   7,276 
Net (loss) gain on price risk management activities  $(58,326)  $103,716 
           
Other Income (Expense)          
Cash received (paid) on settlement of derivative instruments          
Gain (loss) on derivative instruments  $(15,705)  $(1,629)
Non-cash loss on derivative instruments          
Gain (loss) on derivative instruments   17,830    (11,157)
Net gain (loss) on interest rate derivatives  $2,125   $(12,786)

 

22

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 5 – Risk Management Activities (continued)

 

The following table presents the Company’s open commodity price derivative contracts as of June 30, 2021 by fiscal year:

 

Instrument  Range of Price  Quantity (MMBTU)     
Type  $/MMBTU  2022   2023   Total   Fair Value 
                    
                  (Amounts in
thousands)
 
Swap  $2.23 - $3.41   175,372,500    77,740,000    253,112,500   $(182,103)
Basis Swap  ($1.23) - $3.48   175,372,500    77,740,000    253,112,500    57,875 
       350,745,000    155,480,000    506,225,000   $(124,228)

 

The following table presents the Company’s open commodity price derivative contracts as of June 30, 2020 by fiscal year:

 

Instrument  Range of Price   Quantity (MMBTU)     
Type  $/MMBTU   2021   2022   2023   Total   Fair Value 
                         
                       (Amounts in
thousands)
 
Swap   $2.07 - $3.10    151,753,854    74,950,000    1,840,000    228,543,854   $28,747 
Basis Swap   ($0.96) - $4.94    162,713,854    74,950,000    1,840,000    239,503,854    (3,445)
         314,467,708    149,900,000    3,680,000    468,047,708   $25,302 

 

All outstanding interest rate swap contracts were terminated prior to June 30, 2021. The following table presents the Company’s open interest rate derivative contracts as of June 30, 2020:

 

Instrument Type  Range of Fixed
Rates
  Notional Amount   From  To  Fair Value 
      (Amounts in
thousands)
         (Amounts in
thousands)
 
1 Month LIBOR Swap  2.12 - 2.73%  $225,000,000   7/1/2020  3/31/2021  $(3,810)
1 Month LIBOR Swap  2.12 - 2.74%  $225,000,000   4/1/2021  3/31/2022   (5,214)
1 Month LIBOR Swap  2.12 - 2.13%  $225,000,000   4/1/2022  3/31/2023   (4,543)
1 Month LIBOR Swap  2.12 - 2.13%  $225,000,000   4/1/2023  3/31/2024   (4,263)
                 $(17,830)

 

23

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 6 – Employee Benefits

 

401(K) Plan

 

Effective July 1, 2017, the Company adopted a defined contribution plan (the Benefit Plan) that complies with Section 401(k) of the Internal Revenue Code. All employees are eligible to participate immediately upon date of hire, and all participants are eligible for the employer non-discretionary match at 100%, up to 6% of a participant’s eligible compensation. Participants may elect voluntary salary deferral contributions withheld from their salary based on an elected percentage of up to 100%, subject to annual individual statutory deferral limitations. Participants are immediately vested in their elective contributions and employer non-discretionary matching plus actual earnings thereon. Vesting in the employer’s discretionary contribution portion of their accounts prior plus actual earnings thereon is based on years of credited service. For employer’s discretionary contributions, participants are vested immediately upon completing three full years of service. Upon separation, participants are entitled to the vested portion of their accounts. Employer contribution expense for the years ended June 30, 2021 and 2020 was approximately $1.0 million for both periods and recorded in general and administrative expense.

 

Long-Term Incentive Plan

 

Effective October 31, 2018, Alta Resources, LLC, a member of Alta Resources Holdings, LLC, adopted a long term incentive plan (the LTIP Plan) to award and retain employees of the Company by providing participating employees with an opportunity to receive additional compensation in connection with the future success of the Parent, by providing a Phantom Unit. A Phantom Unit is defined in the LTIP Plan as a notional unit that, once vested, permits the holder to receive the applicable Distribution Value and/or Unit Value (two award components). Phantom Units vest in three ratable, annual installments beginning on the first anniversary from the initial date of grant. Vesting is contingent on the participant’s continued employment, with certain exceptions. On a change in control, 100% of any unvested units vest only if the participant continues employment through the date of change in control. Vesting conditions vary with respect to termination cause.

 

The Company accounts for the first component of the award (the Distribution Value) as an in-substance profit-sharing arrangement in accordance with ASC 710, Compensation. No distribution pursuant to the LTIP Plan was declared as of June 30, 2021 and 2020, and therefore no compensation expense was recognized during the years ended June 30, 2021 and 2020.

 

24

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 6 – Employee Benefits (continued)

 

The second component of the award (the Unit Value) provides rights to the residual equity interest in the Parent, whereby the employee has a put right prior to an ultimate liquidation event for 85% of the then-determined fair value. Additionally, the employee may only sell, in any one calendar year, a maximum of 20% of the greatest number of Phantom Units held by the employee during their employment with the Company or any of its affiliates. Furthermore, a participant may not sell more than 50% in the aggregate of the greatest number of Phantom Units held by the employee during their employment with the Company or any of its affiliates. Vesting is dependent upon: 1) liquidation event or change in control in the Parent, as defined in the LTIP Plan, and 2) employment condition through the date of liquidation or change in control. The Company accounts for the second component in accordance with ASC 718, Compensation – Stock Compensation, as a liability award. As the performance conditions were not considered probable as of the grant date and as of June 30, 2021 and 2020, no compensation expense was recognized for the combined financial statements during the years ended June 30, 2021 and 2020. As a result of the Acquisition, compensation expense was recognized in July 2021 upon change in control.

 

In May 2020, a portion of these units vested in accordance with the above vesting schedule. The Company opened the sellback window to employees between August 17 through 28, 2020. An immaterial portion of units were sold back to the Company.

 

Note 7 – Revenue from Contracts with Customers

 

Disaggregation of Revenue

 

The table below provides disaggregated information on the Company’s revenues:

 

   2021   2020 
          
   (Amounts in Thousands) 
Revenues from contracts with customers          
Natural gas  $622,754   $448,076 
Other operating          
Marketing   15,055    10,135 
Midstream   6,166    4,811 
Total other operating   21,221    14,946 
Total revenues from contracts with customers   643,975    463,022 
Net gain (loss) on commodity risk management activities   (58,326)   103,716 
Other revenues   317    271 
Total revenues  $585,966   $567,009 

 

25

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 7 – Revenue from Contracts with Customers (continued)

 

Transaction Price Allocated to Remaining Performance Obligations

 

A significant number of the Company’s product sales have a contract term of one year or less. For those contracts, the Company has utilized the practical expedient allowed in ASC 606 that exempts it from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

 

For the Company’s product sales that have a contract term greater than one year, the Company has also utilized the practical expedient waiving the requirement to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company’s product sales that have a contractual term greater than one year have no long-term fixed consideration.

 

Contract Balances

 

Under the Company’s sales contracts, it invoices its customers once its performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities. Accounts receivable attributable to the Company’s revenue contracts with customers was $84.3 million as of June 30, 2021 and $37.8 million as of June 30, 2020.

 

Prior−Period Performance Obligations

 

The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas sales may be received for one to three months after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between its estimates and the actual amounts for product sales in the month that payment is received from the purchaser. Any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the year ended June 30, 2020, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.

 

26

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 8 – Related Party Transactions

 

In connection with the Management and Administrative Services Agreement (MASA), as amended, between the Parent and the Company, the Company provides administrative support and management functions to the Parent to evaluate prospective oil and gas properties. Amounts due from affiliates are classified in notes receivable from affiliates and other in the accompanying combined balance sheets of approximately $2.5 million and $2.4 million as of June 30, 2021 and 2020, respectively. Amounts due from affiliates were settled subsequent to the closing of the Acquisition in July 2021.

 

In connection with the Management and Administrative Services Agreement (MASA) executed on July 10, 2020 between the Company and Alta Resources Development II, LLC (ARDII), a related party, the Company provides administrative support and management functions to ARDII to evaluate prospective oil and gas properties. Amounts due from ARDII are included in advance to affiliates in the accompanying combined balance sheets of approximately $0.2 million and $0.6 million as of June 30, 2021 and 2020, respectively. The advance to affiliates was repaid to the Company in July 2021.

 

Note 9 – Subsequent Events

 

Management considered subsequent events through September 24, 2021, the date on which the Company’s combined financial statements were available for issuance. Other than those events disclosed in the notes to the combined financial statements, no other events have occurred.

 

Note 10Natural Gas Producing Activities (Unaudited)

 

The following supplementary information summarized presents the results of natural gas activities in accordance with the full cost method of accounting for production activities.

 

27

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 10 Natural Gas Producing Activities (Unaudited) (continued)

 

Costs Incurred Related to Natural Gas Operations

 

The following tables present total aggregate capitalized costs and costs incurred related to natural gas production activities:

 

   Years Ended June 30, 
   2021   2020 
         
   (Amounts in thousands) 
Evaluated properties  $2,337,796   $2,074,787 
Unevaluated properties   10,968    8,146 
Total capitalized costs   2,348,764    2,082,933 
Less: Accumulated depletion and impairment   (1,470,826)   (661,327)
Net capitalized costs  $877,938   $1,421,606 

 

Results of Operations for Producing Activities

 

The following table presents the results of operations related to natural gas production:

 

   Years Ended June 30, 
   2021   2020 
         
   (Amounts in thousands) 
Sales of natural gas  $622,754   $448,076 
Transportation and processing   196,386    157,435 
Lease Operating Expense   41,244    39,186 
Depreciation and depletion   177,857    170,921 
Impairment and expiration of leases   631,641    139,063 
Results of operations from producing activities, excluding corporate overhead     $  (424,374 )     $  (58,529 )

 

28

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 10Natural Gas Producing Activities (Unaudited) (continued)

 

Reserve Information

 

Proved developed reserves represent only those reserves expected to be recovered from existing wells and support equipment. Proved undeveloped reserves represent proved reserves expected to be recovered from new wells after substantial development costs are incurred.

 

As of June 30, 2021, the estimate of proved natural gas reserves was prepared by Company engineers and audited by Netherland, Sewell & Associates, Inc. (NSAI), an independent consulting firm hired by management. NSAI conducted a detailed, well-by-well audit of all the Company's properties. The estimates prepared by the Company and audited by NSAI were within the recommended 10% tolerance threshold set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards). Standard engineering and geoscience methods, or a combination of methods, including performance analysis, volumetric analysis, analogy and material balance were utilized in the evaluation of reserves. Since 1961, NSAI has evaluated oil and gas properties and independently certified petroleum reserves quantities in the United States and internationally.

 

As of June 30, 2020, the Company’s estimate of proved natural gas reserves was prepared by NSAI.  NSAI has estimated 100% of the total net natural gas proved reserves attributable to the Company's interests as of June 30, 2020 in accordance with the SPE Standards. All of the Company's proved reserves are located in the United States.

 

The engineer primarily responsible for providing Company data necessary for the preparation of the reserves estimate holds a Bachelor of Science degree in Mining Engineering from the National Institute of Technology in India and a Master’s Degree in Petroleum Engineering from the University of Texas at Austin and has 15 years of experience in the oil and gas industry. To support the accurate and timely preparation and disclosure of its reserve estimates, the Company established internal controls over its reserve estimation processes and procedures, including the following: the price, heat content conversion rate and cost assumptions used in the economic model to determine the reserves are reviewed by management; division of interest and production volumes are reconciled between the system used to calculate the reserves and other accounting/measurement systems; and the reserves reconciliation between prior year reserves and current year reserves is reviewed by senior management.

 

29

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 10Natural Gas Producing Activities (Unaudited) (continued)

 

   Year ended June 30, 
   2021   2020 
         
   (Volumes in Mmcf) 
Balance at July 1   3,820,617    3,679,226 
Revisions of previous estimates   628,943    405,928 
Production   (341,712)   (264,537)
Balance at June 30   4,107,848    3,820,617 
Proved developed reserves as of:          
Balance at July 1   1,943,820    1,737,819 
Balance at June 30   2,206,697    1,943,820 
Proved undeveloped reserves as of:          
Balance at July 1   1,876,797    1,941,407 
Balance at June 30   1,901,151    1,876,797 

 

Positive revisions of 628.9 Bcf during the year ended June 30, 2021 were due primarily to outperformance of new wells relative to type curve, adjustments to development schedule, acceleration of non-operated development, and base production optimization. Positive revisions of 405.9 Bcf during the year ended June 30, 2020 were due primarily to changes in working interests and net revenue interests, adjustments to the development schedule, improved development pacing and type curve updates to reflect well outperformance relative to type curve.

 

Standard Measure of Discounted Future Cash Flow

 

Management cautions that the standard measure of discounted future cash flows should not be viewed as an indication of the fair market value of natural gas and oil producing properties, nor of the future cash flows expected to be generated therefrom. The information presented does not give recognition to future changes in estimated reserves, selling prices or costs and has been discounted at a rate of 10%.

 

The following table summarizes estimated future net cash flows from natural gas and crude oil reserves:

 

   Year ended June 30, 
   2021   2020 
         
   (Amounts in thousands) 
Future cash flows  $6,289,023   $5,988,487 
Future production costs   (2,382,659)   (2,052,950)
Future development costs   (980,751)   (1,040,484)
Future net cash flows   2,925,613    2,895,053 
10% annual discount for estimated timing of cash flows   (1,466,367)   (1,520,154)
Standardized measure of discounted future net cash flows  $1,459,246   $1,374,899 

 

30

 

 

ARD Operating, LLC and Alta Marcellus Development, LLC

Notes to the Combined Financial Statements

 

Note 10Natural Gas Producing Activities (Unaudited) (continued)

 

The above cash flows include approximately $134.0 million and $122.9 million for future plugging and abandonment costs as of June 30, 2021 and 2020, respectively.

 

For 2021, reserves were computed using gas prices based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period July 2020 through June 2021. The average Henry Hub spot price of $2.428 per MMBtu was adjusted for energy content, transportation fees, and market differentials. The fees associated with the Company's firm transportation contracts were included as a deduction to gas revenue. Gas prices were held constant throughout the lives of the properties. The average adjusted gas price weighted by production over the lives of the properties was $1.531 per Mcf.

 

For 2020, reserves were computed using gas prices based on the 12-month unweighted arithmetic average of the first day-of-the-month price for each month in the period July 2019 through June 2020. The average Henry Hub spot price of $2.066 per MMBtu was adjusted for energy content, transportation fees, and market differentials. The fees associated with the Company's firm transportation contracts were included as a deduction to gas revenue. Gas prices were held constant throughout the lives of the properties. The average adjusted gas price weighted by production over the lives of the properties was $1.567 per Mcf.

 

The following table summarizes the changes in the standardized measure of discounted future net cash flows:

 

   Year ended June 30, 
   2021   2020 
         
   (Amounts in thousands) 
Net changes in prices, production and development costs  $(64,235)  $(1,802,302)
Revisions of previous quantity estimates   159,561    23,115 
Sales and transfers of natural gas and oil produced—net   (385,124)   (251,455)
Accretion of discount   137,490    290,776 
Previously estimated development costs incurred   213,444    225,647 
Timing and other   23,211    (18,638)
Net change for the year   84,347    (1,532,857)
Beginning of year   1,374,899    2,907,756 
End of year  $1,459,246   $1,374,899 

 

31

 

Exhibit 99.2

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

On July 21, 2021, EQT Corporation and its subsidiaries (“EQT” or the “Company”) acquired all of the issued and outstanding equity interests of Alta Marcellus Development, LLC (“Alta Marcellus”) and ARD Operating, LLC (“ARD”) (the “Acquisition”), which collectively hold all of the upstream and midstream assets of Alta Resources Development, LLC (“Alta”), pursuant to the terms of that certain Membership Interest Purchase Agreement, dated May 5, 2021 (the “Purchase Agreement”), by and among the EQT, EQT Acquisition HoldCo LLC (a wholly-owned indirect subsidiary of EQT), Alta, Alta Marcellus and ARD.

 

The following unaudited pro forma condensed combined financial statements (the “pro forma financial statements”) are derived from the historical audited and unaudited financial statements of EQT and the historical combined financial statements of the Alta Entities, which includes the accounts of ARD and Alta Marcellus and its wholly-owned subsidiaries, Alta Marcellus Midstream, LLC (“AMM”) and Alta Energy Marketing, LLC (AEM) (collectively, the “Alta Entities”).

 

The pro forma financial statements have been prepared to reflect the effects of the Acquisition.

 

The pro forma financial statements are provided for informational purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Company would have been had the Acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. The pro forma financial statements should be read in conjunction with:

 

the accompanying notes to the pro forma financial statements;

 

the audited consolidated financial statements and accompanying notes of EQT contained in EQT’s Annual Report on Form 10-K for the year ended December 31, 2020;

 

the audited consolidated financial statements and accompanying notes of the Alta Entities for the year ended June 30, 2021 filed as an exhibit to the Current Report on Form 8-K to which this exhibit also forms a part (the Form 8-K); and

 

the unaudited condensed consolidated financial statements and accompanying notes of EQT contained in EQT’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.

 

 

 

 

EQT Corporation and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

June 30, 2021

 

   EQT
Historical
   Alta Entities
Historical
   Pro Forma
Adjustments
       Pro Forma
Combined
 
                     
    (Thousands) 
ASSETS                        
Current assets:                        
Cash and cash equivalents  $330,770   $14,501   $(856,305)  (a)   $342,716 
              853,750   (m)      
Accounts receivable, net   651,568    101,514    (2,962)  (c)    750,120 
Derivative instruments, at fair value   648,855    26,031    (9,895)  (c)    672,952 
              7,961   (d)      
Prepaid expenses and other   537,462    2,029    (239)  (a)    539,252 
Total current assets   2,168,655    144,075    (7,690)       2,305,040 
                         
Property, plant and equipment   22,497,579    2,352,170    811,832   (a)    25,661,581 
Less: Accumulated depreciation and depletion   6,678,508    1,473,328    (1,473,328)  (a)    6,678,508 
Net property, plant and equipment   15,819,071    878,842    2,285,160   (a)    18,983,073 
                         
Contract asset   410,000                410,000 
Other assets   587,531    10,509    (153,858)  (a)    443,269 
              (7,961)  (d)      
              7,048   (e)      
Total assets  $18,985,257   $1,033,426   $2,122,699       $22,141,382 
                         
LIABILITIES AND EQUITY                        
Current liabilities:                        
Current portion of debt  $399,699   $   $       $399,699 
Accounts payable   820,134    114,084    (4,186)  (a)    927,070 
              (2,962)  (c)      
Derivative instruments, at fair value   2,160,253    128,149    (11,028)  (c)    2,307,445 
              30,071   (d)      
Other current liabilities   299,115    979    (979)  (b)    331,115 
              32,000   (f)      
Total current liabilities   3,679,201    243,212    42,916        3,965,329 
                         
Credit facility borrowings       384,731    (384,731)  (b)    853,750 
              853,750   (m)      
Senior notes   4,999,502    86,643    (86,643)  (b)    4,999,502 
Note payable to EQM Midstream Partners, LP   97,117                97,117 
Deferred income taxes   1,009,721        (18,452)  (k)    991,269 
Other liabilities and credits   897,294    56,331    88,401   (a)    1,019,003 
              (30,071)  (d)      
              7,048   (e)      
Total liabilities   10,682,835    770,917    472,218        11,925,970 
                         
Equity:                        
Total common shareholders’ equity   8,291,758    262,509    1,925,405   (a)    10,204,748 
              (274,924)  (i)      
Noncontrolling interests in consolidated subsidiaries   10,664                10,664 
Total equity   8,302,422    262,509    1,650,481        10,215,412 
Total liabilities and equity  $18,985,257   $1,033,426   $2,122,699       $22,141,382 

 

See accompanying notes to the unaudited pro forma condensed combined financial information.

 

 

 

 

EQT Corporation and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

Six Months Ended June 30, 2021

 

    EQT
Historical
    Alta Entities
Historical
    Pro Forma
Adjustments
        Pro Forma
Combined
 
                         
    (Thousands, except per share amounts) 
Operating revenues:                        
Sales of natural gas, natural gas liquids and oil  $2,208,855   $389,898   $       $2,598,753 
Loss on derivatives not designated as hedges   (1,534,345)   (116,236)           (1,650,581)
Net marketing services and other   15,297    12,101    (6,744)  (d)    20,654 
Total operating revenues   689,807    285,763    (6,744)       968,826 
Operating expenses:                        
Transportation and processing   909,800    71,238            981,038 
Production   94,776    34,108    (6,744)  (d)    122,140 
Exploration   2,728        319   (g)    3,047 
Selling, general and administrative   94,859    2,372            97,231 
Depreciation and depletion   757,404    81,210    89,853   (j)    928,467 
Gain on sale/exchange of long-lived assets   (18,023)               (18,023)
Impairment and expiration of leases   42,391                42,391 
Other operating expenses   14,668                14,668 
Total operating expenses   1,898,603    188,928    83,428        2,170,959 
Operating (loss) income   (1,208,796)   96,835    (90,172)       (1,202,133)
Income from investments   (23,677)               (23,677)
Dividend and other income   (7,069)   (976)   1,412   (b)    (6,633)
Loss on debt extinguishment   9,756                9,756 
Interest expense   152,085    13,290    (13,241)  (b)    165,670 
              13,536   (l)      
(Loss) income before income taxes   (1,339,891)   84,521    (91,879)       (1,347,249)
Income tax (benefit) expense   (362,340)       (8,541)  (k)    (370,881)
Net (loss) income   (977,551)   84,521    (83,338)       (976,368)
Less: Net loss attributable to noncontrolling interest   (576)               (576)
Net (loss) income attributable to EQT Corporation  $(976,975)  $84,521   $(83,338)      $(975,792)
                         
Loss per share of common stock attributable to EQT Corporation:                        
Basic:                        
Weighted average common stock outstanding   278,996                  278,996 
Net loss  $(3.50)                $(3.50)
Diluted:                        
Weighted average common stock outstanding   278,996                  278,996 
Net loss  $(3.50)                $(3.50)

 

See accompanying notes to the unaudited pro forma condensed combined financial information.

 

 

 

 

EQT Corporation and Subsidiaries

Unaudited Pro Forma Condensed Combined Statement of Operations

Year Ended December 31, 2020

 

   EQT
Historical
   Alta Entities
Historical
   Pro Forma
Adjustments
       Pro Forma
Combined
 
                     
    (Thousands, except per share amounts) 
Operating revenues:                        
Sales of natural gas, natural gas liquids and oil  $2,650,299   $442,463   $       $3,092,762 
Gain on derivatives not designated as hedges   400,214    101,696            501,910 
Net marketing services and other   8,330    18,932    (9,525)  (d)    17,737 
Total operating revenues   3,058,843    563,091    (9,525)       3,612,409 
Operating expenses:                        
Transportation and processing   1,710,734    127,391            1,838,125 
Production   155,403    57,226    (9,525)  (d)    203,104 
Exploration   5,484        1,734   (g)    7,218 
Selling, general and administrative   174,769    7,333            182,102 
Depreciation and depletion   1,393,465    189,960    76,162   (j)    1,659,587 
Amortization of intangible assets   26,006                26,006 
Loss on sale/exchange of long-lived assets   100,729                100,729 
Impairment of other assets   34,694                34,694 
Impairment and expiration of leases   306,688    770,704    (770,704)  (h)    306,688 
Other operating expenses   28,537        32,000   (f)    60,537 
Total operating expenses   3,936,509    1,152,614    (670,333)       4,418,790 
Operating loss   (877,666)   (589,523)   660,808        (806,381)
Gain on Equitrans Share Exchange   (187,223)               (187,223)
Loss from investments   314,468                314,468 
Dividend and other (income) expense   (35,512)   12,759    (11,876)  (b)    (34,629)
Loss on debt extinguishment   25,435                25,435 
Interest expense   271,200    30,722    (30,442)  (b)    307,576 
              36,096   (l)      
Loss before income taxes   (1,266,034)   (633,004)   667,030        (1,232,008)
Income tax (benefit) expense   (298,858)       6,412   (k)    (292,446)
Net loss   (967,176)   (633,004)   660,618        (939,562)
Less: Net loss attributable to noncontrolling interest   (10)               (10)
Net loss attributable to EQT Corporation  $(967,166)  $(633,004)  $660,618       $(939,552)
                         
Loss per share of common stock attributable to EQT Corporation:                        
Basic:                        
Weighted average common stock outstanding   260,613                  260,613 
Net loss  $(3.71)                $(3.61)
Diluted:                        
Weighted average common stock outstanding   260,613                  260,613 
Net loss  $(3.71)                $(3.61)

 

See accompanying notes to the unaudited pro forma condensed combined financial information.

 

 

 

 

EQT Corporation and Subsidiaries 

Notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

1.Basis of Presentation

 

The pro forma financial statements have been prepared to reflect the effects of the Acquisition on the consolidated financial statements of EQT. The unaudited pro forma condensed combined balance sheet (the “pro forma balance sheet”) is presented as if the Acquisition had occurred on June 30, 2021. The unaudited pro forma condensed combined statements of operations (the “pro forma statements of operations”) for the six months ended June 30, 2021 and for the year ended December 31, 2020, are presented as if the Acquisition, the offering and sale in May 2021 of $500 million aggregate principal amount of EQT’s 3.125% senior notes due May 2026 and $500 million aggregate principal amount of EQT’s 3.625% senior notes due May 2013 (collectively, the “Notes Offering”) and the application of the proceeds from the Notes Offering had occurred on January 1, 2020. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the Acquisition.

 

The pro forma financial statements have been prepared using the acquisition method of accounting using the accounting guidance in Accounting Standards Codification (“ASC”) 805, with EQT treated as the acquirer. The acquisition method of accounting is dependent upon certain valuations and other studies that are preliminary. Accordingly, the pro forma adjustments are preliminary, have been made solely for the purpose of providing pro forma financial information, and are subject to revision based on a final determination of fair value. Differences between these preliminary estimates and the final purchase price allocation may have a material impact on the accompanying pro forma financial statements.

 

The Alta Entities’ historical amounts have been derived from the Alta Entities’ audited financial statements filed as an exhibit to the Form 8-K and unaudited financial statements filed as an exhibit to the Current Report on Form 8-K filed by EQT on July 22, 2021. As the Alta Entities prepares its annual financial statements on a fiscal year basis, the amounts reflected in the pro forma statement of operations for the year ended December 31, 2020 for the Alta Entities have been adjusted to a calendar year end to conform with EQT’s financial presentation. Certain of the Alta Entities’ historical amounts have been reclassified to conform to the financial presentation of EQT. The pro forma financial statements are provided for informational purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of EQT would have been had the Acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position.

 

2.Pro Forma Adjustments and Assumptions

 

The pro forma adjustments are based on currently available information and certain estimates and assumptions that EQT believes are reasonable. The actual effects of the Acquisition will differ from the pro forma adjustments. A general description of the pro forma adjustments are provided below.

 

(a)These adjustments reflect the estimated value of net consideration to be paid by EQT in the Acquisition and the adjustment of the historical book values of the Alta Entities’ assets and liabilities as of June 30, 2021 to their estimated fair values. The following table represents the preliminary purchase price allocation to the assets acquired and liabilities assumed from the Alta Entities. This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and the pro forma statements of operations. The final purchase price allocation will be determined when EQT has completed the detailed valuations and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used in the pro forma adjustments.

 

Pursuant to the Purchase Agreement, consideration for the Acquisition consisted of (i) $1.0 billion in cash, part of which was utilized to extinguish Alta Marcellus’ indebtedness (as further described in (b) below) and (ii) 98,789,388 shares of EQT’s common stock, as adjusted pursuant to customer closing purchase price adjustments set forth in the Purchase Agreement.

 

 

 

 

The preliminary purchase price allocation is subject to change as a result of several factors, including but not limited to changes in the estimated fair value of the Alta Entities’ assets acquired and liabilities assumed, which could result from changes in future commodity prices, reserve estimates, cost assumptions, interest rates, discount rate and other facts and circumstances.

 

   Preliminary Purchase
Price Allocation
 
   (Thousands) 
Consideration:     
Equity  $1,925,405 
Cash   1,002,555 
Total consideration  $2,927,960 
      
Fair value of assets acquired:     
Cash and cash equivalents  $14,501 
Accounts receivable, net   101,514 
Derivative instruments, at fair value   33,992 
Prepaid expenses and other   1,790 
Property, plant and equipment   3,164,002 
Other assets   1,988 
Amount attributable to assets acquired  $3,317,787 
      
Fair value of liabilities assumed:     
Accounts payable  $109,898 
Derivative instruments, at fair value   158,220 
Other liabilities and credits   121,709 
Amount attributable to liabilities assumed  $389,827 

 

The estimated fair value of property, plant and equipment to be acquired based on information available as of the preparation of the pro forma financial statements included the following:

 

   Preliminary Purchase
Price Allocation
 
   (Thousands) 
Natural gas and oil proved properties  $1,724,167 
Natural gas and oil unproved properties   1,184,809 
Other property, plant and equipment   255,026 
Pro forma fair value of property, plant & equipment  $3,164,002 

 

The pro forma fair value of natural gas properties was measured using valuation techniques that convert future cash flows into a single discounted amount. Significant inputs to the valuation of natural gas and oil properties include estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital. NYMEX strip pricing as of July 20, 2021 was utilized in determining the pro forma fair value of reserves at a discount rate of 9.5%, after adjustment for expenses and basis differential.

 

 

 

 

(b)Pro forma adjustments related to the extinguishment of the Alta Marcellus’ senior notes and credit facility (the “Alta Entities Debt”), and the elimination of the associated interest rate swaps including:

 

i.A decrease in credit facility borrowings of $384.7 million and senior notes of $86.6 million reflecting the carrying value of the Alta Entities Debt.

 

ii.A decrease in other current liabilities of $1.0 million for the settlement of accrued interest.

 

iii.A decrease in dividend and other income of $1.4 million for the six months ended June 30, 2021 due to the elimination of the gain on the interest rate hedges.

 

iv.A decrease in interest expense of $13.2 million for the six months ended June 30, 2021 reflecting the elimination of the Alta Entities’ historical interest expense and amortization of deferred financing fees.

 

v.An increase in dividend and other income of $11.9 million for the year ended December 31, 2020 due to the elimination of the loss on the interest rate hedges.

 

vi.A decrease in interest expense of $30.4 million for the year ended December 31, 2020 consisting of the elimination of the Alta Entities’ historical interest expense and amortization of deferred financing fees.

 

(c)The following pro forma adjustments eliminate historical transactions between the Alta Entities and the Company that would be treated as intercompany transactions on a consolidated basis.

 

i.The elimination of $3.0 million of receivables and corresponding payables for gas sales and transmission transactions in the pro forma balance sheet as of June 30, 2021.

 

ii.The elimination of $11.0 million in derivative liabilities and $9.9 million in derivative assets related to the elimination of open gas purchase and sale positions that are accounted for as derivative instruments by EQT.

 

iii.These historical transactions did not have a material impact on the pro forma statements of operations and thus no pro forma adjustments were included on the pro forma statement of operations for the six months ended June 30, 2021 or the year ended December 31, 2020.

 

(d)The following pro forma reclassifications were made to conform to EQT’s presentation.

 

i.The reclassification of derivative assets and liabilities from long-term to current.

 

ii.Removing certain net marketing services amounts from revenue and expense for net presentation.

 

(e)Pro forma adjustments to capitalize the right of use assets and related non-current lease liabilities for assumed lease obligations pursuant to ASC 842, which had not yet been adopted by the Alta Entities as of June 30, 2021 in accordance with applicable private company accounting standards.

 

(f)Pro forma adjustment for estimated transaction costs incurred related to the Acquisition, including underwriting, banking, legal and accounting fees that are not capitalized as part of the Acquisition.

 

(g)Pro forma adjustments to reflect delay rental lease payments and other exploratory costs capitalized by the Alta Entities under the full cost method of accounting that would have been expensed to exploration expense under the successful efforts method of accounting for oil and gas properties.

 

(h)Pro forma adjustments to eliminate the Alta Entities’ historical impairment charges recorded under the ceiling test of the full cost method of accounting to conform to EQT’s successful efforts method of accounting for oil and gas properties.

 

(i)Pro forma adjustment to show the elimination of the Alta Entities’ equity on the pro forma balance sheet and other equity impacts from the estimated transaction costs, the adjustment of historical transactions between the Alta Entities and the Company and adjustments related to deferred income taxes.

 

(j)The pro forma adjustments increase depreciation and depletion expense due to the following:

 

i.The increase in the estimated fair value of property, plant and equipment.

 

ii.The depreciation of gathering pipelines over a 50-year useful life and the depreciation of compression and measurement assets over a 25-year useful life separate from the upstream oil and gas assets.

 

 

 

 

iii.The increase in accretion expense related to the higher asset retirement obligation liability which was adjusted to reflect EQT’s internal plugging cost estimates, discount rate, and useful life estimates.

 

(k)The pro forma income tax adjustments included in the pro forma statements of operations and pro forma balance sheet reflect the income tax effects of the Alta Entities’ historical information as well as the income tax effects of the pro forma adjustments presented herein. The pro forma income tax adjustments related to the Alta Entities’ historical information is to conform the Alta Entities’ historical information, which is derived based on a non-taxable corporate structure, with EQT’s taxable corporate structure. The tax rate applied to the pro forma adjustments was the statutory federal and apportioned statutory state tax rate, net of the federal benefit of state taxes, applied to pre-tax income. The pro forma statements of operations also reflects the following nonrecurring adjustments to arrive at a net deferred tax liability balance of $991.3 million for the pro forma balance sheet:

 

i.income tax expense of $18 million due to a remeasurement of deferred income taxes to reflect the combined state apportionment rates; and

 

ii.income tax benefit of $29 million due to a reduction of the Company’s deferred tax valuation allowance. Since the Alta Entities will be included in the Company’s consolidated tax return following the Acquisition, it has determined that the resulting reversal of taxable temporary differences related to the Acquisition allows the Company to realize a portion of its state deferred tax assets that were previously valued.

 

(l)The pro forma interest expense adjustments reflect the impact of the Notes Offering, the proceeds of which were used to fund a portion of the cash consideration of the Acquisition:

 

i.An increase in interest expense of $13.5 million for the six months ended June 30, 2021 and $36.1 million for the year ended December 31, 2020 reflecting the additional interest that would have been incurred if the notes were issued on January 1, 2020.

 

(m)The pro forma adjustment reflects borrowings on the Company’s credit facility to pay the remaining cash consideration of the Acquisition of $853.8 million. Since the Notes Offering was completed in May 2021, but the remaining cash consideration was not paid until closing on July 21, 2021, the Company used the proceeds for working capital needs that would have otherwise required the Company borrow on its credit facility.

 

3.Supplemental Pro Forma Natural Gas, NGLs and Crude Oil Reserves Information

 

The following tables present the estimated pro forma combined net proved developed and undeveloped, natural gas, natural gas liquids (“NGLs”) and crude oil reserves as of December 31, 2020, along with a summary of changes in quantities of net remaining proved reserves during the year ended December 31, 2020. The pro forma reserve information set forth below gives effect to the Acquisition as if it had occurred on January 1, 2020.

 

The following estimated pro forma reserve information is not necessarily indicative of the results that might have occurred had the Acquisition taken place on January 1, 2020 and is not intended to be a projection of future results. Future results may vary significantly from the results reflected because of various factors, including those discussed in the “Risk Factors” section in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

For all tables presented, NGLs and crude oil were converted at a rate of one million barrels (MMbbl) to approximately six billion cubic feet (Bcf).

 

 

 

 

   EQT Historical   Alta Entities
Historical
   Pro Forma
Combined
 
Natural gas, NGLs and oil  (Bcfe) 
Proved developed and undeveloped reserves:               
Balance at January 1, 2020   17,469.4    3,739.1    21,208.4 
Revision of previous estimates   (739.2)   544.6    (194.6)
Purchase of hydrocarbons in place   1,380.6        1,380.6 
Sale of hydrocarbons in place   (256.7)   (17.9)   (274.5)
Extensions, discoveries and other additions   3,445.8    165.8    3,611.6 
Production   (1,497.8)   (300.2)   (1,798.0)
Balance at December 31, 2020   19,802.1    4,131.3    23,933.4 
Proved developed reserves:               
Balance at January 1, 2020   12,444.0    1,855.9    14,299.9 
Balance at December 31, 2020   13,641.3    1,944.7    15,586.1 
Proved undeveloped reserves:               
Balance at January 1, 2020   5,025.4    1,883.2    6,908.6 
Balance at December 31, 2020   6,160.7    2,186.6    8,347.3 

 

   EQT Historical   Alta Entities
Historical
   Pro Forma
Combined
 
Natural gas  (Bcf) 
Proved developed and undeveloped reserves:               
Balance at January 1, 2020   16,677.2    3,739.1    20,416.3 
Revision of previous estimates   (781.7)   544.6    (237.1)
Purchase of natural gas in place   1,209.3        1,209.3 
Sale of natural gas in place   (254.9)   (17.9)   (272.8)
Extensions, discoveries and other additions   3,433.9    165.8    3,599.6 
Production   (1,418.8)   (300.2)   (1,719.0)
Balance at December 31, 2020   18,865.0    4,131.3    22,996.3 
Proved developed reserves:               
Balance at January 1, 2020   11,811.5    1,855.9    13,667.4 
Balance at December 31, 2020   12,750.3    1,944.7    14,695.0 
Proved undeveloped reserves:               
Balance at January 1, 2020   4,865.7    1,883.2    6,748.9 
Balance at December 31, 2020   6,114.7    2,186.6    8,301.3 

 

 

 

 

   EQT Historical   Alta Entities
Historical
   Pro Forma
Combined
 
NGLs  (MMbbl) 
Proved developed and undeveloped reserves:               
Balance at January 1, 2020   127.0        127.0 
Revision of previous estimates   6.8        6.8 
Purchase of NGLs in place   25.9        25.9 
Sale of NGLs in place   (0.3)       (0.3)
Extensions, discoveries and other additions   1.8        1.8 
Production   (12.4)       (12.4)
Balance at December 31, 2020   148.8        148.8 
Proved developed reserves:               
Balance at January 1, 2020   100.9        100.9 
Balance at December 31, 2020   141.5        141.5 
Proved undeveloped reserves:               
Balance at January 1, 2020   26.0        26.0 
Balance at December 31, 2020   7.3        7.3 

 

   EQT Historical   Alta Entities
Historical
   Pro Forma
Combined
 
Oil  (MMbbl) 
Proved developed and undeveloped reserves:               
Balance at January 1, 2020   5.1        5.1 
Revision of previous estimates   0.3        0.3 
Purchase of oil in place   2.7        2.7 
Sale of oil in place            
Extensions, discoveries and other additions   0.2        0.2 
Production   (0.8)       (0.8)
Balance at December 31, 2020   7.4        7.4 
Proved developed reserves:               
Balance at January 1, 2020   4.5        4.5 
Balance at December 31, 2020   7.0        7.0 
Proved undeveloped reserves:               
Balance at January 1, 2020   0.6        0.6 
Balance at December 31, 2020   0.4        0.4 

 

The following table summarizes the pro forma standard measure of discounted future net cash flows from natural gas and crude oil reserves as of December 31, 2020:

 

   EQT Historical   Alta Entities
Historical
   Pro Forma
Adjustments
   Pro Forma
Combined
 
   (Thousands) 
Future cash inflows  $27,976,557   $5,260,721   $   $33,237,278 
Future production costs   (16,344,965)   (2,315,747)       (18,660,712)
Future development costs   (2,268,109)   (1,152,729)       (3,420,838)
Future income tax expenses   (1,820,341)       (10,516)   (1,830,857)
Future net cash flow   7,543,142    1,792,245    (10,516)   9,324,871 
10% annual discount for estimated timing of cash flows   (4,176,684)   (1,001,815)   5,260    (5,173,239)
Standardized measure of discounted future net cash flows  $3,366,458   $790,430   $(5,256)  $4,151,632 

 

 

 

 

The following table summarizes the changes in the pro forma standard measure of discounted future net cash flows from natural gas and crude oil reserves for the year ended December 31, 2020:

 

   EQT Historical   Alta Entities
Historical
   Pro Forma
Adjustments
   Pro Forma
Combined
 
   (Thousands) 
Net sales and transfers of natural gas and oil produced  $(784,163)  $(223,637)  $   $(1,007,800)
Net changes in prices, production and development costs   (6,761,447)   (1,336,656)       (8,098,103)
Extensions, discoveries and improved recovery, net of related costs   714,808    (9,491)       705,317 
Development costs incurred   797,796    223,588        1,021,384 
Net purchase of minerals in place   350,075            350,075 
Net sale of minerals in place   (226,497)   (5,069)       (231,566)
Revisions of previous quantity estimates   (324,415)   (217,723)       (542,138)
Accretion of discount   849,267    185,907        1,035,174 
Net change in income taxes   152,978        (5,256)   147,722 
Timing and other   105,383    (44,680)       60,703 
Net (decrease) increase   (5,126,215)   (1,427,761)   (5,256)   (6,559,232)
Balance at January 1, 2020   8,492,673    2,218,191        10,710,864 
Balance at December 31, 2020  $3,366,458   $790,430   $(5,256)  $4,151,632 

 

 

 

Exhibit 99.3

 

 

 

August 5, 2021

 

Mr. Aviral Sharma

Alta Marcellus Development, LLC

500 Dallas Street, Suite 2700

Houston, Texas 77002

 

Dear Mr. Sharma:

 

In accordance with your request, we have audited the estimates prepared by Alta Marcellus Development, LLC (Alta), as of June 30, 2021, of the proved reserves and future revenue to the Alta interest in certain gas properties located in Pennsylvania. It is our understanding that EQT Corporation plans to purchase the Alta interest in these properties. It is also our understanding that the proved reserves estimates shown herein constitute all of the proved reserves owned by Alta. We have examined the estimates with respect to reserves quantities, reserves categorization, future producing rates, future net revenue, and the present value of such future net revenue, using the definitions set forth in U.S. Securities and Exchange Commission (SEC) Regulation S-X Rule 4-10(a). The estimates of reserves and future revenue have been prepared in accordance with the definitions and regulations of the SEC and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas. We completed our audit on or about the date of this letter. This report has been prepared for use in filing with the SEC; in our opinion the assumptions, data, methods, and procedures used in the preparation of this report are appropriate for such purpose.

 

The following table sets forth Alta's estimates of the gas reserves and future net revenue, as of June 30, 2021, for the audited properties:

 

   Gas Reserves (MMCF)   Future Net Revenue (M$) 
   Gross           Present Worth 
Category  (100%)   Net   Total   at 10% 
Proved Developed Producing   7,025,696.8    2,099,616.0    1,623,121.7    1,037,296.7 
Proved Developed Non-Producing   273,314.0    107,081.0    104,101.1    65,468.5 
Proved Undeveloped   4,950,802.9    1,901,151.7    1,198,390.3    356,481.7 
                     
Total Proved   12,249,814.0    4,107,848.2    2,925,613.3    1,459,246.5 

 

Totals may not add because of rounding.

 

Gas volumes are expressed in millions of cubic feet (MMCF) at standard temperature and pressure bases. These properties have never produced commercial volumes of condensate.

 

When compared on a lease-by-lease basis, some of the estimates of Alta are greater and some are less than the estimates of Netherland, Sewell & Associates, Inc. (NSAI). However, in our opinion the estimates shown herein of Alta's reserves and future revenue are reasonable when aggregated at the proved level and have been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards). Additionally, these estimates are within the recommended 10 percent tolerance threshold set forth in the SPE Standards. We are satisfied with the methods and procedures used by Alta in preparing the June 30, 2021, estimates of reserves and future revenue, and we saw nothing of an unusual nature that would cause us to take exception with the estimates, in the aggregate, as prepared by Alta.

 

 

 

 

 

 

 

 

Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status. The estimates of reserves and future revenue included herein have not been adjusted for risk. Alta's estimates do not include probable or possible reserves that may exist for these properties, nor do they include any value for undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated.

 

Gas prices used by Alta are based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period July 2020 through June 2021. The average Henry Hub spot price of $2.428 per MMBTU is adjusted for energy content, transportation fees, and market differentials. The fees associated with Alta's firm transportation contracts are included as a deduction to gas revenue. Gas prices are held constant throughout the lives of the properties. The average adjusted gas price weighted by production over the remaining lives of the properties is $1.531 per MCF.

 

Operating costs used by Alta are based on historical operating expense records. These costs include the per-well overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district and field levels. Operating costs have been divided into plant-level costs, per-well costs, and per-unit-of-production costs. Headquarters general and administrative overhead expenses of Alta are included to the extent that they are covered under joint operating agreements for the operated properties. Capital costs used by Alta are based on authorizations for expenditure and actual costs from recent activity. Capital costs are included as required for new development wells, production equipment, and projects related to gathering facilities. Abandonment costs used are Alta's estimates of the costs to abandon the wells and production facilities, net of any salvage value. Operating, capital, and abandonment costs are not escalated for inflation.

 

The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be recovered than pr