UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
FOR THE QUARTERLY PERIOD ENDED | ||||||||
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||||||
| FOR THE TRANSITION PERIOD FROM__________ TO__________ | |||||||||||||||||
COMMISSION FILE NUMBER 001-03551
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(412 ) 553-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 16, 2020, 255,598,827 shares of common stock, no par value, of the registrant were outstanding.
TABLE OF CONTENTS
| Page No. | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Thousands, except per share amounts) | |||||||||||||||||||||||
| Operating revenues: | |||||||||||||||||||||||
| Sales of natural gas, natural gas liquids and oil | $ | $ | $ | $ | |||||||||||||||||||
| (Loss) gain on derivatives not designated as hedges | ( | ( | |||||||||||||||||||||
| Net marketing services and other | |||||||||||||||||||||||
| Total operating revenues | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Transportation and processing | |||||||||||||||||||||||
| Production | |||||||||||||||||||||||
| Exploration | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Depreciation and depletion | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Loss on sale/exchange of long-lived assets | |||||||||||||||||||||||
| Impairment of intangible assets | |||||||||||||||||||||||
| Impairment and expiration of leases | |||||||||||||||||||||||
| Transaction, proxy and reorganization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating (loss) income | ( | ( | ( | ||||||||||||||||||||
| Gain on Equitrans Share Exchange (see Note 9) | ( | ||||||||||||||||||||||
| (Gain) loss on investment in Equitrans Midstream Corporation | ( | ||||||||||||||||||||||
| Dividend and other income | ( | ( | ( | ( | |||||||||||||||||||
| Loss on debt extinguishment | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Loss per share of common stock: | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Weighted average common stock outstanding | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Weighted average common stock outstanding | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Thousands) | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Net change in interest rate cash flow hedges (a) | |||||||||||||||||||||||
| Other post-retirement benefits liability adjustment (b) | |||||||||||||||||||||||
| Change in accounting principle (c) | ( | ||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(a)Net of tax expense of $10 and $30 for the three and nine months ended September 30, 2019.
(b)Net of tax expense of $23 and $26 for the three months ended September 30, 2020 and 2019, respectively, and $71 and $78 for the nine months ended September 30, 2020 and 2019, respectively.
(c)Related to adoption of Accounting Standards Update .
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (Thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
| Depreciation and depletion | |||||||||||
| Amortization of intangible assets | |||||||||||
| Impairment of leases and intangible assets and loss on sale/exchange of long-lived assets | |||||||||||
| Gain on Equitrans Share Exchange | ( | ||||||||||
| Loss on investment in Equitrans Midstream Corporation | |||||||||||
| Loss on debt extinguishment | |||||||||||
| Share-based compensation expense | |||||||||||
| Amortization, accretion and other | |||||||||||
| Loss (gain) on derivatives not designated as hedges | ( | ||||||||||
| Cash settlements received on derivatives not designated as hedges | |||||||||||
| Net premiums (paid) received on derivative instruments | ( | ||||||||||
| Changes in other assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Tax receivable | |||||||||||
| Other items, net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Cash received for Equitrans Share Exchange | |||||||||||
| Other investing activities | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings on credit facility | |||||||||||
| Repayment of borrowings on credit facility | ( | ( | |||||||||
| Proceeds from issuance of debt | |||||||||||
| Debt issuance costs and Capped Call Transactions (See Note 6) | ( | ( | |||||||||
| Repayments and retirements of debt | ( | ( | |||||||||
| Premiums paid on debt extinguishment | ( | ||||||||||
| Dividends paid | ( | ( | |||||||||
| Cash paid for taxes related to net settlement of share-based incentive awards | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Cash paid (received) during the period for: | |||||||||||
| Interest, net of amount capitalized | $ | $ | |||||||||
| Income taxes, net | ( | ( | |||||||||
| Non-cash activity during the period for: | |||||||||||
| Increase in right-of-use lease assets and liabilities | $ | $ | |||||||||
| Increase in asset retirement costs and obligations | |||||||||||
| Capitalization of non-cash equity share-based compensation | |||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
EQT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| September 30, 2020 | December 31, 2019 | ||||||||||
| (Thousands) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable (less provision for doubtful accounts: $ | |||||||||||
| Derivative instruments, at fair value | |||||||||||
| Tax receivable | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment | |||||||||||
| Less: Accumulated depreciation and depletion | |||||||||||
| Net property, plant and equipment | |||||||||||
| Net intangible assets | |||||||||||
| Contract asset | |||||||||||
| Investment in Equitrans Midstream Corporation | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Derivative instruments, at fair value | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Credit facility borrowings | |||||||||||
| Term loan facility borrowings | |||||||||||
| Senior notes | |||||||||||
| Note payable to EQM Midstream Partners, LP | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities and credits | |||||||||||
| Total liabilities | |||||||||||
| Shareholders' equity: | |||||||||||
Common stock, | |||||||||||
Treasury stock, shares at cost: | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED EQUITY (UNAUDITED)
| Common Stock | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||
| Shares | No Par Value | Treasury Stock | Retained Earnings | Total Equity | |||||||||||||||||||||||||||||||
| (Thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||
| Balance at July 1, 2019 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive income, net of tax: | |||||||||||||||||||||||||||||||||||
| Net income | ( | ( | |||||||||||||||||||||||||||||||||
Net change in interest rate cash flow hedges, net of tax expense: $ | |||||||||||||||||||||||||||||||||||
Other postretirement benefits liability adjustment, net of tax expense: $ | |||||||||||||||||||||||||||||||||||
Dividends ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation plans | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive loss, net of tax: | |||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
Other postretirement benefits liability adjustment, net of tax expense: $ | |||||||||||||||||||||||||||||||||||
| Share-based compensation plans | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
Common shares authorized: 320,000 and 640,000 at September 30, 2019 and 2020, respectively. Preferred shares authorized: 3,000 . There were no
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED EQUITY (UNAUDITED)
| Common Stock | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||
| Shares | No Par Value | Treasury Stock | Retained Earnings | Total Equity | |||||||||||||||||||||||||||||||
| (Thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive income, net of tax: | |||||||||||||||||||||||||||||||||||
| Net income | ( | ( | |||||||||||||||||||||||||||||||||
Net change in interest rate cash flow hedges, net of tax expense: $ | |||||||||||||||||||||||||||||||||||
Other postretirement benefits liability adjustment, net of tax expense: $ | |||||||||||||||||||||||||||||||||||
Dividends ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation plans | |||||||||||||||||||||||||||||||||||
| Change in accounting principle (a) | ( | ||||||||||||||||||||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Comprehensive loss, net of tax: | |||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
Other postretirement benefits liability adjustment, net of tax expense: $ | |||||||||||||||||||||||||||||||||||
Dividends ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation plans | |||||||||||||||||||||||||||||||||||
| Equity component of convertible senior notes (See Note 6) | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||
Common shares authorized: 320,000 and 640,000 at September 30, 2019 and 2020, respectively. Preferred shares authorized: 3,000 . There were no
(a)Related to adoption of .
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
1. Financial Statements
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Quarterly Report on Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and subsidiaries as of September 30, 2020 and December 31, 2019, the results of its operations and equity for the three and nine month periods ended September 30, 2020 and 2019 and its cash flows for the nine month periods ended September 30, 2020 and 2019. Certain previously reported amounts have been reclassified to conform to the current year presentation. In this Quarterly Report on Form 10-Q, references to "EQT," "EQT Corporation" and "the Company" refer collectively to EQT Corporation and its consolidated subsidiaries.
The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited financial statements at that date. For further information, refer to the Consolidated Financial Statements and accompanying notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold and requires entities to reflect their current estimate of all expected credit losses. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from its scope that have a contractual right to receive cash. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this ASU on January 1, 2020 with no changes to its methodology, financial statements or disclosures.
In July 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718, Compensation – Share Compensation, to include share-based payment transactions where a grantor acquires goods or services from a nonemployee. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company adopted this ASU on January 1, 2020 with no changes to its methodology, financial statements or disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the hierarchy associated with Level 1, 2 and 3 fair value measurements and the related disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company adopted this ASU on January 1, 2020 with no changes to its methodology, financial statements or disclosures.
In August 2018, the FASB issued , Intangibles – Goodwill and Other – Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU provides guidance on accounting for implementation costs incurred by a customer in a cloud computing arrangement that is a service contract. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company adopted this ASU prospectively on January 1, 2020, at which point onward applicable costs were capitalized to the Condensed Consolidated Balance Sheet rather than expensed to selling, general and administrative expense in the Statement of Condensed Consolidated Operations. For the three and nine months ended September 30, 2020, such capitalized costs were approximately $2 million and $6 million, respectively.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by eliminating certain exceptions to ASC 740, Income Taxes, related to the general approach for intraperiod tax allocation, methodology for calculating income taxes in an interim period and recognition of deferred taxes when there are investment ownership changes. In addition, this ASU simplifies aspects of accounting for franchise taxes and interim period effects of enacted changes in tax laws or rates and provides clarification on accounting for transactions that result in a step up in the tax basis of goodwill and allocation of consolidated income tax expense to separate financial statements of entities not subject to income tax. This ASU is effective for fiscal years beginning after December 15, 2020, including interim
9
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
periods within those fiscal years, and early adoption is permitted. The Company is evaluating the impact this standard will have on its financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging: Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU simplifies accounting for convertible instruments by removing certain separation models for convertible instruments. For convertible instruments with conversion features that are not accounted for as derivatives under ASC 815 or do not result in substantial premiums accounted for as paid-in capital, the convertible instrument's embedded conversion features are no longer separated from the host contract. Consequently, and as long as no other feature requires bifurcation and recognition as a derivative, the convertible instrument is accounted for as a single liability measured at its amortized cost. This ASU also amends the impact of convertible instruments on the calculation of diluted earnings per share (EPS) and adds several new disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Adoption beginning after December 15, 2020, including interim periods within those fiscal years, is permitted. The Company has not determined the timing or method of adoption and is evaluating the impact this standard will have on its financial statements and related disclosures.
2. Revenue from Contracts with Customers
Under the Company's natural gas, natural gas liquids (NGLs) and oil sales contracts, the Company generally considers the delivery of each unit (MMBtu or Bbl) to be a separate performance obligation that is satisfied upon delivery. These contracts typically require payment within 25 days of the end of the calendar month in which the commodity is delivered. A significant number of these contracts contain variable consideration because the payment terms refer to market prices at future delivery dates. In these situations, the Company has not identified a standalone selling price because the terms of the variable payments relate specifically to the Company's efforts to satisfy the performance obligations. Other contracts, such as fixed price contracts or contracts with a fixed differential to New York Mercantile Exchange (NYMEX) or index prices, contain fixed consideration. The fixed consideration is allocated to each performance obligation on a relative standalone selling price basis, which requires judgment from management. For these contracts, the Company generally concludes that the fixed price or fixed differentials in the contracts are representative of the standalone selling price.
Based on management's judgment, the performance obligations for the sale of natural gas, NGLs and oil are satisfied at a point in time because the customer obtains control and legal title of the asset when the natural gas, NGLs or oil is delivered to the designated sales point.
The sales of natural gas, NGLs and oil presented in the Statements of Condensed Consolidated Operations represent the Company's share of revenues net of royalties and excluding revenue interests owned by others. When selling natural gas, NGLs and oil on behalf of royalty or working interest owners, the Company is acting as an agent and, thus, reports the revenue on a net basis.
For contracts with customers where the Company's performance obligations had been satisfied and an unconditional right to consideration existed as of the balance sheet date, the Company recorded amounts due from contracts with customers of $275.8 million and $384.0 million in accounts receivable in the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively.
10
EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below provides disaggregated information on the Company's revenues. Certain contracts that provide for the release of capacity that is not used to transport the Company's produced volumes are outside the scope of ASU 2014-09, Revenue from Contracts with Customers. The costs of, and recoveries on, such capacity are reported in net marketing services and other in the Statements of Condensed Consolidated Operations. Derivative contracts are also outside the scope of ASU 2014-09.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (Thousands) | |||||||||||||||||||||||
| Revenues from contracts with customers: | |||||||||||||||||||||||
| Natural gas sales | $ | $ | $ | $ | |||||||||||||||||||
| NGLs sales | |||||||||||||||||||||||
| Oil sales | |||||||||||||||||||||||
| Total revenues from contracts with customers | $ | $ | $ | $ | |||||||||||||||||||
| Other sources of revenue: | |||||||||||||||||||||||
| (Loss) gain on derivatives not designated as hedges | ( | ( | |||||||||||||||||||||
| Net marketing services and other | |||||||||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes the transaction price allocated to the Company's remaining performance obligations on all contracts with fixed consideration as of September 30, 2020. Amounts shown exclude contracts that qualified for the exception to the relative standalone selling price method as of September 30, 2020.
| 2020 (a) | 2021 | 2022 | 2023 | Total | |||||||||||||||||||||||||
| (Thousands) | |||||||||||||||||||||||||||||
| Natural gas sales | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(a)October 1 through December 31.
3. Derivative Instruments
The Company's primary market risk exposure is the volatility of future prices for natural gas and NGLs, which can affect the Company's operating results. The Company uses derivative commodity instruments to hedge its cash flows from sales of produced natural gas and NGLs. The overall objective of the Company's hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.
The derivative commodity instruments used by the Company are primarily swap, collar and option agreements. These agreements may require payments to, or receipt of payments from, counterparties based on the differential between two prices for the commodity. The Company uses these agreements to hedge its NYMEX and basis exposure. The Company may also use other contractual agreements when executing its commodity hedging strategy. The Company typically enters into over the counter (OTC) derivative commodity instruments with financial institutions, and the creditworthiness of all counterparties is regularly monitored.
The Company does not designate any of its derivative instruments as cash flow hedges; therefore, all changes in fair value of the Company's derivative instruments are recognized in operating revenues in the Statements of Condensed Consolidated Operations. The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature. The Company can net settle its derivative instruments at any time.
Contracts that result in physical delivery of a commodity expected to be sold by the Company in the normal course of business are generally designated as normal sales and are exempt from derivative accounting. Contracts that result in the physical receipt or delivery of a commodity but are not designated or do not meet all of the criteria to qualify for the normal purchase and normal sale scope exception are subject to derivative accounting.
11
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The Company's OTC derivative instruments generally require settlement in cash. The Company also enters into exchange traded derivative commodity instruments that are generally settled with offsetting positions. Settlements of derivative commodity instruments are reported as a component of cash flows from operating activities in the Statements of Condensed Consolidated Cash Flows.
With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of production and portions of its basis exposure covering approximately 1,659 Bcf of natural gas and 1,723 Mbbl of NGLs as of September 30, 2020 and 1,644 Bcf of natural gas as of December 31, 2019. The open positions at both September 30, 2020 and December 31, 2019 had maturities extending through December 2024.
Certain of the Company's OTC derivative instrument contracts provide that, if the Company's credit rating assigned by Moody's Investors Service, Inc. (Moody's) or S&P Global Ratings (S&P) is below the agreed-upon credit rating threshold (typically, below investment grade), and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, the counterparty to such contract can require the Company to deposit collateral. 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, the Company can require the counterparty to deposit collateral with the Company. Such collateral can be up to 100 % of the derivative liability. Investment grade refers to the quality of a company's credit as assessed by one or more credit rating agencies. To be considered investment grade, a company must be rated "Baa3" or higher by Moody's, "BBB–" or higher by S&P and "BBB–" or higher by Fitch Rating Service (Fitch). Anything below these ratings is considered non-investment grade. As of September 30, 2020, the Company's senior notes were rated "Ba3" by Moody's and "BB–" by S&P.
When the net fair value of any of the Company's OTC derivative instrument contracts represents a liability to the Company that is in excess of the agreed-upon dollar threshold for the Company's then-applicable credit rating, the counterparty has the right to require the Company to remit funds as a margin deposit in an amount equal to the portion of the derivative liability that is in excess of the dollar threshold amount. The Company records these deposits as a current asset in the Condensed Consolidated Balance Sheets. As of September 30, 2020, the aggregate fair value of all OTC derivative instruments with credit rating risk-related contingent features that were in a net liability position was $228.8 million, for which the Company deposited and recorded as a current asset $142.0 million. As of December 31, 2019, there were no
When the net fair value of any of the Company's OTC derivative instrument contracts represents an asset to the Company that is in excess of the agreed-upon dollar threshold for the counterparty's then-applicable credit rating, the Company has the right to require the counterparty to remit funds as a margin deposit in an amount equal to the portion of the derivative asset that is in excess of the dollar threshold amount. The Company records these deposits as a current liability in the Condensed Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, there were no
When the Company enters into exchange traded natural gas contracts, exchanges may require the Company to remit funds to the corresponding broker as good-faith deposits to guard against the risks associated with changing market conditions. The Company is required to make such deposits based on an established initial margin requirement and the net liability position, if any, of the fair value of the associated contracts. The Company records these deposits as a current asset in the Condensed Consolidated Balance Sheets. When the fair value of such contracts is in a net asset position, the broker may remit funds to the Company. The Company records these deposits as a current liability in the Condensed Consolidated Balance Sheets. The initial margin requirements are established by the exchanges based on the price, volatility and the time to expiration of the contract. The margin requirements are subject to change at the exchanges' discretion. As of September 30, 2020 and December 31, 2019, the Company recorded $102.5 million and $12.6 million, respectively, of such deposits as a current asset in the Condensed Consolidated Balance Sheets.
Refer to Note 9 for a discussion of the derivative liability recorded in connection with the Equitrans Share Exchange (defined in Note 9).
12
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below summarizes the impact of netting agreements and margin deposits on gross derivative assets and liabilities.
| Gross derivative instruments recorded in the Condensed Consolidated Balance Sheets | Derivative instruments subject to master netting agreements | Margin requirements with counterparties | Net derivative instruments | |||||||||||||||||||||||
| (Thousands) | ||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||
| Asset derivative instruments, at fair value | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Liability derivative instruments, at fair value | ( | ( | ||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Asset derivative instruments, at fair value | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Liability derivative instruments, at fair value | ( | ( | ||||||||||||||||||||||||
The Company has not executed any interest rate swaps since 2011. As of December 31, 2019, amounts related to historical interest rate swaps that had been previously recorded in accumulated other comprehensive income (OCI) were fully reclassified into interest expense. See Note 8.
4. Fair Value Measurements
The Company records its financial instruments, which are principally derivative instruments, at fair value in the Condensed Consolidated Balance Sheets. The Company estimates the fair value of its financial instruments using quoted market prices when available. If quoted market prices are not available, fair value is based on models that use market-based parameters, including forward curves, discount rates, volatilities and nonperformance risk, as inputs. Nonperformance risk considers the effect of the Company's credit standing on the fair value of liabilities and the effect of the counterparty's credit standing on the fair value of assets. The Company estimates nonperformance risk by analyzing publicly available market information, including a comparison of the yield on debt instruments with credit ratings similar to the Company's or counterparty's credit rating and the yield on a risk-free instrument.
The Company has categorized its assets and liabilities recorded at fair value into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities that use Level 2 inputs primarily include the Company's swap, collar and option agreements.
Exchange traded commodity swaps have Level 1 inputs. The fair value of the commodity swaps with Level 2 inputs is based on standard industry income approach models that use significant observable inputs, including, but not limited to, NYMEX natural gas forward curves, LIBOR-based discount rates, basis forward curves and natural gas liquids forward curves. The Company's collars and options are valued using standard industry income approach option models. The significant observable inputs used by the option pricing models include NYMEX forward curves, natural gas volatilities and LIBOR-based discount rates.
13
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The table below summarizes assets and liabilities measured at fair value on a recurring basis.
| Gross derivative instruments recorded in the Condensed Consolidated Balance Sheets | Fair value measurements at reporting date using: | ||||||||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||||||||
| (Thousands) | |||||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Asset derivative instruments, at fair value | $ | $ | $ | $ | |||||||||||||||||||
Liability derivative instruments, at fair value | |||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Asset derivative instruments, at fair value | $ | $ | $ | $ | |||||||||||||||||||
Liability derivative instruments, at fair value | |||||||||||||||||||||||
The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term maturities. The carrying value of the Company's investment in Equitrans Midstream Corporation (Equitrans Midstream) approximates fair value as Equitrans Midstream is a publicly traded company. The carrying values of borrowings on the Company's credit facility and term loan facility (which was fully repaid in the second quarter of 2020) approximate fair value as the interest rates are based on prevailing market rates. The Company considered all of these fair values to be Level 1 fair value measurements.
The Company has an immaterial investment in a fund that invests in companies developing technology and operating solutions for exploration and production companies. The investment is valued using, as a practical expedient, the net asset value provided in the financial statements received from fund managers and is recorded in other assets in the Condensed Consolidated Balance Sheets.
The Company estimates the fair value of its senior notes using established fair value methodology. Because not all of the Company's senior notes are actively traded, their fair value is a Level 2 fair value measurement. As of September 30, 2020 and December 31, 2019, the Company's senior notes had a fair value of approximately $4.8 billion and $3.9 billion, respectively, and a carrying value of approximately $4.4 billion and $3.9 billion, respectively, inclusive of any current portion. The fair value of the Company's note payable to EQM Midstream Partners, LP (EQM) is estimated using an income approach model with a market-based discount rate and is a Level 3 fair value measurement. As of September 30, 2020 and December 31, 2019, the Company's note payable to EQM had a fair value of approximately $131 million and $128 million, respectively, and a carrying value of approximately $106 million and $110 million, respectively, inclusive of any current portion. See Note 6 for further discussion of the Company's debt.
The Company recognizes transfers between Levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Levels 1, 2 and 3 during the periods presented.
See Note 9 for a discussion of the fair value measurement of the Equitrans Share Exchange and Note 10 for a discussion of the fair value measurement of the 2020 Asset Exchange Transactions and 2020 Divestiture (each defined in Note 10). See Note 1 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the fair value of assets related to the impairment and expiration of leases.
5. Income Taxes
14
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
calculate taxes for the nine months ended September 30, 2019. There were no material changes to the Company's methodology for determining unrecognized tax benefits during the nine months ended September 30, 2020.
The Company recorded income tax benefit at an effective tax rate of 22.3 % and 17.1 % for the nine months ended September 30, 2020 and 2019, respectively. The Company's effective tax rate for the nine months ended September 30, 2020 was higher compared to the U.S. federal statutory rate due primarily to state taxes, including valuation allowances that limit certain state tax benefits, and the benefit related to the settlement of the Company's 2010, 2011 and 2012 audit with the Internal Revenue Service (IRS). These items were partly offset by valuation allowances provided against federal and state deferred tax assets for the additional unrealized losses on the Company's investment in Equitrans Midstream incurred through September 30, 2020 that, if such investment is sold, would become capital losses. The Company believes it is more likely than not that such additional unrealized losses will not be realized for tax purposes.
The Company's effective tax rate for the nine months ended September 30, 2019 was lower compared to the U.S. federal statutory rate due primarily to state valuation allowances that limit certain state tax benefits as well as the Company's recognition of executive compensation and transaction costs, which are not deductible for tax purposes, partly offset by state taxes recorded in 2019 and the Company's reversal of its valuation allowances related to state net operating losses utilization against future taxable income and Alternative Minimum Tax (AMT) refund sequestration. The Company's reversal of its AMT refund valuation allowance resulted from a first quarter 2019 IRS announcement that reversed the IRS's prior position that 6.2 % of AMT refunds are subject to sequestration by the U.S. federal government.
On March 27, 2020, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). The CARES Act accelerated the Company's ability to claim federal refunds of AMT credits, increasing the Company's expected collectable refund in 2020 by $94.8 million to $379.3 million, all of which, plus interest of $12.1 million, was received during the nine months ended September 30, 2020. The CARES Act also increased the interest expense limitation from 30% to 50% of adjusted taxable income (ATI) and provides the Company the option to use its 2019 ATI in 2020. Further, the CARES Act modified certain net operating loss (NOL) rules, including allowing five year carrybacks for NOLs arising in 2018, 2019 and 2020 and temporarily removing the 80% taxable income NOL utilization limit for those periods. The Company does not expect any other tax-related provisions of the CARES Act to have a material impact on its financial statements and related disclosures.
6. Debt
Credit facility. The Company has a $2.5 billion credit facility that expires in July 2022.
The Company had $0.8 billion of letters of credit outstanding under its credit facility as of September 30, 2020 and no letters of credit outstanding under its credit facility as of December 31, 2019.
Under the Company's credit facility, for the three months ended September 30, 2020 and 2019, the maximum amounts of outstanding borrowings were $399 million and $319 million, respectively, the average daily balances were approximately $149 million and $105 million, respectively, and interest was incurred at weighted average annual interest rates of 2.2 % and 3.6 %, respectively. Under the Company's credit facility, for the nine months ended September 30, 2020 and 2019, the maximum amounts of outstanding borrowings were $399 million and $1,108 million, respectively, the average daily balances were approximately $90 million and $340 million, respectively, and interest was incurred at weighted average annual interest rates of 2.5 % and 4.0 %, respectively. Based on the Company's senior notes credit rating as of September 30, 2020, the margin on base rate loans under the Company's credit facility was 1.00 % and the margin on Eurodollar rate loans was 2.00 %.
Term loan facility. The Company had a $1.0 billion term loan facility that was scheduled to mature in May 2021. During the second quarter 2020, the Company used proceeds from the offering of its Convertible Notes (see below), income tax refunds received during the quarter (see Note 5) and proceeds from the 2020 Divestiture (see Note 10) to fully repay its term loan facility on June 30, 2020. Under the Company's term loan facility, from January 1, 2020 through June 30, 2020, the average daily balance was approximately $692 million and interest was incurred at a weighted average annual interest rate of 2.6 %. As of September 30, 2019, the Company had $1.0 billion of outstanding borrowings under its term loan facility. For the period May 31, 2019 through September 30, 2019, interest was incurred on the Company's term loan facility borrowings at a weighted average annual interest rate of 3.3 %.
Adjustable Rate Notes. On January 21, 2020, the Company issued $1.0 billion aggregate principal amount of 6.125 % senior notes due February 1, 2025 and $750 million aggregate principal amount of 7.000 % senior notes due February 1, 2030 (together, the Adjustable Rate Notes). The Company used the net proceeds from the Adjustable Rate Notes to repay $500 million aggregate
15
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
principal amount of the Company's floating rate notes, $500 million aggregate principal amount of the Company's 2.50 % senior notes, $500 million aggregate principal amount of the Company's 4.875 % senior notes and $200 million of the Company's term loan facility borrowings. The Company fully redeemed its floating rate notes and 2.50 % senior notes at a price of 100 % and 100.446 % (inclusive of a make whole call premium), respectively, of each note's principal amount plus accrued but unpaid interest of $1.2 million and $4.2 million, respectively. This resulted in the payment of make whole call premiums of $2.2 million related to the Company's 2.50 % senior notes. The $500 million aggregate principal amount of the Company's 4.875 % senior notes was redeemed at a total cost of $517.4 million, inclusive of a tender premium of $10.0 million and accrued but unpaid interest of $7.4 million.
As a result of downgrades of the Company's senior notes credit rating that occurred subsequent to the issuance of the Adjustable Rate Notes, the interest rate on the 6.125 % senior notes increased to 7.875 % and the interest rate on the 7.000 % senior notes increased to 8.750 % beginning with the interest payment period that started on August 1, 2020. The adjusted interest rate under the Adjustable Rate Notes cannot exceed 2 % of the original interest rate first set forth on the face of the senior notes.
Convertible Notes. On April 28, 2020, the Company issued $500 million aggregate principal amount of 1.75 % convertible senior notes (the Convertible Notes) due May 1, 2026 unless earlier redeemed, repurchased or converted. The Convertible Notes were issued in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. After deducting offering costs of $16.9 million and Capped Call Transactions (defined and described below) costs of $32.5 million, the net proceeds from the offering of $450.6 million were used to repay $450 million of the Company's term loan facility borrowings as well as for general corporate purposes.
Interest under the Convertible Notes is payable semiannually in arrears on May 1 and November 1 of each year beginning on November 1, 2020.
Holders of the Convertible Notes may convert their Convertible Notes, at their option, at any time prior to the close of business on January 30, 2026 under the following circumstances:
•during any quarter commencing after the quarter ended June 30, 2020 as long as the last reported price of EQT common stock for at least 20 trading days (consecutive or otherwise) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130 % of the conversion price on each such trading day;
•during the five -business-day period after any five -consecutive-trading-day period (the measurement period) in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period is less than 98 % of the product of the last reported price of EQT common stock and the conversion rate for the Convertible Notes on each such trading day;
•if the Company calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding such redemption date; and
•upon the occurrence of certain corporate events set forth in the Convertible Notes indenture.
On or after February 1, 2026, holders of the Convertible Notes may convert their Convertible Notes, at their option, at any time until the close of business on the second scheduled trading date immediately preceding May 1, 2026.
Upon conversion of the Convertible Notes, the Company intends to use a combined settlement approach to satisfy its obligation by paying or delivering to holders of the Convertible Notes cash equal to the principal amount of the obligation and EQT common stock for amounts that exceed the principal amount of the obligation.
The Company may not redeem the Convertible Notes prior to May 5, 2023. On or after May 5, 2023 and prior to February 1, 2026, the Company may redeem for cash all or any portion of the Convertible Notes, at its option, at a redemption price equal to 100 % of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest up to the redemption date as long as the last reported price per share of EQT common stock has been at least 130 % of the conversion price in effect for at least 20 trading days (consecutive or otherwise) during any 30 -consecutive-trading-day period ending on the trading day immediately preceding the date on which the Company delivers notice of redemption. A sinking fund is not provided for the Convertible Notes.
16
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The initial conversion rate for the Convertible Notes is 66.6667 shares of EQT common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of $15.00 per share of EQT common stock. The initial conversion price represents a premium of 20 % to the $12.50 per share closing price of EQT common stock on April 23, 2020. The conversion rate is subject to adjustment under certain circumstances. In addition, following certain corporate events that occur prior to May 1, 2026 or if the Company delivers notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or notice of redemption.
In connection with the Convertible Notes offering, the Company entered into privately negotiated capped call transactions (the Capped Call Transactions), the purpose of which is to reduce the potential dilution to EQT common stock upon conversion of the Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of such obligation, with such reduction and offset subject to a cap. The Capped Call Transactions have an initial strike price of $15.00 per share of EQT common stock and an initial capped price of $18.75 per share of EQT common stock, each of which are subject to certain customary adjustments.
For accounting purposes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt instruments that do not have associated convertible features. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the principal value of the Convertible Notes. The equity component is not remeasured as long as it continues to meet the condition for equity classification. The excess of the principal amount of the liability component over its carrying amount (the debt discount) will be amortized to interest expense over the term of the Convertible Notes, which is approximately 6 years, at an effective interest rate of 8.4 %. At inception, the Company recorded the Convertible Notes at fair value of approximately $358.1 million, a net deferred tax liability of $41.0 million and an equity component of $100.9 million.
Issuance costs were allocated to the liability and equity components of the Convertible Notes based on their relative fair values. Issuance costs attributable to the liability component of $12.1 million were recorded as a reduction to the liability component of the Convertible Notes and will be amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 8.4 %. Issuance costs attributable to the equity component of $4.8 million, representing the conversion option, were netted with the equity component.
The Capped Call Transactions are separate from the Convertible Notes. The Capped Call Transactions were recorded in shareholders' equity and were not accounted for as derivatives. The cost to purchase the Capped Call Transactions were recorded as a reduction to equity and will not be remeasured.
For the nine months ended September 30, 2020, the Convertible Notes had a net shareholders' equity impact of $63.6 million, which consisted of the conversion option equity component of $100.9 million less the Capped Call Transactions costs of $32.5 million and issuance costs attributable to the equity component of $