EQT Reports 2012 Full-Year Earnings
EQT Reports 2012 Full-Year Earnings
2012 Production Sales Volume Growth of 33%
PITTSBURGH--(BUSINESS WIRE)-- EQT Corporation (NYS: EQT) today announced 2012 net income of $183.4 million, compared to $479.8 million last year. To accurately review and compare the year-over-year earnings results, certain items should be considered. Results for 2012 were negatively impacted by items totaling $62.2 million net. Results for 2011 were positively impacted by several items totaling $238.0 million including gains on the sale of the Big Sandy Pipeline and the Langley Natural Gas Processing Complex. Adjusted earnings per diluted share (EPS) was $1.49 in 2012, down from $2.19 in 2011. Operating cash flow was $832 million in 2012, vs. $887 million in 2011; and adjusted cash flow per share was $5.56 in 2012, compared to $5.92 last year. See the Non-GAAP Disclosures section of this press release for detailed adjustments related to net income, EPS, and cash flow per share.
Highlights for 2012 include:
- Record annual production sales volumes of 258.5 Bcfe, 33% higher than 2011
- Record Marcellus sales volumes of 150.6 Bcfe; 85% higher vs. 2011
- Record gathered volumes of 335.4 TBtu; 30% higher vs. 2011
- Year-end proved reserves increased by 12% to 6.0 Tcfe (separate press release issued today)
- Completed EQT Midstream Partners, LP initial public offering (IPO)
- Announced an agreement to sell EQT's gas utility, Equitable Gas
In 2012, EQT's operating income was $470.5 million, compared to $861.3 million in 2011, which included $202.9 million of pre-tax gains on the sale of Big Sandy and Langley. Operating revenues were $1.7 million higher in 2012; however the increase in production, gathering and transmission volumes was nearly offset by a 31% lower NYMEX price, as well as lower storage and marketing revenues. Total operating expenses increased $189.5 million to $1,171.1 million, as depreciation, depletion and amortization expense (DD&A); selling, general and administrative expense (SG&A); exploration expenses, and operation and maintenance (O&M) were all higher. These increases are consistent with the growth in produced volumes and midstream throughput.
Fourth quarter 2012 net income was $48.0 million, compared to $90.8 million in 2011. The 2012 results were negatively impacted by items totaling $39.1 million, including a $23.3 million charge for the termination of an interest rate hedge, $4.5 million in expenses related to the pending sale of Equitable Gas, and a $4.4 million lease impairment. Fourth quarter 2012 adjusted EPS was $0.48, down from $0.59 in 2011. Operating cash flow was $268.9 million in 2012, vs. $243.7 million in 2011; and adjusted cash flow per share was $1.79, vs. $1.62 last year. See the Non-GAAP Disclosures section of this press release for detailed adjustments related to net income, EPS, and cash flow per share.
In the fourth quarter of 2012, EQT's operating income was $151.0 million, a 13% decrease from the same quarter of 2011. Higher net operating revenues, from an increase in production, gathering and transmission volumes was more than offset by lower commodity prices, lower storage, marketing and other net revenues, and higher costs related to the increased volumes. Net operating revenues rose 13% to $419.5 million in the quarter, while net operating expenses were $268.5 million, an increase of $71.3 million compared to last year -- consistent with the growth of the EQT Production and EQT Midstream businesses.
RESULTS BY BUSINESS
Driven by horizontal drilling in the Marcellus shale, EQT Production achieved record production sales volumes of 258.5 Bcfe for 2012, representing a 33% increase over 2011. Approximately 58% of EQT's 2012 production sales volumes came from Marcellus wells, and Marcellus volumes increased by 85% over last year.
Production operating income totaled $187.9 million in 2012, $199.2 million lower than 2011. Operating revenue was $793.8 million, $2.5 million higher than last year. Increased revenue from sales volume growth was nearly offset by lower realized commodity prices that included an $8.2 million reduction related to a financial derivative adjustment, and a $10.0 million reduction from the resale of unused transportation capacity. The average wellhead sales price to EQT Corporation was 21% lower than last year at $4.26 per Mcfe, with $3.05 per Mcfe allocated to EQT Production; and $1.21 per Mcfe allocated to EQT Midstream.
Consistent with growth and increased drilling activity, EQT Production 2012 operating expenses rose to $605.9 million, a $201.7 million increase over last year. DD&A was $152.5 million higher; SG&A was $28.5 million higher; production taxes were $9.4 million higher, and included $6.7 million in retroactive Pennsylvania impact fees; and lease operating expense (LOE) was $5.8 million higher than 2011. Per unit LOE was 10% lower year-over-year at $0.18 per Mcfe, due to production sales volumes growing significantly faster than operating costs. LOE including production taxes totaled $0.34 per Mcfe, excluding the $6.7 million retroactive portion of the Pennsylvania impact fee.
Production sales volumes totaled 76.2 Bcfe in the fourth quarter 2012, 44% higher than the fourth quarter 2011, and 12% higher sequentially. Operating income for the fourth quarter of 2012 was $72.6 million, compared to $106.1 million in the same period last year. Production operating revenues for the quarter were $244.4 million, 14% higher than last year due to the increase in sales volumes; however, partially offset by a 20% lower average wellhead sales price to EQT Production. Operating expenses for the quarter were $171.8 million in 2012, $63.9 million higher than the fourth quarter 2011, consistent with the increase in Marcellus drilling activity. Exploration expense totaled $5.5 million and included $4.4 million of lease impairment charges during the quarter.
The Company drilled (spud) 135 gross wells during 2012; 127 targeted the Marcellus shale with an average length of pay of 5,485 feet; 7 targeted the Huron shale and 1 targeted the Utica shale.
Production sales volumes in 2013 are projected between 335 and 340 Bcfe, 31% higher than in 2012. Liquids volumes for 2013 are now expected between 3,900 and 4,000 MBBls.
EQT Midstream's operating income totaled $237.3 million in 2012, 11% higher than in 2011 after excluding $202.9 million in pre-tax gains from the sale of Big Sandy and Langley. The Company realized higher gathered volumes and an increase in firm transportation revenues. Net operating revenues for 2012 totaled $449.4 million, representing a $44.8 million increase over 2011. Net gathering revenues were $302.3 million in 2012, up 21% from 2011, due to a 30% increase in gathered volumes, partially offset by lower gathering rates. Net transmission revenues increased by 16% to $104.5 million in 2012, mainly driven by the sale of increased capacity associated with the Sunrise and Marcellus expansion projects. Storage, marketing and other net revenues totaled $42.7 million in 2012, down 34% from 2011, as a result of lower marketed volumes and lower seasonal price spreads, and a non-cash $9.2 million unrealized loss on derivatives and inventory.
Operating expenses for 2012 totaled $212.1 million, 11% higher than in 2011 and consistent with the growth in the EQT Midstream business, such as higher compressor O&M and depreciation expenses, property taxes, and labor on the expanded gathering and transmission infrastructure. On a per unit basis; however, year-over-year gathering and compression expenses were 20% lower in 2012. O&M in 2011 was reduced by $10.3 million resulting from a property tax reserve. SG&A was flat year-over-year as a result of a $2.8 million recovery from the Lehman Brothers bankruptcy, and a $2.5 million reduction of a regulatory reserve at Transmission, which together offset higher SG&A costs.
EQT Midstream had fourth quarter 2012 operating income of $70.4 million, a 33% increase over the same period in 2011. Net gathering revenues increased 27% to $83.8 million in the fourth quarter 2012, primarily due to a 43% increase in gathered volumes. Net transmission revenues totaled $33.5 million, a 59% increase over 2011, mainly due to the sale of capacity on the Sunrise and Marcellus expansion projects. Net storage, marketing and other revenues totaled $7.7 million, a 59% decrease over 2011, and included a $4.3 million non-cash unrealized loss on derivatives and inventory. Operating expenses for the quarter were $54.6 million, up $1.5 million from 2011, as an increase in DD&A was partly offset by a $2.5 million reduction of a regulatory reserve included in SG&A.
Distribution's operating income totaled $68.6 million in 2012, 21% lower than reported in 2011. Net operating revenues for 2012 were $170.0 million, $17.5 million lower than last year, due to the warmest weather on record in the Company's service territory. Operating expenses for 2012 were $101.4 million, compared to $100.7 million in 2011.
Distribution's fourth quarter 2012 operating income totaled $24.8 million, compared to $22.1 million for the same period in 2011. Total net operating revenues were $50.0 million, essentially unchanged compared with last year, while operating expenses were $2.4 million lower as a result of lower incentive compensation expense and a reduction in the estimate of asset retirement obligations.
2012 Capital Expenditures
EQT invested $1,400 million in capital projects during 2012. This included $992 million for EQT Production, including $135 million for acreage acquisitions; $376 million for EQT Midstream; and $32 million for Distribution infrastructure projects and other corporate items.
Initial Public Offering - EQT Midstream Partners, LP
On July 2, 2012, EQT Midstream Partners, LP (NYS: EQM) completed its initial public offering (IPO) of 14,375,000 common units at $21.00 per common unit. EQT received $231 million cash and retained a 57.4% limited partner interest and a 2% general partner interest. EQT Midstream Partners results are consolidated in the EQT Corporation financial results.
On December 20, 2012, the Company announced that it has entered into a definitive agreement for the transfer of its natural gas distribution business, Equitable Gas Company, to Peoples Natural Gas, subject to receipt of regulatory approvals. As part of the transaction, EQT will receive cash proceeds of $720 million, subject to certain purchase price adjustments, and select midstream assets and commercial arrangements, which are expected to generate at least $40 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) per year. The Company realized a $4.5 million unallocated SG&A expense in the fourth quarter related to the transaction.
Concurrent with the December 20, 2012 announcement referenced above, EQT reduced its dividend, effective January 2013. The new annual dividend rate of $0.12 per share reflects the blend of EQT's two remaining core businesses - a dividend-supporting midstream business, and a capital-intensive, rapidly growing production business.
Interest Rate Hedge
During the third quarter 2011, the Company entered into an interest rate hedge in anticipation of refinancing $200 million of long-term debt scheduled to mature in November 2012. Given the strong liquidity position at year end, and visibility of future capital, the Company retired the debt using cash on hand and recognized a $23 million expense to close the interest rate hedge.
EQT has hedged approximately 43% of its forecasted 2013 sales of produced natural gas. The Company does not hedge produced liquids. The Company's total hedge positions for 2013 through 2015 production are:
|Total Volume (Bcfe)||121||79||65|
|Average Price per Mcf (NYMEX)*||$||4.70||$||4.53||$||4.60|
|Total Volume (Bcfe)||25||24||23|
|Average Floor Price per Mcf (NYMEX)*||$||4.95||$||5.05||$||5.03|
|Average Cap Price per Mcf (NYMEX)*||$||9.09||$||8.85||$||8.97|
* The above price is based on a conversion rate of 1.05 MMBtu/Mcf
The Company reports operating income by segment in this press release. Interest, income taxes and unallocated (expense)/income are controlled on a consolidated, corporate-wide basis and are not allocated to the segments. The Company's management reviews and reports segment results for operating revenues and purchased gas costs net of third-party transportation costs.
The following table reconciles operating income by segment as reported in this press release to the consolidated operating income reported in the Company's financial statements:
|Three Months Ended|
|Operating income (thousands):|
Unallocated (expense)/income is primarily due to certain incentive compensation and administrative costs in excess of budget that are not allocated to the operating segments.
EQT Production's average wellhead sales price is calculated by allocating some revenues to EQT Midstream for the gathering and transportation of the produced gas. EQT Production's average wellhead sales prices were as follows:
|Three Months Ended|
|Revenues ($ / Mcfe)|
|Average NYMEX price||$||3.40||$||3.55||$||2.79||$||4.04|
|Average net liquids revenue||0.76||1.13||0.81||1.11|
|Hedge adjusted price||$||4.87||$||5.51||$||4.72||$||5.80|
|Midstream Revenue Deductions ($ / Mcfe)|
|Gathering to EQT Midstream||$||(0.99||)||$||(1.07||)||$||(1.02||)||$||(1.11||)|
|Transmission to EQT Midstream||(0.21||)||(0.14||)||(0.19||)||(0.22||)|
|Third-party gathering and transmission*||(0.37||)||(0.17||)||(0.36||)||(0.31||)|
|Total midstream revenue deductions||(1.68||)||(1.50||)||(1.67||)||$||(1.76||)|
|Average wellhead sales price to EQT Production||$||3.19||$||4.01||$||3.05||$||4.04|
|EQT Revenue ($ / Mcfe)|
|Revenues to EQT Midstream||$||1.20||$||1.21||$||1.21||$||1.33|
|Revenues to EQT Production||3.19||4.01||3.05||4.04|
|Average wellhead sales price to EQT Corporation||$||4.39||$||5.22||$||4.26||$||5.37|
*Due to the sale of unused capacity on the El Paso 300 line that was not under long-term resale agreements at prices below the capacity charge, third-party gathering and transmission rates increased by $0.04 per Mcfe for the full year 2012 and $0.07 per Mcfe in the fourth quarter 2012. In 2011, the unused capacity on the El Paso 300 line not under long-term resale agreements was sold at prices above the capacity charge, decreasing third-party gathering and transmission rates by $0.03 per Mcfe for the full year 2011 and $0.12 per Mcfe for the fourth quarter 2011.
NOTE: Beginning Q1 2013, the preceding table will be replaced by the expanded price reconciliation table located on page 12 of this release.
EQT's unit costs to produce, gather, process and transport EQT's produced natural gas were:
|Three Months Ended|
|Production segment costs: ($ / Mcfe)|
|Midstream segment costs: ($ / Mcfe)|
|Gathering and transmission||$||0.28||$||0.40||$||0.32||$||0.37|
|Total ($ / Mcfe)||$||1.01||$||1.26||$||1.13||$||1.25|
*Excludes the retroactive Pennsylvania Impact Fee of $0.03 per Mcfe for the year-ended December 31, 2012, for Marcellus wells spud prior to 2012.
Marcellus Horizontal Well Status (cumulatively since inception)
|As of 12/31/12||As of 9/30/12||As of 6/30/12||As of 3/31/12||As of 12/31/11|
|Wells complete, not online||17||27||22||3||22|
|Frac stages (spud wells)*||7,289||6,390||5,411||4,747||3,796|
|Frac stages online||4,425||3,604||3,247||2,749||2,171|
|Frac stages complete, not online||462||622||412||51||331|
*Includes planned stages for spud wells that have not yet been hydraulically fractured.
Adjusted Net Income and Adjusted Earnings Per Diluted Share
Adjusted net income and adjusted earnings per diluted share are non-GAAP financial measures that are presented because they are important measures used by management to evaluate period-to-period comparisons of earnings trends. Adjusted net income and adjusted earnings per diluted share should not be considered in isolation or as a substitute for operating income, net income or earnings per diluted share. The table below reconciles adjusted net income and adjusted earnings per diluted share with net income and earnings per diluted share, as derived from the statements of consolidated income to be included in the Company's Form 10-K for the year ended December 31, 2012.
|Three Months Ended|
|Net income attributable to EQT, as reported||48,041||90,846||183,395||479,769|
|(Deduct)/ add back:||`|
|Interest rate hedge expense||23,340||-||23,340||-|
|Resale of unused transmission capacity||5,496||(6,495||)||9,984||(6,495||)|
|Financial derivative reserve reduction||-||-||8,227||-|
|Unrealized losses on commercial derivatives and inventory||4,279||2,605||9,225||755|
|PA impact fee (retroactive portion)||-||-||6,745||-|
|Cost associated with sale of gas utility||
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