EQT Corporation
10-Q on 10/31/2019   Download
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM                TO               
 COMMISSION FILE NUMBER 001-03551

EQT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania
 
25-0464690
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 

625 Liberty Avenue, Suite 1700
Pittsburgh, Pennsylvania 15222
(Address of principal executive offices and 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
Common Stock, no par value
 
EQT
 
New York Stock Exchange

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.
Large accelerated filer
 
Accelerated filer
 
Emerging growth company
Non-accelerated filer
 
Smaller reporting company
 
 
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No 
 
As of October 29, 2019, 255,643,475 shares of common stock, no par value, of the registrant were outstanding.


Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 Index
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents


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,
 
2019
 
2018
 
2019
 
2018
 
(Thousands, except per share amounts)
Operating revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and natural gas liquids
$
769,627

 
$
1,046,989

 
$
2,941,767

 
$
3,264,728

Gain (loss) on derivatives not designated as hedges
180,313

 
(3,075
)
 
455,952

 
5,620

Net marketing services and other
1,636

 
6,132

 
7,282

 
42,382

Total operating revenues
951,576

 
1,050,046

 
3,405,001

 
3,312,730

Operating expenses:
 

 
 

 
 

 
 

Transportation and processing
437,942

 
420,747

 
1,314,172

 
1,265,473

Production
37,821

 
42,734

 
117,545

 
149,231

Exploration
3,492

 
3,596

 
6,356

 
6,474

Selling, general and administrative
79,376

 
51,816

 
214,562

 
154,590

Depreciation and depletion
390,993

 
388,016

 
1,154,519

 
1,152,418

Impairment/loss on sale/exchange of long-lived assets
13,935

 
259,279

 
13,935

 
2,706,438

Impairment of intangible assets
15,411

 

 
15,411

 

Lease impairments and expirations
49,601

 
12,176

 
127,719

 
35,584

Amortization of intangible assets
7,755

 
10,341

 
28,439

 
31,025

Proxy, transaction and reorganization
76,779

 
8,792

 
102,386

 
23,930

Total operating expenses
1,113,105

 
1,197,497

 
3,095,044

 
5,525,163

Operating (loss) income
(161,529
)
 
(147,451
)
 
309,957

 
(2,212,433
)
Unrealized loss on investment in Equitrans Midstream Corporation
(261,093
)
 

 
(276,779
)
 

Dividend and other income
22,960

 
4,323

 
67,592

 
4,063

Interest expense
47,709

 
56,180

 
154,785

 
171,211

Loss from continuing operations before income taxes
(447,371
)
 
(199,308
)
 
(54,015
)
 
(2,379,581
)
Income tax benefit
(86,343
)
 
(71,961
)
 
(9,244
)
 
(596,723
)
Loss from continuing operations
(361,028
)
 
(127,347
)
 
(44,771
)
 
(1,782,858
)
Income from discontinued operations, net of tax

 
190,795

 

 
537,673

Net (loss) income
(361,028
)
 
63,448

 
(44,771
)
 
(1,245,185
)
Less: Net income from discontinued operations attributable to noncontrolling interests

 
103,141

 

 
362,696

Net loss attributable to EQT Corporation
$
(361,028
)
 
$
(39,693
)
 
$
(44,771
)
 
$
(1,607,881
)
 
 
 
 
 
 
 
 
Amounts attributable to EQT Corporation:
 
 
 
 
 
 
 
Loss from continuing operations
$
(361,028
)
 
$
(127,347
)
 
$
(44,771
)
 
$
(1,782,858
)
Income from discontinued operations, net of tax

 
87,654

 

 
174,977

Net loss attributable to EQT Corporation
$
(361,028
)
 
$
(39,693
)
 
$
(44,771
)
 
$
(1,607,881
)
 
 
 
 
 
 
 
 
Earnings per share of common stock attributable to EQT Corporation:
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Weighted average common stock outstanding
255,235

 
259,560

 
255,069

 
262,816

Loss from continuing operations
$
(1.41
)
 
$
(0.49
)
 
$
(0.18
)
 
$
(6.79
)
Income from discontinued operations

 
0.34

 

 
0.67

Net loss
$
(1.41
)
 
$
(0.15
)
 
$
(0.18
)
 
$
(6.12
)
Diluted:
 

 
 

 
 

 
 

Weighted average common stock outstanding
255,235

 
259,560

 
255,069

 
262,816

Loss from continuing operations
$
(1.41
)
 
$
(0.49
)
 
$
(0.18
)
 
$
(6.79
)
Income from discontinued operations

 
0.34

 

 
0.67

Net loss
$
(1.41
)
 
$
(0.15
)
 
$
(0.18
)
 
$
(6.12
)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

Table of Contents



EQT CORPORATION AND SUBSIDIARIES 
Statements of Condensed Consolidated Comprehensive (Loss) Income (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
 
(Thousands)
Net (loss) income
$
(361,028
)
 
$
63,448

 
$
(44,771
)
 
$
(1,245,185
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

 
 

 
 

Net change in cash flow hedges:
 

 
 

 
 

 
 

Natural gas (a)

 
(430
)
 

 
(1,183
)
Interest rate (b)
43

 
52

 
127

 
132

Other post-retirement benefits liability adjustment (c)
77

 
86

 
229

 
258

Change in accounting principle (d)

 

 
(496
)
 

Other comprehensive income (loss)
120

 
(292
)
 
(140
)
 
(793
)
Comprehensive (loss) income
(360,908
)
 
63,156

 
(44,911
)
 
(1,245,978
)
Less: Comprehensive income from discontinued operations attributable to noncontrolling interests

 
103,141

 

 
362,696

Comprehensive loss attributable to EQT Corporation
$
(360,908
)
 
$
(39,985
)
 
$
(44,911
)
 
$
(1,608,674
)
 
(a)
Net of tax benefit of $150 and $413 for the three and nine months ended September 30, 2018, respectively.
(b)
Net of tax expense of $10 for both the three months ended September 30, 2019 and 2018 and $30 and $54 for the nine months ended September 30, 2019 and 2018, respectively.
(c)
Net of tax expense of $26 and $29 for the three months ended September 30, 2019 and 2018, respectively, and $78 and $89 for the nine months ended September 30, 2019 and 2018, respectively.
(d)
Related to adoption of Accounting Standards Update (ASU) 2018-02. See Note 1 for additional information.

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

4

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
Statements of Condensed Consolidated Cash Flows (Unaudited)
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
(Thousands)
Cash flows from operating activities:
 
Net loss
$
(44,771
)
 
$
(1,245,185
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Deferred income tax benefit
(10,407
)
 
(502,853
)
Depreciation and depletion
1,154,519

 
1,290,876

Amortization of intangible assets
28,439

 
62,185

Asset and lease impairments
157,065

 
2,742,022

Unrealized loss on investment in Equitrans Midstream Corporation
276,779

 

Share-based compensation expense
29,453

 
23,137

Amortization, accretion and other
19,385

 
(33,492
)
Gain on derivatives not designated as hedges
(455,952
)
 
(5,620
)
Net cash settlements received (paid) on derivatives not designated as hedges
152,149

 
(27,401
)
Net premiums received on derivative instruments
22,512

 

Changes in other assets and liabilities:
 

 
 

Accounts receivable
508,306

 
(7,713
)
Accounts payable
(286,453
)
 
205,360

Other items, net
82,830

 
(55,926
)
Net cash provided by operating activities
1,633,854

 
2,445,390

Cash flows from investing activities:
 

 
 

Capital expenditures
(1,257,333
)
 
(2,225,671
)
Capital expenditures for discontinued operations (a)

 
(624,359
)
Proceeds from sale of assets

 
583,895

Capital contributions to Mountain Valley Pipeline, LLC (a)

 
(446,049
)
Other investing activities
1,123

 
(7,276
)
Net cash used in investing activities
(1,256,210
)
 
(2,719,460
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings on credit facility
2,261,250

 
3,695,500

Repayment of borrowings on credit facility
(2,900,250
)
 
(4,540,500
)
Proceeds from borrowings on term loan facility
1,000,000

 

Debt issuance costs for term loan facility
(913
)
 

Repayments and retirements of debt
(703,471
)
 
(7,999
)
Dividends paid
(22,985
)
 
(23,736
)
Proceeds from awards under employee compensation plans

 
1,946

Cash paid for taxes related to net settlement of share-based incentive awards
(7,220
)
 
(21,910
)
Repurchase and retirement of common stock

 
(538,876
)
Repurchase of common stock

 
(27
)
Distributions to noncontrolling interests (a)

 
(279,539
)
Increase in borrowings on credit facilities of discontinued operations (a)

 
2,524,000

Repayment of borrowings on credit facilities of discontinued operations (a)

 
(2,968,000
)
Proceeds from issuance of EQM Midstream Partners, LP debt (a)

 
2,500,000

Debt discount and issuance costs for EQM Midstream Partners, LP debt (a)

 
(34,249
)
Acquisition of 25% ownership interest in Strike Force Midstream LLC (a)

 
(175,000
)
Net cash (used in) provided by financing activities
(373,589
)
 
131,610

Net change in cash, cash equivalents and restricted cash
4,055

 
(142,460
)
Cash, cash equivalents and restricted cash at beginning of period
3,487

 
147,315

Cash and cash equivalents at end of period
$
7,542

 
$
4,855

Cash paid (received) during the period for:
 

 
 

Interest, net of amount capitalized
$
125,817

 
$
163,688

Income taxes, net
$
(1,480
)
 
$
193

Non-cash activity during the period for:
 
 
 
Increase in right-of-use lease assets and lease liabilities
$
112,141

 
$

Increase in asset retirement costs and obligations
$
3,610

 
$
6,109

 
(a)
Related to discontinued operations. See Note 2.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

Table of Contents



EQT CORPORATION AND SUBSIDIARIES 
Condensed Consolidated Balance Sheets (Unaudited) 
 
September 30, 2019
 
December 31, 2018
 
(Thousands)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
7,542

 
$
3,487

Accounts receivable (less provision for doubtful accounts of $6,179 and $8,648 at September 30, 2019 and December 31, 2018, respectively)
552,260

 
1,241,843

Derivative instruments, at fair value
771,634

 
481,654

Tax receivable
127,789

 
131,573

Prepaid expenses and other
35,995

 
111,107

Total current assets
1,495,220

 
1,969,664

 
 
 
 
Property, plant and equipment
23,460,786

 
22,148,012

Less: accumulated depreciation and depletion
5,890,792

 
4,755,505

Net property, plant and equipment
17,569,994

 
17,392,507

 
 
 
 
Intangible assets, net
33,483

 
77,333

Investment in Equitrans Midstream Corporation
736,223

 
1,013,002

Other assets
325,529

 
268,838

Total assets
$
20,160,449

 
$
20,721,344

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of debt
$
4,916

 
$
704,390

Accounts payable
755,102

 
1,059,873

Derivative instruments, at fair value
339,995

 
336,051

Other current liabilities
349,697

 
254,687

Total current liabilities
1,449,710

 
2,355,001

 
 
 
 
Credit facility borrowings
161,000

 
800,000

Term loan borrowings
999,239

 

Senior Notes
3,887,907

 
3,882,932

Note payable to EQM Midstream Partners, LP
106,333

 
110,059

Deferred income taxes
1,809,650

 
1,823,381

Other liabilities
848,985

 
791,742

Total liabilities
9,262,824

 
9,763,115

 
 
 
 
Shareholders' equity:
 

 
 

Common stock, no par value, authorized 320,000 shares, issued 257,003 and 257,225 shares at September 30, 2019 and December 31, 2018, respectively
7,818,683

 
7,828,554

Treasury stock, shares at cost of 1,833 and 2,753 at September 30, 2019 and
December 31, 2018, respectively
(32,527
)
 
(49,194
)
Retained earnings
3,117,015

 
3,184,275

Accumulated other comprehensive loss
(5,546
)
 
(5,406
)
Total equity
10,897,625

 
10,958,229

Total liabilities and equity
$
20,160,449

 
$
20,721,344

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

6

Table of Contents



EQT CORPORATION AND SUBSIDIARIES 
Statements of Condensed Consolidated Equity (Unaudited)

 
Common Stock
 
 
 
 
 
Accumulated Other Comprehensive (Loss) Income
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Shares
 
No Par Value
 
Treasury Stock
 
Retained Earnings
 
 
 
Total Equity
 
(Thousands, except per share or unit amounts)
Balance at July 1, 2018
264,331

 
$
9,316,209

 
$
(50,769
)
 
$
2,416,802

 
$
(2,959
)
 
$
5,023,336

 
$
16,702,619

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

 
 

 
 
 
(39,693
)
 
 

 
103,141

 
63,448

Net change in cash flow hedges:
 

 
 

 
 
 
 

 
 
 
 

 
 
Natural gas (a)
 
 
 
 
 
 
 
 
(430
)
 
 
 
(430
)
Interest rate (b)
 
 
 
 
 
 
 
 
52

 
 
 
52

Other post-retirement benefits liability adjustment (c)
 
 
 
 
 
 
 
 
86

 
 
 
86

Dividends (d)
 

 
 

 
 
 
(7,838
)
 
 

 
 

 
(7,838
)
Share-based compensation plans
41

 
6,996

 
755

 
 

 
 

 
462

 
8,213

Distributions to noncontrolling interests (e)
 

 
 

 
 
 
 

 
 

 
(98,794
)
 
(98,794
)
Repurchase and retirement of common stock
(9,946
)
 
(500,199
)
 
 
 
 
 
 
 
 
 
(500,199
)
Changes in ownership of consolidated subsidiaries
 
 
(138,837
)
 
 
 
 
 
 
 
189,072

 
50,235

Balance at September 30, 2018
254,426

 
$
8,684,169

 
$
(50,014
)
 
$
2,369,271

 
$
(3,251
)
 
$
5,217,217

 
$
16,217,392

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2019
254,796

 
$
7,807,740

 
$
(39,310
)
 
$
3,485,711

 
$
(5,666
)
 
$

 
$
11,248,475

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 
 

 
 
 
(361,028
)
 
 

 
 
 
(361,028
)
Net change in interest rate cash flow hedges (b)
 
 
 
 
 
 
 
 
43

 
 
 
43

Other post-retirement benefit liability adjustment (c)
 
 
 
 
 
 
 
 
77

 
 
 
77

Dividends (d)
 

 
 

 
 
 
(7,668
)
 
 

 
 

 
(7,668
)
Share-based compensation plans
374

 
10,943

 
6,783

 
 

 
 

 
 
 
17,726

Balance at September 30, 2019
255,170

 
$
7,818,683

 
$
(32,527
)
 
$
3,117,015

 
$
(5,546
)
 
$

 
$
10,897,625


Common shares authorized: 320,000 shares. Preferred shares authorized: 3,000 shares. There are no preferred shares issued or outstanding.
 
(a)
Net of tax benefit of $150.
(b)
Net of tax expense of $10 for both the three months ended September 30, 2018 and 2019.
(c)
Net of tax expense of $29 and $26 for the three months ended September 30, 2018 and 2019, respectively.
(d)
Dividends were $0.03 per share for both the three months ended September 30, 2018 and 2019.
(e)
Distributions to noncontrolling interests from EQM Midstream Partners, LP (EQM) and EQGP Holdings, LP (EQGP) were $1.09 and $0.306 per common unit, respectively.

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

7

Table of Contents



EQT CORPORATION AND SUBSIDIARIES 
Statements of Condensed Consolidated Equity (Unaudited)

 
Common Stock
 
 
 
 
 
Accumulated Other Comprehensive (Loss) Income
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Shares
 
No Par Value
 
Treasury Stock
 
Retained Earnings
 
 
 
Total Equity
 
(Thousands, except per share or unit amounts)
Balance at January 1, 2018
264,320

 
$
9,388,903

 
$
(63,602
)
 
$
3,996,775

 
$
(2,458
)
 
$
5,094,995

 
$
18,414,613

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

 
 

 
 
 
(1,607,881
)
 
 

 
362,696

 
(1,245,185
)
Net change in cash flow hedges:
 

 
 

 
 
 
 

 
 
 
 

 
 
Natural gas (a)
 
 
 
 
 
 
 
 
(1,183
)
 
 
 
(1,183
)
Interest rate (b)
 
 
 
 
 
 
 
 
132

 
 
 
132

Other post-retirement benefits liability adjustment (c)
 
 
 
 
 
 
 
 
258

 
 
 
258

Dividends (d)
 

 
 

 
 
 
(23,736
)
 
 

 
 

 
(23,736
)
Share-based compensation plans
752

 
(9,116
)
 
13,588

 
 

 
 

 
953

 
5,425

Distributions to noncontrolling interests (e)
 

 
 

 
 
 
 

 
 

 
(279,539
)
 
(279,539
)
Change in accounting principle
 
 
 
 
 
 
4,113

 
 
 
 
 
4,113

Repurchase and retirement of common stock
(10,646
)
 
(538,876
)
 
 
 
 
 
 
 
 
 
(538,876
)
Acquisition of 25% ownership interest in Strike Force Midstream LLC
 
 
1,818

 
 
 
 
 
 
 
(176,818
)
 
(175,000
)
Changes in ownership of consolidated subsidiaries
 
 
(158,560
)
 
 
 


 
 
 
214,930

 
56,370

Balance at September 30, 2018
254,426

 
$
8,684,169

 
$
(50,014
)
 
$
2,369,271

 
$
(3,251
)
 
$
5,217,217

 
$
16,217,392

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
254,472

 
$
7,828,554

 
$
(49,194
)
 
$
3,184,275

 
$
(5,406
)
 
$

 
$
10,958,229

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 
 

 
 
 
(44,771
)
 
 

 
 
 
(44,771
)
Net change in interest rate cash flow hedges (b)
 
 
 
 
 
 
 
 
127

 
 
 
127

Other post-retirement benefit liability adjustment (c)
 
 
 
 
 
 
 
 
229

 
 
 
229

Dividends (d)
 

 
 

 
 
 
(22,985
)
 
 

 
 

 
(22,985
)
Share-based compensation plans
920

 
4,599

 
16,667

 
 

 
 

 
 
 
21,266

Change in accounting principle (f)
 
 
 
 
 
 
496

 
(496
)
 
 
 

Other
(222
)
 
(14,470
)
 
 
 
 
 
 
 
 
 
(14,470
)
Balance at September 30, 2019
255,170

 
$
7,818,683

 
$
(32,527
)
 
$
3,117,015

 
$
(5,546
)
 
$

 
$
10,897,625


Common shares authorized: 320,000 shares. Preferred shares authorized: 3,000 shares. There are no preferred shares issued or outstanding.
 
(a)
Net of tax benefit of $413.
(b)
Net of tax expense of $54 and $30 for the nine months ended September 30, 2018 and 2019, respectively.
(c)
Net of tax expense of $89 and $78 for the nine months ended September 30, 2018 and 2019, respectively.
(d)
Dividends were $0.09 per share for both the nine months ended September 30, 2018 and 2019.
(e)
Distributions to noncontrolling interests were $3.18, $0.808 and $0.5966 per common unit from EQM, EQGP and Rice Midstream Partners LP (RMP), respectively.
(f)
Related to adoption of ASU 2018-02. See Note 1 for additional information.

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

8

Table of Contents
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 footnotes 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, 2019 and December 31, 2018, the results of its operations and equity for the three and nine month periods ended September 30, 2019 and 2018 and its cash flows for the nine month periods ended September 30, 2019 and 2018. Certain previously reported amounts have been reclassified to conform to the current year presentation. In this Quarterly Report on Form 10-Q, references to "we," "us," "our," "EQT," "EQT Corporation" and the "Company" refer collectively to EQT Corporation and its consolidated subsidiaries.

The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all information and footnotes required by GAAP for complete financial statements. Additionally, the Condensed Consolidated Financial Statements have been recast to reflect the presentation of discontinued operations as a result of the Separation and Distribution defined and described in Note 2.

For further information, refer to the consolidated financial statements and related footnotes as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases. The standard requires entities to record assets and liabilities that arise from operating leases. In July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which provided an optional transition method of adoption that permitted entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under the optional transition method, comparative financial information and disclosures are not required. The update also provided transition practical expedients. The standard requires disclosure of the nature, maturity and value of an entity's lease liabilities and elections made by the entity. In March 2019, the FASB issued ASU 2019-01, Leases: Codification Improvements, which, among other things, clarified interim disclosure requirements in the year of ASU 2016-02 adoption.

The Company adopted ASU 2016-02, ASU 2018-11 and ASU 2019-01 on January 1, 2019 using the optional transition method of adoption. The Company implemented a new lease accounting system to monitor its population of lease contracts. The Company also implemented processes and controls to review both new contracts and modifications to existing contracts that contain lease components for appropriate accounting treatment and to generate disclosures required under the standards. For the disclosures required by the standards, see Note 10.

In June 2016, the 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 will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company does not expect that the adoption of this standard will have a material impact on its financial statements and related disclosures and plans to adopt this ASU in the first quarter of 2020.

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the Tax Cuts and Jobs Act) from accumulated other comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The reclassification permitted under this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

9

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




The Company adopted this ASU on January 1, 2019, resulting in a $0.5 million decrease to other comprehensive income and increase to retained earnings.

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 guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on its financial statements and related disclosures and plans to adopt this ASU in the first quarter of 2020.

2.                        Discontinued Operations

On November 12, 2018, the Company completed the separation of its midstream business, which was composed of the separately operated natural gas gathering, transmission and storage and water services businesses of the Company, from its upstream business, which is composed of the natural gas, oil and natural gas liquids (NGLs) development, production and sales and commercial operations of the Company (the Separation). The Separation was effected by the transfer of the midstream business from the Company to Equitrans Midstream Corporation (Equitrans Midstream) and the distribution of 80.1% of the outstanding shares of Equitrans Midstream's common stock to the Company's shareholders (the Distribution).

The Company retained 19.9% of the outstanding shares of Equitrans Midstream's common stock. The Company does not have the ability to exercise significant influence and does not have a controlling financial interest in Equitrans Midstream or any of its subsidiaries; therefore, this investment is accounted for as an investment in equity securities. As of September 30, 2019 and December 31, 2018, the fair value was based on the closing stock price of Equitrans Midstream's common stock multiplied by the number of shares of Equitrans Midstream's common stock owned by the Company. The changes in fair value were recorded in the Statements of Condensed Consolidated Operations.

Equitrans Midstream included the Company's former EQM Gathering, EQM Transmission and EQM Water segments. For all periods prior to the Separation and Distribution, the results of operations of Equitrans Midstream are reflected as discontinued operations. The Statements of Condensed Consolidated Operations have been recast to reflect this presentation and present certain transportation and processing expenses in continuing operations that were previously eliminated in consolidation. The cash flows related to Equitrans Midstream have not been segregated and are included within the Statements of Condensed Consolidated Cash Flows for all periods prior to the Separation and Distribution.

The results of operations of Equitrans Midstream, as presented as discontinued operations in the Statements of Condensed Consolidated Operations, are summarized below. The Company allocated the transaction costs associated with the Separation and Distribution and a portion of the costs associated with the acquisition of Rice Energy Inc. to discontinued operations.
 
 
Three Months Ended 
 September 30, 2018
 
Nine Months Ended 
 September 30, 2018
 
 
(Thousands)
Operating revenues
 
$
108,824

 
$
334,394

Transportation and processing
 
(234,340
)
 
(688,876
)
Operation and maintenance
 
29,909

 
82,458

Selling, general and administrative
 
13,584

 
41,238

Depreciation
 
47,295

 
138,458

Transaction costs
 
22,714

 
69,246

Amortization of intangible assets
 
10,387

 
31,160

Other income
 
17,432

 
39,029

Interest expense
 
36,862

 
68,848

Income from discontinued operations before income taxes
 
199,845

 
630,891

Income tax expense
 
9,050

 
93,218

Income from discontinued operations after income taxes
 
190,795

 
537,673

Less: Net income from discontinued operations attributable to noncontrolling interests
 
103,141

 
362,696

Net income from discontinued operations
 
$
87,654

 
$
174,977



10

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




The following table presents cash flows from discontinued operating activities related to Equitrans Midstream that are included and not separately stated in the Statements of Condensed Consolidated Cash Flows. Cash flows from investing and financing activities are separately stated in the Statements of Condensed Consolidated Cash Flows.
 
 
Nine Months Ended 
 September 30, 2018
 
 
(Thousands)
Operating activities:
 
 
Deferred income tax benefit
 
$
(124,331
)
Depreciation
 
138,458

Amortization of intangibles
 
31,160

Other income
 
(39,029
)
Share-based compensation expense
 
1,293



3.        Revenue from Contracts with Customers

Under the Company's natural gas, oil and NGLs 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 contain fixed consideration (i.e. fixed price contracts or contracts with a fixed differential to New York Mercantile Exchange (NYMEX) or index prices). The fixed consideration is allocated to each performance obligation on a relative standalone selling price basis, which requires judgment from management. For these contracts, the Company generally concludes that the fixed price or fixed differentials in the contracts are representative of the standalone selling price.

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

The sales of natural gas, oil and NGLs presented on 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, oil and NGLs on behalf of royalty owners or working interest owners, the Company is acting as an agent and, thus, reports the revenue on a net basis.

Because the Company's performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with customers of $301.5 million and $783.0 million as accounts receivable within the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. Accounts receivable also includes amounts due from joint interest partners as well as amounts due for settled derivative instruments.


11

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




The table below provides disaggregated information regarding 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 cost of, and recoveries on, that capacity are reported within net marketing services and other. Derivative contracts are also outside the scope of Revenue from Contracts with Customers.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(Thousands)
Revenues from contracts with customers:
 
 
 
 
 
 
 
 
Natural gas sales
 
$
726,076

 
$
931,976

 
$
2,763,792

 
$
2,877,660

NGLs sales
 
34,880

 
106,621

 
151,004

 
357,746

Oil sales
 
8,671

 
8,392

 
26,971

 
29,322

Net marketing services and other
 

 
2,605

 

 
14,273

Total revenues from contracts with customers
 
769,627

 
1,049,594

 
2,941,767

 
3,279,001

 
 
 
 
 
 
 
 
 
Other sources of revenue:
 
 
 
 
 
 
 
 
Net marketing services and other
 
1,636

 
3,527

 
7,282

 
28,109

Gain (loss) on derivatives not designated as hedges
 
180,313

 
(3,075
)
 
455,952

 
5,620

Total operating revenues
 
$
951,576

 
$
1,050,046

 
$
3,405,001

 
$
3,312,730



The following table includes the transaction price allocated to the Company's remaining performance obligations on all contracts with fixed consideration as of September 30, 2019. The table excludes all contracts that qualified for the exception to the relative standalone selling price method.
 
2019 (a)
 
2020
 
2021
 
Total
 
(Thousands)
Natural gas sales
$
22,001

 
$
56,269

 
$
14,731

 
$
93,001



(a)
October 1 through December 31.

4.                        Derivative Instruments
 
The Company's primary market risk exposure is the volatility of future prices for natural gas and NGLs, which can affect the operating results of the Company. The Company uses derivative commodity instruments to hedge its cash flows from sales of the Company's produced natural gas and NGLs. The Company's overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.

The derivative commodity instruments currently used by the Company are primarily swap agreements, collar agreements and option agreements that 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 in implementing its commodity hedging strategy. The Company's over the counter (OTC) derivative commodity instruments are typically entered into 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 within 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. If contracts that result in the physical receipt or delivery of a commodity are not designated or do not meet all the criteria to qualify for the normal purchase and normal sale scope exception, the contracts are subject to derivative accounting.
 

12

Table of Contents
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 operations in the accompanying Statements of Condensed Consolidated Cash Flows.
 
With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of production and portions of its basis exposure covering approximately 1,922 Bcf of natural gas and 276 Mbbls of NGLs as of September 30, 2019, and 3,128 Bcf of natural gas and 1,505 Mbbls of NGLs as of December 31, 2018. The open positions at both September 30, 2019 and December 31, 2018 had maturities extending through December 2024.

When the net fair value of any of the Company's swap agreements represents a liability to the Company that is in excess of the agreed-upon threshold between the Company and the counterparty, the counterparty requires 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 threshold amount. The Company records these deposits as a current asset. When the net fair value of any of the Company's swap agreements represents an asset to the Company that is in excess of the agreed-upon threshold between the Company and the counterparty, the Company requires 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 threshold amount. The Company records a current liability for such amounts received. The Company had no such deposits in its Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

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 must make such deposits based on an established initial margin requirement as well as 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 a current liability for any such amounts received. The initial margin requirements are established by the exchanges based on the price, volatility and the time to expiration of the related contract. The margin requirements are subject to change at the exchanges' discretion. The Company recorded current assets of $23.4 million and $40.3 million as of September 30, 2019 and December 31, 2018, respectively, for such deposits in its Condensed Consolidated Balance Sheets.

The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities.
 
 
Gross derivative instruments, recorded in the Condensed Consolidated Balance Sheets
 
Derivative instruments subject to master netting agreements
 
Margin deposits remitted to counterparties
 
Derivative instruments, net
 
 
(Thousands)
As of September 30, 2019
 
 
 
 
 
 
 
 
Asset derivative instruments, at fair value