Item 1. Financial Statements
Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(Thousands, except per share amounts)
Operating revenues:
Sales of natural gas, natural gas liquids and oil $ 3,694,194 $ 1,784,050 $ 9,546,029 $ 3,992,905
Loss on derivatives ( 1,627,296 ) ( 3,257,237 ) ( 5,550,028 ) ( 4,791,582 )
Net marketing services and other 2,565 8,349 21,860 23,646
Total operating revenues 2,069,463 ( 1,464,838 ) 4,017,861 ( 775,031 )
Operating expenses:
Transportation and processing 541,092 494,897 1,596,900 1,404,697
Production 81,785 57,823 235,353 152,599
Exploration 357 20,495 2,870 23,223
Selling, general and administrative 67,231 49,113 195,603 143,972
Depreciation and depletion 418,695 442,876 1,269,936 1,200,280
Gain on sale/exchange of long-lived assets ( 265 ) ( 391 ) ( 2,455 ) ( 18,414 )
Impairment of contract asset — — 184,945 —
Impairment and expiration of leases 20,497 41,109 97,536 83,500
Other operating expenses 15,485 38,766 38,952 53,434
Total operating expenses 1,144,877 1,144,688 3,619,640 3,043,291
Operating income (loss) 924,586 ( 2,609,526 ) 398,221 ( 3,818,322 )
(Income) loss from investments ( 2,877 ) ( 43,184 ) 14,331 ( 66,861 )
Dividend and other income ( 157 ) ( 4,260 ) ( 11,066 ) ( 11,329 )
Loss on debt extinguishment 27,814 — 139,085 9,756
Interest expense 60,138 75,509 194,025 218,236
Income (loss) before income taxes 839,668 ( 2,637,591 ) 61,846 ( 3,968,124 )
Income tax expense (benefit) 152,206 ( 661,380 ) ( 5,257 ) ( 1,020,650 )
Net income (loss) 687,462 ( 1,976,211 ) 67,103 ( 2,947,474 )
Less: Net income attributable to noncontrolling interests 3,792 601 8,120 25
Net income (loss) attributable to EQT Corporation $ 683,670 $ ( 1,976,812 ) $ 58,983 $ ( 2,947,499 )
Income (loss) per share of common stock attributable to EQT Corporation:
Basic:
Weighted average common stock outstanding 369,987 356,792 371,308 304,961
Net income (loss) $ 1.85 $ ( 5.54 ) $ 0.16 $ ( 9.67 )
Diluted:
Weighted average common stock outstanding 403,889 356,792 377,028 304,961
Net income (loss) $ 1.69 $ ( 5.54 ) $ 0.16 $ ( 9.67 )
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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STATEMENTS OF CONDENSED CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(Thousands)
Net income (loss) $ 687,462 $ ( 1,976,211 ) $ 67,103 $ ( 2,947,474 )
Other comprehensive income, net of tax:
Other postretirement benefits liability adjustment, net of tax expense: $ 20 , $ 70 , $ 61 and $ 124
63 37 190 198
Comprehensive income (loss) 687,525 ( 1,976,174 ) 67,293 ( 2,947,276 )
Less: Comprehensive income attributable to noncontrolling interests 3,792 601 8,120 25
Comprehensive income (loss) attributable to EQT Corporation $ 683,733 $ ( 1,976,775 ) $ 59,173 $ ( 2,947,301 )
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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EQT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2022 December 31, 2021
(Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 87,541 $ 113,963
Accounts receivable (less provision for doubtful accounts: $ 357 and $ 321 )
1,938,717 1,438,031
Derivative instruments, at fair value 1,466,800 543,337
Prepaid expenses and other 409,409 191,435
Total current assets 3,902,467 2,286,766
Property, plant and equipment 26,978,974 26,016,092
Less: Accumulated depreciation and depletion 8,846,789 7,597,172
Net property, plant and equipment 18,132,185 18,418,920
Contract asset 29,250 410,000
Other assets 477,235 491,702
Total assets $ 22,541,137 $ 21,607,388
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt $ 421,987 $ 1,060,970
Accounts payable 1,678,083 1,339,251
Derivative instruments, at fair value 4,214,888 2,413,608
Other current liabilities 322,944 372,412
Total current liabilities 6,637,902 5,186,241
Senior notes 4,257,359 4,435,782
Note payable to EQM Midstream Partners, LP 89,973 94,320
Deferred income taxes 893,139 907,306
Other liabilities and credits 1,004,163 1,012,740
Total liabilities 12,882,536 11,636,389
Equity:
Common stock, no par value,
shares authorized: 640,000 , shares issued: 368,194 and 377,432
9,923,539 10,071,820
Treasury stock, shares at cost: 32 and 1,033
( 579 ) ( 18,046 )
Accumulated deficit ( 299,577 ) ( 94,400 )
Accumulated other comprehensive loss ( 4,421 ) ( 4,611 )
Total common shareholders' equity 9,618,962 9,954,763
Noncontrolling interest in consolidated subsidiaries 39,639 16,236
Total equity 9,658,601 9,970,999
Total liabilities and equity $ 22,541,137 $ 21,607,388
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2022 2021
(Thousands)
Cash flows from operating activities:
Net income (loss) $ 67,103 $ ( 2,947,474 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax benefit ( 14,229 ) ( 1,020,094 )
Depreciation and depletion 1,269,936 1,200,280
Impairments of long-lived assets and gain on sale/exchange of long-lived assets 280,026 65,086
Loss (income) from investments 14,331 ( 66,861 )
Loss on debt extinguishment 139,085 9,756
Share-based compensation expense 33,706 20,822
Amortization, accretion and other 63,687 17,897
Loss on derivatives 5,550,028 4,791,582
Net cash settlements paid on derivatives ( 4,672,998 ) ( 729,445 )
Net premiums received (paid) on derivative instruments 13,809 ( 53,429 )
Changes in other assets and liabilities:
Accounts receivable ( 507,050 ) ( 404,442 )
Accounts payable 343,925 276,509
Other current assets ( 27,960 ) ( 642,554 )
Other items, net ( 151,641 ) ( 26,131 )
Net cash provided by operating activities 2,401,758 491,502
Cash flows from investing activities:
Capital expenditures ( 1,047,475 ) ( 706,938 )
Deposit on acquisition ( 150,000 ) —
Cash paid for acquisitions — ( 1,021,510 )
Proceeds from sale/exchange of assets 5,394 —
Proceeds from sale of investment shares 189,249 —
Other investing activities ( 14,306 ) 13,590
Net cash used in investing activities ( 1,017,138 ) ( 1,714,858 )
Cash flows from financing activities:
Proceeds from credit facility borrowings 10,242,000 6,216,000
Repayment of credit facility borrowings ( 10,242,000 ) ( 5,812,000 )
Proceeds from issuance of debt — 1,000,000
Debt issuance costs ( 17,852 ) ( 19,713 )
Repayment and retirement of debt ( 833,029 ) ( 146,005 )
Premiums paid on debt extinguishment ( 135,248 ) ( 9,599 )
Dividends paid ( 148,765 ) —
Cash paid for taxes related to net settlement of share-based incentive awards ( 24,193 ) ( 3,805 )
Proceeds from exercises under employee compensation plans 15,505 —
Repurchase and retirement of common stock ( 270,345 ) —
Net contribution from noncontrolling interest 4,050 3,750
Other financing activities ( 1,165 ) ( 690 )
Net cash (used in) provided by financing activities ( 1,411,042 ) 1,227,938
Net change in cash and cash equivalents ( 26,422 ) 4,582
Cash and cash equivalents at beginning of period 113,963 18,210
Cash and cash equivalents at end of period $ 87,541 $ 22,792
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
See Note 1 for supplemental cash flow information.
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STATEMENTS OF CONDENSED CONSOLIDATED EQUITY (UNAUDITED)
Common Stock
Shares No Par Value Treasury Stock Retained Earnings
(Accumulated Deficit) Accumulated Other
Comprehensive Loss (a) Noncontrolling Interest in
Consolidated Subsidiaries Total Equity
(Thousands, except per share amounts)
Balance at July 1, 2021 278,858 $ 8,149,607 $ ( 20,084 ) $ 85,939 $ ( 5,194 ) $ 10,664 $ 8,220,932
Comprehensive loss, net of tax:
Net (loss) income ( 1,976,812 ) 601 ( 1,976,211 )
Other postretirement benefits liability adjustment, net of tax expense: $ 70
37 37
Share-based compensation plans 105 9,495 1,882 11,377
Alta Acquisition (Note 9) 98,789 1,925,405 1,925,405
Balance at September 30, 2021 377,752 $ 10,084,507 $ ( 18,202 ) $ ( 1,890,873 ) $ ( 5,157 ) $ 11,265 $ 8,181,540
Balance at July 1, 2022 369,720 $ 9,948,646 $ ( 2,848 ) $ ( 880,127 ) $ ( 4,484 ) $ 28,903 $ 9,090,090
Comprehensive income, net of tax:
Net income 683,670 3,792 687,462
Other postretirement benefits liability adjustment, net of tax expense: $ 20
63 63
Dividends ($ 0.15 per share)
( 55,493 ) ( 55,493 )
Share-based compensation plans 209 2,292 2,269 4,561
Convertible Notes settlements (Note 6) 1 10 10
Repurchase and retirement of common stock ( 1,768 ) ( 27,409 ) ( 47,627 ) ( 75,036 )
Distribution to noncontrolling interest ( 4,306 ) ( 4,306 )
Contribution from noncontrolling interest 11,250 11,250
Balance at September 30, 2022 368,162 $ 9,923,539 $ ( 579 ) $ ( 299,577 ) $ ( 4,421 ) $ 39,639 $ 9,658,601
Common shares authorized: 640,000 . Preferred shares authorized: 3,000 . There were no preferred shares issued or outstanding.
(a) Amounts included in accumulated other comprehensive loss are related to other postretirement benefits liability adjustments, net of tax, which are attributable to net actuarial losses and net prior service costs.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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EQT CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED EQUITY (UNAUDITED)
Common Stock
Shares No Par Value Treasury Stock Retained Earnings
(Accumulated Deficit) Accumulated Other
Comprehensive Loss (a) Noncontrolling Interest in
Consolidated Subsidiaries Total Equity
(Thousands, except per share amounts)
Balance at January 1, 2021 278,345 $ 8,145,539 $ ( 29,348 ) $ 1,056,626 $ ( 5,355 ) $ 7,490 $ 9,174,952
Comprehensive loss, net of tax:
Net (loss) income ( 2,947,499 ) 25 ( 2,947,474 )
Other postretirement benefits liability adjustment, net of tax expense: $ 124
198 198
Share-based compensation plans 618 13,563 11,146 24,709
Contribution from noncontrolling interest 3,750 3,750
Alta Acquisition (Note 9) 98,789 1,925,405 1,925,405
Balance at September 30, 2021 377,752 $ 10,084,507 $ ( 18,202 ) $ ( 1,890,873 ) $ ( 5,157 ) $ 11,265 $ 8,181,540
Balance at January 1, 2022 376,399 $ 10,071,820 $ ( 18,046 ) $ ( 94,400 ) $ ( 4,611 ) $ 16,236 $ 9,970,999
Comprehensive income, net of tax:
Net income 58,983 8,120 67,103
Other postretirement benefits liability adjustment, net of tax expense: $ 61
190 190
Dividends ($ 0.40 per share)
( 148,765 ) ( 148,765 )
Share-based compensation plans 2,061 11,340 17,467 28,807
Convertible Notes settlements (Note 6) 3 48 48
Repurchase and retirement of common stock ( 10,301 ) ( 159,669 ) ( 115,395 ) ( 275,064 )
Distribution to noncontrolling interest ( 7,200 ) ( 7,200 )
Contribution from noncontrolling interest 11,250 11,250
Other 11,233 11,233
Balance at September 30, 2022 368,162 $ 9,923,539 $ ( 579 ) $ ( 299,577 ) $ ( 4,421 ) $ 39,639 $ 9,658,601
Common shares authorized: 640,000 . Preferred shares authorized: 3,000 . There were no preferred shares issued or outstanding.
(a) Amounts included in accumulated other comprehensive loss are related to other postretirement benefits liability adjustments, net of tax, which are attributable to net actuarial losses and net prior service costs.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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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, 2022 and December 31, 2021, the results of its operations and equity for the three and nine month periods ended September 30, 2022 and 2021 and its cash flows for the nine month periods ended September 30, 2022 and 2021. 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.
These financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Issued Accounting Standards
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (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 Accounting Standards Codification 815 or that 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. Under ASU 2020-06, entities are required to use the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (EPS). The if-converted method assumes share settlement of the instrument, which increases the number of potentially dilutive securities used to calculate diluted EPS. This ASU also adds several new disclosure requirements.
The Company adopted this ASU effective as of January 1, 2022 using the full retrospective method of adoption. The following tables present the impact of the adoption of ASU 2020-06 on the Company's previously reported historical results. See Note 6 for discussion of the Convertible Notes (defined in Note 6).
Three Months Ended September 30, 2021
As Reported ASU 2020-06 Adoption Adjustment As Adjusted
(Thousands, except per share amounts)
Interest expense $ 80,349 $ ( 4,840 ) $ 75,509
Income tax benefit ( 662,915 ) 1,535 ( 661,380 )
Net loss ( 1,979,516 ) 3,305 ( 1,976,211 )
Less: Net income attributable to noncontrolling interest 601 — 601
Net loss attributable to EQT Corporation $ ( 1,980,117 ) $ 3,305 $ ( 1,976,812 )
Basic and diluted:
Weighted average common stock outstanding (a) 356,792 — 356,792
Loss per share of common stock attributable to EQT Corporation $ ( 5.55 ) $ 0.01 $ ( 5.54 )
(a) For the three months ended September 30, 2021, diluted weighted average common stock outstanding did not change because the potentially dilutive securities had an anti-dilutive effect on loss per share.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
Nine Months Ended September 30, 2021
As Reported ASU 2020-06 Adoption Adjustment As Adjusted
(Thousands, except per share amounts)
Interest expense $ 232,434 $ ( 14,198 ) $ 218,236
Income tax benefit ( 1,025,255 ) 4,605 ( 1,020,650 )
Net loss ( 2,957,067 ) 9,593 ( 2,947,474 )
Less: Net income attributable to noncontrolling interest 25 — 25
Net loss attributable to EQT Corporation $ ( 2,957,092 ) $ 9,593 $ ( 2,947,499 )
Basic and diluted:
Weighted average common stock outstanding (a) 304,961 — 304,961
Loss per share of common stock attributable to EQT Corporation $ ( 9.70 ) $ 0.03 $ ( 9.67 )
(a) For the nine months ended September 30, 2021, diluted weighted average common stock outstanding did not change because the potentially dilutive securities had an anti-dilutive effect on loss per share.
December 31, 2021
As Reported ASU 2020-06 Adoption Adjustment As Adjusted
(Thousands)
Current portion of debt (a) $ 954,900 $ 106,070 $ 1,060,970
Deferred income taxes 938,612 ( 31,306 ) 907,306
Common stock, no par value 10,167,963 ( 96,143 ) 10,071,820
Accumulated deficit ( 115,779 ) 21,379 ( 94,400 )
(a) Pursuant to the terms of the Convertible Notes indenture, a sale price condition for conversion of the Convertible Notes was satisfied as of December 31, 2021, and, accordingly, holders of the Convertible Notes were permitted to convert any of their Convertible Notes at their option at any time during the three months ended March 31, 2022, subject to all terms and conditions set forth in the Convertible Notes indenture. Therefore, as of December 31, 2021, the net carrying value of the Convertible Notes was included in current portion of debt in the Consolidated Balance Sheet.
Certain line items in the Statement of Condensed Consolidated Cash Flows for the nine months ended September 30, 2021 were adjusted to reflect the impact of the adoption of ASU 2020-06; however, the adoption did not impact cash and did not change net cash provided by operating, investing or financing activities.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
Supplemental Cash Flow Information . The following table summarizes net cash paid for interest and income taxes and non-cash activity included in the Statements of Condensed Consolidated Cash Flows.
Nine Months Ended September 30,
2022 2021
(Thousands)
Cash paid during the period for:
Interest, net of amount capitalized $ 208,239 $ 220,430
Income taxes, net 10,529 22,263
Non-cash activity during the period for:
Increase in asset retirement costs and obligations $ 14,102 $ 2,709
Capitalization of non-cash equity share-based compensation 3,923 3,728
Increase in right-of-use assets and lease liabilities, net 1,651 1,091
Issuance of common stock for Convertible Notes settlements (Note 6) 48 —
Equity issued as consideration for acquisition (Note 9) — 1,925,405
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 exclude revenue interests owned by others. When selling natural gas, NGLs and oil on behalf of royalty or working interest owners, the Company acts 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 $ 1,486.8 million and $ 1,093.9 million in accounts receivable in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, respectively.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
The table below provides disaggregated information on the Company's revenues. Certain other revenue contracts are outside the scope of ASU 2014-09, Revenue from Contracts with Customers . These contracts 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,
2022 2021 2022 2021
(Thousands)
Revenues from contracts with customers:
Natural gas sales $ 3,543,706 $ 1,605,581 $ 9,008,226 $ 3,572,046
NGLs sales 134,636 152,046 475,988 354,664
Oil sales 15,852 26,423 61,815 66,195
Total revenues from contracts with customers $ 3,694,194 $ 1,784,050 $ 9,546,029 $ 3,992,905
Other sources of revenue:
Loss on derivatives ( 1,627,296 ) ( 3,257,237 ) ( 5,550,028 ) ( 4,791,582 )
Net marketing services and other 2,565 8,349 21,860 23,646
Total operating revenues $ 2,069,463 $ ( 1,464,838 ) $ 4,017,861 $ ( 775,031 )
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, 2022. Amounts shown exclude contracts that qualified for the exception to the relative standalone selling price method as of September 30, 2022.
2022 (a) 2023 2024 Total
(Thousands)
Natural gas sales $ 11,735 $ 14,432 $ 469 $ 26,636
(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 loss on derivatives 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.
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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 its expected sales of production and portions of its basis exposure covering approximately 1,587 billion cubic feet (Bcf) of natural gas and 1,517 thousand barrels (Mbbl) of NGLs as of September 30, 2022 and 2,184 Bcf of natural gas and 3,055 Mbbl of NGLs as of December 31, 2021. The open positions at both September 30, 2022 and December 31, 2021 had maturities extending through December 2027.
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), S&P Global Ratings (S&P) or Fitch Ratings Service (Fitch) 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, S&P or Fitch 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. Anything below these ratings is considered non-investment grade. As of September 30, 2022, the Company's senior notes were rated "Ba1" by Moody's, "BBB–" by S&P and "BBB–" by Fitch.
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, 2022 and December 31, 2021, the aggregate fair value of all OTC derivative instruments with credit rating risk-related contingent features that were in a net liability position was $ 679.5 million and $ 594.9 million, respectively, for which the Company deposited and recorded current assets of $ 142.7 million and $ 0.1 million, respectively.
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 both September 30, 2022 and December 31, 2021, there were no such deposits recorded in the Condensed Consolidated Balance Sheets.
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, 2022 and December 31, 2021, the Company recorded $ 45.2 million and $ 147.7 million, respectively, of such deposits as current assets in the Condensed Consolidated Balance Sheets.
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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, 2022
Asset derivative instruments, at fair value $ 1,466,800 $ ( 1,404,502 ) $ — $ 62,298
Liability derivative instruments, at fair value 4,214,888 ( 1,404,502 ) ( 187,933 ) 2,622,453
December 31, 2021
Asset derivative instruments, at fair value $ 543,337 $ ( 468,266 ) $ — $ 75,071
Liability derivative instruments, at fair value 2,413,608 ( 468,266 ) ( 147,773 ) 1,797,569
The Consolidated GGA (defined in Note 8) executed in connection with the Equitrans Share Exchange (defined in Note 8) provides for additional cash bonus payments (the Henry Hub Cash Bonus) payable by the Company during the period beginning on the first day of the quarter in which the Mountain Valley Pipeline is placed in service and ending on the earlier of 36 months thereafter or December 31, 2024. Such payments are conditioned upon the quarterly average of the NYMEX Henry Hub natural gas settlement price exceeding certain price thresholds. As of September 30, 2022 and December 31, 2021, the derivative liability related to the Henry Hub Cash Bonus had a fair value of approximately $ 53 million and $ 111 million, respectively. The fair value of the derivative liability related to the Henry Hub Cash Bonus is based on significant inputs that are interpolated from observable market data and, as such, is a Level 2 fair value measurement. See Note 4 for a description of the fair value hierarchy.
During the second quarter of 2020, the Company closed a transaction to sell certain non-strategic assets located in Pennsylvania and West Virginia (the 2020 Divestiture), the purchase and sale agreement for which, among other things, provides for additional cash bonus payments (the Contingent Consideration) payable to the Company of up to $ 20 million, conditioned upon the three-month average of the NYMEX Henry Hub natural gas settlement price relative to stated floor and target price thresholds beginning on August 31, 2020 and ending on November 30, 2022. As of September 30, 2022 and December 31, 2021, the derivative asset related to the Contingent Consideration had a fair value of approximately $ 2.0 million and $ 8.2 million, respectively. During the nine months ended September 30, 2022 and 2021, the Company received cash from the Contingent Consideration of $ 6.5 million and $ 5.6 million, respectively. Changes in fair value are recorded in gain on sale/exchange of long-lived assets in the Statements of Condensed Consolidated Operations. The fair value of the derivative asset related to the Contingent Consideration is based on significant inputs that are interpolated from observable market data and, as such, is a Level 2 fair value measurement. See Note 4 for a description of the fair value hierarchy.
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, the 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.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
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 NGLs 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.
The table below summarizes assets and liabilities measured at fair value on a recurring basis.
Fair value measurements at reporting date using:
Gross derivative instruments recorded in the Condensed Consolidated Balance Sheets Quoted prices in active
markets for identical assets
(Level 1) Significant other observable inputs
(Level 2) Significant unobservable inputs
(Level 3)
(Thousands)
September 30, 2022
Asset derivative instruments, at fair value $ 1,466,800 $ 315,991 $ 1,150,809 $ —
Liability derivative instruments, at fair value 4,214,888 222,171 3,992,717 —
December 31, 2021
Asset derivative instruments, at fair value $ 543,337 $ 66,833 $ 476,504 $ —
Liability derivative instruments, at fair value 2,413,608 126,053 2,287,555 —
The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term maturities. The December 31, 2021 carrying value of the Company's investment in Equitrans Midstream Corporation (Equitrans Midstream) approximates fair value as Equitrans Midstream is a publicly traded company. In April 2022, the Company sold the remaining balance of its Equitrans Midstream common stock for net proceeds of approximately $ 189 million. The carrying value of borrowings under the Company's credit facility approximates fair value as the interest rate is based on prevailing market rates. The Company considered all of these fair values to be Level 1 fair value measurements.
The Company has an investment in a fund (the Investment 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.
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, 2022 and December 31, 2021, the Company's senior notes had a fair value of approximately $ 5.2 billion and $ 6.5 billion, respectively, and a carrying value of approximately $ 4.7 billion and $ 5.5 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, 2022 and December 31, 2021, the Company's note payable to EQM had a fair value of approximately $ 96 million and $ 118 million, respectively, and a carrying value of approximately $ 96 million and $ 100 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 3 for a discussion of the fair value measurement of the derivative liability recorded in connection with the Equitrans Share Exchange and the embedded derivative recorded in connection with the 2020 Divestiture. See Note 8 for a discussion of the fair value measurement of the contract asset. See Note 1 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the fair value measurement of the Company's oil and gas properties and other long-lived assets, including impairment and expiration of leases.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
5. Income Taxes
For the nine months ended September 30, 2022 and 2021, the Company calculated the provision for income taxes for interim periods by applying an estimate of the annual effective tax rate for the full fiscal year to "ordinary" income or loss (pre-tax income or loss excluding unusual or infrequently occurring items) for the period. There were no material changes to the Company's methodology for determining unrecognized tax benefits during the nine months ended September 30, 2022.
For the nine months ended September 30, 2022 and 2021, the Company recorded income tax benefit at an effective tax rate of ( 8.5 )% and 25.7 %, respectively. The Company's effective tax rate for the nine months ended September 30, 2022 was lower compared to the U.S. federal statutory rate due primarily to a reduction to deferred state taxes from the Pennsylvania law change enacted on July 8, 2022 that lowered the corporate net income tax rate from 9.99% to 8.99% in 2023 and by 0.5% thereafter until the corporate net income tax rate reaches 4.99% in 2031, partly offset by nondeductible repurchase premiums on the Convertible Notes. The Company's effective tax rate for the nine months ended September 30, 2021 was higher compared to the U.S. federal statutory rate due primarily to state taxes, including valuation allowances limiting certain state tax benefits and West Virginia tax legislation enacted on April 13, 2021 that changed the way taxable income is apportioned to West Virginia for tax years beginning on or after January 1, 2022.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA). The IRA establishes a 15% corporate alternative minimum tax for certain corporations and a 1% excise tax on stock repurchases made by publicly traded U.S. corporations. The IRA also includes new and renewed options for energy credits. These changes are effective for tax years beginning after December 31, 2022. The Company is evaluating the impact these changes will have on its financial statements and disclosures.
The Company intends to maintain a valuation allowance on certain of its state net operating loss deferred tax assets (DTAs) until there is sufficient evidence to support a reversal of all or a portion of such allowance. However, given the Company's anticipated future earnings, the Company believes that there is a reasonable possibility that, in the near term, sufficient positive evidence may become available that supports the release of a portion of the Company's valuation allowance, which would result in the recognition of certain DTAs and a decrease to income tax expense for the period in which the release is recorded. The exact timing and amount of the valuation allowance release would be subject to change based on the level of profitability that the Company can achieve.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
6. Debt
The table below summarizes the Company's outstanding debt.
September 30, 2022 December 31, 2021
Principal Value Carrying Value (a) Principal Value Carrying Value (a)
(Thousands)
Senior notes:
3.00 % notes due October 1, 2022
$ — $ — $ 568,823 $ 567,909
7.42 % series B notes due 2023
10,000 10,000 10,000 10,000
6.125 % notes due February 1, 2025 (b)
915,594 911,883 1,000,000 994,643
1.75 % convertible notes due May 1, 2026
414,846 406,232 499,991 487,543
3.125 % notes due May 15, 2026
463,354 458,098 500,000 493,157
7.75 % debentures due July 15, 2026
115,000 113,094 115,000 112,721
3.90 % notes due October 1, 2027
1,234,433 1,228,714 1,250,000 1,243,340
5.00 % notes due January 15, 2029
336,454 332,015 350,000 344,835
7.000 % notes due February 1, 2030 (b)
730,000 725,071 750,000 744,417
3.625 % notes due May 15, 2031
495,165 488,484 500,000 492,669
Note payable to EQM 95,728 95,728 99,838 99,838
Total debt 4,810,574 4,769,319 5,643,652 5,591,072
Less: Current portion of debt (c) 430,601 421,987 1,074,332 1,060,970
Long-term debt $ 4,379,973 $ 4,347,332 $ 4,569,320 $ 4,530,102
(a) For the Company's credit facility and note payable to EQM, the principal value represents the carrying value. For all other debt, the principal value less the unamortized debt issuance costs and debt discounts represents the carrying value.
(b) Interest rates for this tranche of the Company's senior notes fluctuate based on changes to the credit ratings assigned to the Company's senior notes by Moody's, S&P and Fitch. Interest rates on the Company's other outstanding senior notes do not fluctuate based on changes to the credit ratings assigned to its senior notes by Moody's, S&P and Fitch.
(c) As of September 30, 2022, the current portion of debt includes the 7.42 % series B notes, the 1.75 % convertible notes and a portion of the note payable to EQM. As of December 31, 2021, the current portion of debt includes the 3.00 % notes, the 1.75 % convertible notes and a portion of the note payable to EQM.
Debt Repayments . The Company redeemed or repurchased the following debt during the nine months ended September 30, 2022.
Debt Tranche Principal Premiums/(Discounts) Accrued but Unpaid Interest Total Cost
(Thousands)
3.00 % notes due October 1, 2022
$ 568,823 $ 5,546 $ 7,150 $ 581,519
6.125 % notes due February 1, 2025
84,406 3,046 2,621 90,073
1.75 % convertible notes due May 1, 2026
85,096 127,906 250 213,252
3.125 % notes due May 15, 2026
36,646 ( 2,050 ) 187 34,783
3.90 % notes due October 1, 2027
15,567 ( 643 ) 188 15,112
5.00 % notes due January 15, 2029
13,546 ( 445 ) 195 13,296
7.000 % notes due February 1, 2030
20,000 1,428 640 22,068
3.625 % notes due May 15, 2031
4,835 ( 601 ) 28 4,262
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
Credit Facility . The Company has a $ 2.5 billion credit facility. On June 28, 2022, the Company entered into the Third Amended and Restated Credit Agreement (the Third Amendment) with the lenders party thereto and PNC Bank, National Association, as administrative agent, swing line lender and L/C issuer, amending and restating the Second Amended and Restated Credit Agreement, dated as of July 31, 2017 (the Credit Agreement). The Third Amendment, among other things, (i) extends the maturity date of the commitments and loans under the Credit Agreement to June 28, 2027 and provides, at the Company's option, two one-year extensions thereafter, subject to the approval of the lenders, (ii) allows for commitment increases of up to $ 500 million, subject to the agreement of the Company and new or existing lenders and (iii) allows for Base Rate Loans, Term SOFR Rate Loans and Swing Line Loans (each defined in the Third Amendment).
The Company had approximately $ 27 million and $ 440 million of letters of credit outstanding under its credit facility as of September 30, 2022 and December 31, 2021, respectively.
Under the Company's credit facility, for the three months ended September 30, 2022 and 2021, the maximum amount of outstanding borrowings was $ 1,216 million and $ 1,652 million, respectively, the average daily balances were approximately $ 717 million and $ 813 million, respectively, and interest was incurred at a weighted average annual interest rate of 3.8 % and 1.9 %, respectively. Under the Company's credit facility, for the nine months ended September 30, 2022 and 2021, the maximum amount of outstanding borrowings was $ 1,300 million and $ 1,652 million, respectively, the average daily balances were approximately $ 624 million and $ 525 million, respectively, and interest was incurred at a weighted average annual interest rate of 2.8 % and 2.0 %, respectively.
3.125 % Senior Notes and 3.625 % Senior Notes. On May 17, 2021, the Company issued $ 500 million aggregate principal amount of 3.125 % senior notes due May 15, 2026 and $ 500 million aggregate principal amount of 3.625 % senior notes due May 15, 2031. After deducting offering costs of $ 15.6 million, net proceeds from the sale of the notes of $ 984.4 million were used to partly fund the Alta Acquisition (defined in Note 9). The covenants of the 3.125 % senior notes and 3.625 % senior notes are consistent with the Company's existing senior unsecured notes; however, the 3.125 % senior notes and 3.625 % senior notes include an offer to repurchase provision applicable upon the occurrence of certain change of control events specified in the applicable indentures.
Convertible Notes . In April 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.
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 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 (the Sale Price Condition);
• 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.
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.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
The initial conversion rate for the Convertible Notes was 66.6667 shares of EQT common stock per $1,000 principal amount of the Convertible Notes, which was 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.
As a result of the cash dividend the Company paid on its common stock in the first quarter of 2022, effective February 11, 2022, the conversion rate for the Convertible Notes was adjusted to 67.0535 shares of EQT common stock per $1,000 principal amount of the Convertible Notes. As a result of the cash dividend the Company paid on its common stock in the second quarter of 2022, effective May 10, 2022, the conversion rate for the Convertible Notes was adjusted to 67.2836 shares of EQT common stock per $1,000 principal amount of the Convertible Notes. As a result of the cash dividend paid by the Company on its common stock in the third quarter of 2022, effective August 8, 2022, the conversion rate for the Convertible Notes was adjusted to 67.5232 shares of EQT common stock per $1,000 principal amount of the Convertible Notes. Future dividend payments by the Company will result in further adjustments to the conversion rate per share of EQT common stock.
The Sale Price Condition for conversion of the Convertible Notes was satisfied as of December 31, 2021 and September 30, 2022, and, accordingly, holders of the Convertible Notes are permitted to convert any of their Convertible Notes at their option at any time beginning on January 1, 2022 and continuing until December 31, 2022, subject to the terms and conditions set forth in the Convertible Notes indenture. Therefore, as of December 31, 2021 and September 30, 2022, the net carrying value of the Convertible Notes was included in current portion of debt on the Condensed Consolidated Balance Sheets.
The following table summarizes Convertible Notes conversion right exercises from issuance through October 21, 2022. The Company elected to settle all such conversions by issuing to the converting holders shares of EQT common stock.
Settlement Month Principal Converted Shares Issued Average Conversion Price
(Thousands)
September 2021 $ 9 599 $ 19.64
March 2022 8 536 33.65
April 2022 26 1,742 34.78
July 2022 5 335 36.91
October 2022 10 674 40.14
Upon conversion of the remaining outstanding Convertible Notes, the Company may satisfy its conversion obligation by paying and/or delivering at the Company's election, in the manner and subject to the terms and conditions provided in the Convertible Notes indenture, cash, shares of EQT common stock or a combination thereof. 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.
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, including adjustments as a result of the Company paying a dividend on its common stock.
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 of $ 32.5 million was recorded as a reduction to equity and will not be remeasured.
Based on the closing stock price of EQT common stock of $ 40.75 on September 30, 2022 and excluding the impact of the Capped Call Transactions, the if-converted value of the Convertible Notes exceeded the principal amount by $ 727 million.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
The table below summarizes the net carrying value and fair value of the Convertible Notes.
September 30, 2022 December 31, 2021
(Thousands)
Principal $ 414,846 $ 499,991
Less: Unamortized debt issuance costs 8,614 12,448
Net carrying value of Convertible Notes $ 406,232 $ 487,543
Fair value of Convertible Notes (a) $ 1,139,843 $ 854,985
(a) The fair value is a Level 2 fair value measurement. See Note 4.
The table below summarizes the components of interest expense related to the Convertible Notes. The effective interest rate for the Convertible Notes is 2.4 %.
Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
(Thousands)
Contractual interest expense $ 1,821 $ 2,188 $ 6,191 $ 6,563
Amortization of issuance costs 574 675 1,945 2,016
Total Convertible Notes interest expense $ 2,395 $ 2,863 $ 8,136 $ 8,579
5.678 % Senior Notes and 5.700 % Senior Notes. On October 4, 2022, the Company issued $ 500 million aggregate principal amount of 5.678 % senior notes due October 1, 2025 and $ 500 million aggregate principal amount of 5.700 % senior notes due April 1, 2028. The Company intends to use the estimated net proceeds from the sale of the notes of $ 989.5 million (after deducting estimated offering costs of $ 10.5 million) to partly fund the Tug Hill and XcL Midstream Acquisition (defined in Note 9). The covenants of the 5.678 % senior notes and 5.700 % senior notes are consistent with the Company's existing senior unsecured notes. The 5.678 % senior notes and 5.700 % senior notes have a special mandatory redemption provision that provides that if the consummation of the Tug Hill and XcL Midstream Acquisition does not occur on or before June 30, 2023 or if the Company notifies the trustee of the notes that it will not pursue consummation of the Tug Hill and XcL Midstream Acquisition, the Company is required to redeem the notes of each series then outstanding at a price equal to 101 % of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.
Term Loan Facility and Bridge Loan Facility . In connection with the Tug Hill and XcL Midstream Purchase Agreement (defined in Note 9), on September 6, 2022, the Company entered into a debt commitment letter, which was amended and restated on September 20, 2022. Pursuant to such amended and restated debt commitment letter, Royal Bank of Canada, PNC Bank, National Association, Mizuho Bank, Ltd. and certain other financial institutions committed to provide the Company with an unsecured bridge loan facility in an aggregate principal amount of $ 1.25 billion (the Bridge Loan Facility) and an unsecured term loan facility in an aggregate principal amount of $ 1.25 billion (the Term Loan Facility), subject to satisfaction of standard conditions. In connection with the closing of the offering of the Company’s 5.678 % senior notes and 5.700 % senior notes on October 4, 2022, the commitments under the Bridge Loan Facility were automatically reduced by $ 989.5 million (the estimated net proceeds from the sale of the notes) in accordance with the terms of the Bridge Loan Facility. As of September 30, 2022, neither the Bridge Loan Facility nor the Term Loan Facility had closed, and, accordingly, commitments thereunder remained undrawn.
7. Earnings (Loss) Per Share
For the three and nine months ended September 30, 2022, potentially dilutive securities, composed of the Company's options, restricted stock, performance awards and stock appreciation rights, of 5,879,634 and 5,719,990 , respectively, were included in the Company's calculation of diluted earnings per share.
In periods when the Company reports a net loss, all options, restricted stock, performance awards and stock appreciation rights are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on loss per share. As a result, for the three and nine months ended September 30, 2021, all such securities of 7,506,075 and 7,642,451 , respectively, were excluded from potentially dilutive securities because of their anti-dilutive effect on loss per share.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
In addition, the Company uses the if-converted method to calculate the impact of the Convertible Notes on diluted earnings (loss) per share. For the three months ended September 30, 2022, such potentially dilutive securities of approximately 28.0 million were included in the Company's calculation of diluted earnings per share. For the nine months ended September 30, 2022, such if-converted securities of approximately 31.6 million were excluded from potentially dilutive securities because of their anti-dilutive effect on loss per share when considering the numerator adjustments. For both the three and nine months ended September 30, 2021, such if-converted securities of approximately 33.3 million were excluded from potentially dilutive securities because of their anti-dilutive effect on loss per share. See Notes 1 and 6 for further discussion of the Convertible Notes.
8. Impairment of Contract Asset
During the first quarter of 2020, the Company sold to Equitrans Midstream approximately 50 % of the Company's then-owned equity interest in Equitrans Midstream in exchange for a combination of cash and rate relief under certain of the Company's gathering contracts with an affiliate of Equitrans Midstream (the Equitrans Share Exchange). The rate relief was effected through the execution of a consolidated gas gathering and compression agreement entered into between the Company and an affiliate of Equitrans Midstream (the Consolidated GGA).
In addition, because the Mountain Valley Pipeline was not in service by January 1, 2022, the Consolidated GGA provided the Company the option to forgo a portion of the gathering fee relief that would otherwise be applicable following the Mountain Valley Pipeline in-service date in exchange for a cash payment of approximately $ 196 million (the Cash Payment Option). During the third quarter of 2022, the Company elected to exercise the Cash Payment Option, and, on October 4, 2022, the Company received the cash proceeds from the Cash Payment Option.
On the closing date of the Equitrans Share Exchange, the Company recorded in the Condensed Consolidated Balance Sheet a contract asset of $ 410 million representing the estimated fair value of the rate relief inclusive of the Cash Payment Option. During the first quarter of 2022, the Company identified indicators that the carrying value of the contract asset may not be fully recoverable, including increased uncertainty of the estimated timing of completion of the Mountain Valley Pipeline due to recent court rulings. As a result of the Company's impairment evaluation, the Company recognized impairment of $ 184.9 million in the Statement of Condensed Consolidated Operations. The impairment reduced the carrying value of the contract asset to its estimated fair value as of March 31, 2022 of $ 225 million, of which $ 196 million was attributable to the Cash Payment Option provided by the Consolidated GGA and presented in prepaid expenses and other in the Condensed Consolidated Balance Sheet and $ 29 million was attributable to the residual rate relief realizable upon the in-service date of the Mountain Valley Pipeline and presented in contract asset in the Condensed Consolidated Balance Sheet. The fair value of the contract asset was based on significant inputs that are not observable in the market and, as such, is a Level 3 fair value measurement. See Note 4 for a description of the fair value hierarchy. Key assumptions used in the fair value calculation included the following: (i) a probability-weighted estimate of the in-service date of the Mountain Valley Pipeline; (ii) an estimate of the potential exercise and timing of the Cash Payment Option; (iii) an estimated production volume forecast and (iv) a market-based weighted average cost of capital.
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
9. Acquisitions
Tug Hill and XcL Midstream Acquisition. On September 6, 2022, the Company entered into a purchase agreement with EQT Production Company (a wholly-owned indirect subsidiary of the Company), THQ Appalachia I, LLC (Tug Hill) and THQ-XcL Holdings I, LLC (XcL Midstream) (the Tug Hill and XcL Midstream Purchase Agreement), pursuant to which the Company and EQT Production Company agreed to acquire Tug Hill's upstream assets and XcL Midstream's gathering and processing assets through the acquisition of all of the issued and outstanding membership interests of each of THQ Appalachia I Midco, LLC and THQ-XcL Holdings I Midco, LLC (the Tug Hill and XcL Midstream Acquisition) for consideration of approximately $ 2.6 billion in cash and 55.0 million shares of EQT common stock, as adjusted pursuant to customary closing purchase price adjustments. The Tug Hill and XcL Midstream Purchase Agreement has an effective date of July 1, 2022. The Tug Hill and XcL Midstream Acquisition is expected to close in the fourth quarter of 2022, subject to regulatory approvals. Upon execution of the Tug Hill and XcL Midstream Purchase Agreement, the Company deposited $ 150 million into an escrow account, which will be credited toward the cash consideration upon closing of the Tug Hill and XcL Midstream Acquisition and is recorded in other assets in the September 30, 2022 Condensed Consolidated Balance Sheet.
Alta Acquisition. On July 21, 2021, the Company completed its acquisition (the Alta Acquisition) of Alta Marcellus Development, LLC and ARD Operating, LLC and subsidiaries (together, the Alta Target Entities), pursuant to that certain Membership Interest Purchase Agreement, dated May 5, 2021 (the Alta Purchase Agreement), by and among the Company, EQT Acquisition HoldCo LLC (a wholly-owned indirect subsidiary of the Company), Alta Resources Development, LLC (Alta Resources) and the Alta Target Entities. The Alta Target Entities collectively held all of Alta Resources' upstream and midstream assets and liabilities. The purchase price for the Alta Acquisition consisted of approximately $ 1.0 billion in cash and 98,789,388 shares of EQT common stock, as adjusted pursuant to customary closing purchase price adjustments. The Alta Purchase Agreement has an effective date of January 1, 2021.
As a result of the Alta Acquisition, the Company acquired approximately 300,000 net Northeast Marcellus acres, approximately 1.0 Bcfe per day of current net production, approximately 300 miles of midstream gathering systems, approximately 100 miles of a freshwater system and a firm transportation portfolio to premium demand markets.
The Company completed the purchase price allocation for the Alta Acquisition during the second quarter of 2022, at which time the value of the assets acquired and liabilities assumed were revised. The purchase accounting adjustments recorded in 2022 were not material to the Company's financial statements.
Post-Acquisition Operating Results . The Alta Target Entities contributed the following to the Company's consolidated results.
July 21, 2021 through September 30, 2021
(Thousands)
Sales of natural gas, NGLs and oil $ 251,129
Loss on derivatives not designated as hedges ( 293,840 )
Net marketing services and other 2,525
Total operating revenues $ ( 40,186 )
Net loss $ ( 129,779 )
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EQT CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Unaudited Pro Forma Information . The table below summarizes the Company's results as though the Alta Acquisition had been completed on January 1, 2021. Certain of Alta Resources' historical amounts were reclassified to conform to the Company's financial presentation of operations. The following unaudited pro forma information is provided for informational purposes only and does not represent what consolidated results of operations would have been had the Alta Acquisition occurred on January 1, 2021 nor are they necessarily indicative of future consolidated results of operations.
Three Months Ended
September 30, 2021 Nine Months Ended
September 30, 2021
(Thousands, except per share amounts)
Pro forma sales of natural gas, NGLs and oil $ 1,839,002 $ 4,437,755
Pro forma loss on derivatives ( 3,268,035 ) ( 4,918,616 )
Pro forma net marketing services and other 7,798 28,452
Pro forma total operating revenues $ ( 1,421,235 ) $ ( 452,409 )
Pro forma net loss $ ( 1,974,059 ) $ ( 2,950,427 )
Pro forma net loss attributable to noncontrolling interests 601 25
Pro forma net loss attributable to EQT Corporation $ ( 1,974,660 ) $ ( 2,950,452 )
Pro forma loss per share (basic and diluted) $ ( 5.53 ) $ ( 9.67 )
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Table of Contents
EQT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.