EQT Reports Third Quarter 2018 Results

PITTSBURGH–(BUSINESS WIRE)–EQT Corporation (NYSE: EQT) today announced financial and operational performance results for the third quarter 2018.

Highlights:

• Increase of 125% in net cash provided by operating activities
• Increase of 160% in adjusted operating cash flow
• Decrease of 23% in Production’s per unit cash operating costs
• Completion of the sale of the Company’s non-core Huron assets

EQT reported a net loss attributable to EQT for the third quarter 2018 compared to net income attributable to EQT for the same period 2017, primarily due to higher operating costs, including a charge of $259.3 million on capacity contracts related to the sale of the Huron assets, and higher interest expense – all of which were partly offset by higher revenue from an 82.5% increase in sales volume. Net cash from operating activities was higher in the quarter compared to the same quarter last year due to an increase in revenue, partly offset by an increase in cash operating costs. The increases in volumes and revenue were primarily a result of the acquisition of Rice Energy Inc. (Rice).

Adjusted net income attributable to EQT, which excludes non-cash derivatives, asset and lease impairments, and transaction-related expenses, increased $73.5 million for the 2018 quarter. Adjusted operating cash flow attributable to EQT, which includes transaction-related expenses and excludes the non-controlling interests in EQM Midstream Partners, LP (EQM), increased 160%.

The Non-GAAP Disclosures section of this news release provides reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures, as well as important disclosures regarding certain projected non-GAAP financial measures.

RESULTS BY BUSINESS

EQT PRODUCTION

The $133.9 million decrease in operating income in the third quarter 2018 compared to 2017 was primarily due to higher operating expenses, including a charge of $259.3 million on capacity contracts related to the sale of the Huron assets, and a loss on derivatives not designated as hedges in the current quarter, partly offset by higher revenue from an increase in sales volume. The volume increase resulted from the Rice acquisition and the company’s drilling program.

Compared to the same quarter last year, the realized price for natural gas during the quarter was flat at $2.76 per Mcfe, as a decrease in the average NYMEX natural gas price net of cash settled derivatives was offset by an improvement in the average natural gas differential.

Operating expenses for the quarter were $586.2 million higher than the same period last year. In addition to the loss associated with the sale of the Huron assets – depreciation and depletion expense increased $167.0 million; gathering expense increased $82.6 million; and transmission expense increased $63.2 million, all consistent with an increase in production volume. Exploration expense increased $13.3 million, primarily due to an increase in the number of leases expiring in the third quarter of 2018. Per unit cash operating expenses decreased 23%.

Adjusted operating income for the quarter, which excludes impairment charges and non-cash derivatives, was $147.1 million higher, primarily due to an increase in revenue that was partially offset by higher expenses.

Estimated well development capital expenditures for 2018 increased by $300 million to $2.5 billion. This was driven by inefficiencies resulting from higher activity levels, the learning curve on ultra-long laterals and service cost increases.

EQT is committed to producing volumes in the most capital efficient manner. As a result of the Company’s decision to work at a more moderate and efficient pace, the Company changed certain operating activities in October of 2018 that will result in turned-in-line wells coming online later than planned in the fourth quarter. This change is expected to result in a 30 Bcfe reduction of production volumes for 2018. Approximately 10 Bcfe of this production would have been sold in the first half of October at an average local price of approximately $2.00. The Company entered into firm sales agreements to sell this 10 Bcfe in the first quarter 2019, at an average price of approximately $2.90. To reflect these decisions, the sales volume guidance 2018 was reduced to 1460-1480 Bcfe.

EQM MIDSTREAM PARTNERS, LP (EQM)

The third quarter 2018 financial results for EQM were released today and provide operational results, as well as updates on significant midstream projects under development by EQM. EQM’s news release is available at www.eqm-midstreampartners.com. The summary results are:

Acquisition of Rice Midstream Partners (RMP) by EQM

On July 23, 2018, EQM completed its acquisition of RMP and RMP’s general partner (the Midstream Mergers), with each RMP unitholder receiving 0.3319 common units of EQM for each common unit of RMP held by each RMP unitholder immediately prior to closing. In connection with closing the transaction, the issued and outstanding incentive distributions rights of RMP were canceled.

EQM Gathering Financial Results

Operating income increased 107% in the third quarter 2018 compared to third quarter 2017, driven by higher revenue from the Midstream Mergers, the acquisition of EQT’s retained midstream assets that was completed in May 2018 and production development in the Marcellus and Utica Shales, which was partly offset by higher operating costs. Revenue from firm reservation fees represented 45% of total revenue during the quarter.

Operating expenses were $44.4 million higher in the third quarter 2018 compared to the third quarter 2017 resulting from the Midstream Mergers and the acquisition of EQT’s retained midstream assets, as well as higher system throughput and additional assets placed in-service, which is consistent with the growth in the business.

EQM Transmission Financial Results

Revenue from firm reservation fees represented 93% of total revenue during the quarter.

Operating expenses were $0.7 million higher, primarily as a result of increased operating and maintenance expense.

EQM Water Financial Results

The Company acquired the water assets on November 13, 2017, as part of the Rice Merger; as a result, there is no comparative period for these operations.

Mountain Valley Pipeline Update

Mountain Valley Pipeline, LLC (MVP JV) has modified its construction schedule for the Mountain Valley Pipeline (MVP) and now anticipates a fourth quarter 2019 in-service date. The 303-mile, 42-inch diameter pipeline is estimated to cost $4.6 billion, with EQM funding approximately $2.2 billion.

OTHER BUSINESS

Non-Core Huron Assets Sale

On July 18, 2018, EQT completed the sale of its non-core Huron assets located in Southern Appalachia to Diversified Gas and Oil PLC, for $575 million in cash, subject to customary purchase price adjustments. The transaction also relieved EQT of approximately $200 million of plugging and other liabilities associated with the assets. EQT retained the deep drilling rights across the acreage. EQT recognized a $259.3 million charge on capacity contracts related to this sale in the third quarter 2018.

Share Repurchase Program

During the third quarter 2018, the Company repurchased 9,946,382 shares at an average price of $50.29. This completed the Company’s previously announced $500 million share repurchase program.

EQM and EQGP Distributions

On October 23, 2018, EQM approved a cash distribution to its unitholders of $1.115 per unit for the third quarter 2018. The quarterly distribution is 2% higher than the second quarter 2018 and 14% higher than the third quarter 2017.

EQGP Holdings, LP (EQGP) approved a cash distribution to its unitholders of $0.315 per unit for the third quarter 2018. The quarterly distribution is 3% higher than the second quarter 2018 and 38% higher than the third quarter 2017.

Calculation of Net Income Attributable to Non-controlling Interest (NCI)

The results of EQGP and EQM are consolidated in EQT’s results. For the third quarter 2018, EQT’s results reflected earnings of $103.1 million, or $0.40 per diluted share, attributable to the publicly held partnership interests.

Hedging

As of October 23, 2018, the approximate volumes and prices of the Company’s derivative commodity instruments hedging sales of produced gas for 2018 through 2020 were:

Well Statistics

Wells Drilled (spud)

Wells Turned-in-line (TIL)

Marcellus Horizontal Well Status (cumulative since inception)*

*These totals may differ from previous presentations to account for purchases, dispositions, wells plugged, or that have had a change in target formation to/from Marcellus.

Ohio Utica Horizontal Well Status

*These totals may differ from previous presentations to account for acquisitions, dispositions, or wells plugged.

Operating Income (Loss)

The Company reports operating income (loss) by segment in this news release. Other income, interest, income taxes, and unallocated expense are controlled on a consolidated, corporate-wide basis and are not allocated to the segments.

The following table reconciles operating income (loss) by segment, as reported in this news release, to the consolidated operating income (loss) reported in the Company’s financial statements:

NON-GAAP DISCLOSURES

Adjusted Net Income Attributable to EQT and Adjusted Earnings per Diluted Share (adjusted EPS)

Adjusted net income attributable to EQT and adjusted EPS are non-GAAP supplemental financial measures that are presented because they are important measures used by management to evaluate period-to-period comparisons of earnings trends. Adjusted net income attributable to EQT and adjusted EPS should not be considered as alternatives to net income attributable to EQT or earnings per diluted share (EPS) presented in accordance with GAAP. Adjusted net income attributable to EQT as presented excludes the revenue impact of changes in the fair value of derivative instruments prior to settlement, asset and lease impairments, transaction costs and certain other items that impact comparability between periods. Management utilizes adjusted net income attributable to EQT to evaluate earnings trends because the measure reflects only the impact of settled derivative contracts; thus, the income from natural gas sales is not impacted by the often-volatile fluctuations in the fair value of derivatives prior to settlement. The measure also excludes other items that affect the comparability of results or that are not indicative of trends in the ongoing business. Management believes that adjusted net income attributable to EQT as presented provides useful information for investors for evaluating period-over-period earnings.

The table below reconciles adjusted net income attributable to EQT and adjusted EPS with net income attributable to EQT and EPS as derived from the statements of consolidated operations.

Operating Cash Flow, Adjusted Operating Cash Flow Attributable to EQT and Adjusted Operating Cash Flow Attributable to EQT Production

Operating cash flow, adjusted operating cash flow attributable to EQT and adjusted operating cash flow attributable to EQT Production are non-GAAP supplemental financial measures that are presented as indicators of an oil and gas exploration and production company’s ability to internally fund exploration and development activities and to service or incur additional debt. EQT includes this information because management believes that changes in operating assets and liabilities relate to the timing of cash receipts and disbursements and therefore may not relate to the period in which the operating activities occurred. Adjusted operating cash flow attributable to EQT is EQT’s net cash provided by operating activities, less changes in other assets and liabilities, adjusted to exclude EQM adjusted EBITDA and adjusted EBITDA attributable to the Midstream Mergers, plus EQM interest expense plus the EQGP, EQM and RMP cash distributions payable to EQT. Prior to EQT’s 2018 operational forecast announcement in December 2017, the Company’s calculation of adjusted operating cash flow attributable to EQT did not include the addition of EQM’s interest expense. The Company believes it is preferable to present this non-GAAP supplemental financial measure with this adjustment as it better reflects EQT’s cash flows by excluding the cost of debt for EQM. EQT has recast all periods presented to be consistent with this change in the definition of adjusted operating cash flow attributable to EQT. Management believes that removing the impact on operating cash flows of the public unitholders of EQGP and EQM that is otherwise required to be consolidated in EQT’s results provides useful information to an EQT investor. As used in this news release, adjusted operating cash flow attributable to EQT Production means the EQT Production segment’s total operating revenues less the EQT Production segment’s cash operating expense, less (losses) gains on derivatives not designated as hedges, plus net cash settlements (paid) received on derivatives not designated as hedges, plus premiums (paid) received for derivatives that settled during the period, plus EQT Production asset impairments (if applicable). Operating cash flow, adjusted operating cash flow attributable to EQT, and adjusted operating cash flow attributable to EQT Production should not be considered as alternatives to net cash provided by operating activities presented in accordance with GAAP. The table below reconciles operating cash flow and adjusted operating cash flow attributable to EQT with net cash provided by operating activities, as derived from the statements of consolidated cash flows to be included in EQT’s report on Form 10-Q for the three and nine months ended September 30, 2018.

EQT has not provided projected net cash provided by operating activities or reconciliations of projected adjusted operating cash flow attributable to EQT or EQT Production to projected net cash provided by operating activities, the most comparable financial measure calculated in accordance with GAAP. EQT is unable to project net cash provided by operating activities because this metric includes the impact of changes in operating assets and liabilities related to the timing of cash receipts and disbursements that may not relate to the period in which the operating activities occurred. EQT is unable to project these timing differences with any reasonable degree of accuracy without unreasonable efforts such as predicting the timing of its and customers’ payments, with accuracy to a specific day, three or more months in advance. Furthermore, EQT does not provide guidance with respect to its average realized price, among other items, that impact reconciling items between net cash provided by operating activities and adjusted operating cash flow attributable to EQT and EQT Production, as applicable. Natural gas prices are volatile and out of EQT’s control, and the timing of transactions and the income tax effects of future transactions and other items are difficult to accurately predict. Therefore, EQT is unable to provide projected net cash provided by operating activities, or the related reconciliations of projected adjusted operating cash flow attributable to EQT and EQT Production to projected net cash provided by operating activities, without unreasonable effort.

EQT Production Adjusted Operating Revenue

The table below reconciles EQT Production adjusted operating revenues, a non-GAAP supplemental financial measure, to EQT Production total operating revenue, as reported in the EQT Production Results of Operations, its most directly comparable financial measure calculated in accordance with GAAP. Refer to the Financial Information by Business Segment footnote to be included in EQT’s report on Form 10-Q for the three and nine months ended September 30, 2018, for a reconciliation of EQT Production total operating revenue to EQT Corporation total operating revenue.

EQT Production adjusted operating revenue (also referred to as total natural gas & liquids sales, including cash settled derivatives) is presented because it is an important measure used by the Company’s management to evaluate period-over-period comparisons of earnings trends. EQT Production adjusted operating revenue as presented excludes the revenue impact of changes in the fair value of derivative instruments prior to settlement and the revenue impact of certain pipeline and net marketing services. Management utilizes EQT Production adjusted operating revenue to evaluate earnings trends because the measure reflects only the impact of settled derivative contracts and thus does not impact the revenue from natural gas sales with the often-volatile fluctuations in the fair value of derivatives prior to settlement. EQT Production adjusted operating revenue also excludes “Pipeline and net marketing services” because management considers this revenue to be unrelated to the revenue for its natural gas and liquids production. EQT Production “Pipeline and net marketing services” includes revenue for gathering services provided to third-parties, as well as both the cost of and recoveries on third-party pipeline capacity not used for EQT Production sales volume. Management further believes that EQT Production adjusted operating revenue, as presented, provides useful information to investors for evaluating period-over-period earnings trends.

EQT Production Adjusted Operating Income (Loss)

The table below reconciles EQT Production adjusted operating income (loss), a non-GAAP supplemental financial measure, to EQT Production operating (loss) income, as reported in the EQT Production Results of Operations. Refer to the Operating Income (Loss) section in this news release for a reconciliation of EQT Production total operating (loss) income to EQT Corporation total operating income (loss), as reported.

EQT Production adjusted operating income (loss) is presented because it is an important measure used by EQT’s management to evaluate period-over-period comparisons of earnings trends. EQT Production adjusted operating income (loss) should not be considered as an alternative to EQT Corporation operating income (loss) presented in accordance with GAAP. EQT Production adjusted operating income (loss) excludes the revenue impact of changes in the fair value of derivative instruments prior to settlement and asset and lease impairments. Management utilizes EQT Production adjusted operating income (loss) to evaluate earnings trends because the measure reflects only the impact of settled derivative contracts and thus the income from natural gas sales is not impacted by the often-volatile fluctuations in the fair value of derivatives prior to settlement. The measure also excludes certain other items that affect the comparability of results and are not indicative of trends in the ongoing business. Management believes that EQT Production adjusted operating income (loss) as presented provides useful information for investors for evaluating period-over-period earnings.

EQM Adjusted EBITDA

EQM adjusted EBITDA means EQM’s net income plus EQM’s net interest expense, depreciation, amortization of intangible assets, preferred interest payments, non-cash long-term compensation expense and transaction costs less EQM’s equity income, AFUDC-equity and adjusted EBITDA of assets prior to acquisition. EQM adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of EQT’s consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess the effects of the noncontrolling interests in relation to:

• EQT’s operating performance as compared to other companies in its industry;
• the ability of EQT’s assets to generate sufficient cash flow to make distributions to its investors;
• EQT’s ability to incur and service debt and fund capital expenditures; and
• the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

EQT believes that EQM adjusted EBITDA provides useful information to investors in assessing the impact of the noncontrolling interest in EQM on EQT’s financial condition and results of operations. EQM adjusted EBITDA should not be considered as an alternative to EQM’s net income, operating income, or any other measure of financial performance or liquidity presented in accordance with GAAP. EQM adjusted EBITDA has important limitations as an analytical tool because it excludes some, but not all, items that affect EQM’s net income. Additionally, because adjusted EBITDA may be defined differently by other companies in EQT’s or EQM’s industries, the definition of EQM adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing the utility of the measure. The table below reconciles EQM adjusted EBITDA with EQM’s net income, as derived from the statements of consolidated operations to be included in EQM’s report on Form 10-Q for the three and nine months ended September 30, 2018.

Third Quarter 2018 Webcast Information

The Company’s conference call with securities analysts begins at 10:30 a.m. ET today and will be broadcast live via the Company’s web site at www.eqt.com, and on the investor information page of the Company’s web site at ir.eqt.com, with a replay available for seven days following the call.

EQM Midstream Partners, LP and EQGP Holdings, LP, for which EQT Corporation is the parent company, will also host a joint conference call with security analysts today, beginning at 11:30 a.m. ET. The call will be broadcast live via www.eqm-midstreampartners.com, and on the investor information page of the Company’s web site at ir.eqm-midstreampartners.com with a replay available for seven days following the call.

About EQT Corporation:

EQT Corporation is an integrated energy company with emphasis on Appalachian area natural gas production, gathering, and transmission. With more than 130 years of experience and a long-standing history of good corporate citizenship, EQT is the largest producer of natural gas in the United States. As a leader in the use of advanced horizontal drilling technology, EQT is committed to minimizing the impact of drilling-related activities and reducing its overall environmental footprint. Through safe and responsible operations, EQT is helping to meet our nation’s growing demand for clean-burning energy, while continuing to provide a rewarding workplace and enrich the communities where its employees live and work. EQT owns the general partner interest and a 91% limited partner interest in EQGP Holdings, LP. EQGP Holdings, LP owns the general partner interest, all of the incentive distribution rights, and a portion of the limited partner interest in EQM Midstream Partners, LP.

Visit EQT Corporation at www.eqt.com; and to learn more about EQT’s sustainability efforts, please visit https://csr.eqt.com.

About EQM Midstream Partners

EQM Midstream Partners, LP (EQM) is a growth-oriented limited partnership formed by EQT Corporation to own, operate, acquire, and develop midstream assets in the Appalachian Basin. As the third largest gatherer of natural gas in the United States, EQM provides midstream services to EQT Corporation and third-party companies through its strategically located natural gas transmission, storage, and gathering systems, and water services to support energy development and production in the Marcellus and Utica regions. EQM owns approximately 950 miles of FERC-regulated interstate pipelines and approximately 2,130 miles of high-and low-pressure gathering lines.

For more information on EQM Midstream Partners, visit www.eqm-midstreampartners.com.

About EQGP Holdings:

EQGP Holdings, LP is a limited partnership that owns the general partner interest, all the incentive distribution rights, and a portion of the limited partner interests in EQM Midstream Partners, LP. EQT Corporation owns the general partner interest and a 91% limited partner interest in EQGP Holdings, LP.

For more information on EQGP Holdings, LP, visit www.eqm-midstreampartners.com.

EQT Management speaks to investors from time to time and the analyst presentation for these discussions, which is updated periodically, is available via the Company’s investor relationship website at ir.eqt.com.

Cautionary Statements

The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves that a company anticipates as of a given date to be economically and legally producible and deliverable by application of development projects to known accumulations. We use certain terms, such as “EUR” (estimated ultimate recovery) and “3P” (proved, probable and possible), that the SEC’s guidelines prohibit us from including in filings with the SEC. These measures are by their nature more speculative than estimates of reserves prepared in accordance with SEC definitions and guidelines and accordingly are less certain.

Total sales volume per day (or daily production) is an operational estimate of the daily production or sales volume on a typical day (excluding curtailments).

Disclosures in this news release contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Statements that do not relate strictly to historical or current facts are forward-looking. Without limiting the generality of the foregoing, forward-looking statements contained in this news release specifically include the expectations of plans, strategies, objectives and growth and anticipated financial and operational performance of the Company and its subsidiaries, including guidance regarding the Company’s strategy to develop its reserves; drilling plans and programs (including the number, type, average length-of-pay or lateral length and location of wells to be drilled and number and type of drilling rigs); projected natural gas prices, basis and average differential; total resource potential, reserves and EUR; projected Company and third party production sales volume and growth rates (including liquids sales volume and growth rates); projected unit costs and well costs; projected pipeline and net marketing services revenues; projected gathering and transmission volume and growth rates; infrastructure programs (including the timing, cost and capacity of the transmission and gathering expansion projects); the cost, capacity, and timing of regulatory approvals and anticipated in-service date of the MVP project; the ultimate terms, partners and structure of the MVP JV; technology (including drilling and completion techniques); acquisition transactions; the projected general and administrative savings, capital efficiency savings and other operating efficiencies and synergies resulting from the acquisition of Rice (the Rice Merger) and the Midstream Mergers, and the Company’s ability to achieve the anticipated synergies and efficiencies; monetization transactions, including asset sales, joint ventures or other transactions involving the Company’s assets; the impact and outcome of pending and future litigation; whether the separation of the Company’s production and midstream businesses (the Separation) will be completed and the timing of the Separation; the projected cash flows resulting from the Company’s partnership interests in EQGP and EQM; internal rate of return (IRR) and returns per well; projected capital contributions and expenditures; potential future impairments of the Company’s assets; liquidity and financing requirements, including funding sources and availability; changes in the Company’s or EQM’s credit ratings; projected net income attributable to noncontrolling interests, adjusted operating cash flow attributable to EQT, adjusted operating cash flow attributable to EQT Production, EBITDA, revenues and cash-on-hand; hedging strategy; the effects of government regulation; the amount and timing of any repurchases under the Company’s stock buyback program; projected dividend and distribution amounts and rates; and tax position, projected effective tax rate and the impact of changes in tax laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has based these forward-looking statements on current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and beyond the Company’s control. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors,” of the Company’s Form 10-K for the year ended December 31, 2017 as filed with the SEC, as updated by any subsequent Form 10-Qs.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.

Information in this news release regarding EQGP and its subsidiaries, including EQM, and RMP is derived from publicly available information published or to be published by the partnerships.

2018 GUIDANCE

See the Non-GAAP Disclosures section for important information regarding the non-GAAP financial measures included in this news release, including reasons why EQT is unable to provide projections of its 2018 net cash provided by operating activities, the most comparable financial measure to adjusted operating cash flow attributable to EQT and EQT Production, calculated in accordance with GAAP.

Based on current NYMEX natural gas prices of $2.97
Adjusted operating cash flow does not include transaction costs or tax impacts of the separation.

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