EQT CORPORATION The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in this report. Unless the context otherwise indicates, all references in this report to "EQT," the "Company," "we," "us," or "our" are toEQT Corporation and its subsidiaries, collectively. CAUTIONARY STATEMENTS This Quarterly Report on Form 10-Q contains 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 and are usually identified by the use of words such as "anticipate," "estimate," "could," "would," "will," "may," "forecast," "approximate," "expect," "project," "intend," "plan," "believe" and other words of similar meaning, or the negative thereof, in connection with any discussion of future operating or financial matters. Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the expectations of our plans, strategies, objectives and growth and anticipated financial and operational performance, including guidance regarding our strategy to develop our reserves; drilling plans and programs (including availability of capital to complete these plans and programs); total resource potential and drilling inventory duration; projected production and sales volume and growth rates (including liquids production and sales volume and growth rates); natural gas prices; changes in basis and the impact of commodity prices on our business; potential future impairments of our assets; projected well costs and capital expenditures; infrastructure programs; the cost, capacity, and timing of obtaining regulatory approvals; our ability to successfully implement and execute our operational, organizational, technological and ESG initiatives, and achieve the anticipated results of such initiatives; projected reductions of our gathering and compression rates resulting from our consolidated gas gathering and compression agreement with Equitrans Midstream Corporation (Equitrans Midstream), and the anticipated cost savings and other strategic benefits associated with the execution of such agreement; monetization transactions, including asset sales, joint ventures or other transactions involving our assets, and our planned use of the proceeds from such monetization transactions; potential acquisition transactions or other strategic transactions, the timing thereof and our ability to achieve the intended operational, financial and strategic benefits from any such transactions, including our acquisition of certain upstream and midstream assets fromAlta Resources Development, LLC ; the timing and structure of any dispositions of our remaining retained shares of Equitrans Midstream's common stock, and the planned use of the proceeds from any such dispositions; the amount and timing of any repayments, redemptions or repurchases of our common stock, outstanding debt securities or other debt instruments; our ability to reduce our debt and the timing of such reductions, if any; projected dividends, if any; projected cash flows and free cash flow; liquidity and financing requirements, including funding sources and availability; our ability to maintain or improve our credit ratings, leverage levels and financial profile; our hedging strategy and projected margin posting obligations; the effects of litigation, government regulation and tax position; and the expected impact of changes to tax laws. The forward-looking statements included in this Quarterly Report on Form 10-Q 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. We have based these forward-looking statements on current expectations and assumptions about future events, taking into account all information currently known by us. While we consider 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 our control. These risks and uncertainties include, but are not limited to, volatility of commodity prices; the costs and results of drilling and operations; access to and cost of capital; uncertainties about estimates of reserves, identification of drilling locations and the ability to add proved reserves in the future; the assumptions underlying production forecasts; the quality of technical data; our ability to appropriately allocate capital and resources among our strategic opportunities; inherent hazards and risks normally incidental to drilling for, producing, transporting and storing natural gas, natural gas liquids (NGLs) and oil; cyber security risks; availability and cost of drilling rigs, completion services, equipment, supplies, personnel, oilfield services and water required to execute our exploration and development plans; the ability to obtain environmental and other permits and the timing thereof; government regulation or action; environmental and weather risks, including the possible impacts of climate change; and disruptions to our business due to acquisitions and other significant transactions. These and other risks and uncertainties are described under Item 1A., "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Any forward-looking statement speaks only as of the date on which such statement is made, and we do not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. 22
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
OperationsConsolidated Results of Operations
Net loss attributable toEQT Corporation for the three months endedSeptember 30, 2021 was$1,980.1 million ,$5.55 per diluted share, compared to net loss attributable toEQT Corporation for the same period in 2020 of$600.6 million ,$2.35 per diluted share. The change was attributable primarily to the loss on derivatives not designated as hedges, increased depreciation and depletion, increased transportation and processing expense and increased other operating expenses, partly offset by increased sales of natural gas, NGLs and oil, higher income tax benefit and higher income from investments. Net loss attributable toEQT Corporation for the nine months endedSeptember 30, 2021 was$2,957.1 million ,$9.70 per diluted share, compared to net loss attributable toEQT Corporation for the same period in 2020 of$1,030.9 million ,$4.03 per diluted share. The change was attributable primarily to the loss on derivatives not designated as hedges, the gain on Equitrans Share Exchange (defined and discussed in Note 8 to the Condensed Consolidated Financial Statements) recognized in the first quarter of 2020, increased depreciation and depletion, increased transportation and processing expense and increased other operating expenses, partly offset by increased sales of natural gas, NGLs and oil, higher income tax benefit, the income from investments, the gain on sale of long-lived assets and decreased impairment and expiration of leases.
See "Sales Volume and Revenues" and "Operating Expenses" for discussions of items affecting operating income and "Other Income Statement Items" for a discussion of other income statement items. See "Investing Activities" under "Capital Resources and Liquidity" for a discussion of capital expenditures.
Average Realized Price Reconciliation
The following table presents detailed natural gas and liquids operational
information to assist in the understanding of our consolidated operations,
including the calculation of our average realized price ($/Mcfe), which is based
on adjusted operating revenues, a non-GAAP supplemental financial measure.
Adjusted operating revenues is presented because it is an important measure we
use to evaluate period-to-period comparisons of earnings trends. Adjusted
operating revenues should not be considered as an alternative to total operating
revenues. See "Non-GAAP Financial Measures Reconciliation" for a reconciliation
of adjusted operating revenues with total operating revenues, the most directly
comparable financial measure calculated in accordance with GAAP.
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EQT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Thousands, unless otherwise noted)
NATURAL GAS
Sales volume (MMcf) 464,574 348,136 1,249,140 1,043,126
NYMEX price ($/MMBtu) $ 4.02 $ 1.97 $ 3.23 $ 1.88
Btu uplift 0.19 0.11 0.17 0.10
Natural gas price ($/Mcf) $ 4.21 $ 2.08 $ 3.40 $ 1.98
Basis ($/Mcf) (a) $ (0.76) $ (0.48) $ (0.54) $ (0.35)
Cash settled basis swaps not designated as hedges
($/Mcf) (0.05) 0.01 (0.05) 0.01
Average differential, including cash settled
basis swaps ($/Mcf) $ (0.81) $ (0.47) $ (0.59) $ (0.34)
Average adjusted price ($/Mcf) $ 3.40 $ 1.61 $ 2.81 $ 1.64
Cash settled derivatives not designated as hedges
($/Mcf) (1.20) 0.72 (0.49) 0.77
Average natural gas price, including cash settled
derivatives ($/Mcf) $ 2.20 $ 2.33 $ 2.32 $ 2.41
Natural gas sales, including cash settled
derivatives $ 1,021,529 $ 811,122 $ 2,891,452 $ 2,513,128
LIQUIDS
NGLs, excluding ethane:
Sales volume (MMcfe) (b) 16,504 10,661 47,262 32,053
Sales volume (Mbbl) 2,751 1,777 7,877 5,342
Price ($/Bbl) $ 49.39 $ 19.83 $ 40.67 $ 17.33
Cash settled derivatives not designated as hedges
($/Bbl) (16.35) - (9.82) (0.17)
Average price, including cash settled derivatives
($/Bbl) $ 33.04 $ 19.83 $ 30.85 $ 17.16
NGLs sales $ 90,877 $ 35,227 $ 243,057 $ 91,648
Ethane:
Sales volume (MMcfe) (b) 10,546 6,442 26,936 18,540
Sales volume (Mbbl) 1,758 1,074 4,490 3,090
Price ($/Bbl) $ 9.22 $ 2.94 $ 7.64 $ 3.35
Ethane sales $ 16,202 $ 3,153 $ 34,296 $ 10,339
Oil:
Sales volume (MMcfe) (b) 3,389 899 7,460 3,136
Sales volume (Mbbl) 565 150 1,243 523
Price ($/Bbl) $ 46.79 $ 24.43 $ 53.24 $ 22.32
Oil sales $ 26,423 $ 3,662 $ 66,195 $ 11,672
Total liquids sales volume (MMcfe) (b) 30,439 18,002 81,658 53,729
Total liquids sales volume (Mbbl) 5,074 3,001 13,610 8,955
Total liquids sales $ 133,502 $ 42,042 $ 343,548 $ 113,659
TOTAL
Total natural gas and liquids sales, including
cash settled derivatives (c) $ 1,155,031 $ 853,164 $ 3,235,000 $ 2,626,787
Total sales volume (MMcfe) 495,013 366,138 1,330,798 1,096,855
Average realized price ($/Mcfe) $ 2.33 $
2.33
(a)Basis represents the difference between the ultimate sales price for natural gas, including the effects of delivered price benefit or deficit associated with our firm transportation agreements, and theNew York Mercantile Exchange (NYMEX) natural gas price. (b)NGLs, ethane and oil were converted to Mcfe at a rate of six Mcfe per barrel. (c)Total natural gas and liquids sales, including cash settled derivatives, is also referred to in this report as adjusted operating revenues, a non-GAAP supplemental financial measure. 24
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
Operations
Non-GAAP Financial Measures Reconciliation
The table below reconciles adjusted operating revenues, a non-GAAP supplemental
financial measure, with total operating revenues, its most directly comparable
financial measure calculated in accordance with GAAP. Adjusted operating
revenues (also referred to in this report as total natural gas and liquids
sales, including cash settled derivatives) is presented because it is an
important measure we use to evaluate period-to-period comparisons of earnings
trends. Adjusted operating revenues excludes the revenue impacts of changes in
the fair value of derivative instruments prior to settlement and net marketing
services and other. We use adjusted operating revenues to evaluate earnings
trends because, as a result of the measure's exclusion of the often-volatile
changes in the fair value of derivative instruments prior to settlement, the
measure reflects only the impact of settled derivative contracts. Net marketing
services and other consists of the costs of, and recoveries on, pipeline
capacity releases, revenues for gathering services provided to third parties and
other revenues. Because we consider net marketing services and other to be
unrelated to our natural gas and liquids production activities, adjusted
operating revenues excludes net marketing services and other. We believe that
adjusted operating revenues provides useful information to investors for
evaluating period-to-period comparisons of earnings trends.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Thousands, unless otherwise noted)
Total operating revenues $ (1,464,838) $ 172,127 $ (775,031) $ 1,806,258
Add (deduct):
Loss on derivatives not designated as
hedges 3,257,237 427,182 4,791,582 11,320
Net cash settlements (paid) received on
derivatives not designated as hedges (619,864) 252,089 (729,445) 813,218
Premiums (paid) received for derivatives
that settled during the period (9,155) 2,083 (28,460) 604
Net marketing services and other (8,349) (317) (23,646) (4,613)
Adjusted operating revenues, a non-GAAP
financial measure $ 1,155,031 $ 853,164 Total sales volume (MMcfe) 495,013 366,138 1,330,798 1,096,855
Average realized price ($/Mcfe)
$ 2.43 $ 2.39 Sales Volume and Revenues Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % 2021 2020 % (Thousands, unless otherwise noted) Sales volume by shale (MMcfe): Marcellus (a) 449,650 318,740 41.1 1,198,707 958,243 25.1 Ohio Utica 41,226 46,523 (11.4) 125,189 134,728 (7.1) Other 4,137 875 372.8 6,902 3,884 77.7 Total sales volume (b) 495,013 366,138 35.2 1,330,798 1,096,855 21.3 Average daily sales volume (MMcfe/d) 5,381 3,980 35.2 4,875 4,003 21.8 Operating revenues: Sales of natural gas, NGLs and oil$ 1,784,050 $ 598,992 197.8$ 3,992,905 $ 1,812,965 120.2 Loss on derivatives not designated as hedges (3,257,237) (427,182) 662.5 (4,791,582) (11,320) 42,228.5 Net marketing services and other 8,349 317 2,533.8 23,646 4,613 412.6 Total operating revenues$ (1,464,838) $ 172,127 (951.0)$ (775,031) $ 1,806,258 (142.9)
(a)Includes Upper Devonian wells. (b)NGLs, ethane and oil were converted to Mcfe at a rate of six Mcfe per barrel.
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended
Sales of natural gas, NGLs and oil. Sales of natural gas, NGLs and oil increased for the three months endedSeptember 30, 2021 compared to the same period in 2020 due to increased sales volume. Average realized price for the three months endedSeptember 30, 2021 compared to the same period in 2020 remained consistent due to higher NYMEX prices and higher liquids prices, offset by lower cash settled derivatives and unfavorable differential. For the three months endedSeptember 30, 2021 and 2020, we paid$619.9 million and received$252.1 million , respectively, of net cash settlements on derivatives not designated as hedges, which are included in average realized price but may not be included in operating revenues. Sales volume increased primarily as a result of sales volume increases of 74 Bcfe from the assets acquired in the Alta Acquisition (defined and discussed in Note 10 to the Condensed Consolidated Financial Statements), sales volume increases of 34 Bcfe from the assets acquired in the Chevron Acquisition (defined below) and prior period sales volume decreases of 15 Bcfe from the 2020 Strategic Production Curtailments (defined below).
The Chevron Acquisition refers to our acquisition of upstream assets from
The 2020 Strategic Production Curtailments refers to our strategic decisions to temporarily curtail 2020 production. InMay 2020 , we temporarily curtailed approximately 1.4 Bcf per day of gross production, equivalent to approximately 1.0 Bcf per day of net production. InJuly 2020 , we began a moderated approach to bring back on-line the curtailed production. InSeptember 2020 , we curtailed approximately 0.6 Bcf per day of gross production, equivalent to approximately 0.4 Bcf per day of net production. InOctober 2020 , we began a phased approach to bring back on-line the curtailed production, which was completed inNovember 2020 . Loss on derivatives not designated as hedges. For the three months endedSeptember 30, 2021 and 2020, we recognized a loss on derivatives not designated as hedges of$3,257.2 million and$427.2 million , respectively. The losses were related primarily to decreases in the fair market value of our NYMEX swaps and options due to increases in NYMEX forward prices. Net marketing services and other. Net marketing services and other increased for the three months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to the liquids uplift realized on gas purchased at the wellhead from other operators and third-party gathering revenues recognized on the midstream assets acquired in the Alta Acquisition.
Nine Months Ended
Sales of natural gas, NGLs and oil. Sales of natural gas, NGLs and oil increased for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due to increased sales volume and a higher average realized price. Average realized price increased due to higher NYMEX prices and higher liquids prices, partly offset by lower cash settled derivatives and unfavorable differential. For the nine months endedSeptember 30, 2021 and 2020, we paid$729.4 million and received$813.2 million , respectively, of net cash settlements on derivatives not designated as hedges, which are included in average realized price but may not be included in operating revenues. Sales volume increased primarily as a result of sales volume increases of 101 Bcfe from the assets acquired in the Chevron Acquisition, sales volume increases of 74 Bcfe from the assets acquired in the Alta Acquisition and prior period sales volume decreases of 51 Bcfe from the 2020 Strategic Production Curtailments. Loss on derivatives not designated as hedges. For the nine months endedSeptember 30, 2021 and 2020, we recognized a loss on derivatives not designated as hedges of$4,791.6 million and$11.3 million , respectively. The losses were related primarily to decreases in the fair market value of our NYMEX swaps and options due to increases in NYMEX forward prices. Net marketing services and other. Net marketing services and other increased for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to the liquids uplift realized on gas purchased at the wellhead from other operators and third-party gathering revenues recognized on the midstream assets acquired in the Alta Acquisition. 26
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
OperationsOperating Expenses
The following table presents information on our production-related operating
expenses.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 % 2021 2020 %
(Thousands, unless otherwise noted)
Operating expenses:
Gathering $ 316,612 $ 274,196 15.5 $ 883,378 $ 788,012 12.1
Transmission 129,402 120,681 7.2 384,509 387,358 (0.7)
Processing 48,883 32,814 49.0 136,810 97,791 39.9
Lease operating expenses (LOE),
excluding production taxes 32,141 28,758 11.8 84,707 82,675 2.5
Production taxes 25,682 10,912 135.4 67,892 35,704 90.2
Exploration 20,495 3,160 548.6 23,223 4,959 368.3
Selling, general and
administrative 49,113 51,654 (4.9) 143,972 129,933 10.8
Production depletion $ 437,367 $ 336,672 29.9 $ 1,187,188 $ 1,007,654 17.8
Other depreciation and depletion 5,509 4,355 26.5 13,092 13,995 (6.5)
Total depreciation and depletion$ 442,876 $ 341,027 29.9$ 1,200,280 $ 1,021,649 17.5 Per Unit ($/Mcfe): Gathering$ 0.64 $ 0.75 (14.7) $ 0.66$ 0.72 (8.3) Transmission 0.26 0.33 (21.2) 0.29 0.35 (17.1) Processing 0.10 0.09 11.1 0.10 0.09 11.1 LOE, excluding production taxes 0.06 0.08 (25.0) 0.06 0.08 (25.0) Production taxes 0.05 0.03 66.7 0.05 0.03 66.7 Exploration 0.04 0.01 300.0 0.02 - - Selling, general and administrative 0.10 0.14 (28.6) 0.11 0.12 (8.3) Production depletion 0.88 0.92 (4.3) 0.89 0.92 (3.3)
Three Months Ended
Gathering. Gathering expense increased on an absolute basis for the three months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to increased sales volume from the assets acquired in the Alta Acquisition and Chevron Acquisition. Gathering expense decreased on a per Mcfe basis for the three months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to a lower gathering rate structure on the assets acquired in the Alta Acquisition and Chevron Acquisition. Transmission. Transmission expense increased on an absolute basis for the three months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to additional capacity acquired as part of the Alta Acquisition and fewer capacity releases on theTennessee Gas Pipeline . Transmission expense decreased on a per Mcfe basis for the three months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to increased sales volume, some of which, particularly sales volume from assets acquired in the Alta Acquisition and Chevron Acquisition, has lower transmission expense on a per Mcfe basis as compared to our historical transmission portfolio. Processing. Processing expense increased on an absolute and per Mcfe basis for the three months endedSeptember 30, 2021 compared to the same period in 2020 due to increased liquid sales volume due primarily to increased development of liquids-rich areas and increased processed volume from assets acquired in the Chevron Acquisition. 27
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Operations
Production taxes. Production taxes increased on an absolute and per Mcfe basis
for the three months ended September 30, 2021 compared to the same period in
2020 due primarily to increased West Virginia severance taxes as a result of
increased production from the Chevron Acquisition and higher prices as well as
increased Pennsylvania impact fees as a result of higher prices and additional
wells acquired in the Alta Acquisition and Chevron Acquisition.
Exploration. Exploration increased on an absolute and per Mcfe basis for the
three months ended September 30, 2021 compared to the same period in 2020 due
primarily to our purchase of seismic data following the completion of the Alta
Acquisition.
Depreciation and depletion. Production depletion expense increased on an
absolute basis for the three months ended September 30, 2021 compared to the
same period in 2020 due to increased sales volume, partly offset by a lower
annual depletion rate. Production depletion expense decreased on a per Mcfe
basis for the three months ended September 30, 2021 compared to the same period
in 2020 due to a lower annual depletion rate.
Amortization of intangible assets. Amortization of intangible assets for the
three months ended September 30, 2020 was $7.5 million . Our intangible assets
were fully amortized in the fourth quarter of 2020.
(Gain) loss on sale/exchange of long-lived assets. During the three months ended
September 30, 2021 , we recognized a gain on sale/exchange of long-lived assets
of $0.4 million related primarily to changes in the fair value of the Contingent
Consideration from the 2020 Divestiture (defined and discussed in Note 9 to the
Condensed Consolidated Financial Statements). During the three months ended
September 30, 2020 , we recognized a loss on sale/exchange of long-lived assets
of $4.7 million related primarily to the 2020 Asset Exchange Transactions
(defined and discussed in Note 9 to the Condensed Consolidated Financial
Statements), partly offset by changes in the fair value of the Contingent
Consideration from the 2020 Divestiture. See Note 9 to the Condensed
Consolidated Financial Statements.
Impairment and expiration of leases. Impairment and expiration of leases for the
three months ended September 30, 2021 was $41.1 million compared to
$50.4 million for the same period in 2020. The decrease was driven by higher
lease expirations in 2020 due to changes in market conditions.
Other operating expenses. Other operating expenses for the three months ended
September 30, 2021 of $38.8 million were attributable primarily to transaction
costs associated with the Alta Acquisition. Other operating expenses for the
three months ended September 30, 2020 of $6.5 million were attributable
primarily to changes in legal reserves, including settlements and reorganization
costs.
Nine Months Ended
Gathering. Gathering expense increased on an absolute basis for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due to increased sales volume. Gathering expense decreased on a per Mcfe basis for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to increased sales volume, which resulted in our utilization of lower overrun rates as part of the Consolidated GGA (defined and discussed in Note 8 to the Condensed Consolidated Financial Statements), and a lower gathering rate structure on the assets acquired in the Chevron Acquisition and Alta Acquisition. Transmission. Transmission expense decreased on an absolute basis for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to released capacity on, and credits received from, the Texas Eastern Transmission Pipeline in 2020 and released capacity on theTennessee Gas Pipeline , partly offset by additional capacity acquired as part of the Alta Acquisition. Transmission expense decreased on a per Mcfe basis for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to increased sales volume, some of which, particularly volume from the Chevron Acquisition and Alta Acquisition, has lower transmission expense on a per Mcfe basis as compared to our historical transmission portfolio. Processing. Processing expense increased on an absolute and per Mcfe basis for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due to increased liquid sales volume due primarily to increased development of liquids-rich areas and increased processed volume from the Chevron Acquisition. Production taxes. Production taxes increased on an absolute and per Mcfe basis for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to increasedWest Virginia severance taxes as a result of increasedWest Virginia production from the Chevron Acquisition and higher prices as well as increasedPennsylvania impact fees as a result of higher prices and additional wells acquired in the Alta Acquisition andChevron Acquisition. 28
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Operations
Exploration. Exploration increased on an absolute and per Mcfe basis for the
nine months ended September 30, 2021 compared to the same period in 2020 due
primarily to our purchase of seismic data following the completion of the Alta
Acquisition.
Selling, general and administrative. Selling, general and administrative expense
increased on an absolute basis for the nine months ended September 30, 2021
compared to the same period in 2020 due primarily to higher long-term incentive
compensation costs due to changes in the fair value of awards as well as higher
litigation expense.
Depreciation and depletion. Production depletion expense increased on an
absolute basis for the nine months ended September 30, 2021 compared to the same
period in 2020 due to increased sales volume, partly offset by a lower annual
depletion rate. Production depletion expense decreased on a per Mcfe basis for
the nine months ended September 30, 2021 compared to the same period in 2020 due
to a lower annual depletion rate.
Amortization of intangible assets. Amortization of intangible assets for the
nine months ended September 30, 2020 was $22.4 million . Our intangible assets
were fully amortized in the fourth quarter of 2020.
(Gain) loss on sale/exchange of long-lived assets. During the nine months ended
September 30, 2021 , we recognized a gain on sale/exchange of long-lived assets
of $18.4 million related primarily to changes in the fair value of the
Contingent Consideration from the 2020 Divestiture. During the nine months ended
September 30, 2020 , we recognized a loss on sale/exchange of long-lived assets
of $102.7 million , of which $67.2 million related to the 2020 Asset Exchange
Transactions and $35.5 million related to asset sales, including the 2020
Divestiture. See Note 9 to the Condensed Consolidated Financial Statements.
Impairment and expiration of leases. Impairment and expiration of leases for the
nine months ended September 30, 2021 was $83.5 million compared to
$145.5 million for the same period in 2020. The decrease was driven by higher
lease expirations in 2020 due to changes in market conditions.
Other operating expenses. Other operating expenses for the nine months ended
September 30, 2021 of $53.4 million were attributable primarily to transaction
costs associated with the Alta Acquisition and Chevron Acquisition. Other
operating expenses for the nine months ended September 30, 2020 of $11.3 million
were attributable primarily to changes in legal reserves, including settlements,
reorganization and transaction costs.
Other Income Statement Items
Gain on Equitrans Share Exchange. During the first quarter of 2020, we
recognized a gain on the Equitrans Share Exchange of
(Income) loss from investments. For the three and nine months ended
For the three months endedSeptember 30, 2020 , we recognized income on our investment in Equitrans Midstream due to an increase in Equitrans Midstream's stock price. For the nine months endedSeptember 30, 2020 , we recognized a loss on our investment in Equitrans Midstream due to a decrease in Equitrans Midstream's stock price as well as a decrease in the number of shares of Equitrans Midstream's common stock that we owned as a result of theEquitrans Share Exchange. Dividend and other income. Dividend and other income decreased for the nine months endedSeptember 30, 2021 compared to the same period in 2020 due primarily to lower dividends received from our investment in Equitrans Midstream driven by a decrease in the number of shares of Equitrans Midstream's common stock that we owned as well as a decrease in the dividend amount per share. Loss on debt extinguishment. During the nine months endedSeptember 30, 2021 , we recognized a loss on debt extinguishment of$9.8 million due to fees incurred for a bridge-loan commitment related to the Alta Acquisition and the repayment of our 4.875% senior notes. During the three and nine months endedSeptember 30, 2020 , we recognized a loss on debt extinguishment of$3.7 million and$20.7 million , respectively, related to the repayment of our 4.875% senior notes, 2.50% senior notes, floating rate notes and term loan facility. See Note 6 to the Condensed Consolidated Financial Statements. 29
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
Operations
Interest expense. Interest expense increased for the three and nine months ended
September 30, 2021 compared to the same periods in 2020 due to increased
interest incurred on new debt, higher borrowings under our credit facility and
increased interest due to letters of credit issued throughout 2020. These
increases were partly offset by lower interest incurred due to debt repayments
throughout 2020 and in the first quarter of 2021. See Note 6 to the Condensed
Consolidated Financial Statements.
Income tax benefit. See Note 5 to the Condensed Consolidated Financial Statements.
Capital Resources and Liquidity
Although we cannot provide any assurance, we believe cash flows from operating activities and availability under our credit facility should be sufficient to meet our cash requirements inclusive of, but not limited to, normal operating needs, debt service obligations, planned capital expenditures and commitments for at least the next twelve months and, based on current expectations, for the long term. Planned Capital Expenditures and Sales Volume. In 2021, we expect to spend approximately$1,075 million to$1,125 million in total capital expenditures, excluding amounts attributable to noncontrolling interests, which are expected to be funded by operating cash flow and, if required, borrowings under our credit facility. Sales volume in 2021 is expected to be 1,840 Bcfe to 1,870 Bcfe. Operating Activities. Net cash provided by operating activities was$492 million for the nine months endedSeptember 30, 2021 compared to$1,132 million for the same period in 2020. The decrease was due primarily to the cash settlements paid on derivatives not designated as hedges, unfavorable timing of working capital payments, including increased payments for collateral and margin deposits associated with our over the counter (OTC) derivative instrument contracts and exchange traded natural gas contracts, and income tax refunds received in the prior year, partly offset by higher cash operating revenues. Our cash flows from operating activities are affected by movements in the market price for commodities. We are unable to predict such movements outside of the current market view as reflected in forward strip pricing. Refer to Item 1A., "Risk Factors - Natural gas, NGLs and oil price volatility, or a prolonged period of low natural gas, NGLs and oil prices, may have an adverse effect on our revenue, profitability, future rate of growth, liquidity and financial position" in our Annual Report on Form 10-K for the year ended December 31, 2020. Investing Activities. Net cash used in investing activities was$1,715 million for the nine months endedSeptember 30, 2021 compared to$623 million for the same period in 2020. The increase was due primarily to cash paid for acquisitions in 2021 and proceeds received from the sale of assets and the Equitrans Share Exchange in 2020, partly offset by lower capital expenditures.
The following table summarizes our capital expenditures.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Millions)
Reserve development $ 242 $ 176 $ 609 $ 634
Land and lease (a) 27 38 81 88
Capitalized overhead 15 15 42 39
Capitalized interest 5 5 13 13
Other production infrastructure 7 11 31 31
Other corporate items 1 3 5 8
Total capital expenditures 297 248 781 813
(Deduct) add back: Non-cash items (b) (60) 28 (74) (25)
Total cash capital expenditures $ 237 $
276
(a)Capital expenditures attributable to noncontrolling interests were$0.7 million and$5.7 million for the three and nine months endedSeptember 30, 2021 , respectively. (b)Represents the net impact of non-cash capital expenditures, including the effect of timing of receivables from working interest partners, accrued capital expenditures and capitalized share-based compensation costs. The impact of accrued capital expenditures includes the reversal of the prior period accrual as well as the current period estimate. 30
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
Operations
Financing Activities. Net cash provided by financing activities was $1,228
million for the nine months ended September 30, 2021 compared to net cash used
in financing activities of $500 million for the same period in 2020. For the
nine months ended September 30, 2021 , the primary sources of financing cash
flows were net proceeds from the issuance of debt and credit facility
borrowings, and the primary use of financing cash flows was net repayments of
debt. For the nine months ended September 30, 2020 , the primary uses of
financing cash flows were net repayments of debt and credit facility borrowings,
and the primary source of financing cash flows was net proceeds from the
issuance of debt.
See Note 6 to the Condensed Consolidated Financial Statements for further discussion of our debt and borrowings under our credit facility.
Depending on our actual and anticipated sources and uses of liquidity, prevailing market conditions and other factors, we may from time to time seek to retire or repurchase our outstanding debt or equity securities through cash purchases in the open market or privately negotiated transactions. The amounts involved in any such transactions may be material. Additionally, we plan to dispose of our remaining retained shares of Equitrans Midstream's common stock and use the proceeds to reduce our debt.
Security Ratings and Financing Triggers
The table below reflects the credit ratings and rating outlooks assigned to our debt instruments as ofOctober 22, 2021 . Our credit ratings and rating outlooks are subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independent from any other rating. We cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn by a rating agency if, in the rating agency's judgment, circumstances so warrant. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of what is deemed investment grade. Rating agency Senior notes Outlook Moody's Investors Service (Moody's) Ba1 Stable Standard & Poor's Ratings Service (S&P) BB+ Positive Fitch Ratings Service (Fitch) BB+ Stable Changes in credit ratings may affect our access to the capital markets, the cost of short-term debt through interest rates and fees under our lines of credit, the interest rate on our senior notes with adjustable rates, the rates available on new long-term debt, our pool of investors and funding sources, the borrowing costs and margin deposit requirements on our OTC derivative instruments and credit assurance requirements, including collateral, in support of our midstream service contracts, joint venture arrangements or construction contracts. Margin deposits on our OTC derivative instruments are also subject to factors other than credit rating, such as natural gas prices and credit thresholds set forth in the agreements between us and our hedging counterparties. As ofOctober 22, 2021 , we had sufficient unused borrowing capacity, net of letters of credit, under our credit facility to satisfy any requests for margin deposit or other collateral that our counterparties are permitted to request of us pursuant to our OTC derivative instruments, midstream services contracts and other contracts. As ofOctober 22, 2021 , such assurances could be up to approximately$1.1 billion , inclusive of letters of credit, OTC derivative instrument margin deposits and other collateral posted of approximately$0.8 billion in the aggregate. During the third quarter of 2021, we amended agreements with six of our largest OTC hedge counterparties to permanently or temporarily reduce or eliminate our margin posting obligations associated with our OTC derivative instruments with such OTC hedge counterparties. The purpose of such amendments was to mitigate the amount of cash collateral that we would otherwise have been required to post based on current NYMEX strip pricing. As ofOctober 22, 2021 , our margin balance on our existing hedge portfolio, including both OTC and broker margin balances, was approximately$0.4 billion , compared to approximately$0.5 billion as ofJune 30, 2021 , despite a significant increase in natural gas prices betweenJune 30, 2021 andOctober 22, 2021 . See Notes 3 and 6 to the Condensed Consolidated Financial Statements for further information. 31
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
Operations
Our debt agreements and other financial obligations contain various provisions
that, if not complied with, could result in default or event of default under
our credit facility, mandatory partial or full repayment of amounts outstanding,
reduced loan capacity or other similar actions. The most significant covenants
and events of default under the debt agreements relate to maintenance of a
debt-to-total capitalization ratio, limitations on transactions with affiliates,
insolvency events, nonpayment of scheduled principal or interest payments,
acceleration of other financial obligations and change of control provisions.
Our credit facility contains financial covenants that require us to have a total
debt to total capitalization ratio no greater than 65%. The calculation of this
ratio excludes the effects of accumulated other comprehensive income. As of
September 30, 2021 , we were in compliance with all debt provisions and covenants
under our debt agreements.
Commodity Risk Management
The substantial majority of our commodity risk management program is related to
hedging sales of our produced natural gas. The overall objective of our hedging
program is to protect cash flows from undue exposure to the risk of changing
commodity prices. The derivative commodity instruments that we use are primarily
swap, collar and option agreements. The following table summarizes the
approximate volume and prices of our NYMEX hedge positions through 2024 as of
October 22, 2021 .
2021 (a) 2022 2023 2024
Swaps:
Volume (MMDth) 314 1,102 166 2
Average Price ($/Dth) $ 2.39 $ 2.59 $ 2.53 $ 2.67
Calls - Net Short:
Volume (MMDth) 86 406 77 15
Average
$ 3.11 Puts -Net Long : Volume (MMDth) 53 183 69
15
Average Long Strike Price ($/Dth)
$ 2.45 Fixed Price Sales (b): Volume (MMDth) 17 4 3 - Average Price ($/Dth)$ 2.49 $ 2.38 $ 2.38 $ - (a)October 1 through December 31 . (b)The difference between the fixed price and NYMEX price is included in average differential presented in our price reconciliation in "Average Realized Price Reconciliation." The fixed price natural gas sales agreements can be physically or financially settled. For 2021 (October 1 through December 31 ), 2022, 2023 and 2024, we have natural gas sales agreements for approximately 5 MMDth, 18 MMDth, 88 MMDth and 11 MMDth, respectively, that include average NYMEX ceiling prices of$3.17 ,$3.17 ,$2.84 and$3.21 , respectively. During the third quarter of 2021 and during the period beginningOctober 1, 2021 and endingOctober 22, 2021 , we purchased$54 million and$18 million , respectively, of winter calls to reposition our 2021 and 2022 hedge portfolio to enable incremental upside participation in rising natural gas prices and to further mitigate potential incremental margin posting requirements. These positions cover approximately 149 MMDth in 2021 and 2022 and have been excluded from the table above. In addition, during the third quarter of 2021, we purchased$3 million of 2022 swaptions. If exercised, these positions will be converted into approximately 37 MMDth of swaps and have been excluded from the table above. We have also entered into derivative instruments to hedge basis. We may use other contractual agreements to implement our commodity hedging strategy from time to time. See Item 3., "Quantitative and Qualitative Disclosures About Market Risk" and Note 3 to the Condensed Consolidated Financial Statements for further discussion of our hedging program. 32
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EQT CORPORATION AND SUBSIDIARIESManagement's Discussion and Analysis of Financial Condition and Results of
OperationsCommitments and Contingencies
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against us. While the amounts claimed may be substantial, we are unable to predict with certainty the ultimate outcome of such claims and proceedings. We accrue legal and other direct costs related to loss contingencies when actually incurred. We have established reserves that we believe to be appropriate for pending matters and, after consultation with counsel and giving appropriate consideration to available insurance, we believe that the ultimate outcome of any matter currently pending against us will not materially affect our financial condition, results of operations or liquidity. See Note 16 to the Consolidated Financial Statements and Part I, Item 3., "Legal Proceedings" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of our commitments and contingencies. See also Part II, Item 1., "Legal Proceedings."
Recently Issued Accounting Standards
Our recently issued accounting standards are described in Note 1 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our critical accounting policies, including a discussion regarding the estimation uncertainty and the impact that our critical accounting estimates have had, or are reasonably likely to have, on our financial condition or results of operations, are described in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020. The application of our critical accounting policies may require us to make judgments and estimates about the amounts reflected in the Condensed Consolidated Financial Statements. We use historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
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