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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM                TO               
 
 
 
COMMISSION FILE NUMBER 001-03551
 
EQT CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
 
25-0464690 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania
 
15222
(Address of principal executive offices)
 
(Zip code)
 
(412) 553-5700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   x
 
 
Accelerated Filer                  ¨
 
Emerging Growth Company       ¨
Non-Accelerated Filer     ¨
(Do not check if a
smaller reporting company)
 
Smaller Reporting Company  ¨
 
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
 
As of March 31, 2018, 265 (in millions) shares of common stock, no par value, of the registrant were outstanding.


Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Index
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents
PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Operations (Unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands, except per share amounts)
Revenues:
 
 
 
Sales of natural gas, oil and NGLs
$
1,226,374

 
$
673,465

Pipeline, water and net marketing services
144,617

 
79,962

Gain on derivatives not designated as hedges
62,592

 
140,742

Total operating revenues
1,433,583

 
894,169

 
 
 
 
Operating expenses:
 

 
 

Transportation and processing
190,140

 
133,706

Operation and maintenance
25,740

 
16,817

Production
60,123

 
45,672

Exploration
5,104

 
3,122

Selling, general and administrative
52,615

 
71,957

Depreciation, depletion and amortization
437,893

 
231,918

Impairment of long-lived assets
2,329,045

 

Transaction costs
35,711

 

Amortization of intangible assets
20,728

 

Total operating expenses
3,157,099

 
503,192

 
 
 
 
Operating (loss) income
(1,723,516
)
 
390,977

 
 
 
 
Other income
9,585

 
3,048

Interest expense
70,013

 
42,655

(Loss) income before income taxes
(1,783,944
)
 
351,370

Income tax (benefit) expense
(338,965
)
 
100,665

Net (loss) income
(1,444,979
)
 
250,705

Less: Net income attributable to noncontrolling interests
141,015

 
86,713

Net (loss) income attributable to EQT Corporation
$
(1,585,994
)
 
$
163,992

 
 
 
 
Earnings per share of common stock attributable to EQT Corporation:
 

 
 

Basic:
 

 
 

Weighted average common stock outstanding
264,877

 
173,213

Net (loss) income
$
(5.99
)
 
$
0.95

Diluted:
 

 
 

Weighted average common stock outstanding
264,877

 
173,511

Net (loss) income
$
(5.99
)
 
$
0.95

Dividends declared per common share
$
0.03

 
$
0.03

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

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EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Comprehensive Income (Unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands)
Net (loss) income
$
(1,444,979
)
 
$
250,705

 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

Net change in cash flow hedges:
 

 
 

Natural gas, net of tax benefit of $(100) and $(584)
(287
)
 
(888
)
Interest rate, net of tax expense of $18 and $25
44

 
36

Other post-retirement benefits liability adjustment, net of tax expense of $30 and $49
86

 
76

Other comprehensive loss
(157
)
 
(776
)
Comprehensive (loss) income
(1,445,136
)
 
249,929

Less: Comprehensive income attributable to noncontrolling interests
141,015

 
86,713

Comprehensive (loss) income attributable to EQT Corporation
$
(1,586,151
)
 
$
163,216

 
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 Cash Flows (Unaudited)

 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands)
Cash flows from operating activities:
 
Net (loss) income
$
(1,444,979
)
 
$
250,705

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Deferred income taxes
(338,734
)
 
100,665

Depreciation, depletion and amortization
437,893

 
231,918

Amortization of intangibles
20,728

 

Amortization of financing costs
2,872

 
1,806

Asset and lease impairments
2,332,924

 
1,837

Reduction of allowance for doubtful accounts
(1,138
)
 
(1,607
)
Other income
(9,585
)
 
(3,048
)
Stock-based compensation expense
5,892

 
14,765

Gain on derivatives not designated as hedges
(62,592
)
 
(140,742
)
Cash settlements paid on derivatives not designated as hedges
(38,629
)
 
(8,967
)
Changes in other assets and liabilities:
 

 
 

Accounts receivable
62,423

 
64,374

Accounts payable
307

 
(15,225
)
Other items, net
(62,970
)
 
18,336

Net cash provided by operating activities
904,412

 
514,817

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(732,417
)
 
(311,399
)
Capital expenditures for acquisitions

 
(669,479
)
Sales of investments in trading securities

 
283,758

Capital contributions to Mountain Valley Pipeline, LLC
(117,019
)
 
(19,760
)
Net cash used in investing activities
(849,436
)
 
(716,880
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Increase in borrowings on credit facilities
1,217,500

 

Repayment of borrowings on credit facilities
(1,086,500
)
 

Dividends paid
(7,942
)
 
(5,206
)
Distributions to noncontrolling interests
(88,896
)
 
(54,636
)
Repayments and retirements of Senior Notes
(7,999
)
 

Proceeds and excess tax benefits from awards under employee compensation plans
1,946

 

Cash paid for taxes related to net settlement of share-based incentive awards
(20,009
)
 
(17,253
)
Repurchase of common stock
(9
)
 
(7
)
Net cash used in financing activities
8,091

 
(77,102
)
Net change in cash, cash equivalents and restricted cash
63,067

 
(279,165
)
Cash, cash equivalents and restricted cash at beginning of period
147,315

 
1,178,540

Cash and cash equivalents at end of period
$
210,382

 
$
899,375

 
 
 
 
Cash paid during the period for:
 

 
 

Interest, net of amount capitalized
$
27,519

 
$
17,845

Income taxes, net
$
(9
)
 
$
(87
)
 

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)
 
 
March 31, 2018
 
December 31, 2017
 
(Thousands)
Assets
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
210,382

 
$
147,315

Accounts receivable (less accumulated provision for doubtful accounts:
$7,089 at March 31, 2018 and $8,226 at December 31, 2017)
674,104

 
725,236

Derivative instruments, at fair value
262,283

 
241,952

Prepaid expenses and other
44,812

 
48,552

Total current assets
1,191,581

 
1,163,055

 
 
 
 
Property, plant and equipment
27,083,946

 
30,990,309

Less: accumulated depreciation and depletion
4,208,106

 
6,105,294

Net property, plant and equipment
22,875,840

 
24,885,015

 
 
 
 
Intangible assets, net
715,631

 
736,360

Goodwill
1,998,726

 
1,998,726

Investment in nonconsolidated entity
546,428

 
460,546

Other assets
304,140

 
278,902

Total assets
$
27,632,346

 
$
29,522,604

  
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)

 
March 31, 2018
 
December 31, 2017
 
(Thousands)
Liabilities and Shareholders’ Equity
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current portion of Senior Notes
$

 
$
7,999

Accounts payable
699,520

 
654,624

Derivative instruments, at fair value
59,198

 
139,089

Other current liabilities
349,958

 
430,525

Total current liabilities
1,108,676

 
1,232,237

 
 
 
 
Credit facility borrowings
1,892,000

 
1,761,000

Senior Notes
5,564,826

 
5,562,555

Deferred income taxes
1,431,148

 
1,768,900

Other liabilities and credits
771,934

 
783,299

Total liabilities
10,768,584

 
11,107,991

 
 
 
 
Equity:
 

 
 

Shareholders’ equity:
 

 
 

Common stock, no par value, authorized 320,000 shares, shares issued:
267,871 at March 31, 2018 and 267,871 at December 31, 2017
9,363,289

 
9,388,903

Treasury stock, shares at cost: 2,871 at March 31, 2018 (including 299 held in
rabbi trust) and 3,551 at December 31, 2017 (including 253 held in rabbi trust)
(51,304
)
 
(63,602
)
Retained earnings
2,406,952

 
3,996,775

Accumulated other comprehensive (loss)
(2,615
)
 
(2,458
)
Total common shareholders’ equity
11,716,322

 
13,319,618

Noncontrolling interests in consolidated subsidiaries
5,147,440

 
5,094,995

Total equity
16,863,762

 
18,414,613

Total liabilities and equity
$
27,632,346

 
$
29,522,604


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
 
 
 
Accumulated Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
 
 
Shares
Outstanding
 
No
Par Value
 
Retained
Earnings
 
 
 
Total
Equity
 
(Thousands)
Balance, January 1, 2017
172,827

 
$
3,349,166

 
$
2,509,073

 
$
2,042

 
$
3,258,966

 
$
9,119,247

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
 

 
163,992

 
 

 
86,713

 
250,705

Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(584)
 
 
 
 
 
 
(888
)
 
 
 
(888
)
Interest rate, net of tax expense of $25
 
 
 
 
 
 
36

 
 
 
36

Other post-retirement benefits liability adjustment, net of tax expense of $49
 
 
 
 
 
 
76

 
 
 
76

Dividends ($0.03 per share)
 

 
 

 
(5,206
)
 
 

 
 

 
(5,206
)
Stock-based compensation plans, net
489

 
1,052

 
 

 
 

 
190

 
1,242

Distributions to noncontrolling interests ($0.85 and $0.177 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively)
 

 
 

 
 

 
 

 
(54,636
)
 
(54,636
)
Balance, March 31, 2017
173,316

 
$
3,350,218

 
$
2,667,859

 
$
1,266

 
$
3,291,233

 
$
9,310,576

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
264,320

 
$
9,325,301

 
$
3,996,775

 
$
(2,458
)
 
$
5,094,995

 
$
18,414,613

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

 
 

 
(1,585,994
)
 
 

 
141,015

 
(1,444,979
)
Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(100)
 
 
 
 
 
 
(287
)
 
 
 
(287
)
Interest rate, net of tax expense of $18
 
 
 
 
 
 
44

 
 
 
44

Other post-retirement benefit liability adjustment, net of tax expense of $30
 
 
 
 
 
 
86

 
 
 
86

Dividends ($0.03 per share)
 

 
 

 
(7,942
)
 
 

 
 

 
(7,942
)
Stock-based compensation plans, net
680

 
(13,365
)
 
 

 
 

 
390

 
(12,975
)
Distributions to noncontrolling interests ($1.025, $0.244 and $0.2917 per common unit from EQT Midstream Partners, LP, EQT GP Holdings, LP, and Rice Midstream Partners LP, respectively)
 

 
 

 
 

 
 

 
(88,896
)
 
(88,896
)
Change in accounting principle (a)
 
 
 
 
4,113

 
 
 
 
 
4,113

Change in ownership of consolidated subsidiaries
 
 
49

 
 
 
 
 
(64
)
 
(15
)
Balance, March 31, 2018
265,000

 
$
9,311,985

 
$
2,406,952

 
$
(2,615
)
 
$
5,147,440

 
$
16,863,762

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

(a) Related to adoption of ASU No. 2016-01. See Note K and S for additional information.


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


A.                        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 of the information and footnotes required by United States 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 Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and subsidiaries as of March 31, 2018 and December 31, 2017 and the results of its operations, its cash flows and equity for the three month periods ended March 31, 2018 and 2017.  Certain previously reported amounts have been reclassified to conform to the current year presentation. In this Quarterly Report on Form 10-Q, references to “we,” “us,” “our,” “EQT,” “EQT Corporation,” and the “Company” refer collectively to EQT Corporation and its consolidated subsidiaries.
 
Prior to the Rice Merger (as defined in Note B), the Company reported its results of operations through three business segments: EQT Production, EQT Gathering and EQT Transmission. These reporting segments reflected the Company's lines of business and were reported in the same manner in which the Company evaluated its operating performance through September 30, 2017. Following the Rice Merger, the Company adjusted its internal reporting structure to incorporate the newly acquired assets. The Company now conducts its business through five business segments: EQT Production, EQM Gathering (formerly known as EQT Gathering), EQM Transmission (formerly known as EQT Transmission), RMP Gathering and RMP Water.

In February 2018, the Company's Board of Directors unanimously approved a plan to separate its upstream and midstream businesses, creating a standalone publicly traded corporation (NewCo) that will focus on midstream operations. NewCo will own the midstream interests held by EQT. The separation is intended to qualify as tax-free to EQT shareholders for U.S. federal income tax purposes and is expected to be completed by the end of the third quarter 2018. Under the separation plan, EQT shareholders will retain their shares of EQT stock and receive a pro-rata share of the new independent midstream company. The Company also announced that it plans to pursue (i) a sale of Rice retained midstream assets acquired by EQT in connection with the Rice Merger to EQM; (ii) a merger of EQM and RMP; and (iii) a sale of RMP’s incentive distribution rights to EQGP.

The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and related footnotes as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

B.                        Rice Merger

On November 13, 2017, the Company completed its previously announced acquisition of Rice Energy Inc. (Rice) pursuant to the Agreement and Plan of Merger, dated June 19, 2017 (as amended, the Merger Agreement), by and among the Company, Rice and a wholly owned indirect subsidiary of the Company (RE Merger Sub). Pursuant to the terms of the Merger Agreement, on November 13, 2017, RE Merger Sub merged with and into Rice (the Rice Merger) with Rice continuing as the surviving corporation and a wholly owned indirect subsidiary of the Company. Immediately after the effective time of the Rice Merger (the Effective Time), Rice merged with and into another wholly owned indirect subsidiary of the Company.

As a result of the Rice Merger, the Company also acquired Rice's interests in Rice Midstream Partners LP (RMP) (NYSE: RMP), as disclosed in Note E.

The Company recorded $15.9 million in acquisition-related expenses related to the Rice Merger during the three months ended March 31, 2018. The Rice Merger acquisition-related expenses included $6.8 million for compensation arrangements and $5.9 million for professional fees and are included in transaction costs in the Statement of Consolidated Operations.


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




Allocation of Purchase Price

The Rice Merger was accounted for as a business combination, using the acquisition method. The following table summarizes the preliminary purchase price and the preliminary estimated fair values of assets and liabilities assumed as of November 13, 2017, with any excess of the purchase price over the estimated fair value of the identified net assets acquired recorded as goodwill. Approximately, $549.2 million and $1,449.5 million of goodwill has been allocated to EQT Production and RMP Gathering, respectively. Goodwill primarily relates to the value of RMP that cannot be assigned to other assets recognized under GAAP as substantially all of RMP's revenues are from affiliates, deferred tax liabilities arising from differences between the purchase price allocated to Rice’s assets and liabilities based on fair value and the tax basis of these assets and liabilities that carried over to the Company in the Rice Merger, and the Company’s ability to control the Rice acquired assets and recognize synergies. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, title defect analysis and final appraisals of assets acquired and liabilities assumed and the finalization of certain income tax computations. The Company expects to complete the purchase price allocation once the Company has received all of the necessary information, at which time the value of the assets and liabilities will be revised as appropriate.

(in thousands)
Preliminary Purchase Price Allocation
Consideration given:
 
Equity consideration
$
5,943,289

Cash consideration
1,299,407

Buyout of preferred equity in Rice Midstream Holdings LLC
429,708

Buyout of Common Units in RMGP
125,828

Settlement of pre-existing relationships
(14,699
)
   Total consideration
7,783,533

 
 
Fair value of liabilities assumed:
 
Current liabilities
566,774

Long-term debt
2,151,656

Deferred income taxes
1,106,000

Other long-term liabilities
67,533

   Amount attributable to liabilities assumed
3,891,963

 
 
Fair value of assets acquired:
 
Cash
294,671

Accounts receivable
337,007

Current assets
109,465

Net property, plant and equipment
9,903,938

Intangible assets
747,300

Noncontrolling interests
(1,715,611
)
   Amount attributable to assets acquired
9,676,770

Goodwill
$
1,998,726


The fair values of natural gas and oil properties were based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of natural gas and oil properties were measured using valuation techniques that convert future cash flows into a single discounted amount. Significant inputs to the valuation of natural gas and oil properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital. These inputs required significant judgments and estimates by management, are still under review, and may be subject to change. These inputs have a significant impact on the valuation of oil and gas properties and future changes may occur. The fair value of undeveloped property was determined based upon a market approach of comparable transactions using Level 3 inputs.

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





The estimated fair value of midstream facilities and equipment, generally consisting of pipeline systems and compression stations, were estimated using the cost approach. Significant unobservable inputs in the estimate of fair value include management’s assumptions about the replacement costs for similar assets, the relative age of the acquired assets and any potential economic or functional obsolescence associated with the acquired assets. As a result, the estimated fair value of the midstream facilities and equipment represents a Level 3 fair value measurement.
    
The non-controlling interest in the acquired business is comprised of the limited partner units in RMP which were not acquired by EQT as well as the non-controlling interest in Strike Force Midstream LLC (Strike Force Midstream). The RMP limited partner units are actively traded on the New York Stock Exchange, and were valued based on observable market prices as of the transaction date and therefore represent a Level 1 fair value measurement. The non-controlling interest in Strike Force Midstream was calculated based on the enterprise value of Strike Force Midstream and the percentage ownership not acquired by EQT. Significant unobservable inputs in the estimate of the enterprise value of Strike Force Midstream include future revenue estimates and future cost assumptions. As a result, the non-controlling interest in Strike Force Midstream represents a Level 3 fair value measurement.
As part of the preliminary purchase price allocation, the Company identified intangible assets for customer relationships with third party customers and non-compete agreements with certain former Rice executives. The fair value of the identified intangible assets was determined using the income approach, which requires a forecast of the expected future cash flows generated and an estimated market-based weighted average cost of capital. Significant unobservable inputs in the determination of fair value include future production levels, future revenue estimates, future cost assumptions, the estimated probability that former executives would compete in the absence of such non-compete agreements and estimated customer retention rates. As a result, the estimated fair value of the identified intangible assets represents a Level 3 fair value measurement. Differences between the preliminary purchase price allocation and the final purchase price allocation may change the amount of intangible assets and goodwill ultimately recognized in conjunction with the Rice Merger.
In conjunction with the Rice Merger, the Company has carryover tax basis of $422.5 million of tax deductible goodwill.

Unaudited Pro Forma Information

The following unaudited pro forma combined financial information presents the Company’s results as though the Rice Merger had been completed at January 1, 2017. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Rice Merger taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.

(in thousands, except per share data) (unaudited)
Three Months Ended March 31, 2017
Pro forma operating revenues
$
1,266,383

Pro forma net income
$
236,070

Pro forma net income attributable to noncontrolling interests
$
109,085

Pro forma net income attributable to EQT
$
126,985

Pro forma income per share (basic)
$
0.48

Pro forma income per share (diluted)
$
0.48



11

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EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

C.                        EQT GP Holdings, LP

In January 2015, the Company formed EQT GP Holdings, LP (EQGP) (NYSE: EQGP), a Delaware limited partnership, to own the Company's partnership interests in EQT Midstream Partners, LP (EQM) (NYSE: EQM). EQT owns 239,715,000 common units, which represent a 90.1% limited partner interest, and the entire non-economic general partner interest in EQGP. EQGP owned the following EQM partnership interests as of March 31, 2018, which represent EQGP’s only cash-generating assets: 21,811,643 EQM common units, representing a 26.6% limited partner interest in EQM; 1,443,015 EQM general partner units, representing a 1.8% general partner interest in EQM; and all of EQM’s incentive distribution rights, or IDRs, which entitle EQGP to receive up to 48.0% of all incremental cash distributed in a quarter after $0.5250 has been distributed in respect of each common unit and general partner unit of EQM for that quarter. Through EQGP's general partner interest, limited partner interest and IDRs in EQM, EQGP has a controlling financial interest in EQM; therefore, EQGP consolidates EQM. The Company is the ultimate parent company of EQGP and EQM.

The Company consolidates the results of EQGP but records an income tax provision only on its ownership percentage of EQGP earnings.  The Company records the noncontrolling interest of the EQGP and EQM public limited partners (i.e., the EQGP limited partner interests not owned by the Company and the EQM limited partner interests not owned by EQGP) in its financial statements.

On April 24, 2018, the Board of Directors of EQGP's general partner declared a cash distribution to EQGP’s unitholders for the first quarter of 2018 of $0.258 per common unit, or approximately $68.7 million.  The distribution will be paid on May 24, 2018 to unitholders of record, including the Company, at the close of business on May 4, 2018.

D.                        EQT Midstream Partners, LP
 
In January 2012, the Company formed EQM to own, operate, acquire and develop midstream assets in the Appalachian Basin. EQM provides midstream services to the Company and third parties. EQM is consolidated in the Company’s financial statements. The Company records the noncontrolling interest of the EQM public limited partners in its financial statements.

On April 24, 2018, the Board of Directors of EQM's general partner declared a cash distribution to EQM’s unitholders for the first quarter of 2018 of $1.065 per common unit. The cash distribution will be paid on May 15, 2018 to unitholders of record, including EQGP, at the close of business on May 4, 2018. Based on the 80,591,366 EQM common units outstanding on April 26, 2018, the cash distributions by EQM to EQGP for the first quarter 2018 will be approximately $69.7 million consisting of: $23.2 million in respect of its limited partner interest, $2.3 million in respect of its general partner interest and $44.2 million in respect of its IDRs. These distribution amounts to EQGP related to its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the first quarter 2018 distribution.

E.                        Rice Midstream Partners LP

In connection with the Rice Merger, the Company acquired a 28.1% limited partner interest, all of the IDRs and the entire non-economic general partner interest in RMP. The Company is the ultimate parent of RMP, and the Company records the noncontrolling interest of the RMP public limited partners in its financial statements. RMP owns, operates and develops midstream assets in the Appalachian Basin. RMP's assets consist of gathering pipelines and compressor stations, as well as water handling and treatment facilities. RMP provides gathering and water services to the Company and third parties.

As a result of the declaration of RMP’s fourth quarter 2017 cash distribution, which was paid on February 14, 2018, the subordination period with respect to RMP’s subordinated units expired on February 15, 2018 and all of the outstanding RMP subordinated units converted into RMP common units on a one-for-one basis on that day.

On April 24, 2018, the Board of Directors of the general partner of RMP declared a cash distribution to RMP’s unitholders for the first quarter of 2018 of $0.3049 per common unit. The cash distribution will be paid on May 15, 2018 to unitholders of record at the close of business on May 4, 2018. Based on the 102,303,108 RMP common units outstanding on April 26, 2018, distributions by RMP to the Company for the first quarter 2018 will be approximately $13.2 million, consisting of $8.8 million in respect of its limited partner interest and $4.4 million in respect of its IDRs in RMP. The distribution amounts related to IDRs in RMP are subject to change if RMP issues additional common units on or prior to the record date for the first quarter 2018 distribution.


12

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




F.        Revenue from Contracts with Customers

As discussed in Note S, the Company adopted Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not materially change the Company's amount and timing of revenues. The Company applied the ASU only to contracts that were not completed as of January 1, 2018. The Company has elected to exclude all taxes from the measurement of transaction price.

For the sale of natural gas, oil and natural gas liquids (NGLs), 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 gas is delivered. A significant number of these contracts contain variable consideration because the payment terms refer to market prices at future delivery dates. In these situations, the Company has not identified a standalone selling price because the terms of the variable payments relate specifically to the Company’s efforts to satisfy the performance obligations. Other contracts contain fixed consideration (i.e. fixed price contracts or contracts with a fixed differential to NYMEX or index prices). The fixed consideration is allocated to each performance obligation on a relative standalone selling price basis, which requires judgment from management. For these contracts, the Company generally concludes that the fixed price or fixed differentials in the contracts are representative of the standalone selling price.

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

The sales of natural gas, oil and NGLs as presented on the Statements of Consolidated Operations represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling natural gas, oil and NGLs on behalf of royalty owners or working interest owners, EQT is acting as an agent and thus reports the revenue on a net basis.

The Company provides gathering, transmission and storage services in two manners: firm service and interruptible service. Firm service contracts are typically long term and include firm reservation fees, which are fixed, monthly charges for the guaranteed reservation of pipeline or storage capacity. Interruptible service contracts include volumetric based fees, which are charges for the volume of gas actually gathered, transported or stored and do not guaranty access to the pipeline or storage facility. These contracts can be short or long term. Volumetric based fees can also be charged under firm contracts for actual volumes transported, gathered or stored in excess of the firm contracted volume. Firm and interruptible contracts are billed at the end of each calendar month, with payment typically due within 21 days.

Based on total projected contractual revenues and including contracts associated with expected future capacity from expansion projects that are not yet fully constructed but for which EQM has entered into firm contracts, EQM's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately 8 and 15 years, respectively, as of December 31, 2017.

Under a firm contract, the Company has a stand-ready obligation to provide the service over the life of the contract. The performance obligation for firm reservation fee revenues is satisfied over time as the pipeline capacity is made available to the customer. As such, the Company recognizes firm reservation fee revenue evenly over the contract period, using a time-elapsed output method to measure progress. The performance obligation for volumetric based fee revenues is generally satisfied upon the Company's monthly billing to the customer for actual volumes gathered, transported or stored during the month. The amount billed corresponds directly to the value of the Company’s performance to date as the customer obtains value as each volume is gathered, transported or stored.

Water services revenues primarily represent fees charged by RMP for the delivery of fresh water to a customer at a specified delivery point. All of RMP’s water services revenues are generated pursuant to variable price per volume contracts with customers in the Appalachian Basin. For water services contracts, the only performance obligation in each contract is for RMP to provide water (usually a minimum daily volume) to the customer at any designated delivery point. This performance obligation is generally satisfied upon RMP’s monthly billing to the customer for the volume of water provided during the month. For water services arrangements, the customer is typically invoiced on a monthly basis with payment due 21 days after the receipt of the invoice.

Because the Company's performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company has recognized amounts due from contracts with customers of $438.6 million as accounts receivable within the Condensed Consolidated Balance Sheet.

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




The table below provides disaggregated information regarding the Company’s revenues, presented consistently with the Company’s segment reporting. Certain contracts that provide for the release of capacity that is not used to transport the Company’s produced volumes were deemed to be outside the scope of Revenue from Contracts with Customers. The cost of, and recoveries on, that capacity are reported within pipeline and net marketing services at EQT Production. Derivative contracts are also outside the scope of Revenue from Contracts with Customers.

Three Months Ended March 31, 2018
 
Revenues from contracts with customers
 
Other sources of revenue
 
Total
 
 
(Thousands)
Natural gas sales
 
$
1,089,760

 
$

 
$
1,089,760

NGLs sales
 
125,468

 

 
125,468

Oil sales
 
11,146

 

 
11,146

Sales of natural gas, oil and NGLs
 
$
1,226,374

 
$

 
$
1,226,374

 
 
 
 
 
 
 
Pipeline and net marketing services at EQT Production
 
$
38,843

 
$
20,793

 
$
59,636

EQM Gathering:
 
 
 
 
 
 
  Firm reservation fee revenues
 
109,933

 

 
109,933

  Volumetric based fee revenues:
 
 
 
 
 
 
       Usage fees under firm contracts
 
12,108

 

 
12,108

       Usage fees under interruptible contracts
 
3,867

 

 
3,867

EQM Transmission:
 
 
 
 
 
 
  Firm reservation fee revenues
 
97,775

 

 
97,775

  Volumetric based fee revenues:
 
 
 
 
 
 
       Usage fees under firm contracts
 
3,822

 

 
3,822

       Usage fees under interruptible contracts
 
5,337

 

 
5,337

RMP Gathering:
 
 
 
 
 


  Gathering revenues
 
52,730

 

 
52,730

  Compression revenues
 
8,771

 

 
8,771

Water services at RMP Water
 
22,963

 

 
22,963

Intersegment eliminations
 
(232,325
)
 

 
(232,325
)
Pipeline, water and net marketing services
 
$
123,824

 
$
20,793

 
$
144,617

 
 
 
 
 
 
 
Gain on derivatives not designated as hedges
 
$

 
$
62,592

 
$
62,592

 
 
 
 
 
 
 
Total operating revenues
 
$
1,350,198

 
$
83,385

 
$
1,433,583


The following table includes the transaction price allocated to the Company's remaining performance obligations on all contracts with fixed consideration. The table excludes all contracts that qualified for the exception to the relative standalone selling price method. Gathering firm reservation fees and transmission and storage firm reservation fees include amounts related to affiliate contracts.

 
2018 (a)
2019
2020
2021
2022
Thereafter
Total
 
(Thousands)
Natural gas sales
$
54,946

$
15,207

$

$

$

$

$
70,153

Gathering firm reservation fees
$
338,978

$
449,124

$
448,896

$
448,896

$
447,607

$
1,485,787

$
3,619,288

Transmission and storage firm reservation fees
$
294,044

$
384,018

$
381,788

$
377,619

$
372,544

$
3,039,812

$
4,849,825

(a)     April through December 31.


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




G.        Investment in Nonconsolidated Entity

As of March 31, 2018, EQM owned a 45.5% interest (the MVP Interest) in Mountain Valley Pipeline, LLC (MVP Joint Venture). The MVP Joint Venture is constructing the Mountain Valley Pipeline (MVP), an estimated 300-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. The MVP Joint Venture has secured a total of 2.0 Bcf per day of 20-year firm capacity commitments, including a 1.29 Bcf per day firm capacity commitment by the Company.

In October 2017, the Federal Energy Regulatory Commission (FERC) issued the Certificate of Public Convenience and Necessity for the project. In early 2018, the MVP Joint Venture received limited notice to proceed with certain construction activities from the FERC. The MVP Joint Venture commenced construction on the MVP in the first quarter of 2018, which is targeted to be placed in-service during the fourth quarter of 2018.

The MVP Joint Venture has been determined to be a variable interest entity because it has insufficient equity to finance its activities during the construction stage of the project. EQM is not the primary beneficiary because it does not have the power to direct the activities of the MVP Joint Venture that most significantly impact its economic performance. Certain business decisions require the approval of owners holding more than a 66 2/3% interest in the MVP Joint Venture and no one member owns more than a 66 2/3% interest. The MVP Joint Venture is an equity method investment for accounting purposes as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.

In February 2018, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for $65.8 million, which is expected to be paid in May 2018. The capital contribution payable has been reflected on the consolidated balance sheet as of March 31, 2018 with a corresponding increase to the Company's investment in the MVP Joint Venture.

EQM’s ownership share of the MVP Joint Venture's earnings for the three months ended March 31, 2018 and 2017 was $8.8 million and $4.3 million, respectively. These earnings are reported in other income on the Statements of Consolidated Operations for the periods presented.

As of March 31, 2018, EQM had issued a $91 million performance guarantee in favor of the MVP Joint Venture to provide performance assurances for MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP. As of March 31, 2018, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $637 million, which consists of the investment in nonconsolidated entity balance on the Condensed Consolidated Balance Sheet as of March 31, 2018 and amounts which could have become due under EQM's performance guarantee as of that date.

H.     Consolidated Variable Interest Entities

The Company determined EQGP, EQM, RMP and Strike Force Midstream to be variable interest entities. Through EQT's ownership and control of EQGP's general partner, RMP's general partner, EQM's general partner and Strike Force Midstream Holdings LLC (Strike Force Midstream Holdings), which owns a 75% limited liability company interest in Strike Force Midstream, EQT has the power to direct the activities that most significantly impact the economic performance of EQGP, EQM, RMP and Strike Force Midstream. In addition, through EQT's limited partner interest in EQGP and EQGP's general partner interest, limited partner interest and IDRs in EQM, EQT has the obligation to absorb the losses of EQGP and EQM and the right to receive benefits from EQGP and EQM, in accordance with such interests. Furthermore, through EQT's limited partner interest and IDRs in RMP and majority ownership interest in Strike Force Midstream, EQT has the obligation to absorb the losses of RMP and Strike Force Midstream and the right to receive benefits from RMP and Strike Force Midstream, in accordance with such interests. As EQT has a controlling financial interest in, and is primary beneficiary of, EQGP, EQM, RMP and Strike Force Midstream, EQT consolidates EQGP, EQM, RMP and Strike Force Midstream. See Note 13 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional information related to the consolidated variable interest entities.

The risks associated with the operations of EQGP, EQM and RMP are discussed in their respective Annual Reports on Form 10-K for the year ended December 31, 2017, as updated by any Quarterly Reports on Form 10-Q. The risks associated with the operations of Strike Force Midstream are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as updated by any Quarterly Reports on Form 10-Q. See further discussion of the impact that EQT's ownership and control of EQGP, EQM, RMP and Strike Force Midstream have on EQT's financial position, results of operations and cash flows included in EQT's Annual Report on Form 10-K for the year ended December 31, 2017, including in the section captioned

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




"Management's Discussion and Analysis of Financial Condition and Results of Operations." See Notes C, D, and E for further discussion of EQGP, EQM and RMP, respectively.

The following table presents amounts included in the Company's Condensed Consolidated Balance Sheets that were for the use or obligation of EQGP or EQM as of March 31, 2018 and December 31, 2017.
Classification
 
March 31, 2018
 
December 31, 2017
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
9,301

 
$
2,857

Accounts receivable
 
29,481

 
28,804

Prepaid expenses and other
 
12,860

 
8,470

Property, plant and equipment, net
 
2,864,040

 
2,804,059

Other assets
 
568,594

 
483,004

Liabilities:
 
 
 
 
Accounts payable
 
$
48,212

 
$
47,042

Other current liabilities
 
92,667

 
133,531

Credit facility borrowings
 
317,000

 
180,000

Senior Notes
 
987,756

 
987,352

Other liabilities and credits
 
20,880

 
20,273


The following table summarizes EQGP's Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2018 and 2017, inclusive of affiliate amounts.
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(Thousands)
Operating revenues
 
$
232,842

 
$
200,072

Operating expenses
 
55,727

 
55,976

Other expenses
 
1,108

 
2,108

Net income
 
$
176,007

 
$
141,988

 
 
 
 
 
Net cash provided by operating activities
 
$
181,755

 
$
160,769

Net cash used in investing activities
 
(199,954
)
 
(81,687
)
Net cash provided by (used in) financing activities
 
24,643

 
(96,767
)


16

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




The following table presents summary information of assets and liabilities of RMP included in the Company’s Condensed Consolidated Balance Sheets that are for the use or obligation of RMP as of March 31, 2018 and December 31, 2017.
Classification
 
March 31, 2018
 
December 31, 2017
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
46,518

 
$
10,538

Accounts receivable
 
7,205

 
12,246

Prepaid expenses and other
 
2,208

 
1,327

Property, plant and equipment, net
 
1,440,196

 
1,431,802

Goodwill
 
1,346,918

 
1,346,918

Other assets
 
6,123

 

Liabilities:
 
 
 
 
Accounts payable
 
$
22,312

 
$
24,634

Other current liabilities
 
4,530

 
4,200

Credit facility borrowings
 
325,000

 
286,000

Other liabilities and credits
 
9,465

 
9,360


The following table summarizes RMP’s Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2018 and 2017, inclusive of affiliate amounts.
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(Thousands)
Operating revenues
 
$
84,464

 
$

Operating expenses
 
28,999

 

Other expenses
 
1,948

 

Net income
 
$
53,517

 
$

 
 
 
 
 
Net cash provided by operating activities
 
$
62,536

 
$

Net cash used in investing activities
 
(32,712
)
 

Net cash provided by financing activities
 
6,156

 


The following table presents summary information of assets and liabilities of Strike Force Midstream included in the Company’s Condensed Consolidated Balance Sheets that are for the use or obligation of Strike Force Midstream as of March 31, 2018 and December 31, 2017.

Classification
 
March 31, 2018
 
December 31, 2017
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
22,136

 
$
43,938

Accounts receivable
 
20,193

 
12,477

Other current assets
 
107

 

Property, plant and equipment, net
 
377,112

 
356,346

Intangible assets, net
 
450,291

 
457,992

Liabilities:
 
 
 
 
Other current liabilities
 
12,874

 
24,341



17

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




The following table summarizes Strike Force Midstream’s Statements of Consolidated Operations and Cash Flows the three months ended March 31, 2018 and 2017, inclusive of affiliate amounts.
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(Thousands)
Operating revenues
 
$
22,810

 
$

Operating expenses
 
12,953

 

Other (income)
 
(116
)
 

Net income
 
$
9,973

 
$

 
 
 
 
 
Net cash provided by operating activities
 
$
13,620

 
$

Net cash (used in) investing activities
 
(32,423
)
 

Net cash (used in) financing activities
 
(3,000
)
 


I.                        Financial Information by Business Segment
 
As discussed in Note A, the Company adjusted its internal reporting structure following the Rice Merger to incorporate the newly acquired assets. The Company now conducts its business through five business segments: EQT Production, EQM Gathering, EQM Transmission, RMP Gathering and RMP Water.
Three Months Ended March 31, 2018
EQT Production
 
EQM Gathering
 
EQM Transmission
 
RMP
Gathering
 
RMP
Water
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
1,226,374

 
$

 
$

 
$

 
$

 
$

 
$
1,226,374

Pipeline, water and net marketing services
59,636

 
125,908

 
106,934

 
61,501

 
22,963

 
(232,325
)
 
144,617

Gain on derivatives not designated as hedges
62,592

 

 

 

 

 

 
62,592

Total operating revenues
$
1,348,602

 
$
125,908

 
$
106,934

 
$
61,501

 
$
22,963

 
$
(232,325
)
 
$
1,433,583


Three Months Ended March 31, 2017
EQT Production
 
EQM Gathering
 
EQM Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
673,465

 
$

 
$

 
$

 
$
673,465

Pipeline and net marketing services
14,455

 
102,329

 
97,743

 
(134,565
)
 
79,962

Gain on derivatives not designated as hedges
140,742

 

 

 

 
140,742

Total operating revenues
$
828,662

 
$
102,329

 
$
97,743

 
$
(134,565
)
 
$
894,169

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

18

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

 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands)
Operating (loss) income:
 

 
 

EQT Production (a)
$
(1,893,807
)
 
$
257,549

EQM Gathering
98,891

 
73,704

EQM Transmission
79,451

 
71,604

RMP Gathering
44,095

 

RMP Water
11,370

 

Unallocated expenses and intersegment eliminations (b)
(63,516
)
 
(11,880
)
Total operating (loss) income
$
(1,723,516
)
 
$
390,977


(a)
Impairment of long-lived assets of $2.3 billion is included in EQT Production operating income for the three months ended March 31, 2018. See Note Q.
(b)
Unallocated expenses consist primarily of compensation expense and administrative costs, including transaction costs of $35.7 million. Intersegment eliminations include water services that are provided to EQT Production and capitalized as part of development costs.

Reconciliation of operating (loss) income to net (loss) income:
 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands)
Total operating (loss) income
$
(1,723,516
)
 
$
390,977

Other income
9,585

 
3,048

Interest expense
70,013

 
42,655

Income tax (benefit) expense
(338,965
)
 
100,665

Net (loss) income
$
(1,444,979
)
 
$
250,705


 
March 31, 2018
 
December 31, 2017
 
(Thousands)
Segment assets:
 

 
 

EQT Production
$
20,633,392

 
$
22,711,854

EQM Gathering
1,449,871

 
1,411,857

EQM Transmission
1,475,214

 
1,462,881

RMP Gathering
2,741,744

 
2,720,305

RMP Water
163,458

 
185,079

Total operating segments
26,463,679

 
28,491,976

Headquarters assets, including cash and short-term investments
1,168,667

 
1,030,628

Total assets
$
27,632,346

 
$
29,522,604



19

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

 
Three Months Ended March 31,
 
2018
 
2017
 
(Thousands)
Depreciation, depletion and amortization: (c)
 

 
 

EQT Production
$
400,058

 
$
211,097

EQM Gathering
10,738

 
8,860

EQM Transmission
12,441

 
11,687

RMP Gathering
8,124

 

RMP Water
5,771

 

Other
761

 
274

Total
$
437,893

 
$
231,918

 
 
 
 
Expenditures for segment assets (d):
 

 
 

EQT Production (e)
$
675,028

 
$
945,458

EQM Gathering
68,933

 
48,838

EQM Transmission
18,929

 
21,389

RMP Gathering
20,940

 

RMP Water
2,375

 

Other and intersegment eliminations (f)
(21,223
)
 
1,628

Total
$
764,982

 
$
1,017,313

 
(c)
Excludes amortization of intangible assets.
(d)
Includes the capitalized portion of non-cash stock-based compensation costs, non-cash acquisitions and the impact of capital accruals. These non-cash items are excluded from capital expenditures on the Statements of Condensed Consolidated Cash Flows. Expenditures for segment assets does not include consideration for the Rice Merger.
(e)
Expenditures for segment assets in the EQT Production segment included $36.8 million and $42.7 million for fill-ins and bolt-ons associated with legacy EQT acreage for the three months ended March 31, 2018 and 2017, respectively. Expenditures included $44.3 million associated with retained midstream assets during the three months ended March 31, 2018. The three months ended March 31, 2017 included $669.5 million of cash and $15.4 million of non-cash capital expenditures, for the acquisitions discussed in Note P.
(f)
Intersegment eliminations include water services that are provided to EQT Production and capitalized as part of development costs.


20

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

J.                        Derivative Instruments
 
The Company’s primary market risk exposure is the volatility of future prices for natural gas and NGLs, which can affect the operating results of the Company primarily at EQT Production. The Company’s overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.

The Company uses over the counter (OTC) derivative commodity instruments, primarily swap, collar and option agreements that are typically placed with financial institutions. The creditworthiness of all counterparties is regularly monitored. Swap agreements involve payments to or receipts from counterparties based on the differential between two prices for the commodity. Collar agreements require the counterparty to pay the Company if the index price falls below the floor price and the Company to pay the counterparty if the index price rises above the cap price. The Company also sells call options that require the Company to pay the counterparty if the index price rises above the strike price. The Company engages in basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to fluctuations in interest rates. The Company has also engaged in a limited number of swaptions and power-indexed natural gas sales and swaps that are accounted for as derivative commodity instruments.

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.
 
The Company discontinued cash flow hedge accounting in 2014; therefore, all changes in fair value of the Company’s derivative instruments are recognized within operating revenues in the Statements of Consolidated Operations.

In connection with the Rice Merger, the Company assumed all outstanding derivative commodity instruments held by Rice. The assets and liabilities assumed were recognized at fair value at the closing date and subsequent changes in fair value were recognized within operating revenues in the Statements of Consolidated Operations. The derivative commodity instruments assumed were substantially similar to instruments previously held by the Company.

Contracts which result in physical delivery of a commodity expected to be used or sold by the Company in the normal course of business are designated as normal purchases and sales and are exempt from derivative accounting.
 
OTC arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows. 

With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of equity production and portions of its basis exposure covering approximately 2,314 Bcf of natural gas and 1,238 Mbbls of NGLs as of March 31, 2018, and 2,148 Bcf of natural gas and 1,460 Mbbls of NGLs as of December 31, 2017. The open positions at March 31, 2018 and December 31, 2017 had maturities extending through December 2023 and December 2022, respectively.

The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities as of March 31, 2018 and December 31, 2017
As of March 31, 2018
 
Derivative
instruments,
recorded in the
Condensed
Consolidated
Balance
Sheet, gross
 
Derivative
instruments
subject to
master
netting
agreements
 
Margin
deposits
remitted to
counterparties
 
Derivative
instruments, net
 
 
(Thousands)
Asset derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
262,283

 
$
(50,056
)
 
$
(601
)
 
$
211,626

Liability derivatives:
 
 
 
 
 
 

 
 

Derivative instruments, at fair value
 
$
59,198

 
$
(50,056
)
 
$

 
$
9,142


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EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

As of December 31, 2017
 
Derivative
instruments,
recorded in the
Condensed
Consolidated
Balance
Sheet, gross
 
Derivative
instruments
subject to 
master
netting
agreements
 
Margin
deposits
remitted to
counterparties
 
Derivative
instruments, net
 
 
(Thousands)
Asset derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
241,952

 
$
(86,856
)
 
$

 
$
155,096

Liability derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
139,089

 
$
(86,856
)
 
$

 
$
52,233

 

Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings by Standard & Poor’s Rating Service (S&P) or Moody’s Investors Service (Moody’s) are lowered below investment grade, additional collateral must be deposited with the counterparty if the amounts outstanding on those contracts exceed certain thresholds.  The additional collateral can be up to 100% of the derivative liability.  As of March 31, 2018, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $9.0 million, for which the Company had no collateral posted on March 31, 2018.  If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade on March 31, 2018, the Company would not have been required to post any additional collateral under the agreements with the respective counterparties. The required margin on the Company’s derivative instruments is subject to significant change as a result of factors other than credit rating, such as gas prices and credit thresholds set forth in agreements between the hedging counterparties and the Company. Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies. The Company’s senior unsecured debt was rated BBB by S&P and Baa3 by Moody’s at March 31, 2018.  In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Baa3 or higher by Moody’s. Anything below these ratings is considered non-investment grade. See also "Security Ratings and Financing Triggers" under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

K.            Fair Value Measurements
 
The Company records its financial instruments, principally derivative instruments, at fair value in its Condensed Consolidated Balance Sheets.  The Company estimates the fair value using quoted market prices, where available.  If quoted market prices are not available, fair value is based upon models that use market-based parameters as inputs, including forward curves, discount rates, volatilities and nonperformance risk.  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 of a risk-free instrument and credit default swaps rates where available.

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 in Level 2 primarily include the Company’s swap, collar and option agreements.

The fair value of the commodity swaps included in Level 2 is based on standard industry income approach models that use significant observable inputs, including but not limited to New York Mercantile Exchange (NYMEX) natural gas and propane forward curves, LIBOR-based discount rates and basis forward curves. The Company’s collars, options and swaptions are valued using standard industry income approach option models. The significant observable inputs utilized by the option pricing models include NYMEX forward curves, natural gas volatilities and LIBOR-based discount rates. The NYMEX natural gas and propane forward curves, LIBOR-based discount rates, natural gas volatilities and basis forward curves are validated to external sources at least monthly.


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EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

The following assets and liabilities were measured at fair value on a recurring basis during the applicable period:
 
 
 
 
Fair value measurements at reporting date using
Description
 
As of March 31, 2018
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
(Thousands)
Assets
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
262,283

 
$

 
$
262,283

 
$

Liabilities
 
 
 
 
 
 
 
 
Derivative instruments, at fair value
 
$
59,198

 
$

 
$
59,198

 
$


 
 
 
 
Fair value measurements at reporting date using
Description
 
As of December 31, 2017
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
(Thousands)
Assets
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
241,952

 
$

 
$
241,952

 
$

Liabilities
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
139,089

 
$

 
$
139,089

 
$

 
The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments. The carrying values of borrowings under the Company's various credit facilities approximate fair value as the interest rates are based on prevailing market rates.

The company also has an immaterial investment in a fund that invests in companies developing technology and operating solutions for exploration and production companies for which it recognized a cumulative effect of accounting change in the first quarter 2018.

The Company estimates the fair value of its Senior Notes using its established fair value methodology.  Because not all of the Company’s Senior Notes are actively traded, the fair value of the Senior Notes are a Level 2 fair value measurement.  Fair value for non-traded Senior Notes are estimated using a standard industry income approach model that utilizes a discount rate based on market rates for debt with similar remaining time to maturity and credit risk.  The estimated fair value of Senior Notes (including EQM’s Senior Notes) on the Condensed Consolidated Balance Sheets was approximately $5.6 billion at March 31, 2018 and $5.7 billion at December 31, 2017.

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.

For information on the fair values of assets related to the impairments of proved and unproved oil and gas properties and of other long-lived assets, see Note Q and Note 1 in EQT's Annual Report on Form 10-K for the year ended December 31, 2017. For information on the assets acquired in the Rice Merger and the assets acquired in other acquisition transactions, see Notes B and P.


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

L.                       Income Taxes
 
On December 22, 2017, the U.S. Congress enacted the law known as the Tax Cuts and Jobs Act of 2017 (Tax Reform Legislation), which made significant changes to U.S. federal income tax law, including lowering the federal corporate tax rate to 21% from 35% beginning January 1, 2018. The Company is still analyzing certain aspects of the Tax Reform Legislation and refining calculations, which could potentially impact the measurement of deferred tax balances or potentially give rise to new deferred tax amounts. The Company will refine its estimates to incorporate new or better information as it comes available through the filing date of its 2017 U.S. income tax returns in the fourth quarter of 2018.

For the three months ended March 31, 2018 and 2017, the Company calculated the provision for income taxes by applying 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 quarter.

All of EQGP's, RMP’s and Strike Force Midstream’s income is included in the Company's pre-tax income (loss). However, the Company is not required to record income tax expense with respect to the portion of EQGP's and RMP’s income allocated to the noncontrolling public limited partners of EQGP, EQM and RMP or to the portion of Strike Force Midstream’s income allocated to the minority owner, which reduces the Company's effective tax rate in periods when the Company has consolidated pre-tax income and increases the Company's effective tax rate in periods when the Company has consolidated pre-tax loss.

The Company recorded income tax benefit at an effective tax rate of 19.0% for the three months ended March 31, 2018 and income tax expense at an effective tax rate of 28.6% for the three months ended March 31, 2017.  The Company’s forecasted annual effective tax rate for the period ended December 31, 2018 was higher than the statutory rate due to the impact of income allocated to non-controlling limited partners on a forecasted consolidated pre-tax loss and the impact of state taxes. The state taxes increased the forecasted annual effective tax rate as compared to the statutory rate as a result of the pre-tax loss on entities with higher state applicable rates and pre-tax income on entities with lower state applicable rates.  The Company’s effective tax rate for the three months ended March 31, 2018 was significantly lowered because the amount of benefit recorded for the quarter is limited to the amount of benefit forecasted for the entire year.  The Company’s effective tax rate for the three months ended March 31, 2017 was lower than the statutory rate due to the impact of income allocated to non-controlling limited partners on forecasted consolidated pre-tax income.

There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended March 31, 2018

M.                       Revolving Credit Facilities

The Company has a $2.5 billion revolving credit facility that expires in July 2022. The Company had $1.3 billion in borrowings and no letters of credit outstanding under its credit facility as of March 31, 2018. The Company had $1.3 billion in borrowings and $159.4 million of letters of credit outstanding under its credit facility as of December 31, 2017. The maximum amount of outstanding borrowings at any time under the credit facility during the three months ended March 31, 2018 was $1.6 billion, and the average daily balance of borrowings outstanding was approximately $1.4 billion at a weighted average annual interest rate of approximately 3.1%. The Company had no borrowings or letters of credit outstanding under its credit facility any time during the three months ended March 31, 2017.
 
EQM has a $1 billion credit facility that expires in July 2022. EQM had $317 million in borrowings and no letters of credit outstanding under the credit facility as of March 31, 2018. EQM had $180 million in borrowings and no letters of credit outstanding under the credit facility as of December 31, 2017. The maximum amount of outstanding borrowings under EQM’s revolving credit facility at any time during the three months ended March 31, 2018 was $420 million, and the average daily balance of borrowings outstanding was approximately $301 million at a weighted average annual interest rate of approximately 3.0%. EQM had no borrowings or letters of credit outstanding under its revolving credit facility any time during the three months ended March 31, 2017.

Rice Midstream OpCo LLC (RMP OpCo), a direct wholly owned subsidiary of RMP, has an $850 million, secured revolving credit facility that expires in December 2019. RMP OpCo had $325 million in borrowings and $1 million of letters of credit outstanding under the credit facility as of March 31, 2018. RMP had $286 million in borrowings and $1 million of letters of credit outstanding under the credit facility as of December 31, 2017. The maximum amount of outstanding borrowings under RMP’s revolving credit facility at any time during the three months ended March 31, 2018 was $336 million, and the average daily balance of borrowings outstanding was approximately $308 million at a weighted average annual interest rate of approximately 3.6%.

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

N.                            Earnings Per Share

In periods when the Company reports a net loss, all options and restricted stock are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on loss per share. As a result, all options and all restricted stock totaling 1,896,224 were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2018. Potentially dilutive securities (options and restricted stock awards) included in the calculation of diluted earnings per share totaled 298,297 for the three months ended March 31, 2017. Options to purchase common stock excluded from potentially dilutive securities because they were anti-dilutive totaled 440,325 for the three months ended March 31, 2017. The impact of EQM’s, EQGP’s and RMP's dilutive units did not have a material impact on the Company’s earnings per share calculations for either of the periods presented.

O.         Changes in Accumulated Other Comprehensive Income by Component
 
The following tables explain the changes in accumulated OCI by component during the applicable period:
 
Three Months Ended March 31, 2018
 
Natural gas cash
flow hedges, net of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Other post-
retirement
benefit liability
adjustment,
net of tax
 
Accumulated
OCI, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2018
$
4,625

 
$
(555
)
 
$
(6,528
)
 
$
(2,458
)
(Gains) losses reclassified from accumulated OCI, net of tax
(287
)
(a)
44

(a)
86

(b)
(157
)
Accumulated OCI (loss), net of tax, as of March 31, 2018
$
4,338

 
$
(511
)
 
$
(6,442
)
 
$
(2,615
)
 
Three Months Ended March 31, 2017
 
Natural gas cash
flow hedges, net of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Other post-
retirement
benefit liability
adjustment,
net of tax
 
Accumulated
OCI, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2017
$
9,607

 
$
(699
)
 
$
(6,866
)
 
$
2,042

(Gains) losses reclassified from accumulated OCI, net of tax
(888
)
(a)
36

(a)
76

(b)
(776
)
Accumulated OCI (loss), net of tax, as of March 31, 2017
$
8,719

 
$
(663
)
 
$
(6,790
)
 
$
1,266

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)   Gains (losses) reclassified from accumulated OCI, net of tax related to natural gas cash flow hedges were reclassified into operating revenues. Losses from accumulated OCI, net of tax related to interest rate cash flow hedges were reclassified into interest expense.
(b)   The accumulated OCI reclassification is attributable to the net actuarial loss and net prior service cost related to the Company’s post-retirement benefit plans. See Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.


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




P.         Acquisitions

On February 1, 2017, the Company acquired approximately 14,000 net Marcellus acres located in Marion, Monongalia and Wetzel Counties of West Virginia from a third-party.

On February 27, 2017, the Company acquired approximately 85,000 net Marcellus acres, including drilling rights on approximately 44,000 net Utica acres and current natural gas production of approximately 110 MMcfe per day, from Stone Energy Corporation. The acquired acres are primarily located in Wetzel, Marshall, Tyler and Marion Counties of West Virginia. The acquired assets also included 174 Marcellus wells, 120 of which were producing at the time of the acquisition, and 20 miles of gathering pipeline.

During the first quarter 2017, the Company paid net cash of $652.5 million and assumed liabilities estimated at $11.9 million as of March 31, 2017. Furthermore, the Company paid $17.0 million and recorded an additional $3.5 million of non-cash capital expenditures as a result of post-closing adjustments on 2016 acquisitions in the first quarter 2017.

Fair Value Measurement

As these acquisitions qualified as business combinations under GAAP, the fair value of the acquired assets was determined using a market approach for the undeveloped acreage and a discounted cash flow model under the income approach for the wells. Significant unobservable inputs used in the analysis included the determination of estimated developed reserves and forward pricing estimates. As a result, valuation of the acquired assets was a Level 3 fair value measurement.

Q.        Impairment

In the first quarter of 2018, the Company recorded an impairment of $2.3 billion associated with certain non-core production and related pipeline assets in the Huron and Permian Plays.  The impairment of these properties and the related pipeline assets was due to the carrying value of these assets exceeding the expected undiscounted cash flows of the underlying assets and based on management’s determination that it no longer intends to develop the unproved properties. These assets were reduced to their estimated fair value of approximately $1 billion.

The fair value of the impaired assets was based on significant inputs that were not observable in the market and as such are considered to be Level 3 fair value measurements. See Note K for a description of the fair value hierarchy and Note 1 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for our policy on impairment of proved and unproved properties. Key assumptions included in the calculation of the fair value of the impaired assets included (i) reserves, including risk adjustments for probable and possible reserves; (ii) future commodity prices; (iii) to the extent available, market based indicators of fair value including estimated proceeds which could be realized upon a potential disposition; (iv) production rates based on the Company's experience with similar properties in which it operates; (v) estimated future operating and development costs; and (vi) a market-based weighted average cost of capital. See Note R for additional information related to our expected disposition of Permian assets.

R.                        Subsequent Events

EQM-RMP Merger

On April 25, 2018, EQM and RMP entered into an Agreement and Plan of Merger (the Midstream Merger Agreement) with Rice Midstream Management LLC, the general partner of RMP (the RMP General Partner), EQT Midstream Services, LLC, the general partner of EQM (the EQM General Partner), EQM Acquisition Sub, LLC, a wholly owned subsidiary of EQM (Merger Sub), EQM GP Acquisition Sub, LLC, a wholly owned subsidiary of EQM (GP Merger Sub), and, solely for certain limited purposes set forth therein, the Company. Pursuant to the Midstream Merger Agreement, Merger Sub and GP Merger Sub will merge with and into RMP and the RMP General Partner, respectively, with RMP and the RMP General Partner surviving as wholly owned subsidiaries of EQM (the Midstream Mergers). Pursuant to the Midstream Merger Agreement, each RMP common unit issued and outstanding immediately prior to the effective time of the Midstream Mergers will be converted into the right to receive 0.3319 EQM common units.

The completion of the Midstream Mergers is subject to the satisfaction or waiver of certain customary closing conditions, including, but not limited to: (i) approval of the Midstream Merger Agreement by a majority of RMP’s unitholders, (ii) expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the completion of the Drop-Down Transactions (as defined below), and (iv) the completion of the IDR Transaction (as defined below). The

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




Midstream Merger Agreement provides that, upon termination of the Midstream Merger Agreement under certain circumstances, RMP may be required to pay EQM a termination fee equal to $63.4 million less any previous reimbursements by RMP. The Midstream Merger Agreement also provides that, upon termination of the Midstream Merger Agreement under certain circumstances, EQM may be required to reimburse RMP's expenses up to $5.0 million, and RMP may be required to reimburse EQM's expenses up to $5.0 million. As a result of the Midstream Mergers, RMP’s common units will no longer be publicly traded. EQM and RMP expect to complete the Midstream Mergers during the third quarter of 2018.

RMP IDR Purchase and Sale Agreement

On April 25, 2018, the Company, Rice Midstream GP Holdings LP, a wholly owned subsidiary of the Company that owns the RMP IDRs, and EQGP entered into an Incentive Distribution Rights Purchase and Sale Agreement pursuant to which EQGP will acquire all of the issued and outstanding RMP IDRs in exchange for 36,293,766 EQGP common units (the IDR Transaction). If the unit consideration is issued and the Midstream Mergers are not consummated on or prior to December 31, 2018 or the Midstream Merger Agreement is earlier terminated, 8,539,710 of the EQGP common units issued to the Company will be canceled and the Company will pay to EQGP an amount in cash equal to the aggregate amount of any distributions paid by EQGP to the Company related to the forfeited EQGP common units. The completion of the IDR Transaction is subject to certain customary closing conditions. Pursuant to the terms of the Midstream Merger Agreement, the RMP IDRs will be canceled effective at the time of the Midstream Mergers. The Company expects to complete the IDR Transaction during the second quarter of 2018.

Drop-Down Transactions and Gulfport Transaction

On April 25, 2018, the Company, Rice Midstream Holdings LLC, a wholly owned subsidiary of the Company, EQM and EQM Gathering Holdings, LLC, a wholly owned subsidiary of EQM (EQM Gathering), entered into a Contribution and Sale Agreement (the Drop-Down Agreement) pursuant to which EQM Gathering will acquire, in one or more transactions, from the Company all of the Company’s interests in Rice Olympus Midstream LLC, Rice West Virginia Midstream LLC and Strike Force Midstream Holdings in exchange for an aggregate of 5,889,282 EQM common units and aggregate cash consideration of $1.15 billion, subject to customary post-closing purchase price adjustments (collectively, the Drop-Down Transactions). Strike Force Midstream Holdings owns a 75% limited liability company interest in Strike Force Midstream. The completion of the Drop-Down Transactions is subject to certain customary closing conditions.

Also on April 25, 2018, EQM, EQM Gathering, Gulfport Energy Corporation (Gulfport), and an affiliate of Gulfport, entered into a Purchase and Sale Agreement pursuant to which EQM will acquire the remaining 25% limited liability company interest in Strike Force Midstream not owned by the Company for $175 million (the Gulfport Transaction). The completion of the Gulfport Transaction is subject to certain customary closing conditions.

The Company expects to complete the Drop-Down Transactions and the Gulfport Transaction during the second quarter of 2018.

EQM Term Loan

On April 25, 2018, EQM entered into a $2.5 billion unsecured multi-draw 364-day term loan facility with a syndicate of lenders (the EQM Term Loan Facility). The EQM Term Loan Facility is available to fund the cash consideration for the Drop-Down Transactions, to repay borrowings under EQM’s $1 billion revolving credit facility and, following the Midstream Mergers, under RMP’s $850 million revolving credit facility, to fund ongoing working capital requirements and for other general partnership purposes. Unused commitments under the EQM Term Loan Facility will terminate automatically on December 31, 2018. The EQM Term Loan Facility matures on April 24, 2019 and includes mandatory prepayment and commitment reduction requirements related to the receipt by EQM of net cash proceeds from certain debt transactions, equity issuances, asset sales and joint venture distributions.

Permian Sale

EQT entered into an agreement to sell its Permian Basin assets located in Texas for $64 million. The sale, expected to close by end of June 2018, will reduce the Company’s 2018 production sales volume guidance by 5 Bcfe.


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




S.        Recently Issued Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this standard on January 1, 2018 using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity. The Company does not expect the standard to have a significant effect on its results of operations, liquidity or financial position in 2018. The Company implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the disclosures required under the new standard in the first quarter of 2018. For the disclosures required by this ASU, see Note F.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The standard primarily affects accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments, and eliminates the cost method of accounting for equity investments. The Company adopted this standard in the first quarter of 2018 which resulted in a cumulative effect adjustment of $4.1 million shown on the Statement of Condensed Consolidated Equity.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires an entity to record assets and obligations for contracts currently recognized as operating leases. Lessees and lessors must apply a modified retrospective transition approach. The ASU will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The Company has completed a high-level identification of agreements covered by this standard and will continue to evaluate the effect this standard will have on its financial statements, internal controls and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the effect this standard will have on its financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The Company adopted this standard in the first quarter of 2018. The Company had $75 million restricted cash at December 31, 2016. In accordance with ASU 2016-18, restricted cash is included in the beginning of period cash balance and excluded from investing activities on the Statements of Condensed Consolidated Cash Flows for the three months ended March 31, 2017. The Company had no restricted cash on the Condensed Consolidated Balance Sheet from March 31, 2017 through the current period.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test of Goodwill Impairment. This ASU simplifies the quantitative goodwill impairment test requirements by eliminating the requirement to calculate the implied fair value of goodwill (Step 2 of the current goodwill impairment test). Instead, a company would record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value (measured in Step 1 of the current goodwill impairment test). Entities will apply the standard’s provisions prospectively. The Company adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU provides additional guidance on the presentation

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Notes to Condensed Consolidated Financial Statements (Unaudited)




of net benefit cost in the income statement and on the components eligible for capitalization in assets. The Company adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. This ASU provides guidance regarding which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures. This ASU will be applied prospectively to awards modified on or after the adoption date.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows companies to reclassify stranded tax effects resulting from the Tax Reform Legislation from accumulated other comprehensive income to retained earnings. The ASU is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The reclassification permitted under this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Legislation is recognized. The Company is currently evaluating the effect this standard will have on its financial statements and related disclosures.


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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis of financial condition and results of operations in conjunction with the Condensed Consolidated Financial Statements, and the notes thereto, included elsewhere in this report.

CAUTIONARY STATEMENTS
 
Disclosures in this Quarterly Report on Form 10-Q 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 and 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 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 matters discussed in the section captioned “Outlook” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and 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 Marcellus, Utica, Upper Devonian and other reserves; drilling plans and programs (including the number, type, feet of pay, average lateral lengths and location of wells to be drilled and the availability of capital to complete these plans and programs); production sales volumes (including liquids volumes) and growth rates; gathering and transmission volumes; infrastructure programs (including the timing, cost and capacity of the gathering and transmission expansion projects); the cost, capacity, timing of regulatory approvals and anticipated in-service date of the Mountain Valley Pipeline (MVP) project; the ultimate terms, partners and structure of Mountain Valley Pipeline, LLC (the MVP Joint Venture); monetization transactions, including asset sales, joint ventures or other transactions involving the Company’s assets; acquisition transactions; whether any of the Company’s sale of the Rice Energy Inc. (Rice) retained midstream assets to EQT Midstream Partners, LP (EQM), the Company’s sale of the Rice Midstream Partners LP (RMP) incentive distribution rights (IDRs) to EQT GP Holdings, LP (EQGP) and the merger of EQM and RMP (collectively, the Midstream Streamlining Transactions) will be completed and the timing of each transaction or transactions; the risk that EQM or RMP may be unable to obtain governmental and regulatory approvals required for the proposed merger of EQM and RMP, or required governmental and regulatory approvals may delay the merger or result in the imposition of conditions that could cause the parties to abandon the merger; the risk that a condition to closing of the merger may not be satisfied, including approval of the merger by RMP’s unitholders; the possible diversion of management’s time on issues related to the merger; the impact and outcome of pending and future litigation, including litigation, if any, relating to the merger; whether the separation of the Company’s production and midstream businesses (the Separation) will be completed and the timing of the Separation; the Company’s ability to achieve the anticipated synergies, operational efficiencies and returns from its acquisition of Rice; natural gas prices, changes in basis and the impact of commodity prices on the Company's business; reserves, including potential future downward adjustments; projected capital expenditures and capital contributions; the amount and timing of any repurchases under the Company’s share repurchase authorization; liquidity and financing requirements, including funding sources and availability; hedging strategy; the effects of government regulation and litigation; the expected impact of the Tax Cuts and Jobs Act of 2017; and tax position. 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.  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”, and elsewhere in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as updated by Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q.
 
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.
 
In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about the Company. The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

to more recent developments.  Accordingly, these representations and warranties alone may not describe the actual state of affairs of the Company or its affiliates as of the date they were made or at any other time. 

CORPORATE OVERVIEW
 
Three Months Ended March 31, 2018 vs. Three Months Ended March 31, 2017
 
Net loss attributable to EQT Corporation for the three months ended March 31, 2018 was $1,586.0 million, a loss of $5.99 per diluted share, compared to net income attributable to EQT Corporation of $164.0 million, $0.95 per diluted share, for the three months ended March 31, 2017. The decrease was primarily attributable to an impairment charge of $2.3 billion associated with certain non-core production and related pipeline assets in the Huron and Permian Plays. Net income was also negatively impacted by increases in other operating costs, lower gains on derivatives not designated as hedges, a $0.17 decrease in the average realized price, higher net income attributable to noncontrolling interests and higher interest expense. These decreases were partly offset by revenues from an 88% increase in production sales volumes, an income tax benefit for the three months ended March 31, 2018 compared to income tax expense for the three months ended March 31, 2017 and higher pipeline and net marketing services revenue.

During the three months ended March 31, 2018, the Company recorded transaction costs of approximately $35.7 million. Transaction costs include $19.8 million for the sum-of-the-parts review and Midstream Streamlining Transactions and $15.9 million for the Rice Merger (as defined in Note B). Transaction costs are reflected in unallocated expenses as they are not allocated to any operating segment.

In connection with the Rice Merger, the Company obtained intangible assets composed of customer relationships and non-compete agreements with former Rice executives. Amortization expense for the three months ended March 31, 2018 related to customer relationships is approximately $10.4 million and is shown in EQT Production's operating expense. Amortization expense for the three months ended March 31, 2018 related to non-compete agreements with former Rice executives is approximately $10.3 million and is not allocated to any operating segment.

EQT Production paid $38.6 million and $9.0 million of net cash settlements for derivatives not designated as hedges for the three months ended March 31, 2018 and 2017, respectively, that are included in the average realized price but are not in GAAP operating revenues.

Net income attributable to noncontrolling interests was $141.0 million for the three months ended March 31, 2018 compared to $86.7 million for the three months ended March 31, 2017. The $54.3 million increase was primarily the result of the noncontrolling interests in RMP and Strike Force Midstream LLC (Strike Force Midstream) as well as increased net income at EQM.

See “Business Segment Results of Operations” for a discussion of segment operating expenses, production sales volumes and gathering and transmission revenues.

See “Investing Activities” under the caption “Capital Resources and Liquidity” for a discussion of capital expenditures.

Consolidated Operational Data
 
The following table presents detailed natural gas and liquids operational information to assist in the understanding of the Company’s consolidated operations, including the calculation of the Company's average realized price ($/Mcfe), which is based on EQT Production adjusted operating revenues, a non-GAAP supplemental financial measure. EQT Production adjusted operating revenues is presented because it is an important measure used by the Company’s management to evaluate period-to-period comparisons of earnings trends. EQT Production adjusted operating revenues should not be considered as an alternative to EQT Production total operating revenues. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of EQT Production adjusted operating revenues to EQT Production total operating revenues and Note I to the Condensed Consolidated Financial Statements for a reconciliation of EQT Production total operating revenues to EQT Corporation total operating revenues.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
 
Three Months Ended March 31,
in thousands (unless noted)
 
2018 (e)
 
2017
 
%
NATURAL GAS
 
 
 
 
 
 

Sales volume (MMcf)
 
329,404

 
164,464

 
100.3

NYMEX price ($/MMBtu) (a)
 
$
2.98

 
$
3.31

 
(10.0
)
Btu uplift
 
0.20

 
0.28

 
(28.6
)
Natural gas price ($/Mcf)
 
$
3.18

 
$
3.59

 
(11.4
)
 
 
 
 
 
 
 
Basis ($/Mcf) (b)
 
$
0.13

 
$
(0.16
)
 
(181.3
)
Cash settled basis swaps (not designated as hedges) ($/Mcf)
 
(0.15
)
 
0.03

 
(600.0
)
Average differential, including cash settled basis swaps ($/Mcf)
 
$
(0.02
)
 
$
(0.13
)
 
(84.6
)
 
 
 
 
 
 
 
Average adjusted price ($/Mcf)
 
$
3.16

 
$
3.46

 
(8.7
)
Cash settled derivatives (cash flow hedges) ($/Mcf)
 

 
0.01

 
(100.0
)
Cash settled derivatives (not designated as hedges) ($/Mcf)
 
0.04

 
(0.07
)
 
(157.1
)
Average natural gas price, including cash settled derivatives ($/Mcf)
 
$
3.20

 
$
3.40

 
(5.9
)
 
 
 
 
 
 
 
Natural gas sales, including cash settled derivatives
 
$
1,055,065

 
$
559,199

 
88.7

 
 
 
 
 
 
 
LIQUIDS
 
 
 
 
 
 

NGLs (excluding ethane):
 
 
 
 
 
 

Sales volume (MMcfe) (c)
 
18,391

 
17,140

 
7.3

Sales volume (Mbbls)
 
3,065

 
2,857

 
7.3

Price ($/Bbl)
 
$
37.50

 
$
31.41

 
19.4

Cash settled derivatives (not designated as hedges) ($/Bbl)
 
(1.21
)
 
(0.54
)
 
124.1

Average NGL price, including cash settled derivatives ($/Bbl)
 
$
36.29

 
$
30.87

 
17.6

 
 
 
 
 
 
 
NGL sales
 
$
111,236

 
$
88,197

 
26.1

Ethane:
 
 
 
 
 
 
Sales volume (MMcfe) (c)
 
7,997

 
6,973