Acquisitions

12 Months Ended

Dec. 31, 2017

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 as of 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.

At the Effective Time, each share of the common stock, par value $0.01 per share, of Rice (the Rice Common Stock) issued and outstanding immediately prior to the Effective Time was converted into the right to receive 0.37 (the Exchange Ratio) of a share of the common stock, no par value, of the Company (Company Common Stock) and $5.30 in cash (collectively, the Merger Consideration). The aggregate Merger Consideration consisted of approximately 91 million shares of Company Common Stock and approximately $1.6 billion in cash (net of cash acquired and inclusive of amounts payable to employees of Rice who did not continue with the Company following the Effective Time). See Note 18 for further details.

In connection with the closing of the Rice Merger, the Company paid an aggregate of $555.5 million, included in the cash paid for the Merger Consideration of approximately $1.6 billion (net of cash acquired and inclusive of amounts payable to employees of Rice who did not continue with the Company following the Effective Time), to affiliates of EIG Global Energy Partners (collectively, the EIG Funds) to redeem the EIG Funds' respective interests in Rice Midstream Holdings LLC (Rice Midstream Holdings) and RMGP (the EIG Redemptions). Following the EIG Redemptions, each of Rice Midstream Holdings and RMGP are indirect wholly owned subsidiaries of the Company.

In connection with the closing of the Rice Merger, the Company repaid the $321.0 million of outstanding principal under Rice Energy Operating LLC's revolving credit facility and the $187.5 million of outstanding principal under Rice Midstream Holdings' revolving credit facility, together with interest and fees of $1.4 million and $0.3 million, respectively, and the credit agreements were terminated.

Also in connection with the Rice Merger, Rice redeemed and canceled all of its outstanding 6.25% Senior Notes due 2022 (the Rice 2022 Notes) and 7.25% Senior Notes due 2023 (the Rice 2023 Notes) on November 13, 2017. The Company made aggregate payments of $1.4 billion in connection with the note redemptions, including make whole call premiums of $42.2 million and $21.6 million for the Rice 2022 Notes and the Rice 2023 Notes, respectively, and $13.4 million of required interest payments on the Rice 2023 Notes.

The Company acquired a total of approximately 270,000 net acres through the Rice Merger, which includes approximately 205,000 net Marcellus acres, as well as approximately 65,000 net Utica acres in Ohio. The Company also acquired Upper Devonian and Utica drilling rights held in Pennsylvania.

The Company also acquired the interests in RMP disclosed in Note 1.

During the nine months ended September 30, 2017, the Company expensed $8.0 million in debt issuance costs related to a bridge financing commitment to support the Rice Merger. The Company also recorded $237.3 million in acquisition-related expenses related to the Rice Merger during the year ended December 31, 2017. The Rice Merger acquisition related expenses included $75.3 million for stock based compensation and $66.1 million for other compensation arrangements and are included in the Statement of Consolidated Operations Acquisition Costs line.

Rice’s operating revenues represented approximately 10% of the Company’s consolidated operating revenues and Rice's income before income taxes represented approximately 24% of the Company’s consolidated income before income taxes, both for the year ended December 31, 2017.

Allocation of Purchase Price

The Rice Merger has been 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 which 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	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 as of December 31, 2017	$	1,998,726

The fair values of natural gas and oil properties are 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.

The estimated fair value of midstream facilities and equipment, generally consisting of pipeline systems and compression stations, is 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. The RMP limited partner units are actively traded on the New York Stock Exchage, 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 the 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 revenues 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.

Post-Acquisition Operating Results

Subsequent to the completion of the Rice Merger, the acquired entities contributed the following to the Company’s consolidated operating results for the period from November 13, 2017 through December 31, 2017.



(in thousands)
Revenue attributable to EQT	$	323,414
Net income attributable to noncontrolling interests	$	16,644
Net income attributable to EQT	$	529,743

Net income attributable to EQT includes a tax benefit of $410.9 million for the revaluation of Rice’s net deferred tax liabilities as a result of the Tax Reform Legislation discussed in Note 11.

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, 2016. 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, 2016; furthermore, the financial information is not intended to be a projection of future results.



	For the year ended December 31,
(in thousands, except per share data) (unaudited)	2017			2016
Pro forma operating revenues	$	4,809,757		$	2,288,605
Pro forma net income (loss)	$	2,197,041		$	(528,786	)
Pro forma net income attributable to noncontrolling interests	$	(444,248	)	$	(401,149	)
Pro forma net income (loss) attributable to EQT	$	1,752,793		$	(929,935	)
Pro forma income (loss) per share (basic)	$	6.30		$	(3.59	)
Pro forma income (loss) per share (diluted)	$	6.29		$	(3.59	)

Acquisitions

In addition to the Rice Merger discussed in Note 2, the Company executed multiple transactions during 2016 and 2017 that resulted in the Company's acquisition of approximately 304,000 net Marcellus acres, including the transactions listed below:


•	On July 8, 2016, the Company acquired approximately 62,500 net Marcellus acres and 31 Marcellus wells, 24 of which were producing, from Statoil USA Onshore Properties, Inc. (the Statoil Acquisition). The net acres acquired are primarily located in Wetzel, Tyler and Harrison Counties of West Virginia.

•

In the fourth quarter of 2016, the Company acquired approximately 42,600 net Marcellus acres and 42 Marcellus wells, 32 of which were producing at the time of the acquisition, which were being jointly developed by Trans Energy, Inc. (Trans Energy) and Republic Energy Ventures, LLC and its affiliates (collectively, Republic). The net acres acquired are primarily located in Wetzel, Marshall and Marion Counties of West Virginia. The acquisitions were effected through simultaneous transaction agreements that were executed on October 24, 2016 including: (i) a purchase and sale agreement between the Company and Republic; and (ii) an agreement and plan of merger among the Company, a wholly owned subsidiary of the Company (TE Merger Sub) and Trans Energy. The Republic acquisition closed on November 3, 2016 (the Republic Transaction). On October 27, 2016, the Company commenced a tender offer, through its wholly owned subsidiary, to acquire the outstanding shares of common stock of Trans Energy, a publicly traded company, at an offer price of $3.58 per share in cash. Following the tender offer on December 5, 2016, TE Merger Sub merged with and into Trans Energy, at which time Trans Energy became an indirect wholly owned subsidiary of the Company (the Trans Energy Merger).


•	On December 16, 2016, the Company acquired approximately 17,000 net Marcellus acres located in Washington, Westmoreland and Greene Counties of Pennsylvania, and two related Marcellus wells both of which were producing (the 2016 Pennsylvania Acquisition).


•	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.


•	On June 30, 2017, the Company acquired approximately 11,000 net Marcellus acres, and the associated Utica drilling rights, from a third party. The acquired acres are primarily located in Allegheny, Washington and Westmoreland Counties of Pennsylvania.

In total, the Company paid net cash of $740.1 million during the year ended December 31, 2017 for the 2017 acquisitions noted above. The 2017 acquisitions purchase prices remain subject to customary post-closing adjustments as of December 31, 2017. The preliminary fair value assigned to the acquired property, plant and equipment from the 2017 acquisitions as of the opening balance sheet dates totaled $750.1 million. In connection with the 2017 acquisitions, the Company assumed approximately $5.3 million of net current liabilities and $4.7 million of non-current liabilities. The amounts presented in the financial statements represent the Company's estimates based on preliminary valuations of acquired assets and liabilities and are subject to change based on the Company's finalization of asset and liability valuations.

As a result of post-closing adjustments on its 2016 acquisitions, the Company paid $78.9 million for additional undeveloped acreage, included in the $1,130.1 million net cash in connection with the 2016 acquisitions disclosed above, and recorded other non-cash adjustments which reduced the preliminary fair values assigned to the acquired property, plant and equipment by $14.3 million, during the year ended December 31, 2017.

In total, the Company paid $1,130.1 million in net cash in connection with the 2016 acquisitions noted above. The fair value assigned to the acquired property, plant and equipment as of the opening balance sheet dates totaled $1,203.4 million: $256.2 million allocated to the acquired producing wells and $947.2 million allocated to undeveloped leases. In connection with the Trans Energy Merger, the Company also acquired $1.2 million of other non-current assets and assumed $14.4 million of current liabilities and $11.1 million of non-current liabilities. The $14.4 million of current liabilities included a $5.1 million note payable; the Company repaid this note in 2016. The Company also recorded a deferred tax liability of $49.0 million due to differences in the tax and book basis of the acquired assets and liabilities.

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 measurement.