EQT Corp (EQT) FY 2021 MD&A

Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Item 8., "Financial Statements and Supplementary Data."

Consolidated Results of Operations

Net loss attributable to EQT Corporation for 2021 was $1,156 million, $3.58 per diluted share, compared to net loss attributable to EQT Corporation for 2020 of $967 million, $3.71 per diluted share. The change was attributable primarily to the loss on derivatives not designated as hedges, increased depreciation and depletion, increased transportation and processing and the gain on the Equitrans Share Exchange (defined and discussed in Note 5 to the Consolidated Financial Statements) recognized in the first quarter of 2020, partly offset by increased sales of natural gas, NGLs and oil, the income from investments, higher income tax benefit and the gain on sale/exchange of long-lived assets.

Results of operations for 2021 include the results of approximately six months of our operation of assets acquired in the Alta Acquisition, which closed in July 2021, the results of a full year of our operation of assets acquired from Chevron U.S.A. Inc. (the Chevron Acquisition), which closed in November 2020, and nine months of our operation of assets acquired from Reliance Marcellus, LLC (the Reliance Asset Acquisition). See Note 6 to the Consolidated Financial Statements for further discussion of the Alta Acquisition, Chevron Acquisition and Reliance Asset Acquisition.

See Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated herein by reference, for discussion and analysis of consolidated results of operations for the year ended December 31, 2019.

See "Sales Volume and Revenues" and "Operating Expenses" for discussions of items affecting operating income and "Other Income Statement Items" for a discussion of other income statement items. See "Investing Activities" under "Capital Resources and Liquidity" for a discussion of capital expenditures.

Average Realized Price Reconciliation

The following table presents detailed natural gas and liquids operational information to assist in the understanding of our consolidated operations, including the calculation of our average realized price ($/Mcfe), which is based on adjusted operating revenues, a non-GAAP supplemental financial measure. Adjusted operating revenues is presented because it is an important measure we use to evaluate period-to-period comparisons of earnings trends. Adjusted operating revenues should not be considered as an alternative to total operating revenues. See "Non-GAAP Financial Measures Reconciliation" for a reconciliation of adjusted operating revenues with total operating revenues, the most directly comparable financial measure calculated in accordance with GAAP.

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(a)Basis represents the difference between the ultimate sales price for natural gas, including the effects of delivered price benefit or deficit associated with our firm transportation agreements, and the NYMEX natural gas price.

(b)NGLs, ethane and oil were converted to Mcfe at a rate of six Mcfe per barrel.

(c)Total natural gas and liquids sales, including cash settled derivatives, is also referred to in this report as adjusted operating revenues, a non-GAAP supplemental financial measure.

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Non-GAAP Financial Measures Reconciliation

The table below reconciles adjusted operating revenues, a non-GAAP supplemental financial measure, with total operating revenues, its most directly comparable financial measure calculated in accordance with GAAP. Adjusted operating revenues (also referred to in this report as total natural gas and liquids sales, including cash settled derivatives) is presented because it is an important measure we use to evaluate period-to-period comparisons of earnings trends. Adjusted operating revenues excludes the revenue impacts of changes in the fair value of derivative instruments prior to settlement and net marketing services and other. We use adjusted operating revenues to evaluate earnings trends because, as a result of the measure's exclusion of the often-volatile changes in the fair value of derivative instruments prior to settlement, the measure reflects only the impact of settled derivative contracts. Net marketing services and other consists of the costs of, and recoveries on, pipeline capacity releases, revenues for gathering services provided to third parties and other revenues. Because we consider net marketing services and other to be unrelated to our natural gas and liquids production activities, adjusted operating revenues excludes net marketing services and other. We believe that adjusted operating revenues provides useful information to investors for evaluating period-to-period comparisons of earnings trends.

Sales Volume and Revenues

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Sales of natural gas, NGLs and oil. Sales of natural gas, NGLs and oil increased for 2021 compared to 2020 due to increased sales volume and a higher average realized price.

Sales volume increased primarily as a result of sales volume increases of 170 Bcfe from the assets acquired in the Alta Acquisition, sales volume increases of 127 Bcfe from the assets acquired in the Chevron Acquisition, prior year sales volume decreases of 46 Bcfe from the 2020 Strategic Production Curtailments and sales volume increases as a result of the Reliance Asset Acquisition and from wells turned in-line during 2021, partly offset by sales volume decreases 9 Bcfe from the 2020 Divestiture (defined in Note 8 to the Consolidated Financial Statements).

The 2020 Strategic Production Curtailments refers to our strategic decisions to temporarily curtail 2020 production. In May 2020, we temporarily curtailed approximately 1.4 Bcf per day of gross production, equivalent to approximately 1.0 Bcf per day of net production. In July 2020, we began a moderated approach to bring back on-line the curtailed production. In September 2020, we curtailed approximately 0.6 Bcf per day of gross production, equivalent to approximately 0.4 Bcf per day of net production. In October 2020, we began a phased approach to bring back on-line the curtailed production, which was completed in November 2020.

Average realized price increased due to higher NYMEX prices and higher liquids prices, partly offset by lower cash settled derivatives and unfavorable differential. For 2021 and 2020, we paid $2,091.0 million and received $897.2 million, respectively, of net cash settlements on derivatives not designated as hedges, which are included in average realized price but may not be included in operating revenues.

(Loss) gain on derivatives not designated as hedges. For 2021 and 2020, we recognized a loss of $3,775.0 million and a gain of $400.2 million, respectively, on derivatives not designated as hedges. The loss for 2021 was related primarily to decreases in the fair market value of our NYMEX swaps and options due to increases in NYMEX forward prices. The gain for 2020 was related primarily to increases in the fair market value of our NYMEX swaps and options due to decreases in NYMEX forward prices.

Net marketing services and other. Net marketing services and other increased for 2021 compared to 2020 due primarily to the liquids uplift realized on gas purchased at the wellhead from other operators and third-party gathering revenues recognized on the midstream assets acquired in the Alta Acquisition.

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Operating Expenses

The following table presents information on our production-related operating expenses.

Gathering. Gathering expense increased on an absolute basis for 2021 compared to 2020 due to increased sales volume. Gathering expense decreased on a per Mcfe basis for 2021 compared to 2020 due primarily to the lower gathering rate structures on the assets acquired in the Chevron Acquisition and Alta Acquisition and increased sales volume, which resulted in our utilization of lower overrun rates as part of the Consolidated GGA (defined and discussed in Note 5 to the Consolidated Financial Statements).

Transmission. Transmission expense increased on an absolute basis for 2021 compared to 2020 due primarily to additional capacity acquired as part of the Alta Acquisition. Transmission expense decreased on a per Mcfe basis for 2021 compared to 2020 due primarily to increased sales volume from the Chevron Acquisition and Alta Acquisition, which have a lower average transmission expense per Mcfe when compared to our historical transmission portfolio.

Processing. Processing expense increased on an absolute and per Mcfe basis for 2021 compared to 2020 due to increased liquid sales volume as a result of increased development of liquids-rich areas and increased processed volume from the Chevron Acquisition.

LOE. LOE increased on an absolute basis for 2021 compared to 2020 due primarily to additional lease operating costs as a result of the Alta Acquisition and Chevron Acquisition.

Production taxes. Production taxes increased on an absolute and per Mcfe basis for 2021 compared to 2020 due to increased West Virginia severance taxes, which resulted primarily from higher prices, and increased Pennsylvania impact fees, which resulted from higher prices and additional wells acquired in the Alta Acquisition and Chevron Acquisition.

Exploration. Exploration expense increased on an absolute and per Mcfe basis for 2021 compared to 2020 due primarily to our purchase of seismic data following the completion of the Alta Acquisition.

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Selling, general and administrative. Selling, general and administrative expense increased on an absolute basis for 2021 compared to 2020 due primarily to higher long-term incentive compensation costs as a result of changes in the fair value of awards as well as higher litigation expense. Selling, general and administrative expense decreased on a per Mcfe basis for 2021 compared to 2020 due primarily to increased sales volumes and nominal incremental selling, general and administrative spend with respect to the Alta Acquisition and Chevron Acquisition.

Depreciation and depletion. Production depletion expense increased on an absolute basis for 2021 compared to 2020 due to increased sales volume, partly offset by a lower annual depletion rate. Production depletion expense decreased on a per Mcfe basis for 2021 compared to 2020 due to a lower annual depletion rate.

Amortization of intangible assets. Amortization of intangible assets for 2020 was $26.0 million. Our intangible assets were fully amortized in November 2020.

(Gain) loss/impairment on sale/exchange of long-lived assets. During 2021, we recognized a gain on sale/exchange of long-lived assets of $21.1 million related primarily to changes in the fair value of the Contingent Consideration (defined and discussed in Note 8 to the Consolidated Financial Statements) from the 2020 Divestiture. During 2020, we recognized a loss on sale/exchange of long-lived assets of $100.7 million, of which $61.6 million related to the 2020 Asset Exchange Transactions (defined and discussed in Note 7 to the Consolidated Financial Statements) and $39.1 million related to asset sales, including the 2020 Divestiture.

Impairment of intangible and other assets. During the fourth quarter of 2020, we recognized impairment of $34.7 million, of which $22.8 million related to our assessment that the fair values of certain of our right-of-use lease assets were less than their carrying values and $11.9 million related to impairments of certain of our non-operating receivables as a result of expected credit losses.

Impairment and expiration of leases. During 2021 and 2020 we recognized impairment and expiration of leases of $311.8 million and $306.7 million, respectively, related to impairment and expiration of leases that we no longer expect to develop based on our development strategy.

Other operating expenses. Other operating expenses for 2021 of $70.1 million were attributable primarily to transaction costs associated with the Alta Acquisition and Chevron Acquisition. Other operating expenses for 2020 of $28.5 million were attributable primarily to transactions, changes in legal reserves, including settlements, and reorganization. See Note 1 to the Consolidated Financial Statements for a summary of other operating expenses.

Other Income Statement Items

Gain on Equitrans Share Exchange. During the first quarter of 2020, we recognized a gain on the Equitrans Share Exchange of $187.2 million. See Note 5 to the Consolidated Financial Statements.

(Income) loss from investments. For 2021, we recognized income on our investments in Equitrans Midstream and Laurel Mountain Midstream (see Note 6 to the Consolidated Financial Statements). Our investment in Equitrans Midstream fluctuates with changes in Equitrans Midstream's stock price, which was $10.34 and $8.04 as of December 31, 2021 and 2020, respectively. For 2020, we recognized a loss on our investment in Equitrans Midstream due to a decrease in Equitrans Midstream's stock price.

Dividend and other income. Dividend and other income decreased for 2021 compared to 2020 due primarily to lower dividends received from our investment in Equitrans Midstream driven by a decrease in the number of shares of Equitrans Midstream's common stock that we owned as well as a decrease in the dividend amount per share.

Loss on debt extinguishment. During 2021, we recognized a loss on debt extinguishment of $9.8 million due to fees incurred for a bridge-loan commitment related to the Alta Acquisition and the repayment of our 4.875% senior notes. During 2020, we recognized a loss on debt extinguishment of $25.4 million related to the repayment of all or a portion of our 4.875% senior notes, 2.50% senior notes, 3.00% senior notes, floating rate notes and term loan facility. See Note 10 to the Consolidated Financial Statements.

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Interest expense. Interest expense increased for 2021 compared to 2020 due to increased interest incurred on new debt related to the Chevron Acquisition and Alta Acquisition, increased amortization expense due primarily to our convertible debt and higher periodic borrowings under our credit facility. See Note 10 to the Consolidated Financial Statements.

Income tax benefit. See Note 9 to the Consolidated Financial Statements.

Impairment of Oil and Gas Properties

See "Critical Accounting Policies and Estimates" and Note 1 to the Consolidated Financial Statements for a discussion of our accounting policies and significant assumptions related to impairment of our oil and gas properties. See also Item 1A., "Risk Factors – Natural gas, NGLs and oil price declines, and changes in our development strategy, have resulted in impairment of certain of our assets. Future declines in commodity prices, increases in operating costs or adverse changes in well performance or additional changes in our development strategy may result in additional write-downs of the carrying amounts of our assets, including long-lived intangible assets, which could materially and adversely affect our results of operations in future periods."

Capital Resources and Liquidity

Although we cannot provide any assurance, we believe cash flows from operating activities and availability under our credit facility should be sufficient to meet our cash requirements inclusive of, but not limited to, normal operating needs, debt service obligations, planned capital expenditures and commitments for at least the next twelve months and, based on current expectations, for the long term.

Credit Facility

We primarily use borrowings under our credit facility to fund working capital needs, timing differences between capital expenditures and other cash uses and cash flows from operating activities, margin deposit requirements on our derivative instruments and credit assurance requirements, including collateral, in support of our midstream service contracts, joint venture arrangements or construction contracts. See Note 10 to the Consolidated Financial Statements for further discussion of our credit facility.

Known Contractual and Other Obligations; Planned Capital Expenditures

Purchase obligations. We have commitments for demand charges under existing long-term contracts and binding precedent agreements with various pipelines, some of which extend up to 20 years or longer. We have entered into agreements to release some of our capacity under these long-term contracts. We also have commitments for processing capacity in order to extract heavier liquid hydrocarbons from the natural gas stream. Aggregate future payments for these items as of December 31, 2021 were $23.8 billion, composed of $1.7 billion in 2022, $1.8 billion in 2023, $1.8 billion in 2024, $1.8 billion in 2025, $1.7 billion in 2026 and $15.0 billion thereafter (primarily in 2027 through 2042).

In addition, we have commitments to pay for services and materials related to our operations, which primarily include minimum volume commitments to obtain water services and electric hydraulic fracturing services and commitments to purchase equipment, materials and sand. As of December 31, 2021, future commitments under these contracts were $135.6 million in 2022, $99.0 million in 2023, $47.5 million in 2024, $40.0 million in 2025, $40.0 million in 2026 and $178.3 million thereafter.

Contractual Commitments. We have contractual commitments under our debt agreements, including interest payments and principal repayments. See Note 10 to the Consolidated Financial Statements for further discussion of the contractual commitments under our debt agreements, including the timing of principal repayments.

Unrecognized Tax Benefits. As discussed further in Note 9 to the Consolidated Financial Statements, as of December 31, 2021, we had a total reserve for unrecognized tax benefits of $94.1 million and an additional reserve of $97.2 million that was offset against deferred tax assets for general business tax credit carryforwards and NOLs. We are currently unable to make reasonably reliable estimates of the period of cash settlement of these potential liabilities with taxing authorities.

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Planned Capital Expenditures and Sales Volume. In 2022, we expect to spend approximately $1.30 to $1.45 billion in total capital expenditures, excluding amounts attributable to noncontrolling interest. We expect to fund planned capital expenditures with cash generated from operations and, if required, borrowings under our credit facility. Because we are the operator of a high percentage of our acreage, the amount and timing of these capital expenditures are largely discretionary. We could choose to defer a portion of these planned 2022 capital expenditures depending on a variety of factors, including prevailing and anticipated prices for natural gas, NGLs and oil; the availability of necessary equipment, infrastructure and capital; the receipt and timing of required regulatory permits and approvals; and drilling, completion and acquisition costs. Sales volume in 2022 is expected to be 1,950 to 2,050 Bcfe.

Operating Activities

Net cash provided by operating activities was $1,662 million for 2021 compared to $1,538 million for 2020. The increase was due primarily to higher cash operating revenues, partly offset by the cash settlements paid on derivatives not designated as hedges, higher cash operating expenses and income tax refunds received in the prior year.

Our cash flows from operating activities are affected by movements in the market price for commodities. We are unable to predict such movements outside of the current market view as reflected in forward strip pricing. Refer to Item 1A., "Risk Factors – Natural gas, NGLs and oil price volatility, or a prolonged period of low natural gas, NGLs and oil prices, may have an adverse effect on our revenue, profitability, future rate of growth, liquidity and financial position." for further information.

Investing Activities

Net cash used in investing activities was $2,073 million for 2021 compared to $1,556 million for 2020. The increase was due primarily to higher cash paid for acquisitions and proceeds from the sale of assets in 2020.

The following table summarizes our capital expenditures.

(a)Capital expenditures attributable to noncontrolling interest were $9.6 million and $4.9 million for the years ended December 31, 2021 and 2020, respectively.

(b)Represents the net impact of non-cash capital expenditures, including the effect of timing of receivables from working interest partners, accrued capital expenditures and capitalized share-based compensation costs. The impact of accrued capital expenditures includes the current period estimate, net of the reversal of the prior period accrual.

Financing Activities

Net cash provided by financing activities was $506 million for 2021 compared to $32 million for 2020. For 2021, the primary source of financing cash flows was proceeds from the issuance of debt, and the primary uses of financing cash flows were net credit facility borrowings and repayment and retirement of debt. For 2020, the primary source of financing cash flows was proceeds from the issuance of debt and equity, and the primary use of financing cash flows was repayment and retirement of debt. See Note 10 to the Consolidated Financial Statements for further discussion of our debt.

On February 3, 2022, our Board of Directors declared a quarterly cash dividend of $0.125 per share, payable on March 1, 2022, to shareholders of record at the close of business on February 14, 2022.

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Depending on our actual and anticipated sources and uses of liquidity, prevailing market conditions and other factors, we may from time to time seek to retire or repurchase our outstanding debt or equity securities through cash purchases in the open market or privately negotiated transactions. The amounts involved in any such transactions may be material. Additionally, we plan to dispose of our remaining retained shares of Equitrans Midstream's common stock and use the proceeds to reduce our debt.

See Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated herein by reference, for discussion and analysis of operating, investing and financing activities for the year ended December 31, 2019.

Security Ratings and Financing Triggers

The table below reflects the credit ratings and rating outlooks assigned to our debt instruments at February 4, 2022. Our credit ratings and rating outlooks are subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independent from any other rating. We cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn by a rating agency if, in the rating agency's judgment, circumstances so warrant. See Note 3 to the Consolidated Financial Statements for a description of what is deemed investment grade.

Changes in credit ratings may affect our access to the capital markets, the cost of short-term debt through interest rates and fees under our lines of credit, the interest rate on our senior notes with adjustable rates, the rates available on new long-term debt, our pool of investors and funding sources, the borrowing costs and margin deposit requirements on our OTC derivative instruments and credit assurance requirements, including collateral, in support of our midstream service contracts, joint venture arrangements or construction contracts. Margin deposits on our OTC derivative instruments are also subject to factors other than credit rating, such as natural gas prices and credit thresholds set forth in the agreements between us and our hedging counterparties.

As of February 4, 2022, we had sufficient unused borrowing capacity, net of letters of credit, under our credit facility to satisfy any requests for margin deposit or other collateral that our counterparties are permitted to request of us pursuant to our OTC derivative instruments, midstream services contracts and other contracts. As of February 4, 2022, such assurances could be up to approximately $1.1 billion, inclusive of letters of credit, OTC derivative instrument margin deposits and other collateral posted of approximately $0.8 billion in the aggregate.

During the third quarter of 2021, we amended agreements with six of our largest OTC hedge counterparties to permanently or temporarily reduce or eliminate our margin posting obligations associated with our OTC derivative instruments with such OTC hedge counterparties. The purpose of such amendments was to mitigate the amount of cash collateral that we would otherwise have been required to post based on current NYMEX strip pricing. As of February 4, 2022, our margin balance on our existing hedge portfolio, including both OTC and broker margin balances, was approximately $0.3 billion, compared to approximately $0.1 billion as of December 31, 2020, despite a significant increase in natural gas prices. See Notes 3 and 10 to the Consolidated Financial Statements for further information.

Our debt agreements and other financial obligations contain various provisions that, if not complied with, could result in default or event of default under our credit facility, mandatory partial or full repayment of amounts outstanding, reduced loan capacity or other similar actions. The most significant covenants and events of default under the debt agreements relate to maintenance of a debt-to-total capitalization ratio, limitations on transactions with affiliates, insolvency events, nonpayment of scheduled principal or interest payments, acceleration of other financial obligations and change of control provisions. Our credit facility contains financial covenants that require us to have a total debt-to-total capitalization ratio no greater than 65%. The calculation of this ratio excludes the effects of accumulated other comprehensive loss. As of December 31, 2021, we were in compliance with all debt provisions and covenants under our debt agreements.

See Note 10 to the Consolidated Financial Statements for a discussion of borrowings under our credit facility.

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Commodity Risk Management

The substantial majority of our commodity risk management program is related to hedging sales of our produced natural gas. The overall objective of our hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices. The derivative commodity instruments that we use are primarily swap, collar and option agreements. The following table summarizes the approximate volume and prices of our NYMEX hedge positions through 2024 as of February 4, 2022.

(a)January 1 through March 31.

(b)The difference between the fixed price and NYMEX price is included in average differential presented in our price reconciliation in "Average Realized Price Reconciliation." The fixed price natural gas sales agreements can be physically or financially settled.

For 2022, 2023 and 2024, we have natural gas sales agreements for approximately 18 MMDth, 88 MMDth and 11 MMDth, respectively, that include average NYMEX ceiling prices of $3.17, $2.84 and $3.21, respectively.

During the third and fourth quarters of 2021, we purchased $67 million of net winter calls to reposition our 2021 and 2022 hedge portfolio to enable incremental upside participation in rising natural gas prices and to further mitigate potential incremental margin posting requirements. As of December 31, 2021, the remaining positions cover approximately 45 net MMDth in the first quarter of 2022 and have been excluded from the table above.

We have also entered into derivative instruments to hedge basis. We may use other contractual agreements to implement our commodity hedging strategy from time to time.

See Item 7A., "Quantitative and Qualitative Disclosures About Market Risk" and Note 3 to the Consolidated Financial Statements for further discussion of our hedging program.

Off-Balance Sheet Arrangements

See Note 17 to the Consolidated Financial Statements for a discussion of our guarantees.

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Commitments and Contingencies

In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against us. While the amounts claimed may be substantial, we are unable to predict with certainty the ultimate outcome of such claims and proceedings. We accrue legal and other direct costs related to loss contingencies when actually incurred. We have established reserves that we believe to be appropriate for pending matters and, after consultation with counsel and giving appropriate consideration to available insurance, we believe that the ultimate outcome of any matter currently pending against us will not materially affect our financial condition, results of operations or liquidity. See Note 16 to the Consolidated Financial Statements for a discussion of our commitments and contingencies. See Item 3., "Legal Proceedings."

Recently Issued Accounting Standards

Our recently issued accounting standards are described in Note 1 to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Management's discussion and analysis of the Consolidated Financial Statements and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of the Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. The following critical accounting policies, which were reviewed by the Audit Committee of our Board of Directors (the Audit Committee), relate to our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. Actual results could differ from our estimates.

Accounting for Gas, NGLs and Oil Producing Activities. We use the successful efforts method of accounting for our oil and gas producing activities. See Note 1 to the Consolidated Financial Statements for a discussion of the fair value measurement and any subsequent impairments of our proved and unproved oil and gas properties and other long-lived assets as well as evaluation of the recoverability of capitalized costs of unproved oil and gas properties.

We believe accounting for gas, NGLs and oil producing activities is a "critical accounting estimate" because the evaluations of impairment of proved properties involve significant judgment about future events, such as future sales prices of natural gas and NGLs and future production costs, as well as the amount of natural gas and NGLs recorded and timing of recoveries. Significant changes in these estimates could result in the costs of our proved and unproved properties not being recoverable; therefore, we would be required to recognize impairment. See "Impairment of Oil and Gas Properties" and Note 1 to the Consolidated Financial Statements for additional information on impairments of our proved and unproved oil and gas properties.

Oil and Gas Reserves. Proved oil and gas reserves, as defined by SEC Regulation S-X Rule 4-10, are those quantities of oil and gas that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire unless evidence indicates that renewal is reasonably certain regardless of whether deterministic or probabilistic methods are used for the estimation.

Our estimates of proved reserves are reassessed annually using geological, reservoir and production performance data. Reserve estimates are prepared by our engineers and audited by independent engineers. Revisions may result from changes in, among other things, reservoir performance, development plans, prices, operating costs, economic conditions and governmental restrictions. Decreases in prices, for example, may cause a reduction in certain proved reserves due to reaching economic limits sooner. A material change in the estimated volume of reserves could have an impact on the depletion rate calculation and our Consolidated Financial Statements.

We estimate future net cash flows from natural gas, NGLs and crude oil reserves based on selling prices and costs using a twelve-month average price, which is calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the twelve-month period and, as such, is subject to change in subsequent periods. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation. Income tax expense is based on future statutory tax rates and tax deductions and credits available under current laws.

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We believe oil and gas reserves is a "critical accounting estimate" because we must periodically reevaluate proved reserves along with estimates of future production rates, production costs and the timing of development expenditures. Future results of operations and the strength of our Consolidated Balance Sheet for any quarterly or annual period could be materially affected by changes in our assumptions. Significant changes in these estimates could result in a change to our estimated reserves, which could lead to a material change to our production depletion expense. See "Impairment of Oil and Gas Properties" for additional information on our oil and gas reserves.

Income Taxes. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our Consolidated Financial Statements or tax returns. See Note 1 to the Consolidated Financial Statements for a discussion of accounting policies related to income taxes and Note 9 to the Consolidated Financial Statements for a discussion of deferred tax assets, valuation allowances and the amount of financial statement benefit recorded for uncertain tax positions.

We believe income taxes are "critical accounting estimates" because we must assess the likelihood that our deferred tax assets will be recovered from future taxable income and exercise judgment on the amount of financial statement benefit recorded for uncertain tax positions. To the extent that a valuation allowance or uncertain tax position is established or increased or decreased during a period, we record an expense or benefit in income tax expense in our Statements of Consolidated Operations. Future results of operations for any quarterly or annual period could be materially affected by changes in our assumptions. A change to future taxable income or tax planning strategies could impact our ability to utilize deferred tax assets, which would increase or decrease our income tax expense and taxes paid.

Derivative Instruments. We enter into derivative commodity instrument contracts primarily to reduce exposure to commodity price risk associated with future sales of natural gas production. See Note 4 to the Consolidated Financial Statements for a description of the fair value hierarchy. See also Note 5 to the Consolidated Financial Statements for a discussion of the derivative liability recorded in connection with the Equitrans Share Exchange. The values reported in the Consolidated Financial Statements change as these estimates are revised to reflect actual results or as market conditions or other factors, many of which are beyond our control, change.

We believe derivative instruments are "critical accounting estimates" because our financial condition and results of operations can be significantly impacted by changes in the market value of our derivative instruments due to the volatility of both NYMEX natural gas prices and basis. Future results of operations for any quarterly or annual period could be materially affected by changes in our assumptions. Refer to Item 7A., "Quantitative and Qualitative Disclosures about Market Risk" for discussion of a hypothetical increase or decrease of 10% in the market price of natural gas.

Business Combinations. Accounting for a business combination requires a company to record the identifiable assets and liabilities acquired at fair value. In the third quarter of 2021, we completed the Alta Acquisition, and in the fourth quarter of 2020, we completed the Chevron Acquisition. See Note 6 to the Consolidated Financial Statements for a discussion of the most significant assumptions used to estimate the fair value of the assets and liabilities acquired.

We believe business combinations are "critical accounting estimates" because the valuation of acquired assets and liabilities involves significant judgment about future events. Future results of operations for any quarterly or annual period could be materially affected by changes in our assumptions.

Contingencies and Asset Retirement Obligations. We are involved in various legal and regulatory proceedings that arise in the ordinary course of business. We record a liability for contingencies based on our assessment that a loss is probable and the amount of the loss can be reasonably estimated. We consider many factors in making these assessments, including historical experience and matter specifics. Estimates are developed in consultation with legal counsel and are based on an analysis of potential results. See Note 16 to the Consolidated Financial Statements.

We accrue a liability for asset retirement obligations based on an estimate of the amount and timing of settlement. For oil and gas wells, the fair value of our plugging and abandonment obligations is recorded at the time the obligation is incurred, which is typically at the time the well is spud. See Note 1 to the Consolidated Financial Statements.

We believe contingencies and asset retirement obligations are "critical accounting estimates" because we must assess the probability of loss related to contingencies and the expected amount and timing of asset retirement obligation settlement. In addition, we must determine the estimated present value of future liabilities. Future results of operations for any quarterly or annual period could be materially affected by changes in our assumptions. If we incur losses related to contingencies that are higher than we expect, we could incur additional costs to settle such obligations. If the expected amount and timing of our asset retirement obligations change, we will be required to adjust the carrying value of our liabilities in future periods.

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Contract Asset. In the first quarter of 2020, we entered into two share purchase agreements with Equitrans Midstream to sell to Equitrans Midstream 50% of our ownership of Equitrans Midstream's common stock in exchange for a combination of cash and rate relief under certain of our gathering agreements with EQM, an affiliate of Equitrans Midstream. See Note 5 to the Consolidated Financial Statements for further discussion of the key assumptions used in the fair value calculation of the contract asset and Note 1 to the Consolidated Financial Statements for a discussion of impairment considerations.

We believe the Consolidated GGA contract asset is a "critical accounting estimate" because the assumptions used in the valuation of the contract asset involved significant judgment. Future results of operations for any quarterly or annual period could be materially affected by changes in our assumptions. A change in the estimated production volume forecast, the market-based discount rate or the probability-weighted estimate of the in-service date of the Mountain Valley Pipeline could have resulted in a change in the valuation of the contract asset.

Convertible Notes. In the second quarter of 2020, we issued the Convertible Notes and Capped Call Transactions (each defined and discussed in Note 10 to the Consolidated Financial Statements). See Note 10 to the Consolidated Financial Statements for a discussion of our valuation of the liability and equity components and accounting for the Capped Call Transactions and Note 1 to the Consolidated Financial Statements for the effect of the Convertible Notes on our earnings per share calculations.

We believe the accounting complexity of the Convertible Notes is a "critical accounting estimate" because we used judgment to determine the balance sheet classification, to determine the treatment of the Capped Call Transactions and to determine the existence of any derivatives that may require separate accounting under applicable accounting guidance. Future results of operations for any quarterly or annual period could be materially affected by changes in our assumptions.