Edgar Filing: EQUITABLE RESOURCES INC /PA/

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 JUNE 30, 2008

or

o	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 1-3551

EQUITABLE RESOURCES, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA		25-0464690
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

225 North Shore Drive, Pittsburgh, Pennsylvania		15212
(Address of principal executive offices, including zip code)		(Zip code)

(412) 553-5700
(Registrant’s telephone number, including area code:)

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large Accelerated Filer	x	Accelerated Filer o
	Non-Accelerated Filer	o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of June 30, 2008, 130,855,286 shares of common stock, no par value, of the registrant were outstanding.

Table of Contents

EQUITABLE RESOURCES, INC. AND SUBSIDIARIES

Index

		Page No.

Part I. Financial Information:

Item 1.	Financial Statements (Unaudited):

	Statements of Consolidated Income for the Three and Six Months Ended
	June 30, 2008 and 2007	3

	Statements of Condensed Consolidated Cash Flows
	for the Six Months Ended June 30, 2008 and 2007	4

	Condensed Consolidated Balance Sheets as of June 30, 2008
	and December 31, 2007	5 – 6

	Notes to Condensed Consolidated Financial Statements	7 – 17

Item 2.	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	18 – 32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33 – 34

Item 4.	Controls and Procedures	35

Part II. Other Information:

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 4.	Submission of Matters to a Vote of Security Holders	37

Item 6.	Exhibits	38

Signature		39

Index to Exhibits		40-41

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EQUITABLE RESOURCES, INC. AND SUBSIDIARIES

Statements of Consolidated Income (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007

	(Thousands, except per share amounts)

Operating revenues	$	334,009	$	293,240	$	869,783	$	749,786
Cost of sales	118,352		116,953		389,530		336,965
Net operating revenues	215,657		176,287		480,253		412,821

Operating expenses:
Operation and maintenance	28,612		25,568		54,204		53,012
Production	20,369		16,008		36,889		32,238
Exploration	838		117		1,393		399
Selling, general and administrative	32,654		45,483		104,395		111,780
Depreciation, depletion and amortization	32,051		27,592		62,816		55,019
Total operating expenses	114,524		114,768		259,697		252,448

Operating income	101,133		61,519		220,556		160,373

Gain on sale of assets, net	–		119,401		–		119,401

Gain on sale of available-for-sale securities	–		–		–		1,042

Other income	1,574		1,453		5,098		2,284

Equity in earnings of nonconsolidated investments	1,697		666		2,991		775

Interest expense	14,327		10,936		27,980		24,047

Income before income taxes	90,077		172,103		200,665		259,828
Income taxes	34,686		64,760		74,754		95,867
Net income	$	55,391	$	107,343	$	125,911	$	163,961

Earnings per share of common stock:
Basic:
Weighted average common shares outstanding	126,243		121,356		124,372		121,289
Net income	$	0.44	$	0.88	$	1.01	$	1.35
Diluted:
Weighted average common shares outstanding	127,321		122,837		125,432		122,806
Net income	$	0.44	$	0.87	$	1.00	$	1.34
Dividends declared per common share	$	0.22	$	0.22	$	0.44	$	0.44

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EQUITABLE RESOURCES, INC. AND SUBSIDIARIES

Statements of Condensed Consolidated Cash Flows (Unaudited)

	Six Months Ended June 30,
	2008			2007
	(Thousands)
Cash flows from operating activities:
Net income	$	125,911		$	163,961
Adjustments to reconcile net income to cash provided by operating activities:
Provision for losses on accounts receivable	3,922			(1,075		)
Depreciation, depletion, and amortization	62,816			55,019
Gain on sale of assets, net	–			(119,401		)
Gain on sale of available-for-sale securities	–			(1,042		)
Other income	(5,098		)	(2,284		)
Equity in earnings of nonconsolidated investments	(2,991		)	(775		)
Deferred income taxes	125,215			55,823
Excess tax benefits from share-based payment arrangements	(1,124		)	(4,180		)
Decrease in inventory	27,855			42,174
Decrease in accounts receivable and unbilled revenues	6,703			67,376
Increase in margin deposits	(233,693		)	(10,933		)
Increase (decrease) in accounts payable	47,030			(1,373		)
Change in derivative instruments at fair value, net	26,370			27,375
Changes in other assets and liabilities	(94,172		)	41,368
Net cash provided by operating activities	88,744			312,033

Cash flows from investing activities:
Capital expenditures	(511,135		)	(333,576		)
Capital contributions to Nora Gathering, LLC	(10,800		)	–
Proceeds from sale of assets	–			184,576
Restricted cash from sale of assets	–			(95,000		)
Proceeds from contribution of assets	–			23,262
Proceeds from sale of available-for-sale securities	–			7,295
Investment in available-for-sale securities	(3,000		)	(9,709		)
Net cash used in investing activities	(524,935		)	(223,152		)

Cash flows from financing activities:
Dividends paid	(53,789		)	(53,531		)
Proceeds from issuance of common stock	560,821			–
Proceeds from issuance of long-term debt	500,000			–
Debt issuance costs	(6,645		)	–
Decrease in short-term loans	(450,000		)	(33,999		)
(Decrease) increase in note payable to Nora Gathering, LLC	(29,329		)	62,786
Proceeds from exercises under employee compensation plans	842			2,449
Excess tax benefits from share-based payment arrangements	1,124			4,180
Net cash provided by (used in) financing activities	523,024			(18,115		)

Net increase in cash and cash equivalents	86,833			70,766
Cash and cash equivalents at beginning of period	81,711			–
Cash and cash equivalents at end of period	$	168,544		$	70,766

Cash paid during the period for:
Interest, net of amount capitalized	$	19,767		$	23,657
Income taxes, net of refund	$	6,855		$	21,072

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

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EQUITABLE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

	June 30, 2008		December 31, 2007
	(Thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	168,544	$	81,711
Accounts receivable (less accumulated provision for doubtful accounts: June 30, 2008, $19,255; December 31, 2007, $19,829)	218,344		188,561
Unbilled revenues	8,336		48,744
Margin deposits with financial institutions	239,623		5,930
Inventory	255,630		283,485
Derivative instruments, at fair value	6,044		37,143
Prepaid expenses and other	215,139		96,673
Total current assets	1,111,660		742,247

Equity in nonconsolidated investments	148,795		135,366

Property, plant and equipment	4,715,697		4,207,402
Less: accumulated depreciation and depletion	1,340,733		1,287,911
Net property, plant and equipment	3,374,964		2,919,491

Investments, available-for-sale	34,987		35,675
Other assets	119,750		104,192
Total assets	$	4,790,156	$	3,936,971

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

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EQUITABLE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

	June 30, 2008			December 31, 2007
	(Thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term loans	$	–		$	450,000
Note payable to Nora Gathering, LLC	–			29,329
Accounts payable	326,287			279,257
Derivative instruments, at fair value	1,116,943			516,626
Other current liabilities	267,794			244,096
Total current liabilities	1,711,024			1,519,308

Long-term debt	1,253,500			753,500

Other non-current liabilities:
Deferred income taxes and investment tax credits	297,517			400,465
Unrecognized tax benefits	54,099			50,845
Pension and other post-retirement benefits	39,683			41,768
Other credits	79,615			73,613
Total other non-current liabilities	470,914			566,691
Total liabilities	3,435,438			2,839,499

Common stockholders’ equity:
Common stock, no par value, authorized 320,000 shares; shares issued: June 30, 2008, 157,630; December 31, 2007, 149,005	945,423			382,191
Treasury stock, shares at cost: June 30, 2008, 26,775; December 31, 2007, 26,853 (net of shares and cost held in trust for deferred compensation of 159, $2,713 and 180, $3,085)	(483,654		)	(485,051		)
Retained earnings	1,581,718			1,509,596
Accumulated other comprehensive loss	(688,769		)	(309,264		)
Total common stockholders’ equity	1,354,718			1,097,472
Total liabilities and stockholders’ equity	$	4,790,156		$	3,936,971

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

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

A. Financial Statements

On June 30, 2008, the former Equitable Resources, Inc. (Old EQT) entered into and completed an Agreement and Plan of Merger (the Plan) under which Old EQT reorganized into a holding company structure such that a newly formed Pennsylvania corporation, also named Equitable Resources, Inc. ( New EQT), became the publicly traded holding company of Old EQT and its subsidiaries. The primary purpose of this reorganization (the Reorganization) was to separate Old EQT’s state-regulated distribution operations into a new subsidiary in order to better segregate its regulated and unregulated businesses and improve overall financing flexibility. To effect the Reorganization, Old EQT formed New EQT, a wholly-owned subsidiary, and New EQT, in turn, formed EGC Merger Co., a Pennsylvania corporation owned solely by New EQT (MergerSub). Under the Plan, MergerSub merged with and into Old EQT with Old EQT surviving (the Merger). The Merger resulted in Old EQT becoming a direct, wholly-owned subsidiary of New EQT. Throughout the remainder of this Form 10-Q, references to “we,” “us,” “our,” “Equitable,” “Equitable Resources,” “Equitable Resources, Inc.” and the “Company” refer collectively to New EQT and its consolidated subsidiaries.

The accompanying unaudited Condensed Consolidated Financial Statements reflect the results of operations and financial position of Old EQT for the periods presented. However, references to amounts for periods after the closing of the Reorganization relate to New EQT. New EQT had no separate operations for the periods presented. These Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles 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 generally accepted accounting principles 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 Equitable Resources, Inc. and subsidiaries as of June 30, 2008, and the results of its operations and cash flows for the three and six month periods ended June 30, 2008 and 2007. Certain previously reported amounts have been reclassified to conform to the current year presentation.

The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

Due to the seasonal nature of the Company’s natural gas distribution and storage businesses and the volatility of commodity prices, the interim statements for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

For further information, refer to the consolidated financial statements and footnotes thereto included in Equitable Resources’ Annual Report on Form 10-K for the year ended December 31, 2007, the Current Report on Form 8-K filed March 7, 2008 that recast the historical business segment information contained in the Company’s Annual Report on Form 10-K to reflect a change in organizational structure and segment reporting effective for 2008, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 18 of this document.

B. Segment Information

Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and which are subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources.

In January 2008, the Company announced a change in organizational structure and several changes to executive management of the Company to better align the Company to execute its growth strategy for development and infrastructure expansion in the Appalachian Basin. These changes resulted in changes to the Company’s reporting segments effective for fiscal year 2008.

The Company reports its operations in three segments, which reflect its lines of business. The Equitable Production segment includes the Company’s exploration for, and development and production of, natural gas, and a limited amount of crude oil, in the Appalachian Basin. Equitable Midstream’s operations include the natural gas gathering,

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

processing, transportation and storage activities of the Company as well as sales of natural gas liquids. Equitable Distribution’s operations primarily comprise the state-regulated distribution activities of the Company.

Operating segments are evaluated on their contribution to the Company’s consolidated results based on operating income, equity in earnings of nonconsolidated investments, and other income. Interest expense and income taxes are managed on a consolidated basis. Headquarters’ costs are billed to the operating segments based upon a fixed allocation of the headquarters’ annual operating budget. Differences between budget and actual headquarters’ expenses are not allocated to the operating segments.

Substantially all of the Company’s operating revenues, income from operations and assets are generated or located in the United States.

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenues from external customers:
Equitable Production	$	124,949		$	95,491		$	230,026		$	183,469
Equitable Midstream	153,777			122,482			375,102			292,769
Equitable Distribution	114,731			133,099			370,693			384,480
Less: intersegment revenues (a)	(59,448		)	(57,832		)	(106,038		)	(110,932		)
Total	$	334,009		$	293,240		$	869,783		$	749,786
Total operating expenses:
Equitable Production	$	50,772		$	37,552		$	95,517		$	86,769
Equitable Midstream	36,938			28,835			69,537			60,308
Equitable Distribution	28,113			27,864			56,229			59,629
Unallocated (income) expenses (b)	(1,299		)	20,517			38,414			45,742
Total	$	114,524		$	114,768		$	259,697		$	252,448
Operating income:
Equitable Production	$	74,177		$	57,939		$	134,509		$	96,700
Equitable Midstream	23,628			20,662			84,482			72,303
Equitable Distribution	2,029			3,435			39,979			37,112
Unallocated income (expenses) (b)	1,299			(20,517		)	(38,414		)	(45,742		)
Total	$	101,133		$	61,519		$	220,556		$	160,373

Reconciliation of operating income to net income:

Other income:
Equitable Midstream	$	1,464		$	1,375		$	4,847		$	2,138
Equitable Distribution	110			78			251			146
Total	$	1,574		$	1,453		5,098			2,284

Equity in earnings of nonconsolidated investments:
Equitable Production	$	151		$	65		$	244		$	138
Equitable Midstream	1,471			568			2,626			568
Unallocated	75			33			121			69
Total	$	1,697		$	666		$	2,991		$	775

Gain on sale of assets, net	–			119,401			–			119,401
Gain on sale of available-for-sale securities	–			–			–			1,042
Interest expense	14,327			10,936			27,980			24,047
Income taxes	34,686			64,760			74,754			95,867
Net income	$	55,391		$	107,343		$	125,911		$	163,961

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	June 30,		December 31,
	2008		2007
	(Thousands)
Segment Assets:
Equitable Production	$	2,087,969	$	1,614,787
Equitable Midstream	1,537,914		1,232,348
Equitable Distribution	902,416		906,113
Total operating segments	4,528,299		3,753,248
Headquarters assets, including cash and short-term investments	261,857		183,723
Total assets	$	4,790,156	$	3,936,971

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007

	(Thousands)
Depreciation, depletion and amortization:
Equitable Production	$	18,621	$	15,667	$	36,742	$	30,960
Equitable Midstream	7,843		6,538		15,061		13,413
Equitable Distribution	5,155		5,087		10,208		10,040
Other	432		300		805		606
Total	$	32,051	$	27,592	$	62,816	$	55,019

Expenditures for segment assets:
Equitable Production	$	146,413	$	67,623	$	242,876	$	124,388
Equitable Midstream	152,099		99,859		247,664		188,027
Equitable Distribution	12,378		9,143		19,983		20,963
Other	231		112		612		198
Total	$	311,121	$	176,737	$	511,135	$	333,576

(a) Intersegment revenues primarily represent natural gas sales from Equitable Production to Equitable Midstream and transportation activities between Equitable Midstream and Equitable Distribution.

(b) Unallocated income/expenses consist of differences between budget and actual headquarters’ expenses, including incentive compensation and administrative costs, that are not allocated to the operating segments.

C. Derivative Instruments

Natural Gas Hedging Instruments

The Company’s overall objective in its hedging program is to ensure an adequate level of return for the significant well development and infrastructure investments at Equitable Production and Equitable Midstream. The various derivative commodity instruments used by the Company to hedge its exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sale of equity production and forecasted natural gas purchases and sales have been designated and qualify as cash flow hedges. Futures contracts obligate the Company to buy or sell a designated commodity at a future date for a specified price and quantity at a specified location. Swap agreements involve payments to or receipts from counterparties based on the differential between a fixed and variable price 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. Exchange-traded instruments are generally settled with offsetting positions. Over the counter (OTC) arrangements require settlement in cash.

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The fair value of the Company’s derivative commodity instruments classified as cash flow hedges under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133) is presented below:

	As of
	June 30, 2008			December 31, 2007
	(Thousands)
Asset	$	6,044		$	34,921
Liability	(1,101,717		)	(489,227		)
Net liability	$	(1,095,673	)	$	(454,306	)

These amounts are included in the Condensed Consolidated Balance Sheets as derivative instruments, at fair value. The net fair value of derivative instruments changed during the first six months of 2008 as a result of an increase in natural gas prices as well as the increase in the Company’s hedge position during the first six months of 2008. The absolute quantities of the Company’s derivative commodity instruments that have been designated and qualify as cash flow hedges totaled 308.6 Bcf and 287.3 Bcf as of June 30, 2008 and December 31, 2007, respectively, and primarily related to natural gas swaps. The open positions at June 30, 2008 had maturities extending through December 2015.

The Company deferred net losses of $664.0 million and $286.2 million in accumulated other comprehensive loss, net of tax, as of June 30, 2008 and December 31, 2007, respectively, associated with the effective portion of the change in fair value of its derivative instruments designated as cash flow hedges. Assuming no change in price or new transactions, the Company estimates that approximately $291.2 million of net unrealized losses on its derivative commodity instruments reflected in accumulated other comprehensive loss, net of tax, as of June 30, 2008 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions. This recognition occurs through a reduction in the Company’s net operating revenues resulting in the average hedged price becoming the realized sales price.

Ineffectiveness associated with the Company’s derivative instruments designated as cash flow hedges decreased earnings by $0.3 million for the three month period ended June 30, 2008 and increased earnings by $1.3 million for the three month period ended June 30, 2007. These amounts are included in operating revenues in the Statements of Consolidated Income.

The Company had an immaterial amount of derivative commodity instruments held for trading purposes as of June 30, 2008 and December 31, 2007.

In May 2007, the Company sold a portion of its interest in certain gas properties in the Nora area. As part of this transaction, the Company closed out certain cash flow hedges associated with forecasted production at this location by purchasing offsetting positions. The fair value of these derivative instruments was an $11.8 million liability at June 30, 2008. In addition, the fair value of derivative instruments associated with forecasted production at non-core gas properties sold in May 2005 was a $3.4 million liability at June 30, 2008. The Company does not treat these derivatives as hedging instruments under SFAS No. 133. These amounts are included in the Condensed Consolidated Balance Sheet as derivative instruments, at fair value.

When the net fair value of any of the Company’s swap agreements represents a liability to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the counterparty requires the Company to remit funds to the counterparty as a margin deposit for the derivative liability which is in excess of the threshold amount. The Company recorded such deposits in the amount of $219.8 million and $1.6 million in its balance sheet as of June 30, 2008 and December 31, 2007, respectively.

When the Company enters into exchange-traded natural gas contracts, exchanges require participants, including the Company, to remit funds to the corresponding broker as good-faith deposits to guard against the risks associated with changing market conditions. Participants must make such deposits based on an established initial margin requirement as well as the net liability position, if any, of the fair value of the associated contracts. In the case where the fair value of such contracts is in a net asset position, the broker may remit funds to the Company, in which case the Company records a current liability for such amounts received. The initial margin requirements are established by the exchanges based on prices, volatility and the time to expiration of the related contract and are subject to

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

change at the exchanges’ discretion. The Company recorded such deposits in the amount of $19.8 million and $4.3 million in its balance sheet as of June 30, 2008 and December 31, 2007, respectively.

D. Investments, Available-For-Sale

As of June 30, 2008, the investments classified by the Company as available-for-sale consist of $35.0 million of equity and bond funds intended to fund plugging and abandonment and other liabilities for which the Company self-insures. Any unrealized gains or losses with respect to investments classified as available-for-sale are recognized within the Condensed Consolidated Balance Sheets as a component of equity, accumulated other comprehensive loss. During the first six months of 2008, the Company purchased additional equity and bond funds with a cost basis totaling $3.0 million.

During the first six months of 2007, the Company reviewed its investment portfolio including its investment allocation and as a result sold equity funds with a cost basis of $6.3 million for total proceeds of $7.3 million, resulting in the Company recognizing a gain of $1.0 million. The Company used the proceeds from these sales and other available cash to purchase other equity and bond funds with a cost basis totaling $9.7 million during the first quarter of 2007. The Company utilizes the specific identification method to determine the cost of all investment securities sold.

E. Fair Value Measurements

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS No. 157) which established a framework for measuring fair value in accordance with generally accepted accounting principles and expanded disclosures about fair value measurements. The Company adopted the provisions of SFAS No. 157 on January 1, 2008.

The Company has an established process for determining fair value. Fair value is based on quoted market prices, where available. If quoted market prices are not available, fair value is based upon models that use as inputs, market-based parameters, including but not limited to forward curves, discount rates, broker quotes and volatilities. The adoption of SFAS No. 157 required the Company to incorporate nonperformance risk into its models. 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. As a result of the implementation of SFAS No. 157, the Company recorded a gain in accumulated other comprehensive income of $7.8 million during the first quarter of 2008.

In accordance with SFAS No. 157, the Company has categorized its financial instruments 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). Financial instruments included in Level 1 include the Company’s futures contracts and available-for-sale investments, while instruments included in Level 2 include the majority of the Company’s swap agreements, and instruments included in Level 3 include the Company’s collar agreements and a portion of the Company’s swap agreements. The fair value of financial instruments included in Level 2 is based on industry models that use significant observable inputs, including NYMEX forward curves and LIBOR-based discount rates. Financial instruments included in Level 3 represent approximately 13% of the total net derivative instruments, at fair value. The Company’s futures, NYMEX swaps, and collars utilize NYMEX forward curves in the valuation technique. The NYMEX forward curves are validated to external sources at least monthly.

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following assets and liabilities were measured at fair value on a recurring basis during the period:

				Fair value measurements at reporting date using
Description	June 30, 2008			Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	(Thousands)
Assets
Investments, available-for-sale	$	34,987		$	34,987		$	–		$	–
Derivative instruments, at fair value	6,044			4,540			931			573
Total assets	$	41,031		$	39,527		$	931		$	573

Liabilities
Derivative instruments, at fair value	$	(1,116,943	)	$	(37,342	)	$	(932,756	)	$	(146,845	)
Total liabilities	$	(1,116,943	)	$	(37,342	)	$	(932,756	)	$	(146,845	)

	Fair value measurements using significant unobservable inputs (Level 3)

	Derivative instruments, at fair value, net
	(Thousands)
Balance at January 1, 2008	$	(2,387	)
Total gains or losses:
Included in earnings	1,726
Included in other comprehensive income	(124,419		)
Purchases, issuances, and settlements	(21,192		)
Transfers in and/or out of Level 3	–
Balance at June 30, 2008	$	(146,272	)

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of June 30, 2008	$	(430	)

Gains and losses included in earnings for the period are reported in operating revenues in the Statements of Consolidated Income.

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

F. Comprehensive (Loss) Income

Total comprehensive (loss) income, net of tax, was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Thousands)
Net income	$	55,391		$	107,343		$	125,911		$	163,961
Other comprehensive (loss) income:
Net change in cash flow hedges	(267,899		)	58,964			(385,532		)	(33,540		)
Unrealized (loss) gain on investments, available-for-sale	(684		)	932			(2,594		)	468
Pension and other post-retirement benefit plans:
Prior service cost	(71		)	(14		)	(142		)	(118		)
Net loss	394			352			789			914
Settlement loss	77			238			152			317
Total comprehensive (loss) income	$	(212,792	)	$	167,815		$	(261,416	)	$	132,002

The components of accumulated other comprehensive loss, net of tax, are as follows:

	June 30,			December 31,
	2008			2007
	(Thousands)
Net unrealized loss from hedging transactions (a)	$	(664,486	)	$	(286,776	)
Unrealized gain on available-for-sale securities	1,278			3,872
Pension and other post-retirement benefits adjustment	(25,561		)	(26,360		)
Accumulated other comprehensive loss	$	(688,769	)	$	(309,264	)

(a) Includes $7.8 million gain recorded in the first quarter of 2008 related to the adoption of SFAS No. 157.

G. Share-Based Compensation

The Company accounts for its share-based payment awards in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R).

Share-based compensation expense recorded by the Company was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007

2005 Executive Performance Incentive Program	$	–	$	20,830	$	42,548	$	46,379
2007 Supply Long-Term Incentive Program	422		–		910		–
Restricted stock awards	876		626		1,859		1,513
Nonqualified stock options	–		29		–		212
Non-employee directors’ share-based awards	1,731		887		2,280		1,412
Total share-based compensation expense	$	3,029	$	22,372	$	47,597	$	49,516

2005 Executive Performance Incentive Program

The vesting of the awards granted under the 2005 Executive Performance Incentive Program (2005 Program) will occur contingent upon a combination of the level of total shareholder return relative to a fixed group of peer companies and the Company’s average absolute return on total capital during the four year performance period ending December 31, 2008. Payment of awards is expected to be made in cash and stock based on the price of the Company’s common stock at the end of the performance period, December 31, 2008. The Company accounts for these awards as liability awards and as such records compensation expense for the remeasurement of the fair value of

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

the awards at the end of each reporting period. The Company continually monitors its stock price and performance in order to assess the impact on the ultimate payout under the 2005 Program. The Company evaluated its assumptions during the first quarter of 2008 and increased its assumptions for both the ultimate share price and the payout multiple at the end of the performance period. The Company evaluated its assumptions during the second quarter of 2008 and concluded based on the 2005 Program terms and current market conditions that compensation accrued through March 31, 2008 was sufficient and that no additional expense was necessary for the three months ended June 30, 2008.

The 2005 Program expense is classified as selling, general and administrative expense in the Statements of Consolidated Income. A portion of the 2005 Program expense is included as an unallocated expense in deriving total operating income for segment reporting purposes. See Note B. The Company has recorded a total accrual for the 2005 Program of $149.6 million in other current liabilities in its Condensed Consolidated Balance Sheet as of June 30, 2008.

2007 Supply Long-Term Incentive Program

On July 1, 2007, the Company established the 2007 Supply Long-Term Incentive Program (2007 Supply Program) to provide a long-term incentive compensation opportunity to key employees in the Equitable Production and Equitable Midstream segments. Awards granted may be earned by achieving pre-determined total sales volumes targets and by satisfying certain applicable employment requirements. The awards earned may be increased to a maximum of three times the initial award or reduced to zero based upon achievement of the predetermined performance levels. Payment of awards will be made in cash based on the price of the Company’s common stock at the end of the performance period, December 31, 2010. The Company accounts for these awards as liability awards and as such records compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period. The Company evaluated its assumptions during the first quarter of 2008 and increased its assumption for the ultimate share price at the vesting date for the 2007 Supply Program to $78.00. The Company maintained its assumption for the payout multiple at 100% of the units awarded. No changes were made to the Company’s assumptions during the second quarter of 2008. Total compensation cost recorded for the 2007 Supply Program was $2.0 million for the six months ended June 30, 2008, which included $1.1 million of cost capitalized as part of oil and gas-producing properties and $0.9 million recorded as expense in the Company’s Statement of Consolidated Income.

Restricted Stock Awards

The Company granted 125,030 and 72,600 restricted stock awards during the six months ended June 30, 2008 and 2007, respectively, to key employees of the Company. The majority of the shares granted will be fully vested at the end of the three-year period commencing with the date of grant. The weighted average fair value of these restricted stock grants, based on the grant date fair value of the Company’s stock, was $64.23 and $43.61, for the six months ended June 30, 2008 and 2007, respectively.

As of June 30, 2008, there was $8.7 million of total unrecognized compensation cost related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted average period of approximately 22 months.

Non-Qualified Stock Options

No stock options were granted during the six months ended June 30, 2008. The Company granted 20,123 stock options during the six months ended June 30, 2007, all of which comprised options granted for reload rights associated with previously-awarded options, at a weighted average grant date fair value of $6.61.

The fair value of the Company’s option grants was estimated at the dates of grant using a Black-Scholes option-pricing model with the assumptions indicated in the table below for the six month period ended June 30, 2007.

Risk-free interest rate (range)		4.56% to 4.97%
Dividend yield		2.06% to 2.29%
Volatility factor		.148 to .183
Expected term		3-6 years

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of June 30, 2008, there was no unrecognized compensation cost related to outstanding nonvested stock options as all outstanding options were fully vested.

As of June 30, 2008, 101,500 options were outstanding under the 1999 Nonemployee Directors’ Stock Incentive Plan. No options were granted to non-employee directors during the six month periods ended June 30, 2008 and 2007.

Nonemployee Directors’ Share-Based Awards

The Company has historically granted to non-employee directors share-based awards which vested upon award. The value of the share-based awards will be paid in cash on the earlier of the director’s death or retirement from the Company’s Board of Directors. The Company accounts for these share-based awards as liability awards and as such records compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period. A total of 90,320 non-employee director share-based awards were outstanding as of June 30, 2008. A total of 12,800 and 15,570 share-based awards were granted to non-employee directors, at respective weighted average fair values of $68.22 and $49.88, during the six month periods ended June 30, 2008 and 2007, respectively.

H. Income Taxes

The Company estimates an annual effective income tax rate based on projected results for the year and applies this rate to income before taxes to calculate income tax expense. Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period. Separate effective income tax rates are calculated for net income from continuing operations and any other separately reported net income items, such as discontinued operations.

On March 31, 2008, West Virginia enacted legislation, effective for the Company’s tax year beginning January 1, 2009, that contemplates a reduction of West Virginia’s corporate net income tax rate over the next six years. As a result of this law change, the Company recorded a tax benefit of $4.6 million to reflect an overall decrease in the Company’s expected deferred tax liability as of the effective date of each respective income tax rate reduction. This benefit is included in the annual income tax expense and the entire amount was reflected in the first quarter of 2008.

The Company’s effective income tax rate for the six months ending June 30, 2008 is 37.3%. The Company currently estimates the annual effective income tax rate to be approximately 38.1%. The estimated annual effective income tax rate as of June 30, 2007 was 36.5%.

There were no material changes to the Company’s methodology or to the balance recorded for unrecognized tax benefits during the six months ended June 30, 2008.

The consolidated federal income tax liability of the Company has been settled with the Internal Revenue Service (IRS) through 1997. The IRS has completed its audit and review of the Company’s federal income tax filings for the 1998 through 2000 years. The audit results for these periods generated a tax refund for the Company that is in excess of $2 million which requires review and approval by the Joint Committee on Taxation (JCT). During the review process, the JCT questioned an issue that the Company had previously agreed upon with the IRS through the Fast Track Appeals process. The Company is currently working with the Settlement Agent and the IRS Manager to try to resolve the questions raised by the JCT.

The IRS has surveyed the 2001 and 2002 federal income tax filings and is currently reviewing the research and experimentation tax credits claimed for such years. During the second quarter of 2007, the IRS began an examination of the Company’s federal income tax filings for 2003 through 2005. The Company believes that it is appropriately reserved for any uncertain tax positions related to these periods.

The Company is also subject to various routine state income tax examinations. The Company mainly operates in four states which have statutes of limitations that expire between three to four years from the date of filing of the income tax return.

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

I. Pension and Other Postretirement Benefit Plans

The Company’s costs related to its defined benefit pension and other postretirement benefit plans for the three and six months ended June 30, 2008 and 2007 were as follows:

	Pension Benefits						Other Benefits
	Three Months Ended June 30,
	2008			2007			2008			2007
	(Thousands)
Components of net periodic benefit cost
Service cost	$	44		$	63		$	110		$	123
Interest cost	1,080			1,093			610			636
Expected return on plan assets	(1,333		)	(1,403		)	–			–
Amortization of prior service cost	29			41			(226		)	(215		)
Recognized net actuarial loss	312			363			511			574
Settlement loss	126			697			–			–
Net periodic benefit cost	$	258		$	854		$	1,005		$	1,118

	Pension Benefits						Other Benefits
	Six Months Ended June 30,
	2008			2007			2008			2007
	(Thousands)
Components of net periodic benefit cost
Service cost	$	88		$	126		$	220		$	246
Interest cost	2,160			2,186			1,220			1,272
Expected return on plan assets	(2,666		)	(2,806		)	–			–
Amortization of prior service cost	58			82			(452		)	(430		)
Recognized net actuarial loss	624			726			1,022			1,148
Settlement loss	252			1,130			–			–
Net periodic benefit cost	$	516		$	1,444		$	2,010		$	2,236

J. Recently Issued Accounting Standards

Oil and Gas Reporting Requirements

In June 2008, the U.S. Securities and Exchange Commission (SEC) issued a proposed rule to amend the oil and gas reporting requirements which exist in their current form in Regulation S-K and Regulation S-X under the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as Industry Guide 2. The revisions are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves by better aligning the oil and gas disclosure requirements with current practices and technology. The SEC has requested comments to the proposed rule and expects that amendments will be effective for annual reports for fiscal years ending on or after December 31, 2009. The Company is assessing the impact of the proposed rules and will evaluate the impact of any change in the reporting requirements when the final regulations are issued.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” (SFAS No. 161). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact that SFAS No. 161 will have on its consolidated financial statements.

K. Sale of Assets

In the second quarter of 2007, the Company sold a portion of its proved reserves in the Nora area to Pine Mountain Oil and Gas, Inc. (PMOG), a subsidiary of Range Resources Corporation (Range), for cash proceeds of $184.6

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Equitable Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

million then subject to purchase price adjustments. At the date of sale, proceeds of $95.0 million from the sale were placed into an escrow account pursuant to a deferred exchange agreement, and the Company used these restricted funds in the second half of 2007.

Also in the second quarter of 2007, the Company entered into a Contribution Agreement with PMOG relating to the contribution of certain Nora area gathering facilities and pipelines to Nora Gathering, LLC (Nora LLC), a newly formed entity that is equally owned by the Company and PMOG. This gathering system services production of the Company and Range. The Company contributed Nora area gathering property to Nora LLC in exchange for a 50% interest in Nora LLC and cash of $23.3 million. The Company is accounting for its interest in Nora LLC under the equity method of accounting, as the Company determined that it has the ability to exert significant influence over the operating and financial policies of Nora LLC through its 50%, non-controlling interest. The Company and Nora LLC also entered into a demand note agreement whereby Nora LLC loaned to the Company $69.8 million on the initial closing date. As of June 30, 2008, the note has been fully paid and cancelled.

The Company recognized a gain of $119.4 million, net of hedge loss and costs to sell, as a result of these transactions in the second quarter of 2007.

L. Other Events

On May 12, 2008, the Company completed a public offering of 8,625,000 shares of its common stock, no par value (the Common Stock), at an offering price to the public of $67.75 per share. The proceeds from the offering are being used for general corporate purposes, including the Company’s natural gas drilling, development and infrastructure projects. The underwriting agreement governing the Common Stock includes customary representations, warranties and covenants by the Company and provides for customary indemnification by each of the Company and the underwriters against certain liabilities and customary contribution provisions in respect of those liabilities.

On March 13, 2008, the Company completed a public offering of $500.0 million in aggregate principal amount of 6.50% Senior Notes (Senior Notes) due April 1, 2018. The proceeds from the offering were used to repay short-term notes under the Company’s revolving credit facility. The indenture governing the Senior Notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of the Company’s assets.

In June 2006, the West Virginia Supreme Court of Appeals issued a decision involving interpretation of certain types of oil and gas leases of an unrelated party, in a case where a class of royalty owners in the state of West Virginia had filed a lawsuit claiming that the defendant underpaid royalties by deducting certain post-production costs not permitted by such types of leases and not paying a fair value for the gas produced from the royalty owners’ leases. In January 2007, the jury in the aforementioned case returned a verdict in favor of the plaintiff royalty owners, awarding the plaintiffs significant compensatory and punitive damages for the alleged underpayment of royalties. While the defendant has appealed the verdict, this decision may ultimately impact other royalty interest rights in West Virginia. Claims have been brought against others in the oil and gas industry, including the Company. The proceedings against the Company are in the early stages and the plaintiffs have sought class certification. The Company believes that the claims and facts decided in the unrelated lawsuit can be differentiated from those asserted against the Company. Nevertheless, the Company has reviewed its West Virginia royalty agreements and established a reserve it believes to be appropriate.

M. Subsequent Events

In July 2008, the Company purchased deep rights in approximately 23,000 acres in various counties in Pennsylvania for $30.8 million. The Company plans to perform exploratory activities and develop the Marcellus Shale formations on this acreage.

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Equitable Resources, Inc. and Subsidiaries

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

INFORMATION REGARDING FORWARD LOOKING 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,” “will,” “may,” “forecasts,” “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 report include the matters discussed in the sections captioned “Outlook” in 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 drilling and infrastructure programs, production and sales volumes, reserves, capital expenditures, financing requirements, hedging strategy and tax position. These statements involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has based these forward-looking statements on current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 2007.

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 statements, whether as a result of new information, future events or otherwise.

CORPORATE OVERVIEW

Three Months Ended June 30, 2008

vs. Three Months Ended June 30, 2007

Equitable Resources’ consolidated net income for the three months ended June 30, 2008 totaled $55.4 million, or $0.44 per diluted share, compared to $107.3 million, or $0.87 per diluted share, reported for the same period a year ago. The second quarter of 2007 results included a $119.4 million pre-tax net gain on the sale of assets in the Nora area. Several factors contributed to the increase in net income excluding this gain between periods. Changes in the Company’s assumptions for the 2005 Executive Performance Incentive Program decreased unallocated selling, general and administrative expenses for the 2008 quarter. At Equitable Production, operating revenues increased due to a significant increase in the average well-head sales price as well as an increase in sales volumes. At Equitable Midstream, gathering and processing net operating revenues increased primarily due to higher gathering rates and higher natural gas liquids (NGL) sales prices, while transmission and storage net operating revenues increased as the Big Sandy Pipeline came on-line. At Equitable Distribution, net operating revenues decreased slightly between years due to warmer weather. Additionally, the favorable impact of second quarter of 2007 transition expenses for the now terminated agreement to acquire The Peoples Natural Gas Company (Peoples) and Hope Gas, Inc. (Hope) contributed to an increase in net income in 2008 for the Company.

These positive effects on net income were partially offset by higher severance taxes and depreciation, depletion and amortization at Equitable Production, as well as overall increases in overhead and other operating costs associated with Company growth initiatives.

Six Months Ended June 30, 2008

vs. Six Months Ended June 30, 2007

Equitable Resources’ consolidated net income for the six months ended June 30, 2008 totaled $125.9 million, or $1.00 per diluted share, compared to $164.0 million, or $1.34 per diluted share, reported for the same period a year

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Equitable Resources, Inc. and Subsidiaries

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

ago. Several factors contributed to the increase in net income excluding the second quarter of 2007 asset sale gain between periods. At Equitable Production, operating revenues increased due to a significant increase in the average well-head sales price as well as an increase in sales volumes. At Equitable Midstream, gathering and processing net operating revenues increased due to higher NGL sales prices and gathering rates, while transmission and storage net operating revenues increased primarily due to increased commercial storage activity. At Equitable Distribution, net operating revenues were essentially flat, while operating expenses decreased primarily due to transition expenses incurred in the first six months of 2007 for the now terminated Peoples and Hope acquisition agreement.

These positive effects on net income were partially offset by higher depletion, depreciation and amortization and severance taxes at Equitable Production and overall increases in overhead and other operating costs associated with Company growth initiatives.

The Company has reported the components of each segment’s operating income and various operational measures in the sections below, and where appropriate, has provided information describing how a measure was derived. Equitable’s management believes that presentation of this information provides useful information to management and investors regarding the financial condition, operations and trends of each of Equitable’s segments without being obscured by the financial condition, operations and trends for the other segment or by the effects of corporate allocations of interest and income taxes. In addition, management uses these measures for budget planning purposes.

In January 2007, the Company filed applications with the PA PUC and the Public Service Commission of West Virginia (WV PSC) to reorganize as a holding company. In the second quarter of 2008, the PA PUC and the WV PSC approved the new holding company structure. On June 30, 2008, Equitable Resources, Inc. (Old EQT) reorganized into a holding company structure in which a newly formed Pennsylvania corporation also named Equitable Resources, Inc. (New EQT) became the holding company of the Old EQT family of companies.

The primary purpose of this reorganization was to separate the state regulated distribution operations into a new subsidiary in order to better segregate the regulated and unregulated businesses and improve overall financing flexibility for the Company. In connection with the reorganization, Old EQT transferred to New EQT all of the assets and liabilities of Old EQT other than those associated with the Equitable Gas Company division. New EQT and its subsidiaries will continue to conduct the same businesses and operations that Old EQT conducted prior to the reorganization.

EQUITABLE PRODUCTION

OVERVIEW

Equitable Production’s operating revenues for the second quarter increased 31% from 2007 to 2008. The average well-head sales price increased 28% due to a 45% increase in the average NYMEX price and a higher percentage of unhedged gas sales. Sales volumes increased 6% from 2007 to 2008 excluding volumes from properties sold during 2007. The increase in sales volumes was primarily the result of increased production from the 2007 and 2008 drilling programs, partially offset by the normal production decline in the Company’s existing wells.

Second quarter operating expenses at Equitable Production increased 35% over the same period in the prior year primarily due to higher overhead costs associated with the growth of the Company, higher severance taxes and higher depreciation, depletion and amortization expenses.

Equitable Production continued to focus on organic production growth through its drilling program. The Company drilled 324 gross (252 net) wells in the first six months of 2008, including 161 horizontal shale wells, 7 horizontal Berea wells and the Company’s first exploratory vertical Utica well, compared to 277 gross (198 net) wells in the first six months of 2007 which included 16 horizontal shale wells. As of June 30, 2008, the Utica well has not been turned in-line as the Company is in the process of evaluating a nearby horizontal Marcellus well; the Marcellus well will then need to be temporarily shut-in to allow for the Utica well to be tied-in and evaluated.

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Equitable Resources, Inc. and Subsidiaries

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

RESULTS OF OPERATIONS

EQUITABLE PRODUCTION

	Three Months Ended June 30,								Six Months Ended June 30,
	2008			2007			%		2008			2007			%
OPERATIONAL DATA

Natural gas and oil production (MMcfe)	21,543			21,024			2.5		42,564			41,440			2.7
Company usage, line loss (MMcfe)	(1,587		)	(1,621		)	(2.1	)	(2,893		)	(2,699		)	7.2
Total sales volumes (MMcfe)	19,956			19,403			2.9		39,671			38,741			2.4

Average (well-head) sales price ($/Mcfe)	$	6.14		$	4.79		28.2		$	5.67		$	4.61		23.0

Lease operating expenses (LOE), excluding production taxes ($/Mcfe)	$	0.33		$	0.30		10.0		$	0.31		$	0.31		–
Production taxes ($/Mcfe)	$	0.61		$	0.45		35.6		$	0.55		$	0.46		19.6
Production depletion ($/Mcfe)	$	0.81		$	0.70		15.7		$	0.81		$	0.70		15.7

Production depletion	$	17,502		$	14,737		18.8		$	34,593		$	29,069		19.0
Other depreciation, depletion and amortization (DD&A)	1,119			930			20.3		2,149			1,891			13.6
Total DD&A	$	18,621		$	15,667		18.9		$	36,742		$	30,960		18.7

Capital expenditures (thousands)	$	146,413		$	67,623		116.5		$	242,876		$	124,388		95.3

FINANCIAL DATA (Thousands)

Total operating revenues	$	124,949		$	95,491		30.8		$	230,026		$	183,469		25.4

Operating expenses:
LOE, excluding production taxes	7,054			6,354			11.0		13,016			12,887			1.0
Production taxes	13,114			9,530			37.6		23,337			19,103			22.2
Exploration expense	838			117			616.2		1,393			399			249.1
Selling, general and administrative (SG&A)	11,145			5,884			89.4		21,029			23,420			(10.2	)
DD&A	18,621			15,667			18.9		36,742			30,960			18.7
Total operating expenses	50,772			37,552			35.2		95,517			86,769			10.1
Operating income	$	74,177		$	57,939		28.0		$	134,509		$	96,700		39.1

Three Months Ended June 30, 2008

vs. Three Months Ended June 30, 2007

Equitable Production’s operating income totaled $74.2 million for the three months ended June 30, 2008 compared to $57.9 million for the three months ended June 30, 2007. The $16.3 million increase in operating income was primarily the result of an increase in the average well-head sales price.

Total operating revenues were $124.9 million for the three months ended June 30, 2008 compared to $95.5 million for the three months ended June 30, 2007. The $29.4 million increase in total operating revenues was primarily due to a 28% increase in the average well-head sales price and a 6% increase in production sales volumes, excluding volumes from properties sold during 2007. The $1.35 per Mcfe increase in the average well-head sales price was primarily attributable to a $3.38 increase in the average NYMEX price and a higher percentage of unhedged gas sales, partially offset by a lower realized hedge price. The increase in production sales volumes was primarily the result of increased production from the 2007 and 2008 drilling programs, partially offset by the normal production decline in the Company’s wells.

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Equitable Resources, Inc. and Subsidiaries

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

Operating expenses totaled $50.8 million for the three months ended June 30, 2008 compared to $37.6 million for the three months ended June 30, 2007. The increase in SG&A was primarily due to higher overhead costs associated with the growth of the Company and incentive plan expenses, as well as adjustments to the allowance for doubtful accounts due to increased commodity prices. The increase in production taxes was primarily due to an increase in severance taxes (a production tax directly imposed on the value of the gas extracted) resulting primarily from higher gas commodity prices. The increase in DD&A was due to increased depletion expense resulting from increases in the unit rate ($2.5 million) and volume ($0.3 million). The $0.11 increase in the depletion rate is attributable to the increased investment in oil and gas producing properties.

Six Months Ended June 30, 2008

vs. Six Months Ended June 30, 2007

Equitable Production’s operating income totaled $134.5 million for the six months ended June 30, 2008 compared to $96.7 million for the six months ended June 30, 2007. The $37.8 million increase in operating income was primarily the result of an increase in the average well-head sales price, the establishment in 2007 of reserves in connection with legal disputes and an increase in 2008 in production sales volumes.

Total operating revenues were $230.0 million for the six months ended June 30, 2008 compared to $183.5 million for the six months ended June 30, 2007. The $46.5 million increase in total operating revenues was primarily due to a 23% increase in the average well-head sales price and an 8% increase in production sales volumes, excluding volumes from properties sold during 2007. The $1.06 per Mcfe increase in the average well-head sales price was primarily attributable to a $2.32 increase in the average NYMEX price and a higher percentage of unhedged gas sales, partially offset by a lower realized hedge price. The increase in production sales volumes was the result of increased production from the 2007 and 2008 drilling programs, partially offset by the normal production decline in the Company’s wells.

Operating expenses totaled $95.5 million for the six months ended June 30, 2008 compared to $86.8 million for the six months ended June 30, 2007. The increase in DD&A was primarily due to increased depletion expense resulting from increases in the unit rate ($4.8 million) and volume ($0.7 million). The $0.11 increase in the depletion rate is attributable to the increased investment in oil and gas producing properties. The increase in production taxes is primarily due to increased severance taxes mainly resulting from higher gas commodity prices. The decrease in SG&A was primarily due to 2007 reserves for certain legal disputes and a decrease in 2008 in other legal fees, settlements and expenses, partially offset by higher overhead costs associated with the growth of the Company and incentive plan expenses, as well as adjustments to the allowance for doubtful accounts due to increased commodity prices.

OUTLOOK

Equitable Production’s business strategy is focused on growth of the Company’s natural gas reserves. Key elements of Equitable Production’s strategy include:

· Expanding reserves and production through horizontal drilling in Appalachia. Through its capital program, Equitable Production is seeking to maximize the value of its existing asset base by developing its large acreage position, which the Company believes holds significant production and reserve growth potential. A substantial portion of the Company’s 2008 drilling efforts is focused on drilling horizontal wells in shale formations in Kentucky and West Virginia. The Company estimates that more than 350 horizontal wells will be drilled in 2008.

· Exploiting additional reserve potential through key emerging development plays. In 2008, the Company is examining the potential for exploitation of gas reserves in new geological formations and through different technologies. Plans include re-entry wells in the Devonian shale, testing the Devonian shale in Virginia and the Utica shale in Pennsylvania and drilling high and low pressure Marcellus shale wells and Berea sandstone wells. In addition, the Company will obtain proprietary seismic data in order to evaluate deep drilling opportunities for 2009. Approximately 15% of wells drilled in 2008 are expected to be located in these emerging development plays in the Appalachian Basin.

Table of Contents

Equitable Resources, Inc. and Subsidiaries

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

EQUITABLE MIDSTREAM

OVERVIEW

Equitable Midstream’s net operating revenues for the second quarter increased by 22% from 2007 to 2008. This increase was primarily due to higher average gathering fees and higher average NGL sales prices in the gathering and processing business and revenues related to the Big Sandy Pipeline, which came on-line in the second quarter of 2008, in the transmission and storage business. Increases in net operating revenues were partially offset by an increase in operating expenses.

During May 2007, the Equitable Midstream segment contributed certain Nora area gathering facilities and pipelines to Nora Gathering, LLC, a newly formed entity that is equally owned by the Company and Pine Mountain Oil and Gas, Inc., in exchange for a 50% equity interest in the LLC and cash. As a result of the gathering asset contribution, gathered volumes, gathering revenues and gathering-related expenses related to the Nora area gathering activities, which are included in the 2007 results, are not included in Equitable Midstream’s operating results for 2008. However, Equitable Midstream records its 50% equity interest in the earnings of Nora Gathering, LLC in equity in earnings of nonconsolidated investments.

In 2006, Equitrans entered into a rate case settlement with the Federal Energy Regulatory Commission (FERC) that allows Equitrans, among other things, to institute an annual surcharge for the tracking and recovery of all costs (operations, maintenance and return on invested capital) incurred on and after September 1, 2005, related to Equitrans’ Pipeline Safety Program under the Pipeline Safety Improvement Act of 2002. On March 29, 2007, the Company received approval, subject to refund, to institute the surcharge, and on April 1, 2007, the Company commenced billing the surcharge. On November 26, 2007, FERC removed the refund condition and approved the surcharge effective April 1, 2007. Filings to modify the surcharge must be made on or before March 1 of each year for approval by FERC. On February 29, 2008, the Company filed to increase its existing Pipeline Safety Surcharge. On March 27, 2008, the Company received an Interim Order from FERC granting approval, subject to refund, to institute the increased surcharge effective April 1, 2008. On June 30, 2008, FERC removed the refund condition and approved the surcharge as filed effective April 1, 2008. The Company anticipates continuing to utilize the surcharge mechanism in future years to recover costs incurred in connection with its Pipeline Safety Program.

The Company is currently commissioning the first phase of the Mayking Corridor Project (Mayking). This phase provides additions to Equitable Midstream’s existing gathering system in eastern Kentucky, including new compressor units, to gather and transport gas to the Langley processing facility. This project will help to mitigate curtailments and increase the flexibility and reliability of the Company’s gathering systems in transporting gas to market by providing additional capacity.

Table of Contents

Equitable Resources, Inc. and Subsidiaries

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

RESULTS OF OPERATIONS

EQUITABLE MIDSTREAM

Three Months Ended

June 30,

Six Months Ended

June 30,

2008

2007

2008

2007

OPERATIONAL DATA

Gathering and processing:

Gathered volumes (MMBtu)

33,444