Edgar Filing: EQT Corp

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, 2009

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

EQT CORPORATION

(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.)

625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania		15222
(Address of principal executive offices)		(Zip code)

(412) 553-5700

(Registrant’s telephone number, including area code:)

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

225 North Shore Drive, Pittsburgh, Pennsylvania 15212

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No 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, 2009, 130,903,532 shares of common stock, no par value, of the registrant were outstanding.

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EQT CORPORATION 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, 2009 and 2008	3

	Statements of Condensed Consolidated Cash Flows for the Six Months Ended June 30, 2009 and 2008	4

	Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	5 – 6

	Notes to Condensed Consolidated Financial Statements	7 – 19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20 – 33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34 – 36

Item 4.	Controls and Procedures	37

Part II.	Other Information:

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 4.	Submission of Matters to a Vote of Security Holders	39

Item 6.	Exhibits	40

Signature		41

Index to Exhibits		42

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EQT CORPORATION AND SUBSIDIARIES

Statements of Consolidated Income (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(Thousands, except per share amounts)
Operating revenues	$	238,040	$	334,009	$	707,443	$	869,783

Operating expenses:
Purchased gas costs	34,591		118,352		243,598		389,530
Operation and maintenance	34,892		28,612		66,482		54,204
Production	14,860		20,369		29,880		36,889
Exploration	4,414		838		7,725		1,393
Selling, general and administrative	35,581		32,654		65,331		104,395
Depreciation, depletion and amortization	46,188		32,051		90,777		62,816
Total operating expenses	170,526		232,876		503,793		649,227

Operating income	67,514		101,133		203,650		220,556

Other income	698		1,574		1,288		5,098

Equity in earnings of nonconsolidated investments	1,610		1,697		2,732		2,991

Interest expense	26,460		14,327		45,703		27,980

Income before income taxes	43,362		90,077		161,967		200,665
Income taxes	16,717		34,686		63,329		74,754
Net income	$	26,645	$	55,391	$	98,638	$	125,911

Earnings per share of common stock:
Basic:
Weighted average common shares outstanding	130,830		126,243		130,784		124,372
Net income	$	0.20	$	0.44	$	0.75	$	1.01
Diluted:
Weighted average common shares outstanding	131,443		127,321		131,421		125,432
Net income	$	0.20	$	0.44	$	0.75	$	1.00
Dividends declared per common share	$	0.22	$	0.22	$	0.44	$	0.44

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

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EQT CORPORATION AND SUBSIDIARIES

Statements of Condensed Consolidated Cash Flows (Unaudited)

	Six Months Ended June 30,
	2009			2008
	(Thousands)
Cash flows from operating activities:
Net income	$	98,638		$	125,911
Adjustments to reconcile net income to cash provided by operating activities:
Provision for losses on accounts receivable	(1,007		)	3,922
Depreciation, depletion, and amortization	90,777			62,816
Other income	(1,288		)	(5,098		)
Equity in earnings of nonconsolidated investments	(2,732		)	(2,991		)
Deferred income taxes	82,878			125,215
Excess tax benefits from share-based payment arrangements	(329		)	(1,124		)
Decrease in inventory	98,711			27,855
Decrease in accounts receivable and unbilled revenues	148,871			6,703
Decrease (increase) in margin deposits	1,119			(233,693		)
(Decrease) increase in accounts payable	(181,694		)	47,030
Change in derivative instruments at fair value, net	49,703			26,370
Changes in other assets and liabilities	84,469			(94,172		)
Net cash provided by operating activities	468,116			88,744

Cash flows from investing activities:
Capital expenditures	(439,348		)	(511,135		)
Capital contributions to Nora Gathering, LLC	(6,511		)	(10,800		)
Investment in available-for-sale securities	(3,000		)	(3,000		)
Net cash used in investing activities	(448,859		)	(524,935		)

Cash flows from financing activities:
Dividends paid	(57,675		)	(53,789		)
Proceeds from issuance of common stock	—			560,821
Proceeds from issuance of long-term debt	700,000			500,000
Debt issuance costs	(6,874		)	(6,645		)
Decrease in short-term loans	(319,917		)	(450,000		)
Decrease in note payable to Nora Gathering, LLC	—			(29,329		)
Proceeds from exercises under employee compensation plans	225			842
Excess tax benefits from share-based payment arrangements	329			1,124
Net cash provided by financing activities	316,088			523,024

Net increase in cash and cash equivalents	335,345			86,833
Cash and cash equivalents at beginning of period	—			81,711
Cash and cash equivalents at end of period	$	335,345		$	168,544

Cash paid (received) during the period for:
Interest, net of amount capitalized	$	38,714		$	19,767
Income taxes, net of refund	$	(103,317	)	$	6,855

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

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EQT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

	June 30, 2009		December 31, 2008
	(Thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	335,345	$	—
Accounts receivable (less accumulated provision for doubtful accounts: June 30, 2009, $19,945; December 31, 2008, $26,636)	103,574		209,008
Unbilled revenues	7,500		49,930
Margin deposits with financial institutions	3,315		4,434
Inventory	157,427		288,182
Derivative instruments, at fair value	191,970		192,191
Prepaid expenses and other	75,374		183,437
Total current assets	874,505		927,182

Equity in nonconsolidated investments	178,183		169,241

Property, plant and equipment	5,974,278		5,503,921
Less: accumulated depreciation and depletion	1,492,061		1,406,402
Net property, plant and equipment	4,482,217		4,097,519

Investments, available-for-sale	30,514		25,880
Regulatory assets	80,490		83,525
Other assets	30,204		26,315
Total assets	$	5,676,113	$	5,329,662

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

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EQT CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

	June 30, 2009			December 31, 2008
	(Thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	4,300		$	4,300
Short-term loans	—			319,917
Accounts payable	175,038			356,732
Derivative instruments, at fair value	127,037			175,889
Other current liabilities	141,075			185,770
Total current liabilities	447,450			1,042,608

Long-term debt	1,949,200			1,249,200
Deferred income taxes and investment tax credits	901,229			781,520
Unrecognized tax benefits	64,390			47,553
Pension and other post-retirement benefits	58,195			69,409
Other credits	99,874			89,279
Total liabilities	3,520,338			3,279,569

Common stockholders’ equity:
Common stock, no par value, authorized 320,000 shares; shares issued: June 30, 2009 and December 31, 2008, 157,630	949,792			948,497
Treasury stock, shares at cost: June 30, 2009, 26,727; December 31, 2008, 26,764 (net of shares and cost held in trust for deferred compensation of 168, $2,876 and 163, $2,784)	(482,780		)	(483,464		)
Retained earnings	1,694,760			1,653,797
Accumulated other comprehensive loss	(5,997		)	(68,737		)
Total common stockholders’ equity	2,155,775			2,050,093
Total liabilities and stockholders’ equity	$	5,676,113		$	5,329,662

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

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

A. Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles 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 this Form 10-Q, references to “we,” “us,” “our,” “EQT,” “EQT Corporation,” and the “Company” refer collectively to EQT Corporation and its consolidated subsidiaries. In the opinion of management, these statements include all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and subsidiaries as of June 30, 2009, and the results of its operations and cash flows for the three and six month periods ended June 30, 2009 and 2008. Certain previously reported amounts have been reclassified to conform to the current year presentation.

The balance sheet at December 31, 2008 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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

For further information, refer to the consolidated financial statements and footnotes thereto included in EQT Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 20 of this document.

B. Segment Information

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

The Company reports its operations in three segments, which reflect its lines of business. The EQT 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. EQT Midstream’s operations include the natural gas gathering, processing, transportation and storage activities of the Company as well as sales of natural gas liquids (NGLs). Distribution’s operations are primarily comprised of the state-regulated natural gas 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. Actual headquarters’ expenses in excess of budget, which are primarily related to incentive compensation and administrative costs, 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.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues from external customers:
EQT Production	$	89,885		$	124,949		$	187,648		$	230,026
EQT Midstream	119,500			153,777			242,874			375,102
Distribution	78,094			114,731			371,266			370,693
Less: intersegment revenues (a)	(49,439		)	(59,448		)	(94,345		)	(106,038		)
Total	$	238,040		$	334,009		$	707,443		$	869,783

Operating income:
EQT Production	$	33,648		$	74,177		$	78,065		$	134,509
EQT Midstream	32,802			23,628			81,782			84,482
Distribution	9,353			2,029			53,205			39,979
Unallocated (expenses) income (b)	(8,289		)	1,299			(9,402		)	(38,414		)
Total	$	67,514		$	101,133		$	203,650		$	220,556

Reconciliation of operating income to net income:

Other income:
EQT Midstream	$	355		$	1,464		$	905		$	4,847
Distribution	343			110			383			251
Total	$	698		$	1,574		$	1,288		$	5,098

Equity in earnings of nonconsolidated investments:
EQT Production	$	11		$	151		$	47		$	244
EQT Midstream	1,595			1,471			2,662			2,626
Unallocated	4			75			23			121
Total	$	1,610		$	1,697		$	2,732		$	2,991

Interest expense	26,460			14,327			45,703			27,980
Income taxes	16,717			34,686			63,329			74,754
Net income	$	26,645		$	55,391		$	98,638		$	125,911

	June 30,		December 31,
	2009		2008
	(Thousands)
Segment Assets:
EQT Production	$	2,570,361	$	2,338,695
EQT Midstream	1,887,852		1,897,872
Distribution	800,032		951,179
Total operating segments	5,258,245		5,187,746
Headquarters assets, including cash and short-term investments	417,868		141,916
Total assets	$	5,676,113	$	5,329,662

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(Thousands)
Depreciation, depletion and amortization:
EQT Production	$	27,435	$	18,621	$	53,868	$	36,742
EQT Midstream	12,787		7,843		25,025		15,061
Distribution	5,486		5,155		10,924		10,208
Other	480		432		960		805
Total	$	46,188	$	32,051	$	90,777	$	62,816

Expenditures for segment assets:
EQT Production	$	164,880	$	146,413	$	302,316	$	242,876
EQT Midstream	53,344		152,099		115,517		247,664
Distribution	8,717		12,378		15,493		19,983
Other	4,692		231		6,022		612
Total	$	231,633	$	311,121	$	439,348	$	511,135

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

(b) Unallocated (expenses) income primarily consist of incentive compensation and administrative costs in excess of budget that are not allocated to the operating segments.

C. Derivative Instruments

Natural Gas Hedging Instruments

The Company’s primary market risk exposure is the volatility of future prices for natural gas and natural gas liquids, which can affect the operating results of the Company primarily through the EQT Production and EQT Midstream segments. The Company’s overall objective in its commodity hedging program is to ensure an adequate level of return for the well development and infrastructure investments at these segments.

The Company uses non-leveraged derivative commodity instruments that are placed with major financial institutions whose creditworthiness is continually monitored to reduce the effect of this volatility. 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. Put option contracts provide protection from dropping prices and require the counterparty to pay the Company if the index price falls below the contract price. The Company also engages in a limited number of basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to interest rate fluctuations on short or long-term debt.

The Company recognizes all derivative instruments as either assets or liabilities at fair value. The accounting for the changes in fair value of the Company’s derivative instruments depends on the use of the derivative instruments. At contract inception, the Company designates its derivative instruments as hedging or trading activities. To the extent that a derivative instrument has been designated and qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive (loss), net of tax, and is subsequently reclassified into earnings, in the same line item associated with the forecasted transaction, in the same period or periods during which the hedged forecasted transaction affects earnings. For derivative instruments that have not been designated as cash flow hedges, the change in fair value for the instrument is recognized in the Statements of Consolidated Income as operating revenues each period.

Exchange-traded instruments are generally settled with offsetting positions. Over the counter (OTC) arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying statements of Condensed Consolidated Cash Flows.

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

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

of equity production and forecasted natural gas purchases and sales have been designated and qualify as cash flow hedges.

The Company assesses the effectiveness of hedging relationships, the degree that the gain (loss) for the hedging instrument offsets the loss (gain) on the hedged item, both at the inception of the hedge and on an on-going basis. If the gain (loss) for the hedging instrument is greater than the loss (gain) on the hedged item, the ineffective portion of the cash flow hedge is immediately recognized in operating revenues in the Statements of Consolidated Income.

The Company also enters into a limited amount of energy trading contracts to leverage its assets and limit its exposure to shifts in market prices and has a limited amount of other derivative instruments not designated as hedges. During 2008, the Company effectively settled certain derivative commodity hedges scheduled to mature during the period 2010 through 2013 by de-designating the hedges and entering into directly counteractive economic hedges. As of the date of de-designation of these hedges, the Company had recorded a loss, net of tax, in accumulated other comprehensive loss of approximately $11.4 million which will be recognized as part of the realized sales price in the statements of consolidated income when the underlying physical transactions occur. The fair value of the offsetting positions not designated as hedges as of June 30, 2009 was a $46.0 million derivative liability and a $27.7 million derivative asset. During the first quarter of 2009, the Company terminated certain collar agreements scheduled to mature during the period 2010 through 2012. As of the date of termination of these hedges the Company had recorded a gain, net of tax, in accumulated other comprehensive income of approximately $5.1 million which will be recognized as part of the realized sales price in the statements of consolidated income when the underlying physical transactions occur.

The current hedge position extends through 2015 and provides price protection for approximately 60% of expected natural gas production sales volumes in 2009 and greater than 40% of expected natural gas production sales volumes through 2011. See “Commodity Risk Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q for further details of the Company’s hedged position.

All derivatives recognized in the balance sheet and used in cash flow hedging relationships are commodity contracts. All gains (losses) recognized in income or reclassified from accumulated other comprehensive income into income are reported in operating revenues. All derivative instrument assets and liabilities are reported in the balance sheet captions derivative instruments, at fair value.

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Thousands)
Derivatives designated as hedging instruments
Amount of (loss) gain recognized in OCI (effective portion), net of tax	$	(1,532	)	$	(335,052	)	$	142,010		$	(469,761	)
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion), net of tax (a)	23,222			(67,096		)	80,956			(91,994		)
Amount of gain (loss) recognized in income (ineffective portion) (b)	720			(348		)	(5,338		)	674

Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in income	$	126		$	197		$	(27	)	$	278

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	June 30, 2009		December 31, 2008
	(Thousands)
Asset derivatives
Derivatives designated as hedging instruments	$	158,579	$	188,247
Derivatives not designated as hedging instruments	33,391		3,944
Total asset derivatives	$	191,970	$	192,191

Liability derivatives
Derivatives designated as hedging instruments	$	73,253	$	154,605
Derivatives not designated as hedging instruments	53,784		21,284
Total liability derivatives	$	127,037	$	175,889

(a) Includes $0.1 million and $8.8 million for the three and six month periods ended June 30, 2009 of unrealized hedge gains reclassified into earnings to offset lower of cost or market adjustments on hedged items. No such reclassification occurred for the three or six month periods ended June 30, 2008. The Company also had an immaterial amount of OCI reclassified to interest expense related to an interest rate swap on long-term debt.

(b) No amounts have been excluded from effectiveness testing.

The net fair value of derivative instruments changed during the first six months of 2009 primarily as a result of a decrease in natural gas prices. The absolute quantities of the Company’s derivative commodity instruments that have been designated and qualify as cash flow hedges totaled 198 Bcf and 243 Bcf as of June 30, 2009 and December 31, 2008, respectively, and are primarily related to natural gas swaps and collars.

The Company deferred net gains (losses) of $32.3 million and ($28.8) million in accumulated other comprehensive income (loss), net of tax, as of June 30, 2009 and December 31, 2008, 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 $36.7 million of net unrealized gains on its derivative commodity instruments reflected in accumulated other comprehensive income, net of tax, as of June 30, 2009 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions. This recognition occurs through an increase in the Company’s net operating revenues resulting in the average hedged price becoming the realized sales price.

The Company is exposed to credit loss in the event of nonperformance by counterparties to derivative contracts. This credit exposure is limited to derivative contracts with a positive fair value. The Company believes that NYMEX-traded future contracts have minimal credit risk because Commodity Futures Trading Commission regulations are in place to protect exchange participants, including the Company, from potential financial instability of the exchange members. The Company monitors counterparty credit quality by reviewing counterparty credit spreads, credit ratings, credit default swap rates and market activity.

The Company utilizes various processes and information technology systems to monitor and evaluate its credit risk exposures. This includes closely monitoring current market conditions, counterparty credit spreads and credit default swap rates. Credit exposure is controlled through credit approvals and limits. To manage the level of credit risk, the Company deals with financial counterparties that are of investment grade or better, enters into netting agreements whenever possible, and may obtain collateral or other security.

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 records these deposits as a receivable in the consolidated balance sheet. When the net fair value of any of the Company’s swap agreements represents an asset to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the Company requires the counterparty to remit funds as margin deposit in an amount equal to the portion of the derivative asset which is in excess of the threshold amount. The Company records a current liability for such amounts received. The Company had no such deposits in its Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008.

When the Company enters into exchange-traded natural gas contracts, exchanges may require the Company to remit funds to the corresponding broker as good-faith deposits to guard against the risks associated with changing market

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 change at the exchanges’ discretion. The Company recorded such deposits with brokers in the amount of $3.3 million and $4.4 million in its Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008, respectively.

Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings are lowered below investment grade, additional collateral must be deposited with the counterparty. This additional collateral can be up to 100% of the derivative liability. As of June 30, 2009, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $47.1 million, for which the Company had no collateral posted on June 30, 2009. If the Company’s credit rating had been downgraded below investment grade on June 30, 2009, the Company would have been required to post additional collateral of $24.8 million in respect of the liability position. Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies. In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Baa3 or higher by Moody’s. Anything below these ratings is considered non-investment grade.

D. Investments, Available-For-Sale

As of June 30, 2009, the investments classified by the Company as available-for-sale consist of $30.5 million of equity and bond funds intended to fund plugging and abandonment and other liabilities for which the Company self-insures. Unrealized gains or losses with respect to temporarily impaired investments classified as available-for-sale are recognized within the Condensed Consolidated Balance Sheets as a component of equity, accumulated other comprehensive (loss). The Company evaluates these investments quarterly and if the Company subsequently determines that a loss is other-than-temporary, any unrealized losses stemming from such impaired investments will be recognized in earnings.

	June 30, 2009
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Thousands)
Equity funds	$	21,833	$	1,050	$	—	$	22,883
Bond funds	7,371		260		—		7,631
Total investments	$	29,204	$	1,310	$	—	$	30,514

	December 31, 2008
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Thousands)
Equity funds	$	20,219	$	—	$	—	$	20,219
Bond funds	5,661		—		—		5,661
Total investments	$	25,880	$	—	$	—	$	25,880

During the six month periods ended June 30, 2009 and 2008, the Company purchased additional securities with a cost basis totaling $3.0 million and $3.0 million.

E. Fair Value Measurements

The Company has an established process for determining fair value for its financial instruments, principally derivative commodity instruments and available-for-sale investments. 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, volatilities, and nonperformance risk. Nonperformance risk considers the effect of the Company’s credit standing on the fair value of liabilities and the effect of the counterparty’s credit standing on the fair value of assets. The Company estimates

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

nonperformance risk by analyzing publicly available market information, including a comparison of the yield on debt instruments with credit ratings similar to the Company’s or counterparty’s credit rating and the yield of a risk free instrument. The Company also considers credit default swaps rates where applicable.

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 and option agreements and a portion of the Company’s swap agreements. Since the adoption of fair value accounting, the Company has not made any changes to its classification of financial instruments in any category.

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. Swaps included in Level 3 are valued using internal models; these internal models are validated each period with non-binding broker price quotes. The Company has not experienced significant differences between internally calculated values and broker price quotes. Collars and options included in Level 3 are valued using internal models calculated with market derived volatilities. The Company uses NYMEX forward curves to value futures, NYMEX swaps, collars and options. The NYMEX forward curves are validated to external sources at least monthly.

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, 2009			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	$	30,514		$	30,514		$	—		$	—
Derivative instruments, at fair value	191,970			14,980			76,534			100,456
Total assets	$	222,484		$	45,494		$	76,534		$	100,456

Liabilities
Derivative instruments, at fair value	$	(127,037	)	$	(12,754	)	$	(112,885	)	$	(1,398	)
Total liabilities	$	(127,037	)	$	(12,754	)	$	(112,885	)	$	(1,398	)

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Notes to Condensed Consolidated Financial Statements (Unaudited)

	Fair value measurements using significant unobservable inputs (Level 3)
	Derivative instruments, at fair value, net
	(Thousands)
Balance at January 1, 2009	$	87,605
Total gains or losses:
Included in earnings	86
Included in other comprehensive income	36,248
Purchases, issuances, and settlements	(24,881		)
Transfers in and/or out of Level 3	—
Balance at June 30, 2009	$	99,058

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, 2009	(10		)

Gains and losses related to derivative commodity instruments included in earnings for the period are reported in operating revenues in the Statements of Consolidated Income.

F. Comprehensive Income (Loss)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Thousands)
Net income	$	26,645		$	55,391		$	98,638		$	125,911
Other comprehensive (loss) income:
Net change in cash flow hedges	(24,724		)	(267,899		)	61,113			(385,532		)
Unrealized (loss) gain on investments, available-for-sale	2,454			(684		)	851			(2,594		)
Pension and other post-retirement benefit plans:
Prior service cost	(86		)	(71		)	(172		)	(142		)
Net loss	371			394			742			789
Settlement loss	103			77			206			152
Total comprehensive income (loss)	$	4,763		$	(212,792	)	$	161,378		$	(261,416	)

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

	June 30,			December 31,
	2009			2008
	(Thousands)
Net unrealized gain (loss) from hedging transactions	$	31,894		$	(29,219	)
Unrealized gain on available-for-sale securities	851			—
Pension and other post-retirement benefits adjustment	(38,742		)	(39,518		)
Accumulated other comprehensive loss	$	(5,997	)	$	(68,737	)

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

G. Share-Based Compensation

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2009			2008		2009			2008

2005 Executive Performance Incentive Program	$	—		$	—	$	—		$	42,548
2008 Executive Performance Incentive Program	211			—		348			—
2009 Shareholder Value Plan	5,134			—		6,315			—
2007 Supply Long-Term Incentive Program	1,349			422		2,799			910
Restricted stock awards	835			876		1,986			1,859
Nonqualified stock options	783			—		1,567			—
Non-employee directors’ share-based awards	(112		)	1,731		(304		)	2,280
Total share-based compensation expense	$	8,200		$	3,029	$	12,711		$	47,597

Executive Performance Incentive Programs

The vesting of the stock units granted under the 2005 Executive Performance Incentive Program (2005 Program) occurred on December 31, 2008, after the ordinary close of the performance period, and payment was made on that day. The Company accounted for these awards as liability awards and as such recorded compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period. During the first half of 2008, the Company increased its assumptions for the total payout and recognized $42.5 million of expense related to the 2005 Program.

The vesting of the units granted under the 2008 Executive Performance Incentive Program (2008 Program) will occur upon payment after the end of the performance period, December 31, 2011, at a payout multiple between zero and 300%, which is dependent upon the level of total shareholder return relative to a predefined peer group’s total shareholder return during the 3.5 year performance period and production sales revenues (at a fixed price) for approximately the same period. Payment of awards is expected to be in cash based on the price of the Company’s common stock at the end of the performance period. 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 continually monitors its stock price and performance in order to assess the impact on the ultimate payout under the 2008 Program. The Company’s current assumptions for the ultimate share price and payout multiple are $50 and 100% of the units awarded, respectively. As of June 30, 2009, approximately 59,000 units were outstanding under the 2008 Program. The 2008 Program expense is classified as selling, general and administrative expense in the Statements of Consolidated Income.

2009 Shareholder Value Plan

The vesting of the units granted under the 2009 Shareholder Value Plan (2009 SVP) will occur upon payment after the end of the performance period utilizing a payout factor of between zero and 250%, dependent upon a combination of the level of total shareholder return relative to a predefined peer group and the Company’s average absolute return on total capital during the performance period of January 1, 2005 to December 31, 2009. To determine the actual payment per unit, the payout factor will be multiplied by the period-end stock price and such product will be reduced by $63.82 (referred to as the threshold value). The threshold value approximates the Company’s total shareholder return relative to the predefined peer group through December 31, 2008 at a 175% multiple. Payment of awards is expected to be in cash based on the price of the Company’s common stock at the end of the performance period, December 31, 2009. 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 continually monitors its stock price and performance in order to assess the impact on the ultimate payout under the 2009 SVP. The Company’s current assumptions for the period-end stock and payout multiple are approximately $35 and 200% of the units awarded, respectively. As of June 30, 2009, approximately 963,000 units were outstanding under the 2009 SVP. The 2009 SVP expense is classified as selling, general and administrative expense in the Statements of Consolidated Income.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 EQT Production and EQT Midstream segments and awards were granted at that time. During the first quarter of 2009, the Compensation Committee of the Board of Directors approved the grant of approximately 116,000 additional awards under the 2007 Supply Program. Awards granted may be earned by achieving pre-determined total sales volumes targets, achieving certain efficiency metrics and 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 continually monitors its stock price and performance in order to assess the impact on the ultimate payout under the 2007 Supply Program. The Company’s current assumptions for the ultimate share price and payout multiple are approximately $45 and 200% of the units awarded, respectively. As of June 30, 2009, approximately 272,000 units were outstanding under the 2007 Supply Program.

Restricted Stock Awards

The Company granted 9,000 and 125,030 restricted stock awards during the three months ended June 30, 2009 and 2008, respectively, to key employees of the Company. 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 approximately $34.89 and $64.23, for the three months ended June 30, 2009 and 2008, respectively.

As of June 30, 2009, the Company had $5.5 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 month periods ended June 30, 2009 and 2008. As of June 30, 2009, the Company had $6.0 million of total unrecognized compensation cost related to outstanding nonvested stock options.

Nonemployee Directors’ Share-Based Awards

As of June 30, 2009, 83,500 options were outstanding under the 1999 Nonemployee Directors’ Stock Incentive Plan. No options were granted to non-employee directors during the three month periods ended June 30, 2009 and 2008.

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 84,482 non-employee director share-based awards were outstanding as of June 30, 2009. No share-based awards were granted to non-employee directors during the six month period ended June 30, 2009. A total of 12,800 share-based awards were granted to non-employee directors, at a weighted average fair value of $68.22 per share, during the six month period ended June 30, 2008.

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.

The Company’s effective income tax rate for the six months ending June 30, 2009 was 39.1%. The Company currently estimates the annual effective income tax rate to be approximately 39.1%. The estimated annual effective income tax rate as of June 30, 2008 was 38.1%. The increase in the expected annual effective tax rate is primarily

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

the result of a West Virginia law change in 2008 that created a discrete benefit. The Company has a method change request pending with the Internal Revenue Service which, if approved, will reduce the estimated effective income tax rate for 2009.

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 was included in the first quarter 2008 income tax expense.

There were no material changes to the Company’s methodology for unrecognized tax benefits during the six months ended June 30, 2009. Increases to the Company’s FIN 48 reserve during the six months ended June 30, 2009 were primarily attributable to certain pending changes in the Company’s accounting for repairs expenditures for tax purposes.

The consolidated federal income tax liability of the Company has been settled with the Internal Revenue Service (IRS) through 2000. In December 2008, the Joint Committee on Taxation (JCT) approved the settlement of all issues related to the 1998 through 2000 audit. The Company received a final net tax refund of $3.8 million, including interest, for these years.

As of June 30, 2009, the IRS has completed its audit and review of the Company’s federal income tax filings for the 2001 through 2005 years and the Company has received approximately $3.0 million of the total expected $3.4 million refund relating to the agreed upon audit adjustments for these years. Since the expected refund is greater than $2.0 million, these years will be reviewed by the JCT. The only unresolved issue relates to the research and experimentation tax credits claimed for years 2001 through 2005, which will be referred to the Appeals Division of the IRS after JCT review is completed. The Company also is the subject of various state income tax examinations. The Company believes that it is appropriately reserved for any uncertain tax positions claimed during these periods.

During the second quarter of 2009 EQT received a refund of $99.5 million from the IRS relating to the 2008 net operating loss carryback claim that was filed with the IRS on March 3, 2009. This net operating loss was primarily generated from intangible drilling costs (IDC) generated by the Company’s drilling program that are deducted currently for tax purposes and accelerated tax deprecation for expansion of the gathering infrastructure.

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, 2009 and 2008 were as follows:

	Pension Benefits						Other Benefits
	Three Months Ended June 30,
	2009			2008			2009			2008
	(Thousands)
Components of net periodic benefit cost
Service cost	$	109		$	44		$	144		$	110
Interest cost	906			1,080			537			610
Expected return on plan assets	(1,145		)	(1,333		)	—			—
Amortization of prior service cost	4			29			(226		)	(226		)
Recognized net actuarial loss	298			312			437			511
Settlement loss	173			126			—			—
Net periodic benefit cost	$	345		$	258		$	892		$	1,005

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Notes to Condensed Consolidated Financial Statements (Unaudited)

	Pension Benefits						Other Benefits
	Six Months Ended June 30,
	2009			2008			2009			2008
	(Thousands)
Components of net periodic benefit cost
Service cost	$	218		$	88		$	288		$	220
Interest cost	1,812			2,160			1,074			1,220
Expected return on plan assets	(2,290		)	(2,666		)	—			—
Amortization of prior service cost	8			58			(452		)	(452		)
Recognized net actuarial loss	596			624			874			1,022
Settlement loss	346			252			—			—
Net periodic benefit cost	$	690		$	516		$	1,784		$	2,010

J. Fair Value of Financial Instruments

The carrying value of cash equivalents and short-term loans approximates fair value due to the short maturity of the instruments. Available-for-sale securities and derivative instruments are reported in the Condensed Consolidated Balance Sheets at fair value. See Notes C, D and E.

The estimated fair value of long-term debt on the Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008 was approximately $2.0 billion and $1.2 billion, respectively. The fair value was estimated using the Company’s established fair value methodology based on discounted values using a current discount rate reflective of the remaining maturity.

K. Recently Issued Accounting Standards

Employers’ Disclosures about Post-Retirement Benefit Plan Assets

In December 2008, the FASB issued “Employers’ Disclosures about Post-Retirement Benefit Plan Assets.” The disclosures required by this guidance are intended to enhance the transparency surrounding the types of assets and associated risks in an employer’s defined benefit pension or other post-retirement plan. The new disclosures are required to be included in the financial statements for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statement disclosures.

Amendments to FASB Interpretation No. 46(R)

In June 2009, the FASB issued “Amendments to FASB Interpretation No. 46(R).” These amendments were issued to improve financial reporting by enterprises involved with variable interest entities and are effective as of the beginning the first annual reporting period beginning after November 15, 2009. The Company is currently evaluating the impact that these amendments will have on its consolidated financial statements.

Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140

In June 2009, the FASB issued “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140.” The purpose of this amendment is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The amendment eliminates the concept of a qualifying special-purpose entity for accounting purposes and must be applied as of the beginning of the first annual reporting period beginning after November 15, 2009. This amendment must be applied to transfers occurring on or after the effective date and the disclosure provisions must be applied to transfers that occurred both before and after the effective date. The Company is currently evaluating the impact that these amendments will have on its consolidated financial statements.

Oil and Gas Reporting Requirements

In December 2008, the U.S. Securities and Exchange Commission (SEC) approved amendments to its oil and gas reporting requirements which exist in their current form in Regulations S-K and S-X under the Securities Act of 1933

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Notes to Condensed Consolidated Financial Statements (Unaudited)

and the Securities Exchange Act of 1934, as well as Industry Guide 2. The amendments 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 amendments are effective for annual reports for fiscal years ending on or after December 31, 2009. The Company is currently evaluating the impact the revised oil and gas reporting rules will have on its consolidated financial statements.

L. Other Events

On May 12, 2009, the Company completed a public offering of $700 million in aggregate principal amount of 8.125% Senior Notes (Senior Notes) due June 1, 2019. The proceeds from the offering were used to repay short-term borrowings under the Company’s revolving credit facility and will fund part of the Company’s 2009 capital program. 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.

The Company has evaluated subsequent events through July 29, 2009.

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EQT Corporation 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

CAUTIONARY STATEMENTS

Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “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, 2008.

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.

In reviewing any agreements incorporated by reference in this Form 10-Q, please remember they are included to provide you with information regarding the terms of such agreement and are not intended to provide any other factual or disclosure information about the Company. The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments. Accordingly, these representations and warranties alone may not describe the actual state of affairs as of the date they were made or at any other time.

CORPORATE OVERVIEW

Three Months Ended June 30, 2009

vs. Three Months Ended June 30, 2008

EQT Corporation’s consolidated net income for the three months ended June 30, 2009 totaled $26.6 million, or $0.20 per diluted share, compared to $55.4 million, or $0.44 per diluted share, reported for the same period a year ago. Several factors contributed to the decrease in net income between periods. The Company was negatively impacted by unfavorable commodity prices through reduced average well-head and NGL sales prices together totaling $62 million pre-tax. The impact of the unfavorable commodity prices was partially offset by increases in production gas sales volumes resulting from increased production from the Company’s drilling program, increases in processing, gathering, transmission and commercial activity and the Distribution segment’s increase in base rates. The Company’s continued investment in its oil and gas producing properties and midstream infrastructure resulted in higher DD&A and interest charges and the midstream infrastructure investments required additional operation and maintenance expenses for electricity, property taxes and labor. The effective tax rate for the three months ended June 30, 2009 was 38.6% which is consistent with the 38.5% effective tax rate for the three months ended June 30, 2008.

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Six Months Ended June 30, 2009

vs. Six Months Ended June 30, 2008

EQT Corporation’s consolidated net income for the six months ended June 30, 2009 totaled $98.6 million, or $0.75 per diluted share, compared to $125.9 million, or $1.00 per diluted share, reported for the same period a year ago. Several factors contributed to the decrease in net income between periods. The Company was negatively impacted by unfavorable commodity prices through reduced average well-head sales prices, NGL sales prices and commodity storage price spreads together totaling $110 million pre-tax. The impact of the unfavorable commodity prices was partially offset by increases in production gas sales volumes resulting from increased production from the Company’s drilling program, increases in commercial, transmission, processing and gathering activity, and increased base rates in the Company’s Distribution segment. Decreased SG&A expenses resulted primarily from the absence of incentive compensation expense relating to the Company’s 2005 Executive Performance Incentive Program while the Company’s increased investment in its oil and gas producing properties and midstream infrastructure resulted in increased DD&A and interest charges. The midstream infrastructure investments also resulted in increased operation and maintenance costs for electricity, labor and property taxes to operate the facilities. The effective tax rate for the six months ended June 30, 2009 was 39.1% compared to 37.3% for the six months ended June 30, 2008. The higher effective tax rate in 2009 is primarily the result of a West Virginia law change that created a discrete benefit in the first quarter of 2008.

The current economic downturn is affecting EQT primarily through reduced natural gas prices and disruption to the global financial markets. The Company has not yet experienced other material changes to its financial position, results of operations or liquidity as a result of any changes in the economy; however, if the economic downturn continues for an extended period, EQT may be negatively impacted in various ways which the Company cannot reasonably predict at this time. For more information regarding risks associated with natural gas price volatility and the global financial challenges see Item 1A “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 2008.

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. EQT’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 EQT’s segments without being obscured by the financial condition, operations and trends for the other segments or by the effects of corporate allocations of interest and income taxes. In addition, management uses these measures for budget planning purposes.

EQT PRODUCTION

OVERVIEW

EQT Production continued to focus on organic growth through its drilling program. The Company drilled 304 gross (221 net) wells in the first six months of 2009, including 11 horizontal Marcellus wells, 4 vertical Marcellus wells, 126 horizontal Huron shale wells, 9 horizontal Berea wells, and 1 horizontal Big Lime well, compared to 324 gross (252 net) wells in the first six months of 2008 which included 161 horizontal Huron shale wells and 7 horizontal Berea wells. See “Capital Resources and Liquidity” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q for further details of the Company’s capital expenditures for drilling and development.

EQT Production’s operating revenues for the second quarter decreased 28% from 2009 to 2008 as lower commodity prices more than offset significantly increased production. The average well-head sales price decreased 42% due to a 68% decrease in the average NYMEX price and a higher percentage of unhedged gas sales partially offset by a higher realized hedge price compared to 2008. Gas sales volumes increased 22% from 2008 to 2009. The increase was primarily the result of increased production from the 2008 and 2009 drilling programs partially offset by the normal production decline in the Company’s existing wells.

Second quarter operating expenses at EQT Production included increases in the Company’s depletion and exploration expense. The increase in DD&A resulted from the combination of higher rates, due to the significant on-going drilling and development program, and increased units-of-production. The increase in exploration expense was the result of an increased level of seismic analysis and supporting personnel costs compared to the prior year. Excluding DD&A and exploration expenses, operating expenses decreased both in total and on a per unit basis.

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RESULTS OF OPERATIONS

EQT PRODUCTION

	Three Months Ended June 30,								Six Months Ended June 30,
	2009			2008			%		2009			2008			%
OPERATIONAL DATA

Natural gas and oil production (MMcfe)	25,505			21,543			18.4		49,983			42,564			17.4
Company usage, line loss (MMcfe)	(1,139		)	(1,587		)	(28.2	)	(2,641		)	(2,893		)	(8.7	)
Total sales volumes (MMcfe)	24,366			19,956			22.1		47,342			39,671			19.3

Average (well-head) sales price ($/Mcfe)*	$	3.59		$	6.14		(41.5	)	$	3.87		$	5.67		(31.7	)

Lease operating expenses (LOE), excluding production taxes ($/Mcfe)	$	0.28		$	0.33		(15.2	)	$	0.26		$	0.31		(16.1	)
Production taxes ($/Mcfe)	$	0.29		$	0.61		(52.5	)	$	0.32		$	0.55		(41.8	)
Production depletion ($/Mcfe)	$	1.03		$	0.81		27.2		$	1.03		$	0.81		27.2

Production depletion	$	26,226		$	17,502		49.8		$	51,431		$	34,593		48.7
Other depreciation, depletion and amortization (DD&A)	1,209			1,119			8.0		2,437			2,149			13.4
Total DD&A	$	27,435		$	18,621		47.3		$	53,868		$	36,742		46.6

Capital expenditures (thousands)	$	164,880		$	146,413		12.6		$	302,316		$	242,876		24.5

FINANCIAL DATA (Thousands)

Total operating revenues	$	89,885		$	124,949		(28.1	)	$	187,648		$	230,026		(18.4	)

Operating expenses:
LOE, excluding production taxes	7,170			7,054			1.6		13,212			13,016			1.5
Production taxes	7,326			13,114			(44.1	)	16,150			23,337			(30.8	)
Exploration expense	4,414			838			426.7		7,725			1,393			454.6
Selling, general and administrative (SG&A)	9,892			11,145			(11.2	)	18,628			21,029			(11.4	)
DD&A	27,435			18,621			47.3		53,868			36,742			46.6
Total operating expenses	56,237			50,772			10.8		109,583			95,517			14.7
Operating income	$	33,648		$	74,177		(54.6	)	$	78,065		$	134,509		(42.0	)

* Average well-head sales price is calculated as market price adjusted for hedging activities less deductions for gathering, processing and transmission included in EQT Midstream revenues. These deductions totaled $1.66 and $1.46 for the three months ended June 30, 2009 and 2008 and $1.69 and $1.37 for the six months ended June 30, 2009 and 2008 respectively.

Three Months Ended June 30, 2009

vs. Three Months Ended June 30, 2008

EQT Production’s operating income totaled $33.6 million for the three months ended June 30, 2009 compared to $74.2 million for the three months ended June 30, 2008. The $40.6 million decrease in operating income was primarily the result of a decrease in the average well-head sales price ($62.0 million) offset by an increase in sales volumes ($27.1 million).

Total operating revenues were $89.9 million for the three months ended June 30, 2009 compared to $124.9 million for the three months ended June 30, 2008. The $35.0 million decrease in total operating revenues was primarily due to a 42% decrease in the average well-head sales price, partially offset by an increase in production gas sales volumes. The $2.55 per Mcfe decrease in the average well-head sales price was primarily due to a $7.43 per Dth decrease in the average NYMEX price and a higher percentage of unhedged gas sales, partially offset by a higher

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realized hedge price. The increase in production gas sales volumes was the result of increased production from the 2008 and 2009 drilling programs, partially offset by the normal production decline in the Company’s wells.

Operating expenses totaled $56.2 million for the three months ended June 30, 2009 compared to $50.8 million for the three months ended June 30, 2008. DD&A increased $8.8 million primarily as a result of an increase in the depletion unit rate ($5.6 million) and higher volumes ($3.1 million). The $0.22 increase in the depletion rate was primarily attributable to the increased investment in the Company’s oil and gas producing properties. The increase in exploration expense was due to an increased level of seismic analysis and supporting personnel costs compared to prior year. These increases were offset by a decrease in production taxes primarily due to decreased severance taxes (a production tax directly imposed on the value of the gas extracted) as a result of lower gas commodity prices and lower SG&A primarily related to lower commodity price based reserve for uncollectible accounts.

During the first quarter of 2008, the Company drilled its first exploratory vertical Utica well. During the three months ended June 30, 2009, the Company capitalized $0.2 million of Utica well costs bringing the total capitalized exploratory well costs that are pending the determination of proved reserves to $7.6 million. As of June 30, 2009, this well has not been turned in line. The Company expects to drill a second Utica well in 2010 and to complete the two wells at the same time.

Six Months Ended June 30, 2009

vs. Six Months Ended June 30, 2008

EQT Production’s operating income totaled $78.1 million for the six months ended June 30, 2009 compared to $134.5 million for the six months ended June 30, 2008. The $56.4 million decrease in operating income was primarily the result of a decrease in the average well-head sales price ($85.6 million) offset by an increase in sales volumes ($43.5 million), higher DD&A and an increase in exploration expense.

Total operating revenues were $187.6 million for the six months ended June 30, 2009 compared to $230.0 million for the six months ended June 30, 2008. The $42.4 million decrease in total operating revenues was primarily due to a 32% decrease in the average well-head sales price, partially offset by an increase in production gas sales volumes. The $1.80 per Mcfe decrease in the average well-head sales price was primarily due to a $5.29 per Dth decrease in the average NYMEX price and a higher percentage of unhedged gas sales, partially offset by a higher realized hedge price. Gas sales volumes increased 19% from 2008 to 2009. The increase in production gas sales volumes was the result of increased production from the 2008 and 2009 drilling programs, partially offset by the normal production decline in the Company’s wells.

Operating expenses totaled $109.6 million for the six months ended June 30, 2009 compared to $95.5 million for the six months ended June 30, 2008. The increase in operating expenses was primarily the result of increased DD&A from increases in the depletion unit rate ($11.0 million) and volume ($5.7 million). The $0.22 increase in the depletion rate was primarily attributable to the increased investment in the Company’s oil and gas producing properties. The increase in exploration expense was due to an increased level of seismic analysis and supporting personnel costs compared to prior year. These increases were partially offset by decreases in production taxes and SG&A. The decrease in production taxes was due to decreased severance taxes partially offset by an increase in property taxes. The decrease in severance taxes (a production tax directly imposed on the value of the gas extracted) was primarily due to lower gas commodity prices. The increase in property taxes was a direct result of higher prices in prior years, as property taxes in several of the taxing jurisdictions where the Company’s wells are located are calculated based on historical gas commodity prices and gas sales volumes. The decrease in SG&A was primarily due to adjustments to the reserve for uncollectible accounts resulting from the decrease in the commodity prices.

OUTLOOK

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

· Expanding reserves and production through horizontal drilling in Kentucky, West Virginia and Pennsylvania. Through the capital program, the Company 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 2009 drilling efforts is focused on drilling horizontal wells in Lower Huron shale formations in Kentucky and West Virginia and in the Marcellus shale formation in Pennsylvania and West Virginia.

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· Exploiting additional reserve potential through key emerging development plays. In 2009, the Company is examining the potential for exploitation of gas reserves in new geological formations and through different technologies. Plans include high pressure Marcellus shale wells, re-entry wells in the Devonian shale and testing the Devonian shale in Virginia. In addition, the Company will complete its evaluation of proprietary seismic data in order to evaluate deep drilling opportunities for 2010.

EQT MIDSTREAM

OVERVIEW

EQT Midstream’s 2009 second quarter net operating revenues increased by 34% from 2008 to 2009. Increases in net operating revenues were partially offset by increased operating expenses. Gathering net operating revenues increased primarily due to an increase in gathered volumes. The increase in processing net operating revenues was driven by higher volumes offset by a lower average NGL sales price. Transmission net operating revenues increased primarily due to Big Sandy pipeline activity in 2009, as it became operational in the middle of the second quarter of 2008. Storage and marketing net operating revenues increased as a result of third party marketing utilizing Big Sandy pipeline capacity not currently being used to transport Company production. Operating and maintenance expense and DD&A increased due to the completion in 2008 of significant midstream infrastructure projects

In 2008, EQT Energy, the Company’s gas marketing affiliate, executed a binding precedent agreement with Tennessee Gas Pipeline Company (TGP), a wholly owned subsidiary of El Paso Corporation, for a 15-year term that awarded the Company 300,000 Dth per day of capacity in TGP’s 300-Line expansion project. In July 2009, the parties amended the binding precedent agreement and EQT Energy’s capacity in the project was increased to 350,000 Dth per day beginning in November 2011. When completed, the 300-Line expansion project will consist of approximately 128 miles of 30-inch pipe loop and approximately 52,000 horsepower of additional compression facilities to be constructed in TGP’s existing pipeline corridor in Pennsylvania and New Jersey. The awarded capacity will provide EQT access to consumer markets from the Gulf Coast to the Mid-Atlantic and the Northeast and will also provide back-haul capacity to the Gulf Coast.

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RESULTS OF OPERATIONS

EQT MIDSTREAM

	Three Months Ended June 30,						Six Months Ended June 30,
	2009		2008		%		2009		2008		%
OPERATIONAL DATA

Gathering and processing:
Gathered volumes (BBtu)	39,590		33,444		18.4		78,069		67,281		16.0
Average gathering fee ($/MMBtu)	$	1.04	$	1.00	4.0		$	1.04	$	0.99	5.1
Gathering and compression expense (MMBtu)	$	0.42	$	0.38	10.5		$	0.41	$	0.36	13.9
NGLs sold (Mgal) (a)	32,514		17,181		89.2		59,888		35,574		68.3
Average NGL sales price ($/gal)	$	0.63	$	1.57	(59.9	)	$	0.65	$