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, 2010

 

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)

 

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, 2010, 149,128,747 shares of common stock, no par value, of the registrant were outstanding.

 



 

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, 2010 and 2009

3

 

 

 

 

Statements of Condensed Consolidated Cash Flows for the Six Months Ended June 30, 2010 and 2009

4

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

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 – 31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32 – 33

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

Part II.

Other Information:

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 5.

Other Information

36

 

 

 

Item 6.

Exhibits

36

 

 

 

Signature

37

 

 

Index to Exhibits

38

 

2



 

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,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Thousands, except per share amounts)

 

Operating revenues

 

$

257,515

 

$

238,040

 

$

694,155

 

$

707,443

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Purchased gas costs

 

15,969

 

34,591

 

129,931

 

243,598

 

Operation and maintenance

 

35,567

 

34,892

 

69,906

 

66,482

 

Production

 

16,739

 

14,860

 

33,539

 

29,880

 

Exploration

 

1,078

 

4,414

 

2,413

 

7,725

 

Selling, general and administrative

 

44,416

 

35,581

 

83,628

 

65,331

 

Depreciation, depletion and amortization

 

65,217

 

46,188

 

127,096

 

90,777

 

Total operating expenses

 

178,986

 

170,526

 

446,513

 

503,793

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

78,529

 

67,514

 

247,642

 

203,650

 

Other income

 

153

 

698

 

680

 

1,288

 

Equity in earnings of nonconsolidated investments

 

2,420

 

1,610

 

4,947

 

2,732

 

Interest expense

 

34,080

 

26,460

 

68,214

 

45,703

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

47,022

 

43,362

 

185,055

 

161,967

 

Income taxes

 

17,022

 

16,717

 

66,990

 

63,329

 

Net income

 

$

30,000

 

$

26,645

 

$

118,065

 

$

98,638

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

147,575

 

130,830

 

140,440

 

130,784

 

Net income

 

$

0.20

 

$

0.20

 

$

0.84

 

$

0.75

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

148,289

 

131,443

 

141,270

 

131,421

 

Net income

 

$

0.20

 

$

0.20

 

$

0.84

 

$

0.75

 

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.

 

3



 

EQT CORPORATION AND SUBSIDIARIES

 

Statements of Condensed Consolidated Cash Flows (Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

2010

 

2009

 

 

(Thousands)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

118,065

 

 

$

98,638

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

Provision for losses on accounts receivable

 

4,061

 

 

(1,007

)

Depreciation, depletion, and amortization

 

127,096

 

 

90,777

 

Other income

 

(71

)

 

(1,288

)

Equity in earnings of nonconsolidated investments

 

(4,947

)

 

(2,732

)

Equity award expense

 

6,752

 

 

3,553

 

Deferred income taxes

 

66,431

 

 

82,878

 

Decrease in inventory

 

38,918

 

 

98,711

 

Decrease in accounts receivable and unbilled revenues

 

70,680

 

 

148,871

 

(Increase) decrease in margin deposits

 

(8,981

)

 

1,119

 

(Decrease) increase in accounts payable

 

(53,527

)

 

(181,694

)

Change in derivative instruments at fair value, net

 

5,135

 

 

49,703

 

Changes in other assets and liabilities

 

106,967

 

 

80,916

 

Net cash provided by operating activities

 

476,579

 

 

468,445

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

(522,860

)

 

(439,348

)

Capital contributions to Nora Gathering, LLC

 

 

 

(6,511

)

Investment in available-for-sale securities

 

(750

)

 

(3,000

)

Net cash used in investing activities

 

(523,610

)

 

(448,859

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Dividends paid

 

(61,589

)

 

(57,675

)

Proceeds from issuance of common stock

 

537,239

 

 

 

Proceeds from issuance of long-term debt

 

 

 

700,000

 

Debt issuance costs

 

 

 

(6,874

)

Decrease in short-term loans

 

(5,000

)

 

(319,917

)

Proceeds from exercises under employee compensation plans

 

1,982

 

 

225

 

Net cash provided by financing activities

 

472,632

 

 

315,759

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

425,601

 

 

335,345

 

Cash and cash equivalents at beginning of period

 

 

 

 

Cash and cash equivalents at end of period

 

$

425,601

 

 

$

335,345

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

Interest, net of amount capitalized

 

$

68,214

 

 

$

38,714

 

Income taxes, net of refund

 

$

(124,266

)

 

$

(103,317

)

 

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

 

4



 

EQT CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

June 30,
2010

 

December 31,
2009

 

 

(Thousands)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

425,601

 

 

$

 

Accounts receivable (less accumulated provision for doubtful accounts: June 30, 2010, $18,895; December 31, 2009, $16,792)

 

112,230

 

 

155,574

 

Unbilled revenues

 

6,903

 

 

38,300

 

Inventory

 

144,039

 

 

182,957

 

Derivative instruments, at fair value

 

187,494

 

 

163,879

 

Prepaid expenses and other

 

10,387

 

 

154,456

 

Total current assets

 

886,654

 

 

695,166

 

 

 

 

 

 

 

 

Equity in nonconsolidated investments

 

186,670

 

 

181,866

 

 

 

 

 

 

 

 

Property, plant and equipment

 

7,219,996

 

 

6,478,486

 

Less: accumulated depreciation and depletion

 

1,678,563

 

 

1,563,755

 

Net property, plant and equipment

 

5,541,433

 

 

4,914,731

 

 

 

 

 

 

 

 

Investments, available-for-sale

 

34,975

 

 

36,156

 

Regulatory assets

 

96,356

 

 

99,144

 

Other assets

 

27,947

 

 

30,194

 

Total assets

 

$

6,774,035

 

 

$

5,957,257

 

 

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

 

5



 

EQT CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

June 30,
2010

 

December 31,
2009

 

 

(Thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Short-term loans

 

$

 

 

$

5,000

 

Accounts payable

 

195,460

 

 

248,987

 

Derivative instruments, at fair value

 

108,243

 

 

132,518

 

Other current liabilities

 

176,074

 

 

226,169

 

Total current liabilities

 

479,777

 

 

612,674

 

 

 

 

 

 

 

 

Long-term debt

 

1,949,200

 

 

1,949,200

 

Deferred income taxes and investment tax credits

 

1,124,733

 

 

1,039,473

 

Unrecognized tax benefits

 

53,948

 

 

56,621

 

Pension and other post-retirement benefits

 

46,127

 

 

47,615

 

Other credits

 

113,154

 

 

100,644

 

Total liabilities

 

3,766,939

 

 

3,806,227

 

 

 

 

 

 

 

 

Common stockholders’ equity:

 

 

 

 

 

 

Common stock, no par value, authorized 320,000 shares; shares issued: June 30, 2010, 175,685; December 31, 2009, 157,630

 

1,716,848

 

 

952,237

 

Treasury stock, shares at cost: June 30, 2010, 26,556; December 31, 2009, 26,699

 

(479,523

)

 

(482,125

)

Retained earnings

 

1,751,835

 

 

1,695,358

 

Accumulated other comprehensive income (loss)

 

17,936

 

 

(14,440

)

Total common stockholders’ equity

 

3,007,096

 

 

2,151,030

 

Total liabilities and stockholders’ equity

 

$

6,774,035

 

 

$

5,957,257

 

 

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

 

6



 

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 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, 2010, and the results of its operations and cash flows for the three and six month periods ended June 30, 2010 and 2009.  Certain previously reported amounts have been reclassified to conform to the current year presentation. 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.

 

The balance sheet at December 31, 2009 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

 

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, 2009, 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 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.

 

7



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

     2010

 

 

     2009

 

     2010

 

 

     2009

 

Revenues from external customers:

 

(Thousands)

 

EQT Production

 

$

100,955

 

 

$

89,885

 

 

$

229,945

 

 

$

187,648

 

EQT Midstream

 

168,074

 

 

119,500

 

 

353,539

 

 

242,874

 

Distribution

 

63,349

 

 

78,094

 

 

285,604

 

 

371,266

 

Less: intersegment revenues (a)

 

(74,863

)

 

(49,439

)

 

(174,933

)

 

(94,345

)

Total

 

$

257,515

 

 

$

238,040

 

 

$

694,155

 

 

$

707,443

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

 

EQT Production

 

$

23,777

 

 

$

33,648

 

 

$

82,270

 

 

$

78,065

 

EQT Midstream

 

58,966

 

 

32,802

 

 

126,281

 

 

81,782

 

Distribution

 

4,290

 

 

9,353

 

 

51,709

 

 

53,205

 

Unallocated expenses (b)

 

(8,504

)

 

(8,289

)

 

(12,618

)

 

(9,402

)

Total

 

$

78,529

 

 

$

67,514

 

 

$

247,642

 

 

$

203,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of operating income to net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

EQT Midstream

 

$

64

 

 

$

355

 

 

$

259

 

 

$

905

 

Distribution

 

89

 

 

343

 

 

421

 

 

383

 

Total

 

$

153

 

 

$

698

 

 

$

680

 

 

$

1,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of nonconsolidated investments:

 

 

 

 

 

 

 

 

 

 

 

 

EQT Production

 

$

13

 

 

$

11

 

 

$

55

 

 

$

47

 

EQT Midstream

 

2,401

 

 

1,595

 

 

4,865

 

 

2,662

 

Unallocated

 

6

 

 

4

 

 

27

 

 

23

 

Total

 

$

2,420

 

 

$

1,610

 

 

$

4,947

 

 

$

2,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

34,080

 

 

26,460

 

 

68,214

 

 

45,703

 

Income taxes

 

17,022

 

 

16,717

 

 

66,990

 

 

63,329

 

Net income

 

$

30,000

 

 

$

26,645

 

 

$

118,065

 

 

$

98,638

 

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Thousands)

 

Segment Assets:

 

 

 

 

 

EQT Production

 

$

3,528,028

 

$

2,931,053

 

EQT Midstream

 

1,979,911

 

1,984,525

 

Distribution

 

781,861

 

860,222

 

Total operating segments

 

6,289,800

 

5,775,800

 

Headquarters assets, including cash and short-term investments

 

484,235

 

181,457

 

Total assets

 

$

6,774,035

 

$

5,957,257

 

 

8



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2010

 

 

2009

 

 

2010

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands)

 

Depreciation, depletion and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

EQT Production

 

$

43,468

 

 

$

27,435

 

 

$

84,378

 

 

$

53,868

 

EQT Midstream

 

15,611

 

 

12,787

 

 

30,535

 

 

25,025

 

Distribution

 

6,016

 

 

5,486

 

 

12,010

 

 

10,924

 

Other

 

122

 

 

480

 

 

173

 

 

960

 

Total

 

$

65,217

 

 

$

46,188

 

 

$

127,096

 

 

$

90,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

EQT Production (c)

 

$

252,969

 

 

$

164,880

 

 

$

431,384

 

 

$

302,316

 

EQT Midstream (c)

 

44,293

 

 

53,344

 

 

78,980

 

 

115,517

 

Distribution

 

7,750

 

 

8,717

 

 

11,725

 

 

15,493

 

Other

 

321

 

 

4,692

 

 

771

 

 

6,022

 

Total

 

$

305,333

 

 

$

231,633

 

 

$

522,860

 

 

$

439,348

 

 

(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 primarily consist of certain incentive compensation and administrative costs in excess of budget that are not allocated to the operating segments.

(c)          Expenditures for segment assets for 2010 includes $29.5 million in cash and excludes approximately $230.7 million of EQT stock issued for the acquisition of additional Marcellus Shale acreage in the second quarter of 2010.

 

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.  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 income (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.  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.

 

9



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 under Accounting Standards Codification Topic 815, Derivatives and Hedging.

 

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.

 

The current hedge position extends through 2015 and provides price protection for approximately 35%, 25% and 10% of expected produced natural gas sales volumes in 2010, 2011 and 2012, respectively.  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.  These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature.  The Company can net settle its derivative instruments at any time.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands)

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

Amount of (loss) gain recognized in other comprehensive income (OCI) (effective portion), net of tax

 

$

(16,293

)

 

$

(1,532

)

 

$

61,226

 

 

$

142,010

 

Amount of gain reclassified from accumulated OCI into income (effective portion), net of tax (a)

 

14,111

 

 

23,222

 

 

28,218

 

 

80,956

 

Amount of (loss) gain recognized in income (ineffective portion) (b)

 

(2,414

)

 

720

 

 

(613

)

 

(5,338

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized in income

 

$

212

 

 

$

126

 

 

$

89

 

 

$

(27

)

 

10



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

June 30, 2010

 

December 31, 2009

 

 

(Thousands)

Asset derivatives

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

$

112,663

 

 

$

111,375

 

Derivatives not designated as hedging instruments

 

74,831

 

 

52,504

 

Total asset derivatives

 

$

187,494

 

 

$

163,879

 

 

 

 

 

 

 

 

Liability derivatives

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

$

17,694

 

 

$

61,179

 

Derivatives not designated as hedging instruments

 

90,549

 

 

71,339

 

Total liability derivatives

 

$

108,243

 

 

$

132,518

 

 

(a)  Includes $0 and $2.6 million for the three and six month periods ended June 30, 2010 of unrealized hedge gains reclassified into earnings to offset lower of cost or market adjustments on hedged items.  Includes $0.1 million and $8.1 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.  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 2010 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 168 Bcf and 172 Bcf as of June 30, 2010 and December 31, 2009, respectively, and are primarily related to natural gas swaps and collars.  The open positions at June 30, 2010 had maturities extending through December 2015.

 

The Company had net deferred gains of $48.6 million and $15.6 million in accumulated other comprehensive income (loss), net of tax, as of June 30, 2010 and December 31, 2009, 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 $21.4 million of net unrealized gains on its derivative commodity instruments reflected in accumulated other comprehensive income (loss), net of tax, as of June 30, 2010 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 New York Mercantile Exchange (NYMEX) traded future contracts have minimal credit risk because the 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’s swap, collar and option derivative instruments are primarily with financial institutions and thus are subject to events that would impact those companies individually as well as that industry as a whole.

 

The Company utilizes various processes and analysis 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 Condensed Consolidated Balance Sheets.  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, 2010 and December 31, 2009, respectively.

 

11



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

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 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 a current asset of $2.1 million as of June 30, 2010 and a current liability of $6.9 million as of December 31, 2009 for such deposits in its Condensed Consolidated Balance Sheets.

 

Certain of the Company’s derivative instrument contracts provide that if one or more of the Company’s credit ratings are lowered below investment grade, additional collateral must be deposited with the counterparty.  The additional collateral can be up to 100% of the derivative liability.  As of June 30, 2010, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $20.2 million, for which the Company had no collateral posted on June 30, 2010.  If the Company’s credit rating had been downgraded below investment grade on June 30, 2010, the Company would have been required to post additional collateral of $13.9 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.  The Company’s long-term corporate credit rating was BBB by Standard & Poor’s Rating Services (S&P), Baa1 by Moody’s Investor Services (Moody’s) and BBB+ by Fitch Ratings Service (Fitch) at June 30, 2010. In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Fitch 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, 2010, 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.

 

 

 

June 30, 2010

 

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

(Thousands)

Equity funds

 

$

23,142

 

$

3,098

 

$

 

$

26,240

Bond funds

 

7,801

 

934

 

 

8,735

Total investments

 

$

30,943

 

$

4,032

 

$

 

$

34,975

 

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 income (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.

 

During the six month periods ended June 30, 2010 and 2009, the Company purchased additional securities with a cost basis totaling $0.8 million and $3.0 million, respectively.

 

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, among other things, the effect of the Company’s credit standing on the fair value of liabilities and the effect of the counterparty’s credit standing on the fair value of assets.  The Company estimates nonperformance risk by analyzing publicly available market information, including a comparison of the yield on debt instruments with credit ratings similar to the Company’s or counterparty’s credit

 

12



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 an insignificant 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 each 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 that use significant unobservable inputs; 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,
2010

 

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

 

 

$

34,975

 

 

 

$

34,975

 

 

 

$

 

 

 

$

 

 

Derivative instruments, at fair value

 

 

187,494

 

 

 

5,887

 

 

 

81,305

 

 

 

100,302

 

 

Total assets

 

 

$

222,469

 

 

 

$

40,862

 

 

 

$

81,305

 

 

 

$

100,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments, at fair value

 

 

$

108,243

 

 

 

$

7,038

 

 

 

$

100,461

 

 

 

$

744

 

 

Total liabilities

 

 

$

108,243

 

 

 

$

7,038

 

 

 

$

100,461

 

 

 

$

744

 

 

 

13



 

EQT Corporation and Subsidiaries

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, 2010

 

 

$

88,570

 

Total gains or losses:

 

 

 

 

Included in earnings

 

 

(9

)

Included in other comprehensive income

 

 

36,254

 

Purchases, issuances, and settlements

 

 

(25,257

)

Transfers in and/or out of Level 3

 

 

 

Balance at June 30, 2010

 

 

99,558

 

 

 

 

 

 

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, 2010

 

 

 

 

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.  All gains or losses included in earnings related to available-for-sale securities are included in other income.

 

F.             Comprehensive (Loss) Income

 

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2010

 

 

 

2009

 

 

 

2010

 

 

 

2009

 

 

(Thousands)

Net income

 

$

30,000

 

 

 

$

26,645

 

 

 

$

118,065

 

 

 

$

98,638

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash flow hedges

 

(30,374

)

 

 

(24,724

)

 

 

33,069

 

 

 

61,113

 

Unrealized (loss) gain on investments, available-for-sale

 

(2,354

)

 

 

2,454

 

 

 

(1,499

)

 

 

851

 

Pension and other post-retirement benefit plans:

 

403

 

 

 

388

 

 

 

806

 

 

 

776

 

Total comprehensive (loss) income

 

$

(2,325

)

 

 

$

4,763

 

 

 

$

150,441

 

 

 

$

161,378

 

 

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

 

 

June 30,

 

December 31,

 

2010

 

2009

 

(Thousands)

Net unrealized gain from hedging transactions

 

$

48,366

 

 

 

$

15,297

 

Unrealized gain on available-for-sale securities

 

2,591

 

 

 

4,090

 

Pension and other post-retirement benefits adjustment

 

(33,021

)

 

 

(33,827

)

Accumulated other comprehensive income (loss)

 

$

17,936

 

 

 

$

(14,440

)

 

G.        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.  The effective tax rate is further adjusted for non-recurring discrete items. 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

 

14



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

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, 2010 was 36.2%.  The Company currently estimates the annual effective income tax rate to be approximately 36.2%.  The estimated annual effective income tax rate as of June 30, 2009 was 39.1%.  The decrease in the expected annual effective tax rate from 2009 is primarily the result of a decrease in limitations imposed on certain state tax losses and the impact of certain nondeductible expenses in 2009.  In addition, carrying 2009 losses back to receive a cash refund of taxes paid in prior years resulted in the loss of certain prior year deductions, thereby increasing the overall 2009 rate.

 

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, 2010.

 

The Internal Revenue Service (IRS) has completed its audit and review of the Company’s federal income tax filings through 2005. The only unresolved issue in such prior periods relates to research and experimentation tax credits of $3.8 million claimed by the Company for years 2001 through 2005. This issue is currently under review at the Appeals Division of the IRS.  The IRS commenced its audit and review of the Company’s federal income tax filings for the 2006 through 2009 years during the second quarter of 2010.  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 the periods to be reviewed.

 

The Worker, Homeownership and Business Assistance Act of 2009 extended the applicability of the tax net operating loss carryback provision from 2 years to 5 years for either the 2008 or 2009 tax year.  The Company elected to carryback its 2009 tax operating loss under this new law and received a refund of $121.5 million from the IRS during the first quarter of 2010.  EQT also received a refund of $115.2 million, primarily in the second quarter of 2009 from the IRS relating to the 2008 net operating loss carryback.  These net operating losses were primarily generated from intangible drilling costs (IDC) for the Company’s drilling program that are deducted currently for tax purposes and from accelerated tax depreciation for expansion of the Company’s midstream business.

 

H.        Short-Term Loans

 

On October 27, 2006, the Company entered into a $1.5 billion, five-year revolving credit agreement, which replaced the Company’s previous $1 billion, five-year revolving credit agreement.  On December 15, 2006, the maturity date was extended to October 26, 2011.  Additionally, the Company may request two one-year extensions of the stated maturity date; however, these extensions require the approval of 51% of the lenders underwriting the credit facility.  The revolving credit agreement may be used for working capital, capital expenditures, share repurchases and other purposes including support of a commercial paper program.  Subject to certain terms and conditions, the Company may, on a one time basis, request that the lenders’ commitments be increased to an aggregate amount of up to $2.0 billion.  Each lender in the facility may decide if it will increase its commitment.

 

The credit facility is underwritten by a syndicate of 15 financial institutions each of which is obligated to fund its pro-rata portion of any borrowings by the Company.   As previously disclosed, Lehman Brothers Bank, FSB (now known as Aurora Bank, FSB (Aurora)) was one of the original financial institutions in the syndicate, had committed to make loans not exceeding $95 million under the facility and had failed to fund its portion of all borrowings by the Company since late 2008.  Effective July 28, 2010, Aurora assigned its commitment under the credit facility to US Bank National Association.

 

The Company is not required to maintain compensating bank balances.  The Company’s long-term corporate credit rating, as determined by S&P, Moody’s or Fitch, on the Company’s non-credit-enhanced, senior unsecured long-term debt, determine the level of fees associated with its lines of credit in addition to the interest rate charged by the counterparties on any amounts borrowed against the lines of credit; the lower the Company’s long-term corporate credit rating, the higher the level of fees and borrowing rate.

 

As of June 30, 2010, the Company had no loans outstanding under the revolving credit facility. An irrevocable standby letter of credit of $23.9 million was outstanding at June 30, 2010.  As of December 31, 2009, the Company had outstanding short-term loans under the revolving credit facility of $5.0 million and an irrevocable standby letter of credit of $24.4 million.  Commitment fees averaging approximately one-twelfth of one percent in 2010 and 2009 were paid to maintain credit availability under the revolving credit facility.

 

15



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

The weighted average interest rate for short-term loans outstanding as of December 31, 2009 was 0.51% per annum.  The maximum amount of outstanding short-term loans at any time during the six months ended June 30, 2010 and 2009 was $139.7 million and $491.7 million, respectively.  The average daily balance of short-term loans outstanding during the six months ended June 30, 2010 and 2009 was approximately $26.6 million and $235.5 million at weighted average annual interest rates of 0.86% and 0.87%, respectively.

 

I.          Long-Term Debt

 

 

June 30,

 

December 31,

 

2010

 

2009

 

 

(Thousands)

 

5.15% notes, due November 15, 2012

 

$

200,000

 

 

 

$

200,000

 

5.00% notes, due October 1, 2015

 

150,000

 

 

 

150,000

 

5.15% notes, due March 1, 2018

 

200,000

 

 

 

200,000

 

6.50% notes, due April 1, 2018

 

500,000

 

 

 

500,000

 

8.13% notes, due June 1, 2019

 

700,000

 

 

 

700,000

 

7.75% debentures, due July 15, 2026

 

115,000

 

 

 

115,000

 

Medium-term notes:

 

 

 

 

 

 

 

8.5% to 9.0% Series A, due 2011 thru 2021

 

46,200

 

 

 

46,200

 

7.3% to 7.6% Series B, due 2013 thru 2023

 

30,000

 

 

 

30,000

 

7.6% Series C, due 2018

 

8,000

 

 

 

8,000

 

 

 

1,949,200

 

 

 

1,949,200

 

Less debt payable within one year

 

 

 

 

 

Total long-term debt

 

$

1,949,200

 

 

 

$

1,949,200

 

 

The indentures and other agreements governing the Company’s indebtedness contain certain restrictive financial and operating covenants including covenants that restrict the Company’s ability to incur indebtedness, incur liens, enter into sale and leaseback transactions, complete acquisitions, merge, sell assets and perform certain other corporate actions.  The covenants do not contain a rating trigger.  Therefore, a change in Company’s debt rating would not trigger a default under the indentures and other agreements governing the Company’s long-term indebtedness.

 

Aggregate maturities of long-term debt are $0 in 2010, $6.0 million in 2011, $200.0 million in 2012, $10.0 million in 2013 and $5.0 million in 2014.

 

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, 2010 and December 31, 2009 was approximately $2 billion and $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

 

Disclosures about Fair Value Measurements

 

In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment intended to enhance fair value disclosures, improve the transparency of the inputs and assumptions used to measure the fair value of assets and liabilities reported, and improve comparability with International Financial Reporting Standards. During the three months ended March 31, 2010, the Company adopted certain provisions of this amendment; this did not have a material effect on the Company’s financial statements. Other provisions of the amendment are effective for fiscal years beginning after December 15, 2010.  The Company is currently evaluating the affect that this amendment will have on its consolidated financial statement disclosures.

 

16



 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

L.        Acquisitions

 

During the second quarter of 2010, the Company acquired approximately 48,000 net acres in the Marcellus Shale from a group of private operators and landowners. The acreage is located primarily in Cameron, Clearfield, Elk and Jefferson counties in Pennsylvania. The Company paid $260.2 million for these assets, approximately 90% in EQT stock ($230.7 million) and approximately 10% in cash ($29.5 million). Following the closing of the acquisition, the Company holds approximately 500,000 net acres in the high pressure Marcellus Shale fairway.

 

M.       Earnings Per Share

 

Potentially dilutive securities, consisting of options and restricted stock awards, which were included in the calculation of diluted earnings per share totaled 713,125 and 612,832 for the three months ended June 30, 2010 and June 30, 2009, respectively, and 830,212 and 636,616 for the six months ended June 30, 2010 and June 30, 2009, respectively.  Options to purchase common stock not included within potentially dilutive securities totaled 1,237,425 and 976,473 for the three months ended June 30, 2010 and June 30, 2009, respectively, and 1,237,425 and 977,127 for the six months ended June 30, 2010 and June 30, 2009, respectively.

 

N.       Other Events

 

On March 16, 2010, the Company completed a public offering of 12,500,000 shares of its common stock, no par value (the Common Stock), at an offering price to the public of $44.00 per share. The proceeds from the offering are being used to accelerate development of the Marcellus Shale and Huron/Berea plays.

 

The underwriters in this transaction also exercised their over-allotment option to purchase 225,000 additional shares of the Company’s Common Stock on April 14, 2010 at an offering price to the public of $44.00 per share.

 

O.        Subsequent Events

 

The Company has evaluated subsequent events through the date of financial statement issuance.

 

17



 

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,” “forecast,” “approximate,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters.  Without limiting the generality of the foregoing, forward-looking statements contained in this 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 (including the Equitrans Marcellus Expansion Project) and technology, the timing of signing and the terms of the natural gas processing and  natural gas liquid infrastructure joint venture, the timing of construction of public-access natural gas refueling stations, production and sales volumes, revenue projections, reserves, unit costs, 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, 2009.

 

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, 2010

vs. Three Months Ended June 30, 2009

 

EQT Corporation’s consolidated net income for the three months ended June 30, 2010 totaled $30.0 million, or $0.20 per diluted share, compared to $26.6 million, or $0.20 per diluted share, reported for the same period a year ago. Several factors contributed to the increase in net income between periods.  The Company was favorably impacted by increased produced natural gas sales volumes, increased sales prices for NGLs and higher gathering revenues.  These favorable revenue variances were partially offset by increased depreciation, depletion and amortization resulting from the Company’s investment in natural gas producing properties, increased production and increased midstream infrastructure, lower average well-head sales prices due to lower realized hedge prices and lower hedged volumes and increased interest expense resulting from the Company’s investment in natural gas production.

 

18



 

EQT Corporation and Subsidiaries

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

 

Six Months Ended June 30, 2010

vs. Six Months Ended June 30, 2009

 

EQT Corporation’s consolidated net income for the six months ended June 30, 2010 totaled $118.1 million, or $0.84 per diluted share, compared to $98.6 million, or $0.75 per diluted share, reported for the same period a year ago.  Several factors contributed to the increase in net income between periods.  The Company was favorably impacted by increased produced natural gas sales volumes, increased sales prices for NGLs, higher gathering revenues, base rate increases for residential customers in the distribution business and reduced exploration expenses.  The impact of the favorable increase in produced natural sales volumes was partially offset by lower average well-head sales prices for natural gas as a result of hedging activities. The Company’s continued investment in its oil and gas producing properties and midstream infrastructure resulted in higher depreciation, depletion and amortization and interest charges. Operating expenses also increased, consistent with the growth of the business.

 

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’s strategy is to maximize value by profitably developing the Company’s extensive acreage position through organic growth enabled by a low cost structure.  The Company is focused on continuing its significant organic reserve and production growth through its drilling program and believes that it is a technological leader in drilling in low pressure shale.  The Company drilled 272 gross (228 net) wells in the first six months of 2010, including 205 horizontal wells comprised of 143 horizontal Huron/Berea wells and 62 horizontal Marcellus Shale wells. In the comparable six months in 2009, the Company drilled 304 gross (221 net) wells, including 147 horizontal wells, comprised of 136 horizontal Huron/Berea wells and 11 horizontal Marcellus Shale 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 details regarding the Company’s capital expenditures for drilling and development.

 

During the second quarter of 2010, the Company acquired approximately 48,000 net acres in the Marcellus Shale from a group of private operators and landowners.  The acreage is located primarily in Cameron, Clearfield, Elk and Jefferson counties in Pennsylvania.  EQT paid $260.2 million for these assets, approximately 90% in EQT stock and approximately 10% in cash.  Following the closing of the acquisition, the Company holds approximately 500,000 net acres in the high pressure Marcellus Shale fairway.

 

EQT Production’s operating revenues for the second quarter of 2010 increased 12% compared to 2009 as a result of significantly increased sales of produced natural gas partially offset by lower average well-head sales prices.  Sales of produced natural gas increased 31% from the second quarter of 2009 to the second quarter of 2010.  The increase was primarily the result of increased production from the 2009 and 2010 drilling programs.  The average well-head sales price decreased 14% due to a lower realized hedge price and lower hedged gas sales compared to 2009, partially offset by a 17% increase in the average NYMEX price.

 

Second quarter operating expenses at EQT Production in 2010 included an increase in the Company’s depletion expense as a result of higher depletion rates attributable to the significant on-going well development program and increased production volumes.

 

19



 

EQT Corporation and Subsidiaries

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

 

 

RESULTS OF OPERATIONS

 

EQT PRODUCTION

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2010

 

2009

 

%

 

2010

 

2009

 

%

OPERATIONAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas and oil production (MMcfe)

 

32,789

 

 

25,505

 

 

28.6

 

 

64,186

 

 

49,983

 

 

28.4

 

Company usage, line loss (MMcfe)

 

(874

)

 

(1,139

)

 

(23.3

)

 

(2,271

)

 

(2,641

)

 

(14.0

)

Total sales volumes (MMcfe)

 

31,915

 

 

24,366

 

 

31.0

 

 

61,915

 

 

47,342

 

 

30.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average (well-head) sales price ($/Mcfe) (a)

 

$

3.10

 

 

$

3.59

 

 

(13.6

)

 

$

3.64

 

 

$

3.87

 

 

(5.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses (LOE), excluding production taxes ($/Mcfe)

 

$

0.26

 

 

$

0.28

 

 

(7.1

)

 

$

0.25

 

 

$

0.26

 

 

(3.8

)

Production taxes ($/Mcfe)

 

$

0.22

 

 

$

0.29

 

 

(24.1

)

 

$

0.24

 

 

$

0.32

 

 

(25.0

)

Production depletion ($/Mcfe)

 

$

1.27

 

 

$

1.03

 

 

23.3

 

 

$

1.25

 

 

$

1.03

 

 

21.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production depletion

 

$

41,527

 

 

$

26,226

 

 

58.3

 

 

$

80,504

 

 

$

51,431

 

 

56.5

 

Other depreciation, depletion and amortization (DD&A)

 

1,941

 

 

1,209

 

 

60.5

 

 

3,874

 

 

2,437

 

 

59.0

 

Total DD&A

 

$

43,468

 

 

$

27,435

 

 

58.4

 

 

$

84,378

 

 

$

53,868

 

 

56.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (thousands) (b)

 

$

483,656

 

 

$

164,880

 

 

193.3

 

 

$

662,071

 

 

$

302,316

 

 

119.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL DATA (Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total operating revenues

 

$

100,955

 

 

$

89,885

 

 

12.3

 

 

$

229,945

 

 

$

187,648

 

 

22.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOE, excluding production taxes

 

8,397

 

 

7,170

 

 

17.1

 

 

16,200

 

 

13,212

 

 

22.6

 

Production taxes

 

7,314

 

 

7,326

 

 

(0.2

)

 

15,383

 

 

16,150

 

 

(4.7

)

Exploration expense

 

1,078

 

 

4,414

 

 

(75.6

)

 

2,413

 

 

7,725

 

 

(68.8

)

Selling, general and administrative (SG&A)

 

16,921

 

 

9,892

 

 

71.1

 

 

29,301

 

 

18,628

 

 

57.3

 

DD&A

 

43,468

 

 

27,435

 

 

58.4

 

 

84,378

 

 

53,868

 

 

56.6

 

Total operating expenses

 

77,178

 

 

56,237

 

 

37.2

 

 

147,675

 

 

109,583

 

 

34.8

 

Operating income

 

$

23,777

 

 

$

33,648

 

 

(29.3

)

 

$

82,270

 

 

$

78,065

 

 

5.4

 

 

(a)    Average (well-head) sales price is calculated as market price adjusted for hedging activities less deductions for gathering, processing, transmission and NGL revenues included in EQT Midstream revenues. These deductions totaled $2.39 and $1.98 per Mcfe for the three months ended June 30, 2010 and 2009, respectively, and $2.40 and $1.94 per Mcfe for the six months ended June 30, 2010 and June 30, 2009, respectively.

(b)   Capital expenditures for the three and six month periods ended June 30, 2010 and 2009 include $278.8 million and $2.1 million, respectively, for undeveloped property acquisitions, primarily within the Marcellus play. This amount includes $230.7 million of undeveloped property which was acquired with EQT stock in the second quarter of 2010.

 

Three Months Ended June 30, 2010

vs. Three Months Ended June 30, 2009

 

EQT Production’s operating income decreased $9.9 million to $23.8 million for the three months ended June 30, 2010 compared to the second quarter 2009.  This decrease in operating income was primarily the result of higher DD&A, a decrease in the average well-head sales price, and higher SG&A expenses partially offset by a 31% increase in sales of produced natural gas.

 

Total operating revenues were $101.0 million for the three months ended June 30, 2010 compared to $89.9 million for the three months ended June 30, 2009.  The $11.1 million increase in total operating revenues was primarily due to an increase in produced natural gas sales volumes partially offset by a 14% decrease in the average well-head sales price. The increase in produced natural gas sales volumes was the result of increased production from the 2009 and 2010 drilling programs, primarily in the Marcellus Shale and Huron/Berea plays. The increase in produced

 

20



 

EQT Corporation and Subsidiaries

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

 

 

natural gas sales volumes were partially offset by the normal production decline in the Company’s wells.  The $0.49 per Mcfe decrease in the average well-head sales price was primarily due to a lower realized hedge price, and lower hedged gas sales compared to 2009 partially offset by a 17% increase in the average NYMEX price.

 

Operating expenses totaled $77.2 million for the three months ended June 30, 2010 compared to $56.2 million for the three months ended June 30, 2009.  The increase in operating expenses was primarily the result of increases in DD&A, SG&A, and LOE, excluding production taxes. The increase in DD&A is primarily due to increases in the depletion unit rate ($7.9 million) and volumes ($7.2 million). The $0.24 per Mcfe increase in the depletion rate is primarily attributable to the increased investment in oil and gas producing properties.  The increase in SG&A was primarily due to a $4.5 million charge during the second quarter related to the buy-out of excess contractual capacity for the processing and disposal of salt water rendered unnecessary as a result of significantly improved drill site recycling procedures, as well as increases in hiring, relocation and personnel costs. The increase in LOE, excluding production taxes was mainly due to increased activity in the Marcellus Shale play.  These factors were partially offset by a decrease in exploration expense due to a reduction in geophysical  activity compared to the prior year.

 

Six Months Ended June 30, 2010

vs. Six Months Ended June 30, 2009

 

EQT Production’s operating income totaled $82.3 million for the six months ended June 30, 2010 compared to $78.1 million for the six months ended June 30, 2009.  The $4.2 million increase in operating income was primarily the result of an increase in sales of produced natural gas ($56.3 million) partially offset by higher DD&A, a decrease in the average well-head sales price ($13.7 million) and SG&A expenses.

 

Total operating revenues were $229.9 million for the six months ended June 30, 2010 compared to $187.6 million for the six months ended June 30, 2009.  The $42.3 million increase in total operating revenues was primarily due to a 31% increase in sales of produced natural gas partially offset by a 6% decrease in the average well-head sales price. The increase in produced natural gas sales volumes was the result of increased production from the 2009 and 2010 drilling programs, primarily in the Marcellus Shale and Huron/Berea plays. The $0.23 per Mcfe decrease in the average well-head sales price was primarily due to a lower realized hedge price and lower hedged gas sales partially offset by a 12% increase in the average NYMEX price.

 

Operating expenses totaled $147.7 million for the six months ended June 30, 2010 compared to $109.6 million for the six months ended June 30, 2009.  The increase in operating expenses was primarily the result of increased DD&A from increases in the depletion unit rate ($14.7 million) and volume ($14.1 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 SG&A was primarily due to a $4.5 million charge related to the buy-out of excess contractual capacity for the processing and disposal of salt water as well as higher personnel costs and hiring and relocation costs and a favorable adjustment to the reserve for uncollectible accounts in the prior year.  The increase in LOE, excluding production taxes was primarily due to increased activity in the Marcellus Shale play in the current year.  These factors were partially offset by a decrease in exploration expense due to a reduction in geophysical activity compared to the prior year.

 

OUTLOOK

 

EQT Production’s business strategy is focused on organic growth of the Company’s natural gas reserves and sales volumes.  EQT Production’s strategy is primarily comprised of:

 

Expanding reserves and production through horizontal drilling in Pennsylvania, West Virginia and Kentucky. The Company is committed to expanding its production and developed reserves through cost-effective, technologically-advanced horizontal drilling in its existing plays. The Company will seek 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 2010 drilling efforts will be focused on drilling horizontal wells in shale formations in Pennsylvania, West Virginia and Kentucky.  The Company continues to focus on its highly successful horizontal air drilling program by drilling fractured horizontal single lateral wells, non-fractured horizontal multilateral wells, stacked horizontal wells and extended lateral wells. Additionally, based on favorable preliminary results, the Company is in the process of incorporating extended lateral wells into its preferred standard operating procedures for the Huron/Berea play.  The Company expects to access significantly more reserves through the extended lateral drilling procedures for less than a proportional amount of the development costs.

 

21



 

EQT Corporation and Subsidiaries

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

 

 

EQT MIDSTREAM

 

OVERVIEW

 

EQT Midstream’s 2010 second quarter net operating revenues were 37% higher than the second quarter 2009 period.  This increase was primarily a result of increases in NGL sales prices, and higher gathering and processing volumes. Storage and marketing net operating revenues increased as a result of asset optimization activities.  O&M expense increased in conjunction with the overall growth of the business while DD&A increased primarily due to the investment in infrastructure during 2009.

 

During the quarter ended June 30, 2010, the Company and DCP Midstream Partners, and its sponsor, DCP Midstream, LLC (together, DCP), signed a non-binding letter of intent to create a natural gas processing and related natural gas liquid (NGL) infrastructure joint venture to serve EQT Production and third party producers in the Marcellus and Huron/Berea shale areas of the Appalachian basin.  The joint venture would pursue gas processing and related NGL infrastructure opportunities and would be the preferred processor for the Company’s wet gas in the Marcellus and Huron/Berea shale areas. The parties continue to negotiate the terms of the definitive documentation to the joint venture.

 

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 Midstream projects.

 

RESULTS OF OPERATIONS

 

EQT MIDSTREAM

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2009

 

  %

 

 

2010

 

2009

 

%

OPERATIONAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gathered volumes (BBtu)

 

47,461

 

39,590

 

19.9

 

 

 

92,084

 

78,069

 

18.0

 

Average gathering fee ($/MMBtu)

 

$

1.10

 

$

1.04

 

5.8

 

 

 

$

1.10

 

$

1.04

 

5.8

 

Gathering and compression expense ($/MMBtu)

 

$

0.39

 

$

0.42

 

(7.1

)

 

 

0.38

 

$

0.41

 

(7.3

)

NGLs sold (Mgal) (a)

 

36,515

 

32,514

 

12.3

 

 

 

69,729

 

59,888

 

16.4

 

Average NGL sales price ($/gal)

 

$

1.07

 

$

0.63

 

69.8

 

 

 

$

1.11

 

$

0.65

 

70.8

 

Transmission pipeline throughput (BBtu)

 

24,065

 

22,313

 

7.9

 

 

 

49,058

 

39,531

 

24.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues (thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gathering

 

$

51,029

 

$

40,775

 

25.1

 

 

 

$

99,763

 

$

79,454

 

25.6

 

Processing

 

25,607

 

10,127

 

152.9

 

 

 

48,341

 

16,747

 

188.7

 

Transmission

 

18,007

 

17,735

 

1.5

 

 

 

39,560

 

37,545

 

5.4

 

Storage, marketing and other

 

16,726

 

12,574

 

33.0

 

 

 

40,553

 

40,021

 

1.3

 

Total net operating revenues

 

$

111,369

 

$

81,211

 

37.1

 

 

 

$

228,217

 

$

173,767

 

31.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (thousands)

 

$

44,293

 

$

53,344

 

(17.0

)

 

 

$

78,980

 

$

115,517

 

(31.6

)

 

22



 

EQT Corporation and Subsidiaries

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

%

 

2010

 

2009

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL DATA (Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating revenues

 

$

168,074

 

 

$

119,500

 

 

40.6

 

 

$

353,539

 

 

$

242,874

 

 

45.6

 

 

Purchased gas costs

 

56,705

 

 

38,289

 

 

48.1

 

 

125,322

 

 

69,107

 

 

81.3

 

 

Total net operating revenues

 

111,369

 

 

81,211

 

 

37.1

 

 

228,217

 

 

173,767

 

 

31.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance (O&M)

 

25,577

 

 

24,440

 

 

4.7

 

 

49,554

 

 

45,641

 

 

8.6

 

 

SG&A

 

11,215

 

 

11,182

 

 

0.3

 

 

21,847

 

 

21,319

 

 

2.5

 

 

DD&A

 

15,611

 

 

12,787

 

 

22.1

 

 

30,535

 

 

25,025

 

 

22.0

 

 

Total operating expenses

 

52,403

 

 

48,409

 

 

8.3

 

 

101,936

 

 

91,985

 

 

10.8

 

 

Operating income

 

$

58,966

 

 

$

32,802

 

 

79.8

 

 

$

126,281

 

 

$

81,782

 

 

54.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

$

64

 

 

$

355

 

 

(82.0

)

 

$

259

 

 

$

905

 

 

(71.4