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 SEPTEMBER 30, 2011

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:)

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 September 30, 2011, 149,437,433 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 Nine Months ended September 30, 2011 and 2010	3

			Statements of Condensed Consolidated Cash Flows for the Nine Months ended September 30, 2011 and 2010	4

			Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	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 – 30

Item 3.			Quantitative and Qualitative Disclosures About Market Risk	30 – 31

Item 4.			Controls and Procedures	32

Part II.	Other Information:

Item 1.			Legal Proceedings	33

Item 1A.			Risk Factors	33

Item 6.			Exhibits	33

Signature				34

Index to Exhibits				35

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EQT CORPORATION AND SUBSIDIARIES

Statements of Consolidated Income (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(Thousands, except per share amounts)
Operating revenues	$	336,720	$	257,335	$	1,141,391	$	951,490

Operating expenses:
Purchased gas costs	8,197		8,838		127,870		138,769
Operation and maintenance	35,872		40,483		91,513		110,775
Production	24,908		16,010		60,784		49,163
Exploration	814		941		3,387		3,354
Selling, general and administrative	44,745		34,333		124,572		117,961
Depreciation, depletion and amortization	87,343		68,548		247,627		195,644
Total operating expenses	201,879		169,153		655,753		615,666

Operating income	134,841		88,182		485,638		335,824
Gain on dispositions	180,143		–		202,928		–
Other income	3,098		2,924		27,948		8,551
Interest expense	32,503		33,861		98,642		102,075

Income before income taxes	285,579		57,245		617,872		242,300
Income taxes	106,665		20,723		228,949		87,713
Net income	$	178,914	$	36,522	$	388,923	$	154,587

Earnings per share of common stock:
Basic:
Weighted average common shares outstanding	149,441		149,133		149,373		143,048
Net income	$	1.20	$	0.24	$	2.60	$	1.08
Diluted:
Weighted average common shares outstanding	150,301		149,775		150,144		143,806
Net income	$	1.19	$	0.24	$	2.59	$	1.07
Dividends declared per common share	$	0.22	$	0.22	$	0.66	$	0.66

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)

	Nine Months Ended September 30,
	2011			2010
	(Thousands)
Cash flows from operating activities:
Net income	$	388,923		$	154,587
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization	247,627			195,644
Deferred income taxes	190,330			99,205
Gain on dispositions	(202,928		)	–
Equity award expense	15,118			10,290
Other income	(27,948		)	(8,551		)
Provision for losses on accounts receivable	(176		)	2,917
Unrealized (gains) losses on derivative financial instruments	(3,905)			(4,702		)
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenues	66,952			90,183
Inventory	467			15,589
Accounts payable	37,535			(57,402		)
Derivative instruments at fair value, net	3,884			(9,294		)
Federal income tax carryback refund	–			121,463
Other assets and liabilities	(2,544		)	11,118
Net cash provided by operating activities	713,335			621,047

Cash flows from investing activities:
Additions to property, plant and equipment	(892,557		)	(863,011		)
Dividend from Nora Gathering, LLC	23,500			–
Proceeds from sale of available-for-sale securities	29,947			–
Proceeds from dispositions	619,999			–
Investment in available-for-sale-securities	–			(750		)
Net cash used in investing activities	(219,111		)	(863,761		)

Cash flows from financing activities:
Dividends paid	(98,709		)	(94,438		)
Proceeds from issuance of common stock	–			537,239
Decrease in short-term loans	(53,650		)	(5,000		)
Repayments of long-term debt	(9,457		)	–
Proceeds from exercises under employee compensation plans	2,504			2,280
Net cash (used in) provided by financing activities	(159,312		)	440,081

Net increase in cash and cash equivalents	334,912			197,367
Cash and cash equivalents at beginning of period	–			–
Cash and cash equivalents at end of period	$	334,912		$	197,367

Cash paid (received) during the period for:
Interest, net of amount capitalized	$	76,934		$	80,703
Income taxes, net of refunds	$	35,628		$	(124,124	)

See discussion of non-cash transactions in Notes B and K. 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)

	September 30, 2011		December 31, 2010
	(Thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	334,912	$	–
Accounts receivable (less accumulated provision for doubtful accounts at September 30, 2011 and December 31, 2010: $14,913 and $18,335)	124,542		156,709
Unbilled revenues	8,158		38,361
Inventory	138,012		137,853
Derivative instruments, at fair value	313,537		225,339
Assets held for sale	–		207,678
Prepaid expenses and other	49,732		62,000
Total current assets	968,893		827,940

Equity in nonconsolidated investments	136,148		191,265

Property, plant and equipment	8,393,467		7,689,025
Less: accumulated depreciation and depletion	1,907,848		1,778,934
Net property, plant and equipment	6,485,619		5,910,091

Investments, available-for-sale	–		28,968
Regulatory assets	98,388		100,949
Other assets	31,146		39,225
Total assets	$	7,720,194	$	7,098,438

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)

	September 30, 2011			December 31, 2010
	(Thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	25,315		$	6,000
Short-term loans	–			53,650
Accounts payable	252,030			212,134
Derivative instruments, at fair value	108,926			106,721
Other current liabilities	206,369			218,479
Total current liabilities	592,640			596,984

Long-term debt	1,978,596			1,943,200
Deferred income taxes and investment tax credits	1,502,625			1,274,888
Unrecognized tax benefits	36,991			41,451
Pension and other post-retirement benefits	38,845			44,135
Other credits	132,760			119,084
Total liabilities	4,282,457			4,019,742

Common stockholders’ equity:
Common stock, no par value, authorized 320,000 shares (shares issued September 30, 2011 and December 31, 2010: 175,685 and 175,684)	1,731,246			1,723,898
Treasury stock, at cost (shares at September 30, 2011 and December 31, 2010: 26,247 and 26,531)	(473,925		)	(479,072		)
Retained earnings	2,085,980			1,795,766
Accumulated other comprehensive income	94,436			38,104
Total common stockholders’ equity	3,437,737			3,078,696
Total liabilities and stockholders’ equity	$	7,720,194		$	7,098,438

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 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 its subsidiaries as of September 30, 2011, and the results of its operations and cash flows for the three and nine month periods ended September 30, 2011 and 2010. 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, 2010 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 nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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, 2010, 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, natural gas liquids (NGLs) and a limited amount of crude oil, in the Appalachian Basin. EQT Midstream’s operations include the natural gas gathering, transportation, storage and marketing activities of the Company. Distribution’s operations are primarily composed 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. 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 certain 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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues from external customers:
EQT Production	$	207,500		$	131,791		$	577,352		$	395,182
EQT Midstream	122,614			144,634			395,477			436,225
Distribution	49,175			53,208			313,366			338,812
Less: intersegment revenues (a)	(42,569		)	(72,298		)	(144,804		)	(218,729		)
Total	$	336,720		$	257,335		$	1,141,391		$	951,490
Operating income:
EQT Production	$	98,936		$	55,651		$	281,024		$	169,797
EQT Midstream	41,673			35,858			160,549			130,263
Distribution	2,463			644			64,758			52,353
Unallocated expenses (b)	(8,231		)	(3,971		)	(20,693		)	(16,589		)
Total	$	134,841		$	88,182		$	485,638		$	335,824

Reconciliation of operating income to net income:

Gain on dispositions	$	180,143		$	–		$	202,928		$	–
Other income	3,098			2,924			27,948			8,551
Interest expense	32,503			33,861			98,642			102,075
Income taxes	106,665			20,723			228,949			87,713
Net income	$	178,914		$	36,522		$	388,923		$	154,587


	September 30,		December 31,
	2011		2010
	(Thousands)
Segment Assets:
EQT Production	$	4,797,066	$	3,979,676
EQT Midstream	1,729,988		2,076,485
Distribution	812,652		848,419
Total operating segments	7,339,706		6,904,580
Headquarters assets, including cash and short-term investments	380,488		193,858
Total assets	$	7,720,194	$	7,098,438

(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.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010

	(Thousands)
Depreciation, depletion and amortization:
EQT Production	$	66,947		$	46,658	$	186,680		$	131,036
EQT Midstream	14,093			15,705		43,097			46,240
Distribution	6,534			6,057		18,414			18,067
Other	(231		)	128		(564		)	301
Total	$	87,343		$	68,548	$	247,627		$	195,644

Capital expenditures:
EQT Production (a)	$	255,151		$	267,154	$	800,029		$	929,225
EQT Midstream	81,227			59,499		156,832			138,479
Distribution	10,149			9,382		25,179			21,107
Other	1,118			4,116		3,131			4,887
Total	$	347,645		$	340,151	$	985,171		$	1,093,698

(a)

Expenditures for segment assets in the EQT Production segment include $92.6 million of liabilities assumed in exchange for producing properties as part of the ANPI transaction (defined below) discussed in Note K and $230.7 million of undeveloped property which was acquired with EQT common stock in 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 EQT Production and storage, marketing and other activities at EQT Midstream. The Company’s overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.

The Company uses 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 on a gross basis. The accounting for the changes in fair value of the Company’s derivative instruments depends on the use of the derivative instruments. 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, net of tax, and is subsequently reclassified into operating revenues in the same period or periods during which the forecasted transaction affects earnings. For a derivative instrument that has been designated and qualifies as a fair value hedge, the change in the fair value for the instrument is recognized as a portion of operating revenues in the Statements of Consolidated Income each period. In addition, the change in the fair value of the hedged item (natural gas inventory) is recognized as a portion of operating revenues in the Statements of Consolidated Income. The Company has elected to exclude the spot/forward differential from the assessment of effectiveness of the fair value hedges. Any hedging ineffectiveness and any change in fair value of derivative instruments that have not been designated as hedges, are recognized as a portion of operating revenues in the Statements of Consolidated Income 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.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

A portion of the 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. A portion of the derivative commodity instruments used by the Company to hedge its exposure to adverse changes in the market price of natural gas stored in the ground have been designated and qualify as fair value hedges. The current hedge position extends through 2015. 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.

In addition, the Company enters into a limited amount of energy trading contracts to leverage its assets and limit its exposure to shifts in market prices. The Company also has a limited amount of other derivative instruments not designated as hedges. In 2008, the Company effectively settled certain derivative commodity swaps scheduled to mature during the period 2010 through 2013 by de-designating the swaps and entering into directly counteractive swaps. These transactions resulted in offsetting positions which are the majority of the derivative asset and liability balances not designated as hedging instruments.

Substantially all derivatives recognized in the balance sheet and used in hedging relationships are commodity contracts. All derivative instrument assets and liabilities are reported in the Condensed Consolidated Balance Sheets as 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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

	(Thousands)
Derivatives designated as cash flow hedges
Amount of gain (loss) recognized in other comprehensive income (OCI) (effective portion), net of tax	$	64,530		$	59,120		$	101,982		$	120,346
Amount of gain reclassified from accumulated OCI into income (effective portion), net of tax (a)	15,255			17,331			42,078			45,549
Amount of gain (loss) recognized in income (ineffective portion) (b)	(352		)	2,980			(613		)	2,367

Derivatives designated as fair value hedges (c)
Amount of gain (loss) recognized in income for fair value commodity contracts	$	4,261		$		–	$	3,728		$		–
Fair value gain (loss) recognized in income for inventory designated as hedged item	$	(3,781	)	$		–	$	(2,088	)	$		–

Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in income	$	2,663		$	(1,323	)	$	1,840		$	(1,234	)

(a) Includes $2.1 million for the three and nine month periods ended September 30, 2011, of unrealized hedge gains reclassified into earnings to offset lower of cost or market adjustments on hedged items. Includes $7.9 million and $10.5 million for the three and nine month periods ended September 30, 2010, respectively, 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 of cash flow hedges.

(c) For the three months ended September 30, 2011, the net impact on operating revenues consisted of a $0.8 million gain due to the exclusion of the spot/forward differential from the assessment of effectiveness and a $0.3 million loss due to changes in basis. For nine months ended September 30, 2011, the net impact on operating revenues consisted of a $2.3 million gain due to the exclusion of the spot/forward differential from the assessment of effectiveness and a $0.7 million loss due to changes in basis.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

	September 30, 2011		December 31, 2010
	(Thousands)
Asset derivatives
Derivatives designated as hedging instruments	$	231,946	$	141,834
Derivatives not designated as hedging instruments	81,591		83,505
Total asset derivatives	$	313,537	$	225,339

Liability derivatives
Derivatives designated as hedging instruments	$	11,933	$	12,097
Derivatives not designated as hedging instruments	96,993		94,624
Total liability derivatives	$	108,926	$	106,721

In August 2011, the Company entered into a forward-starting interest rate swap to mitigate the risk of rising interest rates. The forward-starting interest rate swap was designated as a cash flow hedge of forecasted future interest payments. The Company recorded a deferred loss of $4.7 million in accumulated other comprehensive income, net of tax, as of September 30, 2011, associated with the change in fair value of the forward-starting interest rate swap. Additionally, the forward-starting interest rate swap is included in the liability derivatives designated as hedging instruments in the table above.

The net fair value of derivative instruments changed during the first nine months of 2011 primarily as a result of the positive net fair value of derivatives executed in 2011 and 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 221 Bcf and 181 Bcf as of September 30, 2011 and December 31, 2010, respectively, and are primarily related to natural gas swaps and collars. The open positions at September 30, 2011 had maturities extending through December 2015. The absolute quantities of the Company’s derivative commodity instruments that have been designated and qualify as fair value hedges totaled 6 Bcf as of September 30, 2011. No derivative commodity instruments were designated as fair value hedges as of December 31, 2010.

The Company had net deferred gains of $129.8 million and $65.2 million in accumulated other comprehensive income, net of tax, as of September 30, 2011 and December 31, 2010, respectively, associated with the effective portion of the change in fair value of its derivative commodity instruments designated as cash flow hedges. Assuming no change in price or new transactions, the Company estimates that approximately $78.6 million of net unrealized gains on its derivative commodity instruments reflected in accumulated other comprehensive income, net of tax, as of September 30, 2011 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions.

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 futures 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 analyses 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 current asset. 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 September 30, 2011 or December 31, 2010, respectively.

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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. The Company records such deposits as current assets. 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 $1.8 million as of September 30, 2011 and a current liability of $0.5 million as of December 31, 2010 for such deposits in its Condensed Consolidated Balance Sheets.

Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings by Standard & Poor’s Rating Services (S&P) or Moody’s Investor Services (Moody’s) 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 September 30, 2011, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $2.3 million, for which the Company had no collateral posted on September 30, 2011. If the Company’s credit rating had been downgraded by S&P or Moody’s below investment grade on September 30, 2011, the Company would have been required to post additional collateral of $2.3 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 unsecured medium-term debt was rated BBB by S&P, Baa2 by Moody’s and BBB by Fitch Ratings Service (Fitch) at September 30, 2011. 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 December 31, 2010 the investments classified by the Company as available-for-sale consisted of $29.0 million of equity and bond funds intended to fund plugging and abandonment and other liabilities for which the Company self-insures.

During the nine month period ended September 30, 2011, the Company sold all of the available-for-sale securities for proceeds of $29.9 million which resulted in gross realized gains of $8.5 million, $4.9 million of which was reclassified from accumulated other comprehensive income. The Company uses the average cost method to determine the cost of securities sold.

E. Fair Value Measurements

The Company records its financial instruments, principally derivative commodity instruments, at fair value in its Condensed Consolidated Balance Sheets. The Company has an established process for determining fair value which 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 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 assets and liabilities recorded at fair value into a three-level fair 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). Assets and liabilities included in Level 1 include the Company’s futures contracts. Assets and liabilities in Level 2 include the majority of the Company’s swap agreements, including the forward-starting interest rate swap, and assets 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 assets and liabilities in each category.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The fair value of assets and liabilities 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	September 30, 2011		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(Thousands)
Assets
Derivative instruments, at fair value	$	313,537	$	7,014	$	193,439	$	113,084
Total assets	$	313,537	$	7,014	$	193,439	$	113,084

Liabilities
Derivative instruments, at fair value	$	108,926	$	8,271	$	100,655	$	–
Total liabilities	$	108,926	$	8,271	$	100,655	$	–

	Fair value measurements using significant unobservable inputs (Level 3)

	Derivative instruments, at fair value, net
	(Thousands)

Balance at January 1, 2011	$	116,672
Total gains or losses:
Included in earnings	14
Included in other comprehensive income	35,121
Settlements	(38,723		)
Transfers in and/or out of Level 3	–
Balance at September 30, 2011	$	113,084

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 September 30, 2011	$	–

The carrying value of cash equivalents and short-term loans approximates fair value due to the short maturity of the instruments.

The estimated fair value of long-term debt on the Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 was approximately $2 billion. The fair value was estimated using the Company’s established fair value methodology primarily based on quoted rates reflective of the remaining maturity and risk.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

F. Comprehensive Income (Loss)

Total comprehensive income, net of tax, was as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2011	2010	2011		2010
	(Thousands)
Net income	$178,914	$ 36,522	$ 388,923		$ 154,587
Other comprehensive (loss) income:
Net change in cash flow hedges	49,304	41,816	59,992		74,885
Unrealized (loss) gain on investments, available- for-sale	–	2,252	(4,896	)	753
Pension and other post-retirement benefit plans	412	405	1,236		1,211
Total comprehensive income (loss)	$228,630	$ 80,995	$ 445,255		$ 231,436

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

	September 30,			December 31,
	2011			2010
	(Thousands)
Net unrealized gain from hedging transactions	$	125,006		$	65,014
Unrealized gain on available-for-sale securities	–			4,896
Pension and other post-retirement benefits adjustment	(30,570		)	(31,806		)
Accumulated other comprehensive income	$	94,436		$	38,104

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. 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 nine months ending September 30, 2011 was 37.1%, including a 38.2% discrete tax rate for the Big Sandy Pipeline gain. The Company currently estimates the 2011 annual effective income tax rate to be approximately 36.9%. The estimated annual effective income tax rate as of September 30, 2010 was 36.2%. The increase in the expected annual effective tax rate from 2010 is primarily the result of increased state income taxes partially offset by a decrease in the reserves for uncertain tax positions.

There were no material changes to the Company’s methodology or for unrecognized tax benefits during the nine months ended September 30, 2011.

During the second quarter of 2011, the Company finalized a settlement with the Internal Revenue Service (IRS) relating to its research and experimentation tax credits claimed from 2001 through 2005. Except for claims related to tax losses carried back to those years, the consolidated federal income tax liability of the Company has been settled with the IRS through 2005. During the second quarter of 2010 the IRS began its audit and review of the Company’s income tax filings for the 2006 through 2009 years. 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.

H. Short-Term Loans

As of September 30, 2011, the Company had no loans or letters of credit outstanding under its revolving credit facility. As of December 31, 2010, the Company had outstanding under the revolving credit facility loans of $53.7 million and an irrevocable standby letter of credit of $23.5 million. Commitment fees averaging approximately 7.5 basis points in the third quarter of 2011 and 2.0 basis points in the third quarter of 2010 were paid to maintain credit availability under the revolving credit facility.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The maximum amount of outstanding short-term loans at any time during the nine months ended September 30, 2011 and 2010 was $104.0 million and $139.7 million, respectively. The average daily balance of short-term loans outstanding during the nine months ended September 30, 2011 and 2010 was approximately $7.3 million and $17.7 million, respectively, at weighted average annual interest rates of 1.81% and 0.86%, respectively.

I. Long-Term Debt

	September 30,		December 31,
	2011		2010
	(Thousands)
7.76% notes, due 2012 thru 2016	$	54,711	$	–
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
	2,003,911		1,949,200
Less debt payable within one year	25,315		6,000
Total long-term debt	$	1,978,596	$	1,943,200

During the second quarter of 2011 the Company assumed 7.76% Guaranteed Senior Notes due August 31, 2011 through February 28, 2016 in the aggregate principal amount of $57.1 million in a non-cash transaction. See Note K.

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 the Company’s debt rating would not trigger a default under the indentures and other agreements governing the Company’s indebtedness.

Aggregate maturities of long-term debt are $6.0 million in 2011, $219.3 million in 2012, $23.2 million in 2013, $11.2 million in 2014, and $166.0 million in 2015.

J. Recently Issued Accounting Standards

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) issued a standard update to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact this standard will have on its disclosures.

Disclosures about Fair Value Measurements

In May 2011, the FASB issued a standard update intended to enhance the fair value disclosure requirements to result in common fair value measurement in United States generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments are to be applied prospectively, and are

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact this standard will have on its financial statements.

K. Acquisition

In December 2000, the Company sold a net profits interest (NPI) in certain producing properties located in the Appalachian Basin to a trust in exchange for approximately $298 million. The NPI entitled the trust to receive 100% of the net profits received from the sale of natural gas and oil from the producing properties until cumulative production from such properties reached a specified amount. The Company owned the Class B interest in the trust, entitling it to specified percentages of any available cash from the trust over time. An outside party, Appalachian NPI, LLC (ANPI), owned the Class A interest in the trust.

Effective May 4, 2011, the Company, through EQT Production Company, acquired the Class A interest in the trust thereby acquiring 100% of the NPI associated with the producing properties (the ANPI transaction). As part of the consideration for the acquired assets, the Company entered into a discounted natural gas sales agreement with ANPI and assumed a swap held by ANPI on the trust’s sales of natural gas.

In addition, the Company assumed 7.76% Guaranteed Senior Notes due August 31, 2011 through February 28, 2016 in the aggregate principal amount of $57.1 million. The notes had a fair value of $64.2 million.

Under U.S. GAAP, the ANPI transaction was a business combination achieved in stages because EQT owned an equity interest in the trust prior to the transaction. As required by the relevant accounting standard, the Company revalued its existing equity investment in the trust at fair value on the date of the acquisition and recorded a gain of $10.1 million which is included in other income on the Statements of Consolidated Income. The fair value was determined using an internal model; significant inputs to the calculation included publicly available forward price curves, expected production volumes and operating costs, as well as Company-determined risk adjusted discount rates which were based on publicly available debt and equity risk premiums.

As a result of this transaction, the Company recorded an increase in oil and gas properties of $140.6 million resulting from the removal of the post-revaluation $48.0 million equity investment in the trust from its books and a net $92.6 million increase in liabilities consisting of: $64.2 million of long term debt, a $16.4 million discounted sales agreement and a $12.7 million swap liability offset by various working capital balances.

This transaction also resulted in the elimination of certain previously disclosed relationships including the Company’s non-controlling interest in the trust, the Company’s liquidity reserve guarantee to ANPI, the Company’s agreement with the trust to provide gathering and operating services to deliver its gas to market and the marketing fee the Company received for the sale of the trust’s gas based on the net revenue for gas delivered.

L. Dispositions

On July 1, 2011, the Company sold the Big Sandy Pipeline to Spectra Energy Partners, LP for $390 million. Big Sandy is a natural gas pipeline regulated by the Federal Energy Regulatory Commission. Big Sandy transports natural gas from the Langley natural gas processing complex to interconnects with unaffiliated pipelines leading to the mid-Atlantic and Northeast markets. In conjunction with this transaction, the Company realized a pre-tax gain of $180.1 million.

On February 1, 2011, the Company sold its natural gas processing complex in Langley, Kentucky and associated natural gas liquids pipeline for $230.5 million. In conjunction with this transaction, the Company realized a pre-tax gain of $22.8 million.

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EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

M. Earnings Per Share

The difference between weighted average common shares outstanding in the basic and diluted earnings per share calculations relates to potentially dilutive options and restricted stock awards. Options to purchase common stock which were anti-dilutive and thus excluded from these shares totaled 1,327,494 for the three months ended September 30, 2010, and 6,480 and 1,249,037 for the nine months ended September 30, 2011 and September 30, 2010 respectively. There were no anti-dilutive shares for the three months ended September 30, 2011.

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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,” “could,” “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 section 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 expected costs of drilling and fracturing services and Equitrans Marcellus Expansion Project) and technology, the Company’s expected use of proceeds from the sale of the Big Sandy Pipeline and the Langley natural gas processing complex, the expected incremental Marcellus gathering capacity to be added throughout 2011, midstream structural alternatives, production and sales volumes, revenue projections, reserves, capital expenditures, 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, 2010.

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.

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, income taxes and certain compensation expenses. In addition, management uses these measures for budget planning purposes.

CORPORATE OVERVIEW

The Company completed several transactions in the first nine months of 2011 that had a positive impact on results for the period ending September 30, 2011, including:

·	The July 2011 sale of the Big Sandy Pipeline to Spectra Energy Partners, LP for $390 million, which resulted in a pre-tax gain of $180.1 million. This transaction resulted in tax expense of $68.8 million.
·	The February 2011 sale of the Langley natural gas processing complex and the associated NGL pipeline for $230.5 million, which resulted in a pre-tax gain of $22.8 million.
·	The May 2011 purchase of all outstanding net profits interests (NPI) from ANPI (the ANPI transaction), which resulted in an increase in oil and gas properties of $140.6 million, as well as a pre-tax gain of $10.1 million, recorded in other income.

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·	Sales of available-for-sale securities for proceeds of $29.9 million, which resulted in pre-tax gains of $8.5 million.

In June 2011 the Company commissioned a natural gas vehicle fueling station in Pittsburgh, Pennsylvania and continues to investigate additional methods of promoting natural gas as a transportation fuel, including providing advice to third parties interested in fleet conversion.

In July 2011 the Company commissioned its 150 MMcfe per day Callisto Compressor Station in Greene County, Pennsylvania in support of the increased drilling activity in the Marcellus play.

Three Months Ended September 30, 2011 vs. Three Months Ended September 30, 2010

EQT Corporation’s consolidated net income increased $142.4 million, to $1.19 per diluted share from $0.24 per diluted share, for the three months ended September 30, 2011 compared to the same period in 2010. Approximately $111.3 million of net income, or $0.74 per diluted share, resulted from the realized gain, net of tax, on the sale of the Big Sandy Pipeline. Operationally, the Company was favorably impacted by a 50.9% increase in production sales volumes and increased gathering revenues, partially offset by increased depreciation, depletion and amortization and operating expenses as a result of the increase in production and a lower average wellhead sales price.

The average wellhead sales price to EQT Corporation was $5.25 per Mcfe during the third quarter 2011 compared to $5.52 per Mcfe in the same period of the prior year. NYMEX price decreased $0.19 for the three months ended September 30, 2011 compared to the prior year. Hedging activities resulted in an increase in the average natural gas price of $0.47 per Mcf in 2011 compared to $0.58 per Mcf in 2010, with the difference mainly resulting from the non-cash benefit for ineffectiveness associated with certain cash flow hedges recognized in 2010.

Nine Months Ended September 30, 2011 vs. Nine Months Ended September 30, 2010

EQT Corporation’s consolidated net income increased $234.3 million, to $2.59 per diluted share from $1.07 per diluted share, in the nine months ended September 30, 2011 compared to 2010. Excluding $0.91 per diluted share from the gains described above, this increase was driven by a 47.4% increase in production sales volumes, higher gathering revenues, transmission revenues, and reductions in certain non-income tax reserves. These favorable variances were partially offset by increased depreciation, depletion and amortization as a result of higher volumes, lower net revenues from storage, marketing and other activities and a lower average wellhead sales price.

The average wellhead sales price to EQT Corporation was $5.42 per Mcfe in 2011 compared to $5.75 per Mcfe in 2010. NYMEX price decreased $0.38, while impact from hedging activities remained relatively flat from 2010 to 2011.

See Investing Activities in Capital resources and Liquidity for a discussion of capital expenditures.

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EQT CORPORATION

	Three Months Ended September 30,			Nine Months Ended September 30,
	2011	2010	%	2011	2010	%
OPERATIONAL DATA
Average wellhead sales price to EQT Corporation:
Natural gas excluding hedges ($/Mcf)	$ 4.21	$ 4.40	(4.3)	$ 4.37	$ 4.68	(6.6)
Hedge impact ($/Mcf of natural gas) (a)	$ 0.47	$ 0.58	(19.0)	$ 0.46	$ 0.48	(4.2)
Natural gas including hedges ($/Mcf)	$ 4.68	$ 4.98	(6.0)	$ 4.83	$ 5.16	(6.4)

NGLs ($/Bbl)	$ 52.56	$ 43.89	19.8	$ 52.12	$ 46.69	11.6
Crude oil ($/Bbl)	$ 81.66	$ 62.39	30.9	$ 83.52	$ 70.37	18.7
Total ($/Mcfe)	$ 5.25	$ 5.52	(4.9)	$ 5.42	$ 5.75	(5.7)

Less revenues to EQT Midstream ($/Mcfe)	$ 1.23	$ 1.71	(28.1)	$ 1.37	$ 1.70	19.4
Average wellhead sales price to EQT Production ($/Mcfe)	$ 4.02	$ 3.81	5.5	$ 4.05	$ 4.05	_


NYMEX natural gas ($/Mcf)	$ 4.19	$ 4.38	(4.3)	$ 4.21	$ 4.59	(8.3)

Natural gas sales volumes (MMcf)	48,070	31,087	54.6	132,035	87,746	50.5
NGL sales volumes (Mbbls)	759	697	9.0	2,259	1,982	14.0
Crude oil sales volumes (Mbbls)	61	36	69.4	141	86	64.0
Total production sales volumes (MMcfe) (b)	51,298	33,988	50.9	141,375	95,903	47.4

Capital expenditures (thousands) (c)	$ 347,645	$ 340,151	2.2	$ 985,171	$1,093,698	(9.9)

(a)	All hedges are related to natural gas.
(b)	NGLs were converted to Mcfe at the rate of 3.76 Mcfe per barrel and 3.86 Mcfe per barrel based on the liquids content for the three and nine months ended September 30, 2011 and 2010, respectively, and crude oil was converted to Mcfe at the rate of six Mcfe per barrel for all periods.
(c)	Capital expenditures in the EQT Production segment include $92.6 million of liabilities assumed in exchange for producing properties as part of the ANPI transaction and $230.7 million of undeveloped property which was acquired with EQT common stock in 2010.

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EQT PRODUCTION

RESULTS OF OPERATIONS

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010		%	2011		2010		%
OPERATIONAL DATA

Natural gas, NGL and crude oil production (MMcfe) (a)	52,456		35,334		48.5	145,021		99,520		45.7
Company usage, line loss (MMcfe)	(1,158)		(1,346)		(13.9)	(3,646)		(3,617)		0.8
Total production sales volumes (MMcfe)	51,298		33,988		50.9	141,375		95,903		47.4

Average daily sales volumes (MMcfe/d)	558		369		51.2	518		351		47.6

Sales volume detail (MMcfe):
Horizontal Marcellus Play	22,401		6,372		251.6	56,896		15,134		275.9
Horizontal Huron Play	9,815		9,953		(1.4)	30,175		28,075		7.5
CBM Play	3,479		3,513		(1.0)	10,254		10,007		2.5
Other (vertical non-CBM)	15,603		14,150		10.3	44,050		42,687		3.2
Total production sales volumes	51,298		33,988		50.9	141,375		95,903		47.4

Average wellhead sales price ($/Mcfe)	$	4.02	$	3.81	5.5	$	4.05	$	4.05	0.0

Lease operating expenses, excluding production taxes (LOE) ($/Mcfe)	$	0.22	$	0.22	0.0	$	0.21	$	0.24	(12.5)
Production taxes ($/Mcfe)	$	0.25	$	0.23	8.7	$	0.21	$	0.25	(16.0)
Production depletion ($/Mcfe)	$	1.23	$	1.26	(2.4)	$	1.24	$	1.26	(1.6)

Depreciation, depletion and amortization (DD&A) (thousands):
Production depletion	$	64,742	$	44,609	45.1	$	180,063	$	125,113	43.9
Other DD&A	2,205		2,049		7.6	6,617		5,923		11.7
Total DD&A	$	66,947	$	46,658	43.5	$	186,680	$	131,036	42.5

Capital expenditures (thousands) (b)	$	255,151	$	267,154	(4.5)	$	800,029	$	929,225	(13.9)


FINANCIAL DATA (Thousands)


Total operating revenues	$	207,500	$	131,791	57.4	$	577,352	$	395,182	46.1

Operating expenses:
LOE	11,612		7,857		47.8	29,760		24,056		23.7
Production taxes (c)	13,296		8,153		63.1	31,024		25,107		23.6
Exploration expense	814		941		(13.5)	3,387		3,354		1.0
Selling, general and administrative (SG&A)	15,895		12,531		26.8	45,477		41,832		8.7
DD&A	66,947		46,658		43.5	186,680		131,036		42.5
Total operating expenses	108,564		76,140		42.6	296,328		225,385		31.5
Operating income	$	98,936	$	55,651	77.8	$	281,024	$	169,797	65.5

(a)	Natural gas, NGL and oil production represents the Company’s interest in natural gas, NGL and oil production measured at the wellhead. It is equal to the sum of total sales volumes and Company usage and line loss.
(b)	Capital expenditures in the EQT Production segment include $92.6 million of liabilities assumed in exchange for producing properties as part of the ANPI transaction in 2011 and $230.7 million of undeveloped property which was acquired with EQT common stock in 2010.
(c)	Production taxes include severance and production-related ad valorem and other property taxes.

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Three Months Ended September 30, 2011 vs. Three Months Ended September 30, 2010

EQT Production’s operating income totaled $98.9 million for the three months ended September 30, 2011 compared to $55.7 million for the three months ended September 30, 2010. The $43.3 million increase in operating income was primarily the result of increases in sales of produced natural gas and in the average well-head sales price, partially offset by higher operating expenses.

Total operating revenues were $207.5 million for the three months ended September 30, 2011 compared to $131.8 million for the three months ended September 30, 2010. The $75.7 million increase in total operating revenues was primarily due to a 50.9% increase in produced natural gas sales volumes as well as a 5.5% increase in the average well-head sales price. The increase in produced natural gas sales volumes was the result of increased production from the 2010 and 2011 drilling programs, primarily in the Marcellus Shale play, as well as the acquisition of producing properties associated with the ANPI transaction in May 2011, which added 2.0 Bcfe of sales volumes in the third quarter. The increase in produced natural gas sales volumes from new drilling was partially offset by the normal production decline in the Company’s wells. The $0.21 per Mcfe increase in the average well-head sales price was primarily due to lower gathering rates and a higher sales price for NGLs and oil in the current year partially offset by a 4.3% decrease in the average NYMEX price and lower hedging gains compared to the third quarter of 2010.

Operating expenses totaled $108.6 million for the three months ended September 30, 2011 compared to $76.1 million for the three months ended September 30, 2010. The increase in operating expenses was the result of increases in production depletion, production taxes, LOE and SG&A. The increase in depletion expense reflects an increase in volumes ($21.6 million) offset by a decrease in the unit rate ($1.5 million). Production taxes increased due to higher revenues and increased assessments in certain jurisdictions that were incurred in the current year. The increase in LOE was primarily the result of increased activity in the current year as well as the elimination of certain pre-acquisition arrangements associated with the ANPI transaction, pursuant to which the Company was reimbursed for certain operating services. SG&A expenses increased primarily due to higher overhead costs associated with the growth of the Company as well as increased labor and related incentive compensation costs.

Nine months ended September 30, 2011 vs. Nine months ended September 30, 2010

EQT Production’s operating income totaled $281.0 million for the nine months ended September 30, 2011 compared to $169.8 million for the nine months ended September 30, 2010. The $111.2 million increase in operating income was primarily due to increased production sales volumes, partially offset by an increase in DD&A.

Total operating revenues were $577.4 million for the nine months ended September 30, 2011 compared to $395.2 million for the nine months ended September 30, 2010. The $182.2 million increase in total operating revenues was primarily due to a 47.4% increase in sales volumes of produced natural gas while the average well-head sales price was flat between periods. The increase in produced natural gas sales volumes was the result of increased production from the 2010 and 2011 drilling programs, primarily in the Marcellus Shale and Huron plays, as well as the acquisition of producing properties associated with the ANPI transaction in May 2011, which added 3.4 Bcfe of sales volumes in the current year. The average well-head sales price remained flat as an 8.3% decrease in the average NYMEX price for natural gas was offset by lower gathering rates and higher sales prices for NGLs and oil in the current year.

Operating expenses totaled $296.3 million for the nine months ended September 30, 2011 compared to $225.4 million for the nine months ended September 30, 2010. The increase in operating expenses was the result of increases in production depletion, production taxes, LOE and SG&A. The depletion expense increased as a result of higher volumes in the current year. Production taxes increased due to higher revenues and increased assessments in certain jurisdictions during the year. The increase in LOE was primarily the result of increased activity in the current year as well as the elimination, as part of the ANPI transaction, of certain operating expense reimbursement arrangements. SG&A increased due to higher overhead costs associated with the growth of the Company and higher incentive compensation costs partially offset by a charge in the prior year related to the buy-out of excess contractual capacity for water treatment.

Table of Contents

EQT MIDSTREAM

RESULTS OF OPERATIONS

	Three Months Ended September 30,					Nine Months Ended September 30,

	2011		2010		%	2011		2010		%
OPERATIONAL DATA


Gathered volumes (BBtu)	67,304		49,990		34.6	188,492		142,074		32.7
Average gathering fee ($/MMBtu)	$	0.94	$	1.08	(13.0)	$	0.97	$	1.10	(11.8	)
Gathering expense ($/MMBtu)	$	0.33	$	0.40	(17.5)	$	0.26	$	0.38	(31.6	)
Transmission pipeline throughput (BBtu)	38,121		27,138		40.5	117,122		76,196		53.7


Net operating revenues (thousands):
Gathering	$	63,285	$	54,014	17.2&