Table of Contents

 

 

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, 2009

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE TRANSITION PERIOD FROM                TO               

 

 

COMMISSION FILE NUMBER 1-3551

 

EQT CORPORATION

(Exact name of registrant as specified in its charter)

 

PENNSYLVANIA

25-0464690

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania

15222

(Address of principal executive offices)

(Zip code)

 

(412) 553-5700

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

 

 

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  ý  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   ý   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 ý

 

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  ý

 

As of September 30, 2009, 130,919,247 shares of common stock, no par value, of the registrant were outstanding.

 



Table of Contents

 

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, 2009 and 2008

3

 

 

 

 

Statements of Condensed Consolidated Cash Flows for the Nine months ended September 30, 2009 and 2008

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

5 – 6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7 – 19

 

 

 

Item 2.

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

20 – 34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35 – 37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

Part II.  Other Information:

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 6.

Exhibits

41

 

 

 

Signature

42

 

 

 

Index to Exhibits

43

 

2



Table of Contents

 

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,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Thousands, except per share amounts)

 

Operating revenues

 

$

218,357

 

$

297,827

 

$

925,800

 

$

1,167,610

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Purchased gas costs

 

13,573

 

82,114

 

257,171

 

471,644

 

Operation and maintenance

 

34,561

 

30,333

 

101,042

 

84,537

 

Production

 

16,153

 

23,076

 

46,033

 

59,965

 

Exploration

 

4,526

 

3,508

 

12,252

 

4,901

 

Selling, general and administrative

 

59,906

 

(38,199)

 

125,237

 

66,196

 

Depreciation, depletion and amortization

 

49,706

 

34,269

 

140,483

 

97,085

 

Total operating expenses

 

178,425

 

135,101

 

682,218

 

784,328

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

39,932

 

162,726

 

243,582

 

383,282

 

 

 

 

 

 

 

 

 

 

 

Other income

 

511

 

611

 

1,799

 

5,709

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of nonconsolidated investments

 

1,950

 

1,557

 

4,682

 

4,548

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

32,393

 

13,012

 

78,096

 

40,992

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

10,000

 

151,882

 

171,967

 

352,547

 

Income taxes

 

7,091

 

55,684

 

70,420

 

130,438

 

Net income

 

$

2,909

 

$

96,198

 

$

101,547

 

$

222,109

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

130,850

 

130,540

 

130,806

 

126,223

 

Net income

 

$

0.02

 

$

0.74

 

$

0.78

 

$

1.76

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

131,505

 

131,558

 

131,450

 

127,288

 

Net income

 

$

0.02

 

$

0.73

 

$

0.77

 

$

1.74

 

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.

 

3



Table of Contents

 

EQT CORPORATION AND SUBSIDIARIES

 

Statements of Condensed Consolidated Cash Flows (Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

101,547

 

$

222,109

 

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

 

 

 

 

 

Provision for losses on accounts receivable

 

(2,110)

 

8,591

 

Depreciation, depletion, and amortization

 

140,483

 

97,085

 

Other income

 

(1,799)

 

(5,709)

 

Equity in earnings of nonconsolidated investments

 

(4,682)

 

(4,548)

 

Deferred income taxes

 

94,799

 

195,381

 

Restricted stock and stock option expenses

 

5,208

 

4,152

 

Excess tax benefits from share-based payment arrangements

 

(400)

 

(1,129)

 

Decrease (increase) in inventory

 

60,484

 

(57,450)

 

Decrease in accounts receivable and unbilled revenues

 

176,121

 

66,551

 

Decrease (increase) in margin deposits

 

7,442

 

(24,742)

 

Decrease in accounts payable

 

(213,206)

 

(10,565)

 

Change in derivative instruments at fair value, net

 

51,658

 

(56,958)

 

Changes in other assets and liabilities

 

137,040

 

(105,897)

 

Net cash provided by operating activities

 

552,585

 

326,871

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(636,066)

 

(959,962)

 

Capital contributions to Nora Gathering, LLC

 

(6,400)

 

(22,800)

 

Investment in available-for-sale securities

 

(3,000)

 

(3,000)

 

Net cash used in investing activities

 

(645,466)

 

(985,762)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Dividends paid

 

(86,517)

 

(82,589)

 

Proceeds from issuance of common stock

 

 

560,739

 

Proceeds from issuance of long-term debt

 

700,000

 

500,000

 

Debt issuance costs

 

(6,874)

 

(6,645)

 

Repayments and retirements of long term debt

 

(2,000)

 

 

Decrease short-term loans

 

(319,917)

 

(356,333)

 

Decrease note payable to Nora Gathering, LLC

 

 

(29,329)

 

Proceeds from exercises under employee compensation plans

 

293

 

842

 

Excess tax benefits from share-based payment arrangements

 

400

 

1,129

 

Net cash provided by financing activities

 

285,385

 

587,814

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

192,504

 

(71,077)

 

Cash and cash equivalents at beginning of period

 

 

81,711

 

Cash and cash equivalents at end of period

 

$

192,504

 

$

10,634

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest, net of amount capitalized

 

$

50,668

 

$

25,616

 

Income taxes, net of refunds

 

$

(103,229)

 

$

6,855

 

 

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

 

4


 


Table of Contents

 

EQT CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

(Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$   192,504

 

$               -

 

Accounts receivable (less accumulated provision for doubtful accounts: September 30, 2009, $ 16,270; December 31, 2008, $26,636)

 

76,452

 

209,008

 

Unbilled revenues

 

8,475

 

49,930

 

Margin deposits with financial institutions

 

-

 

4,434

 

Inventory

 

195,654

 

288,182

 

Derivative instruments, at fair value

 

162,901

 

192,191

 

Prepaid expenses and other

 

94,170

 

183,437

 

Total current assets

 

730,156

 

927,182

 

 

 

 

 

 

 

Equity in nonconsolidated investments

 

180,083

 

169,241

 

 

 

 

 

 

 

Property, plant and equipment

 

6,160,969

 

5,503,921

 

Less: accumulated depreciation and depletion

 

1,527,121

 

1,406,402

 

Net property, plant and equipment

 

4,633,848

 

4,097,519

 

 

 

 

 

 

 

Investments, available-for-sale

 

34,798

 

25,880

 

Regulatory assets

 

79,723

 

83,525

 

Other assets

 

31,025

 

26,315

 

Total assets

 

$ 5,689,633

 

$ 5,329,662

 

 

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

 

5



Table of Contents

 

EQT CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

(Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$        2,300

 

$        4,300

 

Short-term loans

 

-

 

319,917

 

Accounts payable

 

143,526

 

356,732

 

Margin deposits from financial institutions

 

3,008

 

-

 

Derivative instruments, at fair value

 

135,737

 

175,889

 

Other current liabilities

 

210,004

 

185,770

 

Total current liabilities

 

494,575

 

1,042,608

 

 

 

 

 

 

 

Long-term debt

 

1,949,200

 

1,249,200

 

Deferred income taxes and investment tax credits

 

901,553

 

781,520

 

Unrecognized tax benefits

 

64,470

 

47,553

 

Pension and other post-retirement benefits

 

57,137

 

69,409

 

Other credits

 

110,666

 

89,279

 

Total liabilities

 

3,577,601

 

3,279,569

 

 

 

 

 

 

 

Common stockholders’ equity:

 

 

 

 

 

Common stock, no par value, authorized 320,000 shares; shares issued: September 30, 2009 and December 31, 2008, 157,630

 

950,827

 

948,497

 

Treasury stock, shares at cost: September 30, 2009, 26,711; December 31, 2008, 26,764 (net of shares at cost held in trust for deferred compensation of 160, $2,720 and 163, $2,784)

 

(482,315)

 

(483,464)

 

Retained earnings

 

1,668,826

 

1,653,797

 

Accumulated other comprehensive loss

 

(25,306)

 

(68,737)

 

Total common stockholders’ equity

 

2,112,032

 

2,050,093

 

Total liabilities and stockholders’ equity

 

$ 5,689,633

 

$ 5,329,662

 

 

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

 

6



Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

A.                        Financial Statements

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In this Form 10-Q, references to “we,” “us,” “our,” “EQT,” “EQT Corporation,” and the “Company” refer collectively to EQT Corporation and its consolidated subsidiaries.  In the opinion of management, these statements include all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and its subsidiaries as of September 30, 2009, and the results of its operations and cash flows for the three and nine month periods ended September 30, 2009 and 2008.  Certain previously reported amounts have been reclassified to conform to the current year presentation.

 

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

 

Due to the seasonal nature of the Company’s natural gas distribution and storage businesses and the volatility of commodity prices, the interim statements for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

 

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

 

B.                        Segment Information

 

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

 

The Company reports its operations in three segments, which reflect its lines of business.  The EQT Production segment includes the Company’s exploration for, and development and production of, natural gas, and a limited amount of crude oil, in the Appalachian Basin.  EQT Midstream’s operations include the natural gas gathering, processing, transportation and storage activities of the Company as well as sales of natural gas liquids (NGLs).  Distribution’s operations are primarily comprised of the state-regulated natural gas distribution activities of the Company.

 

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

 

7



Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

EQT Production

 

$

91,922

 

$

122,083

 

$

279,570

 

$

352,109

 

EQT Midstream

 

124,065

 

186,114

 

366,939

 

561,216

 

Distribution

 

54,599

 

88,789

 

425,865

 

459,482

 

Less: intersegment revenues (a)

 

(52,229)

 

(99,159)

 

(146,574)

 

(205,197)

 

Total

 

$

218,357

 

$

297,827

 

$

925,800

 

$

1,167,610

 

Operating income:

 

 

 

 

 

 

 

 

 

EQT Production

 

$

31,522

 

$

67,296

 

$

109,587

 

$

201,805

 

EQT Midstream

 

37,878

 

29,772

 

119,660

 

114,254

 

Distribution

 

3,230

 

(1,772)

 

56,435

 

38,207

 

Unallocated (expense) income (b)

 

(32,698)

 

67,430

 

(42,100)

 

29,016

 

Total

 

$

39,932

 

$

162,726

 

$

243,582

 

$

383,282

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of operating income to net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

EQT Midstream

 

$

342

 

$

460

 

$

1,247

 

$

5,307

 

Distribution

 

169

 

151

 

552

 

402

 

 Total

 

$

511

 

$

611

 

$

1,799

 

$

5,709

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of nonconsolidated investments:

 

 

 

 

 

 

 

 

 

EQT Production

 

$

3

 

$

129

 

$

50

 

$

373

 

EQT Midstream

 

1,946

 

1,363

 

4,608

 

3,989

 

Unallocated

 

1

 

65

 

24

 

186

 

 Total

 

$

1,950

 

$

1,557

 

$

4,682

 

$

4,548

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

32,393

 

13,012

 

78,096

 

40,992

 

Income taxes

 

7,091

 

55,684

 

70,420

 

130,438

 

Net income

 

$

2,909

 

$

96,198

 

$

101,547

 

$

222,109

 

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

Segment Assets:

 

 

 

 

 

EQT Production

 

$  2,656,014

 

$  2,338,695

 

EQT Midstream

 

1,932,602

 

1,897,872

 

Distribution

 

812,677

 

951,179

 

Total operating segments

 

5,401,293

 

5,187,746

 

Headquarters assets, including cash and short-term investments

 

288,340

 

141,916

 

Total assets

 

$  5,689,633

 

$  5,329,662

 

 

8



Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands)

 

Depreciation, depletion and amortization:

 

 

 

 

 

 

 

 

 

EQT Production

 

$

29,856

 

$

20,015

 

$

83,724

 

$

56,757

 

EQT Midstream

 

13,477

 

8,607

 

38,502

 

23,668

 

Distribution

 

5,525

 

5,207

 

16,449

 

15,415

 

Other

 

848

 

440

 

1,808

 

1,245

 

Total

 

$

49,706

 

$

34,269

 

$

140,483

 

$

97,085

 

 

 

 

 

 

 

 

 

 

 

Expenditures for segment assets:

 

 

 

 

 

 

 

 

 

EQT Production

 

$

144,497

 

$

250,058

 

$

446,813

 

$

492,934

 

EQT Midstream

 

39,817

 

184,854

 

155,334

 

432,518

 

Distribution

 

9,844

 

12,179

 

25,337

 

32,162

 

Other

 

2,560

 

1,735

 

8,582

 

2,348

 

Total

 

$

196,718

 

$

448,826

 

$

636,066

 

$

959,962

 

 

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

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

 

C.        Derivative Instruments

 

Natural Gas Hedging Instruments

 

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

 

The Company uses non-leveraged derivative commodity instruments that are placed with major financial institutions whose creditworthiness is continually monitored to reduce the effect of this volatility.  Futures contracts obligate the Company to buy or sell a designated commodity at a future date for a specified price and quantity at a specified location.  Swap agreements involve payments to or receipts from counterparties based on the differential between a fixed and variable price for the commodity.  Collar agreements require the counterparty to pay the Company if the index price falls below the floor price and the Company to pay the counterparty if the index price rises above the cap price.  Put option contracts provide protection from dropping prices and require the counterparty to pay the Company if the index price falls below the contract price.  The Company also engages in a limited number of basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to interest rate fluctuations on short or long-term debt.

 

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

 

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

 

The various derivative commodity instruments used by the Company to hedge its exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sale

 

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Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

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

 

The Company also enters into a limited amount of energy trading contracts to leverage its assets and limit its exposure to shifts in market prices and has a limited amount of other derivative instruments not designated as hedges.

 

During 2008, the Company effectively settled certain derivative commodity hedges scheduled to mature during the period 2010 through 2013 by de-designating the hedges and entering into directly counteractive economic hedges.  As of the date of de-designation of these hedges, the Company had recorded a loss, net of tax, in accumulated other comprehensive loss of approximately $11.4 million which will be recognized as part of the realized sales price in the Statements of Consolidated Income when the underlying physical transactions occur.  The fair value of the offsetting positions not designated as hedges as of September 30, 2009 was a $49.7 million derivative liability and a $30.7 million derivative asset.  During the first quarter of 2009, the Company terminated certain collar agreements scheduled to mature during the period 2010 through 2012.  As of the date of termination of these hedges the Company had recorded a gain, net of tax, in accumulated other comprehensive income of approximately $5.1 million which will be recognized as part of the realized sales price in the Statements of Consolidated Income when the underlying physical transactions occur.

 

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

 

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

 

 

 

Three Months Ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands)

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

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

 

$

4,392

 

$

467,117

 

$

146,402

 

$

(2,644)

 

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

 

26,769

 

(59,734)

 

107,725

 

(151,728)

 

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

 

2,262

 

358

 

(3,076)

 

1,032

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized in income

 

$

 

$

(478)

 

$

(27)

 

$

(200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

(Thousands)

 

Asset derivatives

 

 

 

 

 

Derivatives designated as hedging instruments

 

$

127,116

 

$

188,247

 

Derivatives not designated as hedging instruments

 

35,785

 

3,944

 

Total asset derivatives

 

$

162,901

 

$

192,191

 

 

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Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

September 30, 2009

 

December 31, 2008

 

Liability derivatives

 

(Thousands)

 

Derivatives designated as hedging instruments

 

$

79,777

 

$

154,605

 

Derivatives not designated as hedging instruments

 

55,960

 

21,284

 

Total liability derivatives

 

$

135,737

 

$

175,889

 

(a) Includes $0.3 million and $9.1 million for the three and nine month periods ended September 30, 2009, respectively, of unrealized hedge gains reclassified into earnings to offset lower of cost or market adjustments on hedged items.  Includes $47.2 million for the three and nine month periods ended September 30, 2008 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 nine months of 2009 primarily as a result of the settlement of hedged transactions 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 191 Bcf and 243 Bcf as of September 30, 2009 and December 31, 2008, respectively, and are primarily related to natural gas swaps and collars.

 

The Company deferred net gains (losses) of $9.8 million and ($28.8) million in accumulated other comprehensive income (loss), net of tax, as of September 30, 2009 and December 31, 2008, respectively, associated with the effective portion of the change in fair value of its derivative instruments designated as cash flow hedges.  Assuming no change in price or new transactions, the Company estimates that approximately $15.2 million of net unrealized gains on its derivative commodity instruments reflected in accumulated other comprehensive income, net of tax, as of September 30, 2009 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions.  This recognition occurs through an increase in the Company’s net operating revenues resulting in the average hedged price becoming the realized sales price.

 

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

 

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

 

When the net fair value of any of the Company’s swap agreements represents a liability to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the counterparty requires the Company to remit funds to the counterparty as a margin deposit for the derivative liability which is in excess of the threshold amount. The Company records these deposits as a receivable in the consolidated balance sheet.  When the net fair value of any of the Company’s swap agreements represents an asset to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the Company requires the counterparty to remit funds as margin deposits 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, 2009 and December 31, 2008.

 

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

 

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Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

discretion.  The Company recorded a current liability of $3.0 million as of September 30, 2009 and a current asset of $4.4 million at December 31, 2008 for such deposits with brokers in its Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008, respectively.

 

Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings are lowered below investment grade, additional collateral must be deposited with the counterparty.  This additional collateral can be up to 100% of the derivative liability.  As of September 30, 2009, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $61.8 million, for which the Company had no collateral posted on September 30, 2009.  If the Company’s credit rating had been downgraded below investment grade on September 30, 2009, the Company would have been required to post additional collateral of $29.2 million in respect of the liability position.  Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies.  In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Fitch and Baa3 or higher by Moody’s.  Anything below these ratings is considered non-investment grade.

 

D.        Investments, Available-For-Sale

 

As of September 30, 2009, the investments classified by the Company as available-for-sale consist of $34.8 million of equity and bond funds intended to fund plugging and abandonment and other liabilities for which the Company self-insures.  Unrealized gains or losses with respect to temporarily impaired investments classified as available-for-sale are recognized within the Condensed Consolidated Balance Sheets as a component of equity, accumulated other comprehensive loss.  The Company evaluates these investments quarterly and if the Company subsequently determines that a loss is other-than-temporary, any unrealized losses stemming from such impaired investments will be recognized in earnings.

 

 

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

(Thousands)

 

Equity funds

 

$

21,942

 

$

4,747

 

$

 

$

26,689

 

Bond funds

 

7,468

 

641

 

 

8,109

 

Total investments

 

$

29,410

 

$

5,388

 

$

 

$

34,798

 

 

 

 

December 31, 2008

 

 

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

(Thousands)

 

Equity funds

 

$

20,219

 

$

 

$

 

$

20,219

 

Bond funds

 

5,661

 

 

 

5,661

 

Total investments

 

$

25,880

 

$

 

$

 

$

25,880

 

 

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

 

E.         Fair Value Measurements

 

The Company has an established process for determining fair value for its financial instruments, principally derivative commodity instruments and available-for-sale investments.  Fair value is based on quoted market prices, where available.  If quoted market prices are not available, fair value is based upon models that use as inputs market-based parameters, including but not limited to forward curves, discount rates, broker quotes, volatilities, and nonperformance risk.  Nonperformance risk considers the effect of the Company’s credit standing on the fair value of liabilities and the effect of the counterparty’s credit standing on the fair value of assets. The Company estimates 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 and credit default swaps rates where applicable.

 

12


 


Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The Company has categorized its financial instruments into a three-level fair value hierarchy, based on the priority of the inputs to the valuation technique.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  Financial instruments included in Level 1 include the Company’s futures contracts and available-for-sale investments, while instruments included in Level 2 include the majority of the Company’s swap agreements, and instruments included in Level 3 include the Company’s collar and option agreements and a portion of the Company’s swap agreements.  Since the adoption of fair value accounting, the Company has not made any changes to its classification of financial instruments in any category.

 

The fair value of financial instruments included in Level 2 is based on industry models that use significant observable inputs, including NYMEX forward curves and LIBOR-based discount rates.  Swaps included in Level 3 are valued using internal models; these internal models are validated each period with non-binding broker price quotes.  The Company has not experienced significant differences between internally calculated values and broker price quotes.  Collars and options included in Level 3 are valued using internal models calculated with market derived volatilities. The Company uses NYMEX forward curves to value futures, NYMEX swaps, collars and options.  The NYMEX forward curves are validated to external sources at least monthly.

 

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

 

 

 

 

 

   Fair value measurements at reporting date using

 

Description

 

September 30,
2009

 

Quoted
prices in
active
markets for
identical
assets
(Level 1)

 

Significant
other
observable
inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

 

 

(Thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Investments, available-for-sale

 

  $

34,798

 

  $

34,798

 

  $

– 

 

  $

–       

 

Derivative instruments, at fair value

 

162,901

 

16,273

 

59,855

 

86,773

 

Total assets

 

  $

197,699

 

  $

51,071

 

  $

59,855

 

  $

86,773

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments, at fair value

 

  $

(135,737)

 

  $

(7,480)

 

  $

(126,938)

 

  $

(1,319)

 

Total liabilities

 

  $

(135,737)

 

  $

(7,480)

 

  $

(126,938)

 

  $

(1,319)

 

 

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Table of Contents

 

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, 2009

 

$

87,605

Total gains or losses:

 

 

Included in earnings

 

86

Included in other comprehensive income

 

43,993

Purchases, issuances, and settlements

 

(46,230)

Transfers in and/or out of Level 3

 

Balance at September 30, 2009

 

$

85,454

 

 

 

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, 2009

 

21

 

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.  Any gains or losses 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Thousands)

 

Net income

 

  $

2,909 

 

   $

96,198 

 

  $

101,547

 

  $

222,109

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Net change in cash flow hedges

 

(22,348) 

 

479,727 

 

38,765

 

94,195

 

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

 

2,651 

 

(2,413) 

 

3,502

 

(5,007)

 

Pension and other post-retirement benefit plans:

 

 

 

 

 

 

 

 

 

Prior service cost

 

(86) 

 

(70) 

 

(258)

 

(212)

 

Net loss

 

371 

 

395 

 

1,113

 

1,184

 

Settlement loss

 

103 

 

76 

 

309

 

228

 

Total comprehensive (loss) income

 

  $

(16,400) 

 

   $

573,913 

 

  $

144,978

 

  $

312,497

 

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

 Net unrealized gain (loss) from hedging transactions

 

  $

9,546

 

  $

(29,219)

 

 Unrealized gain on available-for-sale securities

 

3,502

 

 

 Pension and other post-retirement benefits adjustment

 

(38,354)

 

(39,518)

 

Accumulated other comprehensive loss

 

  $

(25,306)

 

  $

(68,737)

 

 

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Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

G.        Share-Based Compensation

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Thousands)

 

2005 Executive Performance Incentive Program

 

$

 

 

$(84,231)

 

$

 

$

(41,684)

 

2008 Executive Performance Incentive Program

 

211

 

248

 

559

 

248

 

2009 Shareholder Value Plan

 

24,299

 

 

30,614

 

 

2007 Supply Long-Term Incentive Program

 

1,367

 

(520)

 

4,166

 

391

 

Restricted stock awards

 

872

 

1,771

 

2,858

 

3,630

 

Non-qualified stock options

 

783

 

522

 

2,350

 

522

 

Non-employee directors’ share-based awards

 

670

 

(3,101)

 

366

 

(821)

 

Total share-based compensation expense (income)

 

$

28,202

 

 

$(85,311)

 

$

40,913

 

$

(37,714)

 

 

Executive Performance Incentive Programs

 

The vesting of the stock units granted under the 2005 Executive Performance Incentive Program (2005 Program) occurred on December 31, 2008, after the ordinary close of the performance period, and payment was made on that day.  The Company accounted for these awards as liability awards and as such recorded compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period.  During the three months ended September 30, 2008, the Company decreased its assumptions for both the ultimate share price and the payout multiple at the end of the performance period to approximately $37 per share and 175%, respectively.

 

The settlement of the units granted under the 2008 Executive Performance Incentive Program (2008 Program) will occur after the performance period, December 31, 2011, at a payout multiple between zero and 300%, which is dependent upon the level of total shareholder return relative to a predefined peer group’s total shareholder return during the 3.5 year performance period and production sales revenues (at a fixed price) for approximately the same period.  Payment of awards is expected to be in cash based on the price of the Company’s common stock at the end of the performance period.  Participants have no rights with respect to awards under the 2008 Program prior to payment.  The Company accounts for these awards as liability awards and as such records compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period.  The Company continually monitors its stock price and performance in order to assess the affect on the ultimate payout under the 2008 Program.  The Company’s current assumptions for the ultimate share price and payout multiple are $50 and 100% of the units awarded, respectively.  As of September 30, 2009, approximately 59,000 units were outstanding under the 2008 Program.

 

2009 Shareholder Value Plan

 

The settlement of the units granted under the 2009 Shareholder Value Plan (2009 SVP) will occur after the performance period utilizing a payout factor of between zero and 250%, dependent upon a combination of the level of total shareholder return relative to a predefined peer group and the Company’s average absolute return on total capital during the performance period of January 1, 2005 to December 31, 2009.  To determine the actual payment per unit, the payout factor will be multiplied by the period-end stock price and such product will be reduced by $63.82 (referred to as the threshold value).  The threshold value approximates the Company’s total shareholder return relative to the predefined peer group through December 31, 2008 at a 175% multiple.  Payment of awards is expected to be in cash based on the price of the Company’s common stock at the end of the performance period, December 31, 2009. Participants have no rights with respect to awards under the 2009 SVP prior to payment.  The Company accounts for these awards as liability awards and as such records compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period.  The Company continually monitors its stock price and performance in order to assess the affect on the ultimate payout under the 2009 SVP.  The Company’s current assumptions for the period-end stock and payout multiple are approximately $43 and 225% of the units awarded, respectively.  As of September 30, 2009, approximately 963,000 units were outstanding under the 2009 SVP.   If the Company achieves a performance level increasing the payout factor to 250% at the current assumed period-end stock multiple of approximately $43, then the Company would recognize an additional $11.4 million of compensation expense.

 

15



Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

2007 Supply Long-Term Incentive Program

 

On July 1, 2007, the Company established the 2007 Supply Long-Term Incentive Program (2007 Supply Program) to provide a long-term incentive compensation opportunity to key employees in the EQT Production and EQT Midstream segments and awards were granted at that time.  During the first quarter of 2009, the Compensation Committee of the Board of Directors approved the grant of approximately 116,000 additional awards under the 2007 Supply Program.  Awards granted may be earned by achieving pre-determined total sales volumes targets, achieving certain efficiency metrics and satisfying certain applicable employment requirements.  The awards earned may be increased to a maximum of three times the initial award or reduced to zero based upon achievement of the predetermined performance levels.  The settlement of the units granted under the 2007 Supply Program will occur after the end of the performance period, December 31, 2010.  Payment of awards will be made in cash based on the price of the Company’s common stock at the end of the performance period.  Participants have no rights with respect to awards under the 2007 Supply Program prior to payment.  The Company accounts for these awards as liability awards and as such records compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period.  The Company continually monitors its stock price and performance in order to assess the affect on the ultimate payout under the 2007 Supply Program.  The Company’s current assumptions for the ultimate share price and payout multiple are approximately $45 and 200% of the units awarded, respectively.  As of September 30, 2009, approximately 271,000 units were outstanding under the 2007 Supply Program.

 

Restricted Stock Awards

 

The Company granted 7,800 and 137,730 restricted stock awards during the three months ended September 30, 2009 and 2008, respectively, to key employees of the Company.  The shares granted will be fully vested at the end of the three-year period commencing with the date of grant.  The weighted average fair value of these restricted stock grants, based on the grant date fair value of the Company’s stock, was approximately $39 and $63, for the three months ended September 30, 2009 and 2008, respectively.

 

As of September 30, 2009, the Company had $4.8 million of total unrecognized compensation cost related to non-vested restricted stock awards.  That cost is expected to be recognized over a weighted average period of approximately 22 months.

 

Non-Qualified Stock Options

 

No stock options were granted during the nine month period ended September 30, 2009. A total of 906,000 stock options were granted during the nine month period ended September 30, 2008.  As of September 30, 2009, the Company had $5.4 million of total unrecognized compensation cost related to outstanding non-vested stock options.   Options to purchase approximately 937,800 and 974,200 shares of common stock were outstanding for the three and nine months ended September 30, 2009, respectively, but were not included in the computation of dilutive earnings per share because the effect would be antidilutive.

 

Non-employee Directors’ Share-Based Awards

 

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

 

The Company has historically granted to non-employee directors share-based awards which vested upon award.  The value of the share-based awards will be paid in cash on the earlier of the director’s death or retirement from the Company’s Board of Directors. The Company accounts for these share-based awards as liability awards and as such records compensation expense for the remeasurement of the fair value of the awards at the end of each reporting period.  A total of 84,958 non-employee director share-based awards were outstanding as of September 30, 2009.  No share-based awards were granted to non-employee directors during the nine month period ended September 30, 2009. A total of 12,800 share-based awards were granted to non-employee directors, at a weighted average fair value of $68.22 per share, during the nine month period ended September 30, 2008.

 

H.        Income Taxes

 

The Company estimates an annual effective income tax rate based on projected results for the year and applies this rate to income before taxes to calculate income tax expense.  Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period.  Separate

 

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Table of Contents

 

EQT Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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, 2009 was 40.9%.  The Company currently estimates the annual effective income tax rate to be approximately 40.9%.  The estimated annual effective income tax rate as of September 30, 2008 was 37.3%.  The 2009 increase in the expected annual effective tax rate is primarily the result of nondeductible compensation expense and a West Virginia law change in 2008 that created a discrete benefit.  The Company has a method change request pending with the Internal Revenue Service (IRS) which, if approved, will reduce the estimated annual effective income tax rate by approximately 1.9% for 2009.

 

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

 

There were no material changes to the Company’s methodology for unrecognized tax benefits during the nine months ended September 30, 2009. Increases to the unrecognized tax benefit balance during the nine months ended September 30, 2009 were primarily attributable to certain pending changes in the Company’s accounting for repairs expenditures for tax purposes.

 

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

 

As of September 30, 2009, the IRS has completed its audit and review of the Company’s federal income tax filings for the 2001 through 2005 years and the Company has received approximately $3.0 million of the total expected $3.4 million refund relating to the agreed upon audit adjustments for these years.  In September of 2009, the JCT approved the settlement of all issues related to the 2001 through 2005 audit excluding the Company’s research and experimentation (R&E) tax credits claimed for such years.   The R&E credits have been referred to the Appeals Division of the IRS.  The Company also is the subject of various state income tax examinations.  The Company believes that it is appropriately reserved for any uncertain tax positions claimed during these periods.

 

During the second quarter of 2009 EQT received a refund of $99.5 million from the IRS relating to the 2008 net operating loss carryback claim that was filed with the IRS on March 3, 2009.  This net operating loss was primarily a result of intangible drilling costs incurred as a result of the Company’s drilling program that are deducted currently for tax purposes and accelerated tax deprecation for expansion of the gathering infrastructure.  During the third quarter of 2009, the Company filed a superseding tax return for the 2008 tax year in which the Company has requested an additional refund of $15.5 million relating to the carryback of its 2008 net operating tax loss.  The Company expects to receive the refund in 2009.

 

I.          Long-Term Debt

 

 

 

September  30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Thousands)

 

5.15% notes, due March 1, 2018

 

$      200,000

 

$      200,000

 

5.15% notes, due November 15, 2012

 

200,000

 

200,000

 

5.00% notes, due October 1, 2015

 

150,000

 

150,000

 

6.50% notes, due April 1, 2018

 

500,000

 

500,000

 

8.13% notes, due April 1, 2019

 

700,000

 

 

7.75% debentures, due July 15, 2026

 

115,000

 

115,000

 

Medium-term notes:

 

 

 

 

 

8.5% to 9.0% Series A, due 2009 thru 2021

 

48,500

 

50,500

 

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

 

 

 

1,951,500

 

1,253,500

 

Less debt payable within one year

 

2,300

 

4,300

 

Total long-term debt

 

$   1,949,200

 

$   1,249,200

 

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 indebtedness.

 

Aggregate maturities of long-term debt are $2.3 million in 2009, $0 in 2010, $6.0 million in 2011, $200.0 million in 2012 and $10.0 million in 2013.

 

J.                          Pension and Other Postretirement Benefit Plans

 

The Company’s costs related to its defined benefit pension and other postretirement benefit plans for the three and nine months ended September 30, 2009 and 2008 were as follows:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

Three Months Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Thousands)

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

Service cost

 

$

109

 

$

44

 

$

144

 

$

110

 

Interest cost

 

906

 

1,080

 

537

 

610

 

Expected return on plan assets

 

(1,145)

 

(1,333)

 

 

 

Amortization of prior service cost

 

4

 

29

 

(226)

 

(226)

 

Recognized net actuarial loss

 

298

 

312

 

437

 

511

 

Settlement loss

 

173

 

237

 

 

 

Net periodic benefit cost

 

$

345

 

$

369

 

$

892

 

$

1,005

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

Nine months ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Thousands)

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

Service cost

 

$

327

 

$

132

 

$

432

 

$

330

 

Interest cost

 

2,718

 

3,240

 

1,611

 

1,830

 

Expected return on plan assets

 

(3,435)

 

(3,999)

 

 

 

Amortization of prior service cost

 

12

 

87

 

(678)

 

(678)

 

Recognized net actuarial loss

 

894

 

936

 

1,311

 

1,533

 

Settlement loss

 

519

 

489

 

 

 

Net periodic benefit cost

 

$

1,035

 

$

885

 

$

2,676

 

$

3,015

 

 

K.                        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 September 30, 2009 and December 31, 2008 was approximately $2 billion and $1 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.

 

L.                         Recently Issued Accounting Standards

 

Employers’ Disclosures about Post-Retirement Benefit Plan Assets

 

In December 2008, the FASB issued “Employers’ Disclosures about Post-Retirement Benefit Plan Assets.” The disclosures required by this guidance are intended to enhance the transparency surrounding the types of assets and

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

associated risks in an employer’s defined benefit pension or other post-retirement plan.  The new disclosures are required to be included in the financial statements for fiscal years ending after December 15, 2009.  The Company is currently evaluating the affect that this guidance will have on its consolidated financial statement disclosures.

 

Accounting for Variable Interest Entities

 

In June 2009, the FASB issued amendments to improve financial reporting by enterprises involved with variable interest entities.  The amendments are effective as of the beginning of the first annual reporting period after November 15, 2009.  The Company is currently evaluating the affect that these amendments will have on its consolidated financial statements.

 

Accounting for Transfers of Financial Assets

 

In June 2009, the FASB issued an amendment to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  The amendment eliminates the concept of a qualifying special-purpose entity for accounting purposes and must be applied as of the beginning of the first annual reporting period beginning after November 15, 2009.  This amendment must be applied to transfers occurring on or after the effective date and the disclosure provisions must be applied to transfers that occurred both before and after the effective date.  The Company is currently evaluating the affect that this amendment will have on its consolidated financial statements.

 

Oil and Gas Reporting Requirements

 

In December 2008, the U.S. Securities and Exchange Commission (SEC) approved amendments to its oil and gas reporting requirements.  The amendments are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves by better aligning the oil and gas disclosure requirements with current practices and technology.  The amendments are effective for annual reports for fiscal years ending on or after December 31, 2009.

 

In September 2009, the FASB issued a proposed Accounting Standards Update to align the oil and gas reserve estimation and disclosure requirements of “Extractive Industries — Oil and Gas” with the requirements of the SEC’s amendments to its oil and gas reporting requirements.  The FASB’s proposed amendment would also be effective for annual reporting periods ending on or after December 31, 2009, and applied prospectively as a change in estimate.

 

The Company has determined that the SEC amendments and proposed FASB amendments will not have an affect on the Company’s results of operations, cash flows or financial position at December 31, 2009.  The Company is currently evaluating the affect the revised amendments will have on its financial statement disclosures, including its disclosures of proved oil and natural gas reserves and the “Standard Measure of Discounted Future Cash Flow”.

 

M.       Other Events

 

During the third quarter of 2009, the Company completed the relocation of its corporate headquarters and other operations to downtown Pittsburgh.  As a result of the relocation, the Company recorded impairment expense of $4.0 million as selling, general and administrative expense in the Statements of Consolidated Income.

 

On May 15, 2009, the Company completed a public offering of $700 million in aggregate principal amount of 8.125% Senior Notes (Senior Notes) due June 1, 2019.  The proceeds from the offering were used to repay short-term borrowings under the Company’s revolving credit facility and will fund part of the Company’s 2009 capital program.  The indenture governing the Senior Notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of the Company’s assets.

 

The Company has evaluated subsequent events through October 29, 2009, the date the financial statements were issued.

 

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

 

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

 

INFORMATION REGARDING FORWARD LOOKING STATEMENTS

 

Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “will,” “may,” “forecasts,” “approximate,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters.  Without limiting the generality of the foregoing, forward-looking statements contained in this report include the matters discussed in the sections captioned “Outlook” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the expectations of plans, strategies, objectives, and growth and anticipated financial and operational performance of the Company and its subsidiaries, including guidance regarding the Company’s drilling and infrastructure programs (including the Equitrans expansion project), production and sales volumes, reserves, capital expenditures, financing requirements, hedging strategy and tax position.  These statements involve risks and uncertainties that could cause actual results to differ materially from projected results.  Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  The Company has based these forward-looking statements on current expectations and assumptions about future events.  While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control.  The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 2008.

 

Any forward-looking statement speaks only as of the date on which such statement is made and the Company does not intend to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

In reviewing any agreements incorporated by reference in this Form 10-Q, please remember they are included to provide you with information regarding the terms of such agreement and are not intended to provide any other factual or disclosure information about the Company. The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.  The agreements may also contain covenants in which the Company agrees to take or agrees to refrain from taking specified actions, which should not in all instances be treated as categorical promises to take or refrain from taking specified actions.  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 nor may the covenants alone describe actions which the Company plans to take or refrain from taking.

 

CORPORATE OVERVIEW

 

Three Months Ended September 30, 2009

vs. Three Months Ended September 30, 2008

 

EQT Corporation’s consolidated net income for the three months ended September 30, 2009 totaled $2.9 million, or $0.02 per diluted share, compared to $96.2 million, or $0.73 per diluted share, reported for the same period a year ago.  An increase in share-based compensation expense and a decrease in commodity prices were the primary factors in the decrease in net income between periods.  During the third quarter of 2008, unfavorable market conditions negatively affected the Company’s share price and resulted in the reversal of $84.2 million of compensation expense under the 2005 Executive Performance Incentive Program (2005 Program).   The 2005 Program paid out on December 31, 2008.  During the third quarter of 2009, the Company’s share price and performance in relation to its peer group improved resulting in additional compensation expense of $24.3 million under the Company’s 2009 Shareholder Value Plan (2009 SVP).  The 2009 SVP’s performance period ends on December 31, 2009.  The 2005 Program was, and the 2009 SVP is, a liability plan, in which awards are valued at the end of the performance period, based upon a combination of the Company’s stock price, a factor determined by the Company’s performance compared to its peers and the Company’s return on total capital.  Unfavorable commodity prices continued to adversely affect the Company in the 2009 third quarter through reduced average well-head sales prices, NGL sales

 

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

 

prices and commodity storage price spreads together totaling $47.1 million pre-tax.  Also, during the third quarter 2009, the Company recorded impairment expense of $4.0 million resulting from the relocation of the Company’s offices.

 

These negative factors were partially offset by record production gas sales volumes resulting from increased production from the Company’s drilling program, increases in gathering, transmission, processing, and commercial activity and the Distribution segment’s increase in base rates.  The Company’s continued investment in its oil and gas producing properties and midstream infrastructure resulted in higher DD&A and interest expense.  In addition, midstream infrastructure investments resulted in greater operation and maintenance expenses for electricity, property taxes and labor.

 

Nine months ended September 30, 2009

vs. Nine months ended September 30, 2008

 

EQT Corporation’s consolidated net income for the nine months ended September 30, 2009 totaled $101.5 million or $0.77 per diluted share, compared to $222.1 million, or $1.74 per diluted share, reported for the same period a year ago.  A decrease in natural gas commodity prices and an increase in share-based compensation expense were the primary factors in the decrease in net income between periods.   In 2009, the Company continued to be negatively affected by unfavorable commodity prices through reduced average well-head sales prices, NGL sales prices and commodity storage price spreads together totaling $149.0 million pre-tax.  During the third quarter 2008, unfavorable market conditions negatively affected the Company’s share price and resulted in the net year-to-date reversal of $41.7 million of compensation expense under the 2005 Program.  The 2005 Program paid out on December 31, 2008.  During the first nine months of 2009, the Company’s share price and performance in relation to its peer group improved resulting in additional compensation expense of $30.6 million under the 2009 SVP.  These negative factors were partially offset by record production gas sales volumes resulting from increased production from the Company’s drilling program, increases in commercial, transmission, processing and gathering activity, and increased base rates in the Company’s Distribution segment.  The Company’s increased investment in its oil and gas producing properties and midstream infrastructure resulted in increased DD&A and interest expense.  During the third quarter 2009, the Company recorded impairment expense of $4.0 million resulting from the relocation of the Company’s headquarters.

 

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

 

EQT PRODUCTION

 

OVERVIEW

 

EQT Production continued to focus on organic production growth through its Huron and Marcellus shale horizontal drilling programs during the third quarter.  The Company drilled 518 gross (381 net) wells in the first nine months of 2009, including 271 horizontal wells comprised of 27 horizontal Marcellus wells, 219 horizontal Huron shale wells, 19 horizontal Berea wells and 6 horizontal wells targeting other formations.  The Company drilled 521 gross (413 net) wells in the first nine months of 2008, including 4 horizontal Marcellus wells, 271 horizontal Huron shale wells, and 15 horizontal Berea wells.  See “Capital Resources and Liquidity” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q for details regarding the Company’s capital expenditures for drilling and development.

 

EQT Production’s operating revenues for the three months ended September 30, 2009 decreased 25% from 2009 to 2008 as lower commodity prices more than offset significantly increased production volumes.

 

Third quarter depletion expense at EQT Production increased as a result of higher rates due to the significant on-going drilling and development program and increased units-of production.

 

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

 

RESULTS OF OPERATIONS

 

EQT PRODUCTION

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

%

 

2009

 

2008

 

%

 

OPERATIONAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas and oil production (MMcfe)

 

26,722

 

23,249

 

14.9

 

76,705

 

65,813

 

16.5

 

Company usage, line loss (MMcfe)

 

(1,566)

 

(2,012)

 

(22.2)

 

(4,207)

 

(4,905)

 

(14.2)

 

Total sales volumes (MMcfe)

 

25,156

 

21,237

 

18.5

 

72,498

 

60,908

 

19.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3.55

 

$

5.62

 

(36.8)

 

$

3.76

 

$

5.66

 

(33.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.32

 

$

0.36

 

(11.1)

 

$

0.28

 

$

0.33

 

(15.2)

 

Production taxes ($/Mcfe)

 

$

0.26

 

$

0.62

 

(58.1)

 

$

0.30

 

$

0.57

 

(47.4)

 

Production depletion ($/Mcfe)

 

$

1.04

 

$

0.81

 

28.4

 

$

1.03

 

$

0.81

 

27.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production depletion

 

$

27,734

 

$

18,796

 

47.6

 

$

79,165

 

$

53,389

 

48.3

 

Other depreciation, depletion and amortization (DD&A)

 

2,122

 

1,219

 

74.1

 

4,559

 

3,368

 

35.4

 

Total DD&A

 

$

29,856

 

$

20,015

 

49.2

 

$

83,724

 

$

56,757

 

47.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (thousands)

 

$

144,497

 

$

250,058

 

(42.2)

 

$

446,813

 

$

492,934

 

(9.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL DATA (Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total operating revenues

 

$

91,922

 

$

122,083

 

(24.7)

 

$

279,570

 

$

352,109

 

(20.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

LOE, excluding production taxes

 

8,633

 

8,379

 

3.0

 

21,845

 

21,395

 

2.1

 

Production taxes

 

6,932

 

14,387

 

(51.8)

 

23,082

 

37,724

 

(38.8)

 

Exploration expense

 

4,527

 

3,508

 

29.0

 

12,252

 

4,901

 

150.0

 

Selling, general and administrative (SG&A)

 

10,452

 

8,498

 

23.0

 

29,080

 

29,527

 

(1.5)

 

DD&A

 

29,856

 

20,015

 

49.2

 

83,724

 

56,757

 

47.5

 

Total operating expenses

 

60,400

 

54,787

 

10.2

 

169,983

 

150,304

 

13.1

 

Operating income

 

$

31,522

 

$

67,296

 

(53.2)

 

$

109,587

 

$

201,805

 

(45.7)

 

 

* Average well-head sales price is calculated as market price adjusted for hedging activities less deductions for gathering, processing and transmission included in EQT Midstream revenues. These deductions totaled $1.68/Mcfe and $1.64/Mcfe for the three months ended September 30, 2009 and 2008, respectively, and $1.69/Mcfe and $1.46/Mcfe for the nine months ended September 30, 2009 and 2008, respectively.

 

Three Months Ended September 30, 2009

vs. Three Months Ended September 30, 2008

 

EQT Production’s operating income totaled $31.5 million for the three months ended September 30, 2009 compared to $67.3 million for the three months ended September 30, 2008.  The $35.8 million decrease in operating income was primarily the result of a decrease in the average well-head sales price ($52.1 million) offset by an increase in sales volumes ($22.0 million).

 

Total operating revenues were $91.9 million for the three months ended September 30, 2009 compared to $122.1 million for the three months ended September 30, 2008.  The $30.2 million decrease in total operating revenues was primarily due to a 37% decrease in the average well-head sales price, partially offset by an increase in production gas sales volumes.  The $2.07 per Mcfe decrease in the average well-head sales price was primarily attributable to a $6.85 per Dth decrease in the average NYMEX price and a higher percentage of unhedged gas sales, partially offset by a higher realized hedge price.  Gas sales volumes increased 18% from 2008 to 2009.  The increase in production

 

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

 

gas sales volumes was the result of increased production from the 2009 and 2008 drilling programs including continued horizontal well development of the Company’s Huron and Marcellus shales, partially offset by the normal production decline in the Company’s wells.

 

Operating expenses totaled $60.4 million for the three months ended September 30, 2009 compared to $54.8 million for the three months ended September 30, 2008.  DD&A increased $9.8 million primarily as a result of an increase in the depletion unit rate ($5.9 million) and higher volumes ($2.7 million). The $0.23 increase in the depletion rate was primarily attributable to the increased investment in the Company’s oil and gas producing properties.  Production taxes decreased $7.5 million primarily due to decreased severance taxes (a production tax directly imposed on the value of the gas extracted) as a result of lower gas commodity prices.  The increase in SG&A was due to increased incentive plan expenses and higher overhead costs associated with the growth of the Company partially offset by 2008 legal reserves for certain legal disputes.  The increase in exploration expense was due to an increased level of seismic analysis and supporting personnel costs compared to prior year.

 

During the first quarter of 2008, the Company drilled its first exploratory vertical Utica well. During the three months ended September 30, 2009, the Company capitalized $0.2 million of Utica well costs bringing the total capitalized exploratory well costs that are pending the determination of proved reserves to $7.8 million. As of September 30, 2009, this well has not been turned in line. The Company expects to drill a second Utica well in 2010 and to complete the two wells at the same time.

 

Nine months ended September 30, 2009

vs. Nine months ended September 30, 2008

 

EQT Production’s operating income totaled $109.6 million for the nine months ended September 30, 2009 compared to $201.8 million for the nine months ended September 30, 2008.  The $92.2 million decrease in operating income was primarily the result of a decrease in the average well-head sales price ($137.7 million), higher DD&A, and an increase in exploration expense partially offset by an increase in sales volumes ($65.6 million) and a decrease in production taxes.

 

Total operating revenues were $279.6 million for the nine months ended September 30, 2009 compared to $352.1 million for the nine months ended September 30, 2008.  The $72.5 million decrease in total operating revenues was primarily due to a 34% decrease in the average well-head sales price, partially offset by an increase in production gas sales volumes.  The $1.90 per Mcfe decrease in the average well-head sales price was primarily due to a $5.80 per Dth decrease in the average NYMEX price and a higher percentage of unhedged gas sales partially offset by a higher realized hedge price.  Gas sales volumes increased 19% from 2008 to 2009.  The increase in production gas sales volumes was the result of increased production from the 2008 and 2009 drilling programs, partially offset by the normal production decline in the Company’s wells.

 

Operating expenses totaled $170.0 million for the nine months ended September 30, 2009 compared to $150.3 million for the nine months ended September 30, 2008.  The increase in operating expenses was primarily the result of increased DD&A from increases in the depletion unit rate ($16.9 million) and volume ($8.4 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. This increase was partially offset by a decrease in production taxes. The decrease in production taxes was due to decreased severance taxes, a production tax directly imposed on the value of the gas extracted, as a result of lower gas commodity prices.  Exploration expense increased due to an increased level of seismic analysis and supporting personnel costs compared to prior year.

 

OUTLOOK

 

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

 

·                Expanding reserves and production through horizontal drilling in Kentucky, West Virginia and Pennsylvania. Through the capital program, the Company is seeking to maximize the value of its existing asset base by developing its large acreage position, which the Company believes holds significant production and reserve growth potential. A substantial portion of the Company’s 2009 drilling effort is

 

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EQT Corporation and Subsidiaries

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

 

focused on drilling horizontal wells in the Huron and Berea shale formations in Kentucky and West Virginia and in the Marcellus shale formation in Pennsylvania and West Virginia.

 

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

 

EQT MIDSTREAM

 

OVERVIEW

 

EQT Midstream’s 2009 third quarter net operating revenues increased 23% from the third quarter 2008 to 2009. Increases in net operating revenues were partially offset by increased operating expenses.  Gathering net operating revenues increased primarily due to an increase in gathered volumes and average gathering fees.  Transmission net operating revenues increased primarily due to increased Big Sandy pipeline activity in 2009.  Storage and marketing net operating revenues increased as a result of increased activity with an industrial customer.  The increase in processing net operating revenues was driven by higher volumes partially offset by a lower average NGL sales price.  Operating and maintenance expense and DD&A increased due to the completion in 2008 of significant Midstream infrastructure projects.  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 EQT Midstream infrastructure projects.

 

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

 

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EQT Corporation and Subsidiaries

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

 

RESULTS OF OPERATIONS

 

EQT MIDSTREAM

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

%

 

2009

 

2008

 

%

 

OPERATIONAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gathering and processing:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gathered volumes (BBtu)

 

40,849

 

37,851

 

7.9

 

118,918

 

105,132

 

13.1

 

Average gathering fee ($/MMBtu)

 

 $

1.05

 

 $

0.99

 

6.1

 

 $

1.04

 

$

0.99

 

5.1

 

Gathering and compression expense ($/MMBtu)

 

 $

0.42

 

 $

0.38

 

10.5

 

 $

0.41

 

$

0.37

 

10.8

 

NGLs sold (Mgal) (a)

 

29,948

 

19,916

 

50.4

 

89,836

 

55,490

 

61.9

 

Average NGL sales price ($/gal)

 

 $

0.78

 

 $

1.51

 

(48.3)

 

 $

0.69

 

$

1.48

 

(53.4)

 

Transmission pipeline throughput (BBtu)

 

21,471

 

22,605

 

(5.0)

 

61,003

 

53,745

 

13.5