10-QPeriod: Q2 FY2005

EQT Corp Quarterly Report for Q2 Ended Jun 30, 2005

Filed July 28, 2005For Securities:EQT

Summary

EQT Corp's (EQT) second-quarter 2005 filing reveals a mixed financial performance for the period ended June 30, 2005. While operating revenues saw a modest increase year-over-year, driven by higher natural gas prices and increased sales volumes from the acquisition of Eastern Seven Partners L.P. (ESP), net income significantly declined. This decline was primarily due to substantial gains realized in the prior year from the sale and exchange of Kerr-McGee shares and a favorable insurance settlement, which were not replicated in the current quarter. Despite the net income decrease, the company demonstrated operational improvements in its Equitable Supply segment, with higher production revenues and increased gathering revenues. The Equitable Utilities segment experienced a dip in operating income due to increased operating expenses and lower net operating revenues, while the NORESCO segment saw a decline in operating income due to project development expenses and reduced revenues. The company also highlighted its strategic review of the NORESCO segment and its ongoing focus on expanding its drilling program and optimizing its gathering operations.

Key Highlights

  • 1Net income for the three months ended June 30, 2005, was $64.3 million ($1.04 per diluted share), a significant decrease from $130.8 million ($2.06 per diluted share) in the prior year period, largely due to the absence of significant one-time gains realized in 2004.
  • 2Operating income for the quarter increased to $56.4 million from $47.2 million in the prior year, driven by improved performance in the Equitable Supply segment, benefiting from higher natural gas prices and the acquisition of ESP.
  • 3Equitable Supply segment revenues increased by 21.3% to $112.2 million, with production revenues up 20.3% due to higher sales volumes and prices.
  • 4Equitable Utilities segment operating income decreased by 48.5% to $5.7 million, impacted by lower net operating revenues and increased operating expenses, including impairment charges related to office consolidation.
  • 5The company reported a substantial increase in cash used in operating activities to $63.4 million for the six months ended June 30, 2005, compared to cash provided by operating activities of $170.4 million in the prior year, largely due to increased margin deposit requirements for natural gas swap agreements and higher income tax payments.
  • 6Investing activities provided $275.9 million in cash for the six months ended June 30, 2005, primarily from the sale and tender of Kerr-McGee shares and the sale of properties.
  • 7Subsequent to quarter-end, EQT declared a two-for-one stock split and increased its share repurchase authorization.

Frequently Asked Questions

The substantial decrease in net income was primarily due to the absence of significant one-time gains recognized in the second quarter of 2004. These included a gain on the exchange of Westport for Kerr-McGee shares ($217.2 million) and a gain on the sale and tender of available-for-sale securities. These exceptional items from the prior year were not present in the current quarter's results.

EQT utilizes derivative instruments, primarily natural gas futures and swaps, to hedge against price volatility. For the three months ended June 30, 2005, ineffectiveness associated with these hedges decreased earnings by $0.5 million. The company also has significant unrealized losses on its derivative commodity instruments reflected in accumulated other comprehensive loss, with an estimated $118.1 million expected to be recognized in earnings over the next twelve months.

The operating income for the Equitable Supply segment increased by 19.8% to $63.2 million. This was driven by a 21.3% increase in total operating revenues to $112.2 million. This revenue growth was due to higher production revenues, benefiting from increased sales volumes from the acquisition of ESP and a higher average well-head sales price, as well as increased gathering revenues due to higher gathering rates.

The NORESCO segment experienced a decline in operating income and a decrease in revenue backlog. The company has retained Lincoln Partners LLC to explore strategic alternatives for NORESCO, including a sale, merger, or business combination, to allow the segment to better leverage market opportunities and for EQT to focus on its Utilities and Supply segments.