10-QPeriod: Q3 FY2005

EQT Corp Quarterly Report for Q3 Ended Sep 30, 2005

Filed October 27, 2005For Securities:EQT

Summary

EQT Corporation (EQT) reported its third quarter and nine-month results for 2005, demonstrating mixed performance across its business segments. While overall revenues saw an increase driven by higher natural gas prices and the acquisition of ESP, net income for the nine-month period declined compared to the previous year. This decrease was influenced by significant one-time items, including pension settlement charges and increased incentive compensation expenses, which impacted the Equitable Utilities segment. Conversely, the Equitable Supply segment showed robust growth in operating income, fueled by strong production and gathering revenues, despite increased operating expenses related to expansion and acquisitions. The NORESCO segment experienced a decline in operating income and a reduction in revenue backlog, prompting strategic review. The company's financial position was significantly impacted by volatile natural gas prices, necessitating increased margin deposits for hedging activities, which impacted cash flow from operations. However, EQT took steps to bolster liquidity, including securing a larger revolving credit facility and issuing new notes. The company also continued its divestiture of non-core assets and focused on increasing its drilling program for future production growth. Investors should note the significant gains from the sale of Kerr-McGee shares, which positively impacted the nine-month period, and the ongoing efforts to manage commodity price risk through hedging strategies.

Key Highlights

  • 1Net income for the nine months ended September 30, 2005, decreased to $187.2 million from $236.6 million in the prior year, primarily due to one-time charges and increased incentive compensation.
  • 2Operating income for the Equitable Supply segment increased by 20.4% year-over-year for the nine months ended September 30, 2005, driven by higher natural gas prices and increased sales volumes.
  • 3Equitable Utilities reported an operating loss of $7.5 million for the third quarter of 2005, compared to an operating income of $3.7 million in the prior year, largely due to a $12.7 million pension settlement charge.
  • 4The company generated significant cash flow from investing activities ($285.1 million for the nine months ended September 30, 2005) due to proceeds from the sale of Kerr-McGee shares and non-core gas properties.
  • 5Cash flow from operating activities for the nine months ended September 30, 2005, was a negative $451.7 million, heavily impacted by increased margin deposits for natural gas hedging due to higher commodity prices.
  • 6A new $650 million revolving credit agreement was secured, and $150 million in notes were issued, strengthening the company's liquidity and financial flexibility.
  • 7The company sold significant portions of its Kerr-McGee holdings, realizing pre-tax gains of $19.4 million in Q3 2005 and $46.1 million year-to-date, and has since divested all remaining shares.

Frequently Asked Questions

The decrease in net income for the nine months ended September 30, 2005, compared to the prior year, was primarily due to a $12.7 million pension settlement charge in the Equitable Utilities segment, increased long-term incentive compensation expenses, and impairment charges related to office consolidation. These were partially offset by gains from the sale of Kerr-McGee shares and reduced obligations related to exiting the international power generation market.

The significant increase in natural gas prices led to a substantial rise in margin deposit requirements for the company's natural gas hedge agreements. This resulted in cash flows used in operating activities of $451.7 million for the first nine months of 2005, a significant deterioration from the $133.4 million provided in the prior year period, as the company had to post considerably higher margin amounts.

The Equitable Supply segment showed strong performance, with operating income increasing significantly due to higher average well-head sales prices and increased sales volumes from the acquisition of ESP. The company plans to drill approximately 440 wells in 2005, indicating a focus on production growth. Management believes the margin leverage from realizable gas prices outweighs increased unit costs associated with this strategy.

The company has retained Lincoln Partners LLC to explore strategic alternatives for the NORESCO segment, which could include a sale, merger, or other business combination. This follows a period of declining revenue backlog and operating income for the segment, partly attributed to delays in federal government contracting.