10-QPeriod: Q1 FY2006

EQT Corp Quarterly Report for Q1 Ended Mar 31, 2006

Filed April 27, 2006For Securities:EQT

Summary

EQT Corporation's (EQT) first quarter 2006 results showed a slight decrease in net income compared to the prior year, primarily due to warmer weather impacting customer gas usage and increased operating costs, including higher incentive compensation. Despite this, the company reported strong operational performance in its Equitable Supply segment, driven by higher natural gas prices and gathering fees. Significant strategic initiatives are underway, including a substantial acquisition of Dominion Resources' natural gas distribution and midstream assets in Pennsylvania and West Virginia, valued at approximately $970 million, which is expected to close by the end of 2006 pending regulatory approvals. The company's liquidity appears adequate, supported by cash from operations and available credit facilities. EQT is actively managing its commodity price risk through derivative instruments, primarily for natural gas, to protect earnings. The adoption of SFAS No. 123R, requiring the recognition of share-based compensation expense, has had a modest impact on reported results, with a greater emphasis shifting towards long-term incentive compensation tied to shareholder returns and total capital performance.

Key Highlights

  • 1Net income for Q1 2006 was $72.4 million ($0.59/diluted share), a decrease from $76.4 million ($0.61/diluted share) in Q1 2005, attributed to warmer weather and higher operating costs.
  • 2The Equitable Supply segment saw a 10.1% increase in operating income to $72.0 million, driven by higher average well-head sales prices and gathering fees.
  • 3EQT announced a significant agreement to acquire Dominion Resources' natural gas distribution and midstream assets for approximately $970 million, pending regulatory approvals.
  • 4Operating cash flow significantly improved to $305.9 million in Q1 2006 from $33.6 million in Q1 2005, largely due to a decrease in margin deposit requirements related to natural gas hedging.
  • 5The company adopted SFAS No. 123R, recognizing share-based compensation expense, which impacted Q1 2006 results modestly.
  • 6Capital expenditures increased to $70.6 million in Q1 2006 from $43.8 million in Q1 2005, primarily for an automated meter reading program.
  • 7Credit ratings from Moody's and S&P were placed under review or on negative watch following the announcement of the Dominion acquisition.

Frequently Asked Questions

The decrease in net income is primarily attributed to warmer weather leading to lower customer gas usage and increased operating costs, including higher incentive compensation expenses and production taxes. Additionally, the prior year's first quarter benefited from $1.1 million in pre-tax dividend income from Kerr-McGee Corporation shares.

EQT's main strategic initiative is the pending acquisition of Dominion Resources' natural gas distribution and midstream assets in Pennsylvania and West Virginia for approximately $970 million. This acquisition is expected to significantly expand the company's customer base, storage capacity, and pipeline infrastructure. The company is also focused on developing new drilling opportunities in the Appalachian Basin and expanding its gathering systems.

EQT utilizes a comprehensive hedging program involving exchange-traded natural gas futures, options, and Over-the-Counter (OTC) swap agreements. The primary objective is to protect earnings from fluctuations in natural gas prices. The company sets policy limits for hedging production and actively monitors market prices to make adjustments to its hedging strategy, aiming to hedge at favorable prices and reduce cash flow volatility.

The adoption of SFAS No. 123R, effective January 1, 2006, requires EQT to recognize compensation cost for share-based payments (like stock options) as an expense in its income statement. Previously, the company used the intrinsic value method which generally resulted in no compensation cost for stock options. While the company adopted it using the modified prospective method and prior periods were not restated, it led to the recognition of approximately $0.6 million in compensation expense for stock options in Q1 2006, and the company has shifted its compensation strategy more towards restricted stock awards and performance-based units for which it already recognized expense.