10-QPeriod: Q2 FY2006

EQT Corp Quarterly Report for Q2 Ended Jun 30, 2006

Filed July 27, 2006For Securities:EQT

Summary

EQT Corporation (EQT) reported its financial results for the second quarter and first half of 2006. For the three months ended June 30, 2006, the company's net income was $43.9 million, a decrease from $64.3 million in the same period of 2005, largely due to the absence of significant one-time gains experienced in the prior year, such as the gain on the sale of Kerr-McGee shares and favorable tax adjustments. Diluted earnings per share were $0.36 compared to $0.52 in the prior year. For the six months ended June 30, 2006, net income was $116.3 million, down from $140.7 million in 2005, with diluted EPS of $0.95 versus $1.13. The company saw an increase in operating revenues driven by its Equitable Utilities segment, primarily due to a rate case settlement for its pipeline operations and higher energy marketing revenues. However, this was partially offset by decreased distribution revenues. The Equitable Supply segment also experienced revenue growth from increased production sales volumes and higher gathering fees. Despite these revenue increases, the company's overall profitability was impacted by a significant increase in the fair value of derivative instruments, moving from a net liability of $1.2 billion at the end of 2005 to $770.6 million at June 30, 2006, largely due to a decrease in natural gas prices. The company is actively pursuing a significant acquisition of Dominion Resources' natural gas distribution and midstream assets, targeting regulatory approval by the end of 2006.

Key Highlights

  • 1Net income for Q2 2006 decreased to $43.9 million ($0.36/share) from $64.3 million ($0.52/share) in Q2 2005, primarily due to the absence of one-time gains in the prior year.
  • 2Six-month net income decreased to $116.3 million ($0.95/share) from $140.7 million ($1.13/share) in the prior year, impacted by similar factors.
  • 3Operating revenues increased year-over-year for both periods, driven by growth in the Equitable Utilities and Equitable Supply segments.
  • 4The company is pursuing a significant acquisition of Dominion Resources' natural gas assets for approximately $970 million.
  • 5The fair value of derivative instruments moved from a net liability of $1.2 billion at December 31, 2005, to a net liability of $770.6 million at June 30, 2006, primarily due to declining natural gas prices.
  • 6Cash flows from operating activities significantly improved in the first six months of 2006, providing $397.9 million compared to using $63.0 million in the same period of 2005.
  • 7Capital expenditures increased for Equitable Utilities due to an automated meter reading program, while Equitable Supply's expenditures decreased year-over-year due to a large acquisition in the prior year.

Frequently Asked Questions

The decrease in net income and earnings per share is largely attributable to the absence of significant one-time gains experienced in the second quarter and first half of 2005, such as the gain on the sale of Kerr-McGee shares and favorable tax adjustments. These non-recurring items boosted the prior year's results, making the current year's performance appear lower on a comparative basis.

Revenue growth is being driven by both operating segments. For Equitable Utilities, revenue increased due to the Equitrans rate case settlement, leading to higher pipeline revenues, and increased energy marketing revenues. For Equitable Supply, revenue growth stems from higher production sales volumes and an increase in the average gathering fee.

EQT uses derivative instruments, primarily for natural gas hedging, to protect against price volatility. The fair value of these instruments shifted from a net liability of $1.2 billion at the end of 2005 to $770.6 million at June 30, 2006. This change, largely driven by declining natural gas prices, had a significant impact on the balance sheet, and unrealized losses are expected to be recognized in earnings over the next twelve months.

EQT has entered into a definitive agreement to acquire Dominion Resources' natural gas distribution and midstream assets in Pennsylvania and its natural gas distribution assets in West Virginia for approximately $970 million. The company is targeting regulatory approval by the end of 2006 and has begun transition planning activities. The transaction will significantly expand the company's customer base and operational footprint.