10-QPeriod: Q3 FY2006

EQT Corp Quarterly Report for Q3 Ended Sep 30, 2006

Filed October 26, 2006For Securities:EQT

Summary

EQT Corporation (EQT) reported a decrease in net income from continuing operations for the nine months ended September 30, 2006, compared to the same period in 2005. This decline was primarily driven by unusual items in the prior year, including significant gains from the sale of securities. Excluding these one-time events, operating income from continuing operations also saw a reduction due to increased operating costs in the Supply segment, lower natural gas prices affecting well-head sales, and transition costs within the Utility segment. Despite these challenges, the company's cash flow from operations significantly improved year-over-year, largely due to favorable changes in margin deposit requirements related to hedging activities. A notable development during this period is EQT's agreement to acquire Dominion Resources' natural gas distribution assets in Pennsylvania and West Virginia for approximately $970 million. This transformative acquisition is expected to significantly expand the company's customer base and operational footprint. The company is actively pursuing regulatory approvals and engaged in settlement negotiations with various parties. The company also continues to actively manage its commodity price risk through a robust hedging program.

Key Highlights

  • 1Net income from continuing operations decreased to $148.1 million for the nine months ended September 30, 2006, down from $178.6 million in the prior year, largely due to the absence of significant gains from asset sales recorded in 2005.
  • 2Operating income from continuing operations decreased by $30.5 million year-over-year, impacted by higher operating costs in the Equitable Supply segment and lower natural gas prices.
  • 3Cash flow from operating activities saw a substantial increase of $1.0 billion for the nine months ended September 30, 2006, compared to the same period in 2005, primarily due to changes in margin deposits related to hedging activities.
  • 4The company entered into a definitive agreement to acquire Dominion Resources' natural gas distribution assets for approximately $970 million, a significant strategic move expected to expand its market reach.
  • 5Capital expenditures increased to $253.5 million for the nine months ended September 30, 2006, up from $193.7 million in the prior year, driven by investments in drilling, development, and infrastructure projects.
  • 6The company's financial position shows a significant increase in derivative instruments as a net asset compared to a net liability in the prior year, reflecting changes in natural gas prices and hedging strategies.
  • 7The company has a stated strategy to reorganize as a holding company following the repeal of the Public Utility Holding Company Act of 1935, aiming to improve risk management and financial flexibility.

Frequently Asked Questions

The primary reason for the decrease in net income from continuing operations for the nine months ended September 30, 2006, compared to the same period in 2005, was the absence of significant one-time gains from the sale of securities (specifically Kerr-McGee shares) and other assets that were recognized in the prior year. Excluding these items, the underlying operational performance also faced challenges from increased operating costs and lower commodity prices.

The acquisition of Dominion Resources' natural gas distribution assets in Pennsylvania and West Virginia for approximately $970 million is a major strategic initiative. It is expected to significantly expand EQT's customer base (adding 475,000 customers), storage capacity, and overall operational footprint, reinforcing its position in the natural gas utility sector.

EQT utilizes a comprehensive hedging program involving derivative commodity instruments such as futures contracts, swap agreements, and collar agreements. The company actively hedges its expected future production to protect earnings from significant fluctuations in natural gas prices. The significant improvement in operating cash flow is partly attributed to favorable changes in margin deposit requirements related to these hedging activities, reflecting market price movements.

EQT adopted SFAS No. 123R ('Share-Based Payment') effective January 1, 2006. This requires the recognition of compensation cost for share-based awards (like stock options) as an expense in the income statement. While the company previously used the intrinsic value method, the adoption resulted in the recognition of compensation expense for previously unvested awards. The impact on operating results for the first nine months of 2006 was not significant as the company had shifted its compensation focus to restricted stock awards and performance units, and most outstanding stock options were already vested.