10-QPeriod: Q1 FY2007

EQT Corp Quarterly Report for Q1 Ended Mar 31, 2007

Filed April 27, 2007For Securities:EQT

Summary

Equitable Resources, Inc. (EQT) reported a decrease in net income for the first quarter of 2007 compared to the same period in 2006, primarily driven by higher incentive compensation expenses, increased reserves for royalty disputes, and transition planning costs for an anticipated acquisition. While operating revenues saw a modest increase, driven by both the Equitable Supply and Utilities segments, profitability was impacted by rising operating expenses and lower realized sales prices in the Supply segment. Despite the net income decline, the company is actively pursuing strategic initiatives. These include significant capital expenditures in the Equitable Supply segment to expand drilling and midstream infrastructure, and progress on the acquisition of Dominion Resources' natural gas distribution assets, although this acquisition faces ongoing regulatory scrutiny from the FTC. The company also entered into a significant development plan and asset sale in the Nora Field shortly after the quarter's end. Liquidity remains adequate, supported by operating cash flows and available credit facilities, with a focus on financing the pending acquisition.

Key Highlights

  • 1Net income decreased by $15.8 million to $56.6 million ($0.46/diluted share) in Q1 2007 compared to $72.4 million ($0.59/diluted share) in Q1 2006.
  • 2Operating revenues increased by 6.1% to $456.5 million in Q1 2007 from $430.1 million in Q1 2006.
  • 3Equitable Supply segment saw a 23.8% decrease in operating income to $54.9 million due to higher reserves for royalty disputes and increased operating expenses, partially offset by higher sales volumes and gathering revenues.
  • 4Equitable Utilities segment's operating income increased by 13.4% to $69.2 million, driven by favorable storage asset optimization and colder weather, partially offset by acquisition-related transition expenses.
  • 5Capital expenditures increased significantly, with $157.7 million in Q1 2007 versus $70.6 million in Q1 2006, largely for Supply segment infrastructure and drilling.
  • 6The company is actively pursuing the acquisition of Dominion Resources' natural gas distribution assets, with Pennsylvania regulatory approval obtained, but facing an FTC challenge and ongoing review in West Virginia.
  • 7Post-quarter end, EQT agreed to a significant development plan and sale of interests in the Nora Field for approximately $262 million, along with a joint venture for gathering assets.

Frequently Asked Questions

The primary drivers for the decrease in net income were increased incentive compensation expense ($22.5 million), higher reserves for West Virginia royalty disputes and legal expenses ($11.7 million), and transition planning expenses for the pending acquisition ($4.9 million). Additionally, the prior year's first quarter benefited from a favorable impact related to the Equitrans rate case settlement ($5.4 million).

The acquisition of Dominion Resources' natural gas distribution assets in Pennsylvania and West Virginia for approximately $970 million has received initial approval from the Pennsylvania Public Utility Commission. However, the Federal Trade Commission (FTC) has issued an administrative complaint and filed a lawsuit seeking to enjoin the acquisition, which is expected to be resolved by June 30, 2007. Approval from the West Virginia Public Service Commission and the Pennsylvania Attorney General is still required.

The strategy focuses on growing through an expanded drilling program and midstream gathering and processing systems in the Appalachian Basin. The company plans to drill at least 650 gross operated wells in 2007, including an increased number of horizontal wells, and is continuing to evaluate economic viability of different drilling techniques. Significant capital expenditures are being made for infrastructure projects like the Big Sandy Pipeline.

The company utilizes derivative commodity instruments (futures, swaps, collars) to hedge exposure to natural gas price volatility. In Q1 2007, changes in derivative instrument fair value, primarily due to increasing natural gas prices, resulted in a significant net liability and a substantial unrealized loss deferred in accumulated other comprehensive loss. The company estimates approximately $153.6 million of these losses will be recognized in earnings over the next twelve months as hedged transactions settle.