EQT

EQT Corp 10-Q Summary: Quarter Ended March 31, 2009

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for EQT Corporation, a large accelerated filer incorporated in Pennsylvania. The report covers the three-month period ended March 31, 2009. EQT operates in three primary segments: EQT Production (exploration and development of natural gas and crude oil), EQT Midstream (gathering, processing, transportation, and storage), and Distribution (state-regulated natural gas distribution). As of March 31, 2009, there were 130,897,388 shares of common stock outstanding.

Key Financial Metrics

Note: Total debt calculated as Short-term loans ($351.0M) + Current portion of long-term debt ($4.3M) + Long-term debt ($1,249.2M). Cash equivalents were zero at period end.

Material Changes vs. Prior Period

• Net Income: Increased 2.1% to $72.0 million despite a 12.4% drop in operating revenues. This was driven by a significant reduction in Selling, General, and Administrative (SG&A) expenses ($29.8M vs $71.7M in 2008), primarily due to the absence of a $42.5 million incentive compensation charge related to the 2005 Executive Performance Incentive Program that occurred in Q1 2008.
• Production Segment: Operating revenues decreased 7% due to a 20% drop in average well-head sales prices, partially offset by an 18% increase in gas sales volumes. Operating income fell 26.4% to $44.4 million.
• Midstream Segment: Net operating revenues remained flat ($92.6M vs $93.5M). Operating income decreased 19.5% to $49.0 million, impacted by lower NGL prices and storage spreads, offset by increased gathering and transmission volumes.
• Distribution Segment: Operating income increased 15.6% to $43.9 million, driven by a base rate increase approved by the Pennsylvania Public Utility Commission in February 2009 and lower operating expenses.
• Cash Flow: Operating cash flow more than doubled to $212.6 million, largely due to a $51.3 million decrease in accounts receivable and a $4.0 million net tax refund, compared to a $68.1 million increase in receivables and a $6.9 million tax payment in 2008.

Guidance, Outlook, and Risks

• Capital Strategy: Management maintains a reduced capital spending plan for 2009 compared to 2008, funded by operating cash flows and a $1.5 billion revolving credit facility. The company anticipates 15% annual gas sales volume growth in 2009.
• Hedging: The company has hedged greater than 65% of expected 2009 production and greater than 40% of expected production through 2011. The current hedge position extends through 2015.
• Dividends: A quarterly cash dividend of $0.22 per share was declared, payable June 1, 2009.
• IRS Refund: On April 1, 2009, the company received a $98.9 million refund from the IRS related to a 2008 net operating loss carryback claim.
• Risks: Primary risks include volatility in natural gas prices, credit risk from counterparties (noting Lehman Brothers' default in 2008), and potential downgrades in credit ratings which could increase borrowing costs and margin deposit requirements. Moody's changed the outlook to negative in March 2009, while S&P and Fitch maintained stable outlooks.

Investor Verification Checklist

• Cash Position: Verify the impact of the $98.9 million IRS refund received on April 1, 2009, on the company's liquidity, as cash and cash equivalents were reported as zero at March 31, 2009.
• Debt Covenants: Confirm continued compliance with the 65% total debt-to-total capitalization ratio covenant under the revolving credit facility.
• Commodity Exposure: Review the effectiveness of the hedging program given the 39% decrease in average NYMEX prices and the $6.2 million non-cash charge for hedge ineffectiveness in the Production segment.
• Capital Expenditures: Monitor the execution of the reduced 2009 capital plan, specifically the shift toward horizontal drilling in the Marcellus and Lower Huron shale formations.
• Legal Settlements: Track the status of the West Virginia royalty litigation settlement, which is subject to court approval.