EQT 9.30.2014- 10Q
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM                TO               
 
 
 
COMMISSION FILE NUMBER 1-3551
 
EQT CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
 
25-0464690 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania
 
15222
(Address of principal executive offices)
 
(Zip code)
 
(412) 553-5700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer  x
 
Accelerated Filer                 ¨
Non-Accelerated Filer    ¨
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
 
As of September 30, 2014, 151,506 (in thousands) shares of common stock, no par value, of the registrant were outstanding.



Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Index
 
 
 
Page No.
Part I.      Financial Information:
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.     Other Information:
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 


2

Table of Contents
PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Income (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Thousands, except per share amounts)
Operating revenues
$
578,723

 
$
479,606

 
$
1,766,516

 
$
1,368,582

Operating expenses:
 

 
 

 
 

 
 

Transportation and processing
49,121

 
35,664

 
146,019

 
108,261

Operation and maintenance
27,944

 
25,902

 
80,752

 
73,202

Production
33,840

 
28,076

 
97,662

 
80,712

Exploration
3,606

 
5,256

 
12,477

 
15,124

Selling, general and administrative
57,131

 
48,171

 
169,382

 
142,778

Depreciation, depletion and amortization
175,578

 
169,473

 
484,908

 
474,982

Total operating expenses
347,220

 
312,542

 
991,200

 
895,059

 
 
 
 
 
 
 
 
Gain on sale / exchange of assets

 

 
37,749

 

Operating income
231,503

 
167,064

 
813,065

 
473,523

Other income
1,004

 
2,310

 
6,134

 
6,632

Interest expense
35,717

 
35,554

 
99,558

 
110,690

Income before income taxes
196,790

 
133,820

 
719,641

 
369,465

Income taxes
64,496

 
33,501

 
239,920

 
106,347

Income from continuing operations
132,294

 
100,319

 
479,721

 
263,118

Income from discontinued operations, net of tax

 
2,291

 
1,772

 
42,891

Net income
132,294

 
102,610

 
481,493

 
306,009

Less: Net income attributable to noncontrolling interests
33,739

 
14,354

 
79,824

 
30,642

Net income attributable to EQT Corporation
$
98,555

 
$
88,256

 
$
401,669

 
$
275,367

 
 
 
 
 
 
 
 
Amounts attributable to EQT Corporation:
 

 
 

 
 

 
 

Income from continuing operations
$
98,555

 
$
85,965

 
$
399,897

 
$
232,476

Income from discontinued operations

 
2,291

 
1,772

 
42,891

Net income
$
98,555

 
$
88,256

 
$
401,669

 
$
275,367

 
 
 
 
 
 
 
 
Earnings per share of common stock attributable to EQT Corporation:
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Weighted average common stock outstanding
151,557

 
150,679

 
151,533

 
150,509

Income from continuing operations
$
0.65

 
$
0.57

 
$
2.64

 
$
1.54

Income from discontinued operations

 
0.02

 
0.01

 
0.29

Net income
$
0.65

 
$
0.59

 
$
2.65

 
$
1.83

Diluted:
 

 
 

 
 

 
 

Weighted average common stock outstanding
152,330

 
151,663

 
152,468

 
151,365

Income from continuing operations
$
0.65

 
$
0.57

 
$
2.62

 
$
1.54

Income from discontinued operations

 
0.01

 
0.01

 
0.28

Net income
$
0.65

 
$
0.58

 
$
2.63

 
$
1.82

Dividends declared per common share
$
0.03

 
$
0.03

 
$
0.09

 
$
0.09

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


3

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Comprehensive Income (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Thousands)
Net income
$
132,294

 
$
102,610

 
$
481,493

 
$
306,009

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Net change in cash flow hedges:
 

 
 

 
 

 
 

Natural gas, net of tax expense (benefit) of $11,844, $(5,448), $(16,036) and $(15,595)
17,820

 
(8,287
)
 
(23,418
)
 
(23,782
)
Interest rate, net of tax expense of $25, $25, $75 and $75
36

 
36

 
108

 
108

Pension and other post-retirement benefits liability adjustment, net of tax expense of $113, $307, $340 and $920
175

 
433

 
527

 
1,302

Other comprehensive income (loss)
18,031

 
(7,818
)
 
(22,783
)
 
(22,372
)
Comprehensive income
150,325

 
94,792

 
458,710

 
283,637

Less: Comprehensive income attributable to noncontrolling interests
33,739

 
14,354

 
79,824

 
30,642

Comprehensive income attributable to EQT Corporation
$
116,586

 
$
80,438

 
$
378,886

 
$
252,995

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
Statements of Condensed Consolidated Cash Flows (Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
(Thousands)
Net income
$
481,493

 
$
306,009

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Deferred income taxes
102,301

 
14,869

Depreciation, depletion and amortization
484,908

 
493,341

Gain on sale / exchange of assets
(37,749
)
 

Gain on dispositions
(3,598
)
 

Provision for losses on accounts receivable
1,753

 
986

Other income
(6,134
)
 
(6,846
)
Stock-based compensation expense
33,072

 
37,108

(Gain) loss recognized in operating revenues for hedging ineffectiveness
(13,075
)
 
4,518

Loss (gain) on derivatives not designated as hedges
16,058

 
(307
)
Cash settlements on derivatives not designated as hedges
(9,232
)
 
(233
)
Lease impairment
8,729

 
12,132

Changes in other assets and liabilities:
 

 
 

Dividend from Nora Gathering, LLC
9,463

 
9,000

Excess tax benefits on stock-based compensation
(28,592
)
 

Accounts receivable and unbilled revenues
34,419

 
37,826

Inventory
7,438

 
13,014

Prepaid expenses and other
10,930

 
12,473

Accounts payable
(15,201
)
 
1,078

Accrued interest
30,860

 
27,030

Other items, net
34,102

 
6,110

Net cash provided by operating activities
1,141,945

 
968,108

Cash flows from investing activities:
 

 
 

Capital expenditures from continuing operations
(1,606,307
)
 
(1,195,769
)
Capital expenditures for acquisitions
(163,251
)
 

Capital expenditures from discontinued operations

 
(24,873
)
Restricted cash, net
(338,561
)
 

Proceeds from sale of assets
7,444

 

Net cash used in investing activities
(2,100,675
)
 
(1,220,642
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of common units of EQT Midstream Partners, LP, net of issuance costs
902,467

 
529,442

Proceeds from the issuance of EQT Midstream Partners, LP debt
500,000

 

Increase in short-term loans
450,000

 
178,500

Decrease in short-term loans
(450,000
)
 
(178,500
)
Dividends paid
(13,653
)
 
(13,565
)
Distributions to noncontrolling interests
(46,155
)
 
(21,160
)
Repayments and retirements of long-term debt
(6,162
)
 
(23,204
)
Proceeds and tax benefits from exercises under equity compensation plans
42,181

 
22,863

Cash paid for taxes related to net settlement of share-based incentive awards
(49,013
)
 

Debt issuance costs and revolving credit facility origination fees
(12,690
)
 

Repurchase and retirement of common stock
(32,368
)
 

Net cash provided by financing activities
1,284,607

 
494,376

Net change in cash and cash equivalents
325,877

 
241,842

Cash and cash equivalents at beginning of period
845,641

 
182,055

Cash and cash equivalents at end of period
$
1,171,518

 
$
423,897

Cash paid during the period for:
 

 
 

Interest, net of amount capitalized
$
68,698

 
$
83,660

Income taxes, net
$
127,858

 
$
76,669

 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
September 30, 2014
 
December 31, 2013
 
(Thousands)
Assets
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
1,171,518

 
$
845,641

Restricted cash
338,561

 

Accounts receivable (less accumulated provision for doubtful accounts: $6,977 at September 30, 2014 and $5,171 at December 31, 2013)
199,609

 
235,781

Derivative instruments, at fair value
101,542

 
107,647

Prepaid expenses and other
47,988

 
66,356

Total current assets
1,859,218

 
1,255,425

 
 
 
 
Equity in nonconsolidated investments

 
128,983

 
 
 
 
Property, plant and equipment
13,001,089

 
11,062,136

Less: accumulated depreciation and depletion
3,174,022

 
2,728,374

Net property, plant and equipment
9,827,067

 
8,333,762

 
 
 
 
Other assets
77,367

 
73,883

Total assets
$
11,763,652

 
$
9,792,053

 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)

 
September 30, 2014
 
December 31, 2013
 
(Thousands)
Liabilities and Stockholders’ Equity
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current portion of long-term debt
$
11,011

 
$
11,162

Accounts payable
370,314

 
330,329

Other current liabilities
235,470

 
181,919

Total current liabilities
616,795

 
523,410

 
 
 
 
Long-term debt
2,983,252

 
2,490,354

Deferred income taxes
1,713,824

 
1,655,765

Other liabilities and credits
274,531

 
258,396

Total liabilities
5,588,402

 
4,927,925

 
 
 
 
Equity:
 

 
 

Stockholders’ equity:
 

 
 

Common stock, no par value, authorized 320,000 shares, shares issued:
175,384 at September 30, 2014 and 175,684 at December 31, 2013
1,880,849

 
1,869,843

Treasury stock, shares at cost: 23,878 at September 30, 2014
and 24,800 at December 31, 2013
(431,067
)
 
(447,738
)
Retained earnings
2,936,387

 
2,567,980

Accumulated other comprehensive income
21,920

 
44,703

Total common stockholders’ equity
4,408,089

 
4,034,788

Noncontrolling interests in consolidated subsidiaries
1,767,161

 
829,340

Total equity
6,175,250

 
4,864,128

Total liabilities and equity
$
11,763,652

 
$
9,792,053

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


7

Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Statements of Condensed Consolidated Equity (Unaudited)
 
 
Common Stock
 
 
 
Accumulated Other
Comprehensive
Income
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
 
 
Shares
Outstanding
 
No
Par Value
 
Retained
Earnings
 
 
 
Total
Equity
 
(Thousands)
Balance, January 1, 2013
150,109

 
$
1,308,771

 
$
2,195,502

 
$
99,547

 
$
284,982

 
$
3,888,802

Net income
 

 
 

 
275,367

 
 

 
30,642

 
306,009

Other comprehensive loss
 

 
 

 
 

 
(22,372
)
 
 

 
(22,372
)
Dividends ($0.09 per share)
 

 
 

 
(13,565
)
 
 

 
 

 
(13,565
)
Stock-based compensation plans, net
607

 
69,497

 
 

 
 

 
311

 
69,808

Distributions to noncontrolling interests ($1.12 per common unit)
 

 
 

 
 

 
 

 
(21,160
)
 
(21,160
)
Issuance of common units of EQT Midstream Partners, LP


 


 


 


 
529,442

 
529,442

Deferred taxes related to public offering of common units of EQT Midstream Partners, LP


 
(1,641
)
 


 


 


 
(1,641
)
Balance, September 30, 2013
150,716

 
$
1,376,627

 
$
2,457,304

 
$
77,175

 
$
824,217

 
$
4,735,323

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
150,884

 
$
1,422,105

 
$
2,567,980

 
$
44,703

 
$
829,340

 
$
4,864,128

Net income
 

 
 

 
401,669

 
 

 
79,824

 
481,493

Other comprehensive loss
 

 
 

 
 

 
(22,783
)
 
 

 
(22,783
)
Dividends ($0.09 per share)
 

 
 

 
(13,653
)
 
 

 
 

 
(13,653
)
Stock-based compensation plans, net
922

 
40,436

 
 

 
 

 
1,685

 
42,121

Distributions to noncontrolling interests ($1.47 per common unit)
 

 
 

 
 

 
 

 
(46,155
)
 
(46,155
)
Issuance of common units of EQT Midstream Partners, LP
 

 
 

 
 

 
 

 
902,467

 
902,467

Repurchase and retirement of common stock
(300
)
 
(12,759
)
 
(19,609
)
 
 

 
 

 
(32,368
)
Balance, September 30, 2014
151,506

 
$
1,449,782

 
$
2,936,387

 
$
21,920

 
$
1,767,161

 
$
6,175,250

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


8

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

2
A.                        Financial Statements
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by United States GAAP for complete financial statements.  In the opinion of management, these statements include all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQT Corporation and subsidiaries as of September 30, 2014 and December 31, 2013, the results of its operations for the three and nine month periods ended September 30, 2014 and 2013 and its cash flows for the nine month periods ended September 30, 2014 and 2013.  In this Quarterly Report on Form 10-Q, references to “we,” “us,” “our,” “EQT,” “EQT Corporation,” and the “Company” refer collectively to EQT Corporation and its consolidated subsidiaries.
 
Certain previously reported amounts have been reclassified to conform to the current year presentation. The impact of these reclassifications were not material to any of the previously issued financial statements. Additionally, financial statements and notes to the financial statements previously reported in prior periods have been recast to reflect the presentation of discontinued operations as a result of the Equitable Gas Transaction (refer to Note B for additional information regarding discontinued operations).
 
The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.
 
For further information, refer to the consolidated financial statements and footnotes thereto included in EQT Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 22 of this Quarterly Report on Form 10-Q.
 
B.                        Discontinued Operations
 
On December 17, 2013, the Company and its wholly-owned subsidiary Distribution Holdco, LLC (Holdco) completed the disposition of their ownership interests in Equitable Gas Company, LLC (Equitable Gas) and Equitable Homeworks, LLC (Homeworks) to PNG Companies LLC (the Equitable Gas Transaction). Equitable Gas and Homeworks comprised substantially all of the Company’s previously reported Distribution segment.  The financial information of Equitable Gas and Homeworks is reflected as discontinued operations for all periods presented in these financial statements.  Prior periods have been recast to reflect this presentation.
 
During the second quarter of 2014, the Company received additional cash proceeds of $7.4 million as a result of post-closing purchase price adjustments for the Equitable Gas Transaction. The Company recognized an additional gain of $3.6 million for the nine months ended September 30, 2014, included in income from discontinued operations, net of tax, in the Statements of Consolidated Income. As consideration for the Equitable Gas Transaction, the Company received total cash proceeds of $748.0 million, select midstream assets (including the Allegheny Valley Connector) with a fair value of $140.3 million and other contractual assets with a fair value of $32.5 million.
 
The following table summarizes the components of discontinued operations activity:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Thousands)  
Operating revenues
$

 
$
36,348

 
$

 
$
246,967

 
 
 
 
 
 
 
 
Income from discontinued operations before income taxes

 
3,579

 
3,077

 
67,169

Income tax expense

 
1,288

 
1,305

 
24,278

Income from discontinued operations, net of tax
$

 
$
2,291

 
$
1,772

 
$
42,891



9

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

C.                        EQT Midstream Partners, LP
 
In 2012, the Company formed EQT Midstream Partners, LP (the Partnership) (NYSE: EQM) to own, operate, acquire and develop midstream assets in the Appalachian Basin. The Partnership provides midstream services to the Company and other third parties. The Partnership is consolidated in the Company’s consolidated financial statements. The Company records the noncontrolling interest of the public limited partners in its financial statements.
 
On May 7, 2014, a wholly-owned subsidiary of the Company contributed the Jupiter gathering system to EQM Gathering Opco, LLC (EQM Gathering), a wholly-owned subsidiary of the Partnership, in exchange for $1.18 billion (the Jupiter Transaction). EQM Gathering is consolidated by the Company as it is still controlled by the Company.
 
On May 7, 2014, the Partnership completed an underwritten public offering of 12,362,500 common units, which included the full exercise of the underwriters’ overallotment option, representing Partnership limited partner interests. The Partnership received net proceeds of approximately $902.5 million from the offering, after deducting the underwriters’ discount and offering expenses of approximately $34 million. As of September 30, 2014, the Company held a 2% general partner interest, all incentive distribution rights and a 34.4% limited partner interest in the Partnership. The Company’s limited partner interest in the Partnership consists of 3,959,952 common units and 17,339,718 subordinated units.
 
While the Company did not record a gain for accounting purposes as a result of the Jupiter Transaction, the Company recognized a taxable gain for federal income tax purposes of approximately $569.3 million in 2014. In conjunction with the Jupiter Transaction, $500.0 million of the proceeds received were placed into a qualified trust account pursuant to a deferred exchange agreement, that allows for the use of the funds in a potential like-kind exchange for certain identified assets. The Company has utilized $161.5 million of these funds primarily in connection with the exchange of certain assets with Range Resources Corporation (see Note K for a description of the Range Transaction) during the nine months ended September 30, 2014.

During the third quarter of 2014, the Partnership issued 4.00% Senior Notes due 2024 (4.00% Senior Notes) in the aggregate principal amount of $500.0 million. Net proceeds of the offering of $492.4 million, after deducting a discount of $2.9 million and debt issuance costs of $4.7 million, were used to repay all of the outstanding borrowings under the Partnership’s credit facility and for general partnership purposes. The payment obligations under the 4.00% Senior Notes are unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of the Partnership’s existing and future subsidiaries that guarantees the Partnership’s credit facility (other than EQT Midstream Finance Corporation). The 4.00% Senior Notes contain covenants that limit the Partnership’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of the Partnership’s assets.

During the third quarter of 2013, the Partnership and Equitrans, L.P. (Equitrans) entered into an Agreement and Plan of Merger with EQT and Sunrise Pipeline, LLC (the Sunrise Transaction), a wholly-owned subsidiary of EQT and the owner of the Sunrise Pipeline, pursuant to which Sunrise Pipeline, LLC merged into Equitrans, in exchange for a $507.5 million cash payment, 479,184 common units of the Partnership and 267,942 general partner units of the Partnership.

D.                        Financial Information by Business Segment
 
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and which are subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources.
 
The Company reports its operations in two segments, which reflect its lines of business.  The EQT Production segment includes the Company’s exploration for, and development and production of, natural gas, natural gas liquids (NGLs) and a limited amount of crude oil in the Appalachian and Permian Basins.  The EQT Midstream segment’s operations include the natural gas gathering, transportation, storage and marketing activities of the Company, including ownership and operation of the Partnership.
 
Operating segments are evaluated on their contribution to the Company’s consolidated results based on operating income. Other income, interest and income taxes are managed on a consolidated basis. Headquarters’ costs are billed to the operating segments based upon an allocation of the headquarters’ annual operating budget.  Differences between budget and actual headquarters’ expenses are not allocated to the operating segments.
 

10

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

The Company’s management reviews and reports the EQT Production segment results with third-party transportation and processing costs reflected as a deduction from operating revenues. Third-party costs incurred to gather, process and transport gas produced by EQT Production to market sales points are recorded as a portion of transportation and processing costs in the Statements of Consolidated Income. Some transportation costs incurred by the Company are marketed for resale and are not incurred to transport gas produced by EQT Production.  These transportation costs are reflected as a deduction from operating revenues.

Substantially all of the Company’s operating revenues, income from operations and assets are generated or located in United States. 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Thousands)
Revenues from external customers:
 

 
 

 
 

 
 

EQT Production
$
363,126

 
$
304,231

 
$
1,152,971

 
$
860,874

EQT Midstream
173,856

 
155,677

 
502,427

 
452,731

Third-party transportation and processing costs (a)
48,561

 
34,316

 
144,622

 
104,884

Less intersegment revenues, net (b)
(6,820
)
 
(14,618
)
 
(33,504
)
 
(49,907
)
Total
$
578,723

 
$
479,606

 
$
1,766,516

 
$
1,368,582

 
 
 
 
 
 
 
 
Operating income:
 

 
 

 
 

 
 

EQT Production (c) 
$
140,036

 
$
97,600

 
$
561,930

 
$
276,753

EQT Midstream (c)
93,600

 
78,533

 
265,196

 
224,993

Unallocated expenses (d)
(2,133
)
 
(9,069
)
 
(14,061
)
 
(28,223
)
Total operating income
$
231,503

 
$
167,064

 
$
813,065

 
$
473,523


Reconciliation of operating income to income from continuing operations:
Other income
$
1,004

 
$
2,310

 
$
6,134

 
$
6,632

Interest expense
35,717

 
35,554

 
99,558

 
110,690

Income taxes
64,496

 
33,501

 
239,920

 
106,347

Income from continuing operations
$
132,294

 
$
100,319

 
$
479,721

 
$
263,118

 
 
As of
September 30, 2014
 
As of
 December 31, 2013
 
(Thousands)
Segment assets:
 

 
 

EQT Production
$
7,549,424

 
$
6,359,065

EQT Midstream
2,609,926

 
2,514,429

Total operating segments
10,159,350

 
8,873,494

Headquarters assets, including cash and short-term investments
1,604,302

 
918,559

Total assets
$
11,763,652

 
$
9,792,053

 
(a)
This amount reflects the reclassification of third-party transportation and processing costs from operating revenues to transportation and processing costs at the consolidated level.
(b)
Includes entries to eliminate intercompany natural gas sales from EQT Production to EQT Midstream. The Company also had $8.9 million and $28.9 million for the three and nine months ended September 30, 2013, respectively, of intercompany eliminations for transmission and storage services between EQT Midstream and the Company’s previously reported Distribution segment that were recast to discontinued operations as a result of the Equitable Gas Transaction. These recast adjustments had no impact on the Company’s net income for either of the three and nine month periods ended September 30, 2013.
(c)
Gains on sales / exchanges of assets of $31.0 million and $6.8 million are included in EQT Production and EQT Midstream operating income, respectively, for the nine months ended September 30, 2014.
(d)
Unallocated expenses consist primarily of incentive compensation expense, administrative costs and, for the three and nine months ended September 30, 2013, corporate overhead charges previously allocated to the Distribution segment that were reclassified to Headquarters as part of the recast of the 2013 financial information in this Quarterly Report on Form 10-Q.

11

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Thousands)
Depreciation, depletion and amortization:
 

 
 

 
 

 
 

EQT Production
$
154,031

 
$
150,637

 
$
421,521

 
$
419,619

EQT Midstream
21,709

 
18,930

 
63,848

 
55,601

Other
(162
)
 
(94
)
 
(461
)
 
(238
)
Total
$
175,578

 
$
169,473

 
$
484,908

 
$
474,982

 
 
 
 
 
 
 
 
Expenditures for segment assets (e):
 

 
 

 
 

 
 

EQT Production (f)
$
511,971

 
$
332,370

 
$
1,855,518

 
$
977,394

EQT Midstream
136,589

 
111,593

 
333,813

 
254,205

Other
805

 
942

 
2,167

 
3,162

Total
$
649,365

 
$
444,905

 
$
2,191,498

 
$
1,234,761

 
(e)     Includes non-cash capital expenditures of $25.0 million and $28.4 million for the three months ended September 30, 2014 and 2013, respectively, and $68.8 million and $39.0 million for the nine months ended September 30, 2014 and 2013, respectively, for certain labor overhead costs including a portion of non-cash stock-based compensation expense and non-cash capital expense accruals that have not yet been paid.
(f)      Expenditures for segment assets in the EQT Production segment include $37.2 million and $20.5 million for property acquisitions during the three months ended September 30, 2014 and 2013, respectively, and $646.9 million and $162.1 million for property acquisitions during the nine months ended September 30, 2014 and 2013, respectively. Included within the $646.9 million of property acquisitions during the nine months ended September 30, 2014 is $159.0 million of cash capital expenditures and $353.1 million of non-cash capital expenditures for the exchange of assets with Range Resources Corporation (described in Note K).
 
E.                        Derivative Instruments
 
The Company’s primary market risk exposure is the volatility of future prices for natural gas and NGLs, which can affect the operating results of the Company primarily at EQT Production. The Company’s overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices.
 
The Company uses over the counter (OTC) derivative commodity instruments, primarily swap and collar agreements, that are primarily placed with financial institutions and the creditworthiness of these institutions is regularly monitored. The Company also uses exchange traded futures contracts that obligate the Company to buy or sell a designated commodity at a future date for a specified price and quantity at a specified location. Swap agreements involve payments to or receipts from counterparties based on the differential between two prices for the commodity. Collar agreements require the counterparty to pay the Company if the index price falls below the floor price and the Company to pay the counterparty if the index price rises above the cap price. The Company also engages in basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to interest rate fluctuations on potential debt issuances. During the third quarter of 2014, the Company granted 50,000 dth per day of calendar year 2016 swaptions to counterparties in exchange for calendar year 2015 collars with premium pricing. Swaption contracts grant the counterparty the option to enter into a fixed price swap agreement with the Company at a future date. Each 2016 swaption and associated 2015 collar was executed contemporaneously with a single counterparty, and no cash was exchanged at the inception of the contracts.
 
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. These assets are reported in the Condensed Consolidated Balance Sheets as derivative instruments at fair value and the liabilities are reported within other current liabilities in the Condensed Consolidated Balance Sheets. These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature. The Company can net settle its derivative instruments at any time.
 
The accounting for the changes in fair value of the Company’s derivative instruments depends on the use of the derivative instruments.  To the extent that a derivative instrument has been designated and qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive income (OCI), net of tax, and is subsequently reclassified into the Statements of Consolidated Income in the same period or periods during which the forecasted transaction affects earnings.  In conjunction with the exchange of assets with Range Resources Corporation (see Note K), the Company de-designated certain derivative instruments that were previously designated as cash flow hedges

12

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

because it was probable that the forecasted transactions would not occur, resulting in a pre-tax gain of $28.0 million recorded within gain on sale / exchange of assets in the Statements of Consolidated Income for the nine months ended September 30, 2014.  Any subsequent changes in fair value of these derivative instruments are recognized within operating revenues in the Statements of Consolidated Income each period.
 
For a derivative instrument designated and qualified as a fair value hedge, the change in fair value of the instrument was recognized as a portion of operating revenues in the Statements of Consolidated Income each period. In addition, the change in the fair value of the hedged item (natural gas inventory) was recognized as a portion of operating revenues in the Statements of Consolidated Income. The Company elected to exclude the spot/forward differential for the assessment of effectiveness of the fair value hedges.
 
Most of the derivative commodity instruments used by the Company to hedge its exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sale of equity production have been designated and qualify as cash flow hedges. Historically, some of the derivative commodity instruments used by the Company to hedge its exposure to adverse changes in the market price of natural gas stored in the ground were designated and qualified as fair value hedges. These fair value hedges were de-designated effective October 1, 2013. Basis swaps and the calendar 2016 swaptions and associated 2015 collars are not designated as hedges. Any hedging ineffectiveness and any change in fair value of derivative instruments that have not been designated as hedges are recognized in the Statements of Consolidated Income each period.
 
The Company also enters into fixed price natural gas sales agreements that are satisfied by physical delivery.  These physical commodity contracts qualify for the normal purchases and sales exception and are not subject to derivative instrument accounting.
 
Exchange-traded instruments are generally settled with offsetting positions. OTC arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows. 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Commodity derivatives designated as cash flow hedges
(Thousands)
Amount of gain (loss) recognized in OCI (effective portion), net of tax
$
23,160

 
$
17,733

 
$
(29,489
)
 
$
38,561

Amount of gain reclassified from accumulated OCI, net of tax, into gain on sale / exchange of assets due to forecasted transactions probable to not occur

 

 
16,735

 

Amount of gain (loss) reclassified from accumulated OCI into operating revenues (effective portion), net of tax
5,340

 
26,020

 
(22,806
)
 
62,343

Amount of gain (loss) recognized in operating revenues (ineffective portion) (a)
34,348

 
3,436

 
13,075

 
(4,518
)
 
 
 
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges
 

 
 

 
 

 
 

Amount of loss reclassified from accumulated OCI, net of tax, into interest expense (effective portion)
$
(36
)
 
$
(36
)
 
$
(108
)
 
$
(108
)
 
 
 
 
 
 
 
 
Commodity derivatives designated as fair value hedges (b)
 

 
 

 
 

 
 

Amount of loss recognized in operating revenues for fair value commodity contracts
$

 
$
(502
)
 
$

 
$
(1,341
)
Fair value (loss) gain recognized in operating revenues for inventory designated as hedged item

 
(76
)
 

 
386

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

Amount of gain (loss) recognized in operating revenues
$
1,821

 
$
(943
)
 
$
(16,058
)
 
$
307


(a)   No amounts have been excluded from effectiveness testing of cash flow hedges.
(b)   For the three months ended September 30, 2013, the net impact on operating revenues consisted of a $1.6 million loss due to the exclusion of the spot/forward differential from the assessment of effectiveness of the fair value hedges and a $1.0 million gain due to changes in basis. For the nine months ended September 30, 2013, the net impact on operating revenues consisted of a $0.5 million gain due to the exclusion of the spot/forward differential from the assessment of effectiveness of the fair value hedges and a $1.5 million loss due to changes in basis.

13

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
As of
September 30, 2014
 
As of
December 31, 2013
 
(Thousands)  
Asset derivatives
 

 
 

Commodity derivatives designated as hedging instruments
$
61,332

 
$
104,430

Commodity derivatives not designated as hedging instruments
40,210

 
3,217

Total asset derivatives
$
101,542

 
$
107,647

 
 
 
 
Liability derivatives
 

 
 

Commodity derivatives designated as hedging instruments
$
9,146

 
$
27,618

Commodity derivatives not designated as hedging instruments
19,662

 
2,033

Total liability derivatives (included in other current liabilities)
$
28,808

 
$
29,651

 
The net fair value of derivative commodity instruments changed during the first nine months of 2014 primarily as a result of decreased New York Mercantile Exchange (NYMEX) forward prices and settlements.  The absolute quantities of the Company’s derivative commodity instruments that have been designated and qualify as cash flow hedges totaled 353 Bcf and 398 Bcf as of September 30, 2014 and December 31, 2013, respectively, and are primarily related to natural gas swaps and collars. The open positions at September 30, 2014 and December 31, 2013 had maturities extending through December 2018 and December 2017, respectively.
 
The Company deferred net gains of $38.3 million and $61.7 million in accumulated OCI, net of tax, as of September 30, 2014 and December 31, 2013, respectively, associated with the effective portion of the change in fair value of its derivative commodity instruments designated as cash flow hedges. Assuming no change in price or new transactions, the Company estimates that approximately $23.7 million of net unrealized gains on its derivative commodity instruments reflected in accumulated OCI, net of tax, as of September 30, 2014 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions.
 
The Company is exposed to credit loss in the event of nonperformance by counterparties to derivative contracts.  This credit exposure is limited to derivative contracts with a positive fair value, which may change as market prices change. The Company believes that NYMEX traded futures contracts have limited credit risk because Commodity Futures Trading Commission regulations are in place to protect exchange participants, including the Company, from potential financial instability of the exchange members. The Company’s OTC derivative instruments are primarily placed with financial institutions and thus are subject to events that would impact those companies individually as well as that industry as a whole.
 
The Company utilizes various processes and analysis to monitor and evaluate its credit risk exposures.  These include closely monitoring current market conditions, counterparty credit fundamentals and credit default swap rates.  Credit exposure is controlled through credit approvals and limits based on counterparty credit fundamentals. To manage the level of credit risk, the Company enters into transactions with financial counterparties that are of investment grade or better, enters into netting agreements whenever possible and may obtain collateral or other security.
 
When the net fair value of any of the Company’s swap agreements represents a liability to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the counterparty requires the Company to remit funds to the counterparty as a margin deposit for the derivative liability which is in excess of the threshold amount.  The Company records these deposits as a current asset.  When the net fair value of any of the Company’s swap agreements represents an asset to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the Company requires the counterparty to remit funds as margin deposits in an amount equal to the portion of the derivative asset which is in excess of the threshold amount. The Company records a current liability for such amounts received.  The Company had no such deposits in its Condensed Consolidated Balance Sheets as of September 30, 2014 or December 31, 2013.
 

14

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

When the Company enters into exchange-traded natural gas contracts, exchanges may require the Company to remit funds to the corresponding broker as good-faith deposits to guard against the risks associated with changing market conditions.  The Company must make such deposits based on an established initial margin requirement as well as the net liability position, if any, of the fair value of the associated contracts.  The Company records these deposits as a current asset in the Condensed Consolidated Balance Sheets.  In the case where the fair value of such contracts is in a net asset position, the broker may remit funds to the Company, in which case the Company records a current liability for such amounts received. The initial margin requirements are established by the exchanges based on the price, volatility and the time to expiration of the related contract.  The margin requirements are subject to change at the exchanges’ discretion.  The Company recorded current assets of $0.2 million and $0.3 million as of September 30, 2014 and December 31, 2013, respectively, for such deposits in its Condensed Consolidated Balance Sheets.
 
The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. Margin deposits remitted to financial counterparties or received from financial counterparties related to OTC natural gas swap agreements and options and any funds remitted to or deposits received from the Company’s brokers are recorded on a gross basis.  The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities as of September 30, 2014 and December 31, 2013

As of September 30, 2014
 
Derivative
instruments,
recorded in the
Condensed
Consolidated
Balance
Sheet, gross
 
Derivative
instruments
subject to
master
netting
agreements
 
Margin
deposits
remitted to
counterparties
 
Derivative
instruments,
net
 
 
(Thousands)
Asset derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
101,542

 
$
(23,265
)
 
$

 
$
78,277

 
 
 
 
 
 
 
 
 
Liability derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value (included in other current liabilities)
 
$
28,808

 
$
(23,265
)
 
$
(204
)
 
$
5,339

 
As of December 31, 2013
 
Derivative
instruments,
recorded in the
Condensed
Consolidated
Balance
Sheet, gross
 
Derivative
instruments
subject to 
master
netting
agreements
 
Margin
deposits
remitted to
counterparties
 
Derivative
instruments,
net
 
 
(Thousands)
Asset derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
107,647

 
$
(20,843
)
 
$

 
$
86,804

 
 
 
 
 
 
 
 
 
Liability derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value (included in other current liabilities)
 
$
29,651

 
$
(20,843
)
 
$
(266
)
 
$
8,542

 
Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings by Standard & Poor’s Ratings Services (S&P) or Moody’s Investors Services (Moody’s) are lowered below investment grade, additional collateral must be deposited with the counterparty.  The additional collateral can be up to 100% of the derivative liability.  As of September 30, 2014, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $6.8 million, for which the Company had no collateral posted on September 30, 2014.  If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade to BB+ by S&P or Ba1 by Moody's on September 30, 2014, the Company would have been required to post $0.6 million of additional collateral under the agreements with the respective counterparties.  Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies. The Company’s senior unsecured debt was rated BBB by S&P and Baa3 by Moody’s at September 30, 2014.  In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Baa3 or higher by Moody’s.  Anything below these ratings is considered non-investment grade. 

15

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

F.            Fair Value Measurements
 
The Company records its financial instruments, principally derivative instruments, at fair value in its Condensed Consolidated Balance Sheets.  The Company has an established process for determining fair value which is based on quoted market prices, where available.  If quoted market prices are not available, fair value is based upon models that use as inputs market-based parameters, including but not limited to forward curves, discount rates, volatilities and nonperformance risk.  Nonperformance risk considers the effect of the Company’s credit standing on the fair value of liabilities and the effect of the counterparty’s credit standing on the fair value of assets.  The Company estimates nonperformance risk by analyzing publicly available market information, including a comparison of the yield on debt instruments with credit ratings similar to the Company’s or counterparty’s credit rating and the yield of a risk-free instrument.  The Company also considers credit default swaps rates where applicable.

The Company has categorized its assets and liabilities recorded at fair value into a three-level fair value hierarchy, based on the priority of the inputs to the valuation technique.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  Assets and liabilities included in Level 1 include the Company’s futures contracts.  Assets and liabilities in Level 2 primarily include the Company’s swap and collar agreements. As of December 31, 2013, the Company transferred $54.4 million of derivative instruments, primarily collars, from Level 3 into Level 2.
 
The fair value of the assets and liabilities included in Level 2 is based on standard industry income approach models that use significant observable inputs, including NYMEX forward curves, LIBOR-based discount rates and basis forward curves.  The Company’s collars and swaptions are valued using standard industry income approach option models. The Company's collars were historically classified in Level 3 because the volatility assumption in the option pricing model was not observable over the full duration of the collars.  Effective December 31, 2013, the volatility assumption in the option pricing model was, and at September 30, 2014 continued to be, observable for the duration of the term of the collars outstanding. This change did not have a significant impact on the fair value of the derivative instruments previously included in Level 3. The significant observable inputs utilized by the option pricing models include NYMEX forward curves, natural gas volatilities and LIBOR-based discount rates.
 
The Company uses NYMEX forward curves to value futures, commodity swaps, collars and swaptions. The NYMEX forward curves, LIBOR-based discount rates, natural gas volatilities and basis forward curves are validated to external sources at least monthly.
 
The following assets and liabilities were measured at fair value on a recurring basis during the applicable period:
 
 
 
 
Fair value measurements at reporting date using
Description
 
As of
September 30, 
2014
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
(Thousands)
Assets
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
101,542

 
$
17

 
$
101,525

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 
 
 

Derivative instruments, at fair value (included in other current liabilities)
 
$
28,808

 
$
6

 
$
28,802

 
$

 
 
 
 
 
Fair value measurements at reporting date using
Description
 
As of
December 31, 2013
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
(Thousands)
Assets
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
107,647

 
$
240

 
$
107,407

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Derivative instruments, at fair value (included in other current liabilities)
 
$
29,651

 
$
315

 
$
29,336

 
$


16

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
Fair value measurements using significant
unobservable inputs (Level 3)
Derivative instruments, at fair value, net
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
 
(Thousands)
Beginning of period
$

 
$
74,688

 
$

 
$
90,714

Total gains or losses:
 

 
 

 
 

 
 

Included in earnings

 
414

 

 
(341
)
Included in OCI

 
2,067

 

 
3,459

Purchases

 
(79
)
 

 
(7
)
Settlements

 
(8,769
)
 

 
(25,504
)
Transfers in and/or out of Level 3

 

 

 

End of period
$

 
$
68,321

 
$

 
$
68,321

 
Gains of $0.4 million and losses of $0.8 million are included in earnings in the table above for the three and nine months ended September 30, 2013, respectively, attributable to the change in unrealized gains or losses relating to assets held as of September 30, 2013.
 
The carrying value of cash equivalents approximates fair value due to the short maturity of the instruments; these are considered Level 1 fair values.
 
The Company estimates the fair value of its debt using its established fair value methodology.  Because not all of the Company’s debt is actively traded, the fair value of the debt is a Level 2 fair value measurement.  Fair value for non-traded debt obligations is estimated using a standard industry income approach model which utilizes a discount rate based on market rates for debt with similar remaining time to maturity and credit risk.  The estimated fair value of long-term debt on the Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013 was approximately $3.3 billion and $2.8 billion, respectively.
 
For information on the fair value of certain assets acquired from the exchange of properties with Range Resources Corporation, see Note K.
 
G.                       Income Taxes
 
The Company estimates an annual effective income tax rate based on projected results for the year and applies this rate to income before taxes to calculate income tax expense.  All of the Partnership’s earnings are included in the Company’s net income. However, the Company is not required to record income tax expense with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners, which reduces the Company’s effective tax rate.  Any refinements made due to subsequent information that affects the estimated annual effective income tax rate are reflected as adjustments in the current period.
 
The Company’s effective income tax rate for the nine months ended September 30, 2014 was 33.3%, compared to 28.8% for the nine months ended September 30, 2013.  The increase in the effective income tax rate is primarily attributable to increased state tax expense in 2014 primarily due to higher natural gas prices and production sales volumes, a reduction in a state net operating loss valuation allowance related to bonus depreciation in 2013 and a reduction to tax reserves in 2013, partially offset by the increase in the Partnership earnings allocated to the noncontrolling limited partners resulting from the Partnership’s May 2014 underwritten public offering of common units.
 
There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended September 30, 2014.  The Company believes that it is appropriately reserved for uncertain tax positions.
 

17

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

H.                       Revolving Credit Facilities
 
As of September 30, 2014 and December 31, 2013, the Company had no loans or letters of credit outstanding under its revolving credit facility. The Company did not have any short-term loans outstanding under its revolving credit facility at any time during the three and nine months ended September 30, 2014. The maximum amount of the Company’s outstanding short-term loans at any time was $140.5 million and $178.5 million during the three and nine months ended September 30, 2013, respectively. The average daily balance of short-term loans outstanding was approximately $21.5 million and $16.1 million during the three and nine months ended September 30, 2013, respectively, at weighted average interest rates of 1.61% and 1.65%, respectively.
 
As of September 30, 2014 and December 31, 2013, the Partnership had no loans or letters of credit outstanding under its revolving credit facility. The maximum amount of outstanding short-term loans under the Partnership’s revolving credit facility at any time during the three and nine months ended September 30, 2014 was $330.0 million and $450.0 million, respectively. The average daily balance of short-term loans outstanding was approximately $132.7 million and $159.4 million during the three and nine months ended September 30, 2014, respectively, at weighted average annual interest rates of 1.66% and 1.67%, respectively. The Partnership had no short-term loans outstanding at any time during the three and nine months ended September 30, 2013.
 
The Company incurred commitment fees averaging approximately 6 basis points for the three months ended September 30, 2014 and 2013, and 17 basis points and 18 basis points for the nine months ended September 30, 2014 and 2013, respectively, to maintain credit availability under its revolving credit facility. The Partnership incurred commitment fees averaging approximately 6 basis points for the three months ended September 30, 2014 and 2013, and 18 and 19 basis points for the nine months ended September 30, 2014 and 2013, respectively, to maintain credit availability under its revolving credit facility.
 
I.                            Earnings Per Share
 
Potentially dilutive securities, consisting of options and restricted stock awards, which were included in the calculation of diluted earnings per share, totaled 772,873 and 984,388 for the three months ended September 30, 2014 and 2013, respectively, and 935,027 and 856,112 for the nine months ended September 30, 2014 and 2013, respectively.  There were no options to purchase common stock which were excluded from potentially dilutive securities because they were anti-dilutive for the three and nine months ended September 30, 2014 and 2013.  The impact of the Partnership’s dilutive units did not have a material impact on the Company’s earnings per share calculations for any of the periods presented.
 

18

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

J.         Changes in Accumulated Other Comprehensive Income by Component
 
The following tables explain the changes in accumulated OCI by component during the applicable period:
 
Three Months Ended September 30, 2014
 
Natural gas cash
flow hedges, net
of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Pension and
other post-
retirement
benefits liability
adjustment,
net of tax
 
Accumulated
OCI (loss), net
of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of July 1, 2014
$
20,461

 
$
(1,060
)
 
$
(15,512
)
 
$
3,889

Gains recognized in accumulated OCI, net of tax
23,160

(a)

 

 
23,160

(Gains) losses reclassified from accumulated OCI, net of tax
(5,340
)
(a)
36

(a)
175

(b)
(5,129
)
Change in accumulated other comprehensive income, net of tax
17,820

 
36

 
175

 
18,031

Accumulated OCI (loss), net of tax, as of September 30, 2014
$
38,281

 
$
(1,024
)
 
$
(15,337
)
 
$
21,920

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
 
Natural gas cash
flow hedges, net
of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Pension and
other post-
retirement
benefits liability
adjustment,
net of tax
 
Accumulated
OCI (loss), net
of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of July 1, 2013
$
122,693

 
$
(1,204
)
 
$
(36,496
)
 
$
84,993

Gains recognized in accumulated OCI, net of tax
17,733

(a)

 

 
17,733

(Gains) losses reclassified from accumulated OCI, net of tax
(26,020
)
(a)
36

(a)
433

(b)
(25,551
)
Change in accumulated other comprehensive (loss) income, net of tax
(8,287
)
 
36

 
433

 
(7,818
)
Accumulated OCI (loss), net of tax, as of September 30, 2013
$
114,406

 
$
(1,168
)
 
$
(36,063
)
 
$
77,175


(a)   See Note E for additional information.
(b)   This accumulated OCI reclassification is attributable to the net actuarial loss and net prior service cost related to the Company’s defined benefit pension plans and other post-retirement benefit plans.  See Note 13 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information.

19

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
Nine Months Ended September 30, 2014
 
Natural gas cash
flow hedges, net
of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Pension and
other post-
retirement
benefits liability
adjustment,
net of tax
 
Accumulated
OCI (loss), net
of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2014
$
61,699

 
$
(1,132
)
 
$
(15,864
)
 
$
44,703

Losses recognized in accumulated OCI, net of tax
(29,489
)
(a)

 

 
(29,489
)
Gain reclassified from accumulated OCI, net of tax, into gain on sale / exchange of assets
(16,735
)
(a)

 

 
(16,735
)
Losses reclassified from accumulated OCI, net of tax
22,806

(a)
108

(a)
527

(b)
23,441

Change in accumulated other comprehensive (loss) income, net of tax
(23,418
)
 
108

 
527

 
(22,783
)
Accumulated OCI (loss), net of tax, as of September 30, 2014
$
38,281

 
$
(1,024
)
 
$
(15,337
)
 
$
21,920

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
Natural gas cash
flow hedges, net
of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Pension and
other post-
retirement
benefits liability
adjustment,
net of tax
 
Accumulated
OCI (loss), net
of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2013
$
138,188

 
$
(1,276
)
 
$
(37,365
)
 
$
99,547

Gains recognized in accumulated OCI, net of tax
38,561

(a)

 

 
38,561

(Gains) losses reclassified from accumulated OCI, net of tax
(62,343
)
(a)
108

(a)
1,302

(b)
(60,933
)
Change in accumulated other comprehensive (loss) income, net of tax
(23,782
)
 
108

 
1,302

 
(22,372
)
Accumulated OCI (loss), net of tax, as of September 30, 2013
$
114,406

 
$
(1,168
)
 
$
(36,063
)
 
$
77,175

 
(a)   See Note E for additional information.
(b)   This accumulated OCI reclassification is attributable to the net actuarial loss and net prior service cost related to the Company’s defined benefit pension plans and other post-retirement benefit plans.  See Note 13 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information.
 

20

Table of Contents
EQT Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited) 

K.        Sale and Exchange of Properties
 
In April 2014, the Company executed an agreement to exchange certain assets with Range Resources Corporation (Range).  The transaction closed on June 16, 2014.  The Company received approximately 73,000 net acres and approximately 900 producing wells, most of which are vertical wells, in the Permian Basin of Texas. In exchange, Range received  approximately 138,000 net acres in the Company’s Nora field of Virginia (Nora), the Company’s working interest in approximately 2,000 producing vertical wells in Nora, the Company’s remaining 50% ownership interest in Nora Gathering, LLC (Nora LLC), which owns the supporting gathering system in Nora, and $159.0 million in cash, subject to certain post-closing purchase price adjustments.  The Company accounted for its previous 50% ownership interest in Nora LLC under the equity method, and this investment was reflected within equity in nonconsolidated investments in the Company's Consolidated Balance Sheet. Portions of the exchange of assets with Range are intended to qualify as a tax free asset exchange.
 
The fair value of the assets exchanged by the Company was approximately $512.1 million, of which $1.8 million was recorded during the three months ended September 30, 2014. Fair value of $318.3 million was allocated to the acquired acreage and $193.8 million was allocated to the acquired wells. The Company recorded a pre-tax gain of $37.7 million, which is included in gain on sale / exchange of assets in the Statements of Consolidated Income. The gain on sale / exchange of assets includes a $28.0 million pre-tax gain related to the de-designation of certain derivative instruments that were previously designated as cash flow hedges because it was probable that the forecasted transactions would not occur. As of September 30, 2014, the gain on sale remained subject to final purchase price adjustments.
 
As the asset exchange qualifies as a business combination under United States GAAP, the fair value of the acquired assets was determined using a discounted cash flow model under the market approach. Significant unobservable inputs used in the analysis included the determination of estimated developed reserves, NYMEX forward pricing and comparable sales transactions, which classify the acquired assets as a Level 3 measurement.
 
L.        Recently Issued Accounting Standards
 
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 will replace most of the existing revenue recognition requirements in United States GAAP when it becomes effective. The guidance in ASU No. 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early adoption is not permitted. The Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related disclosures.


21

Table of Contents
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
CAUTIONARY STATEMENTS
 
Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “could,” “would,” “will,” “may,” “forecast,” “approximate,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters.  Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the matters discussed in the section captioned “Outlook” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the expectations of plans, strategies, objectives and growth and anticipated financial and operational performance of the Company and its subsidiaries, including guidance regarding the Company’s strategy to develop its Marcellus and other reserves; drilling plans and programs (including the number, type, feet of pay and location of wells to be drilled and the availability of capital to complete these plans and programs); production sales volumes (including liquids volumes) and growth rates; the timing of the Company’s operational capacity on third-party pipelines; gathering and transmission volumes; infrastructure programs (including the timing, cost and capacity of the transmission and gathering expansion projects); the timing, cost, capacity and expected interconnects with facilities and pipelines of the proposed Ohio Valley Connector (OVC) and Mountain Valley Pipeline (MVP) projects; the ultimate terms, partners and structure of the MVP joint venture; technology (including drilling techniques); monetization transactions, including midstream asset sales (dropdowns) to EQT Midstream Partners, LP (Partnership) and other asset sales, joint ventures or other transactions involving the Company’s assets; natural gas prices and changes in basis; reserves; projected capital expenditures; the amount and timing of any repurchases under the Company’s share repurchase authorization; liquidity and financing requirements, including funding sources and availability; hedging strategy; the effects of government regulation and litigation; and tax position (including the Company’s ability to complete like-kind exchanges).  The forward-looking statements included in this Quarterly Report on Form 10-Q involve risks and uncertainties that could cause actual results to differ materially from projected results.  Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  The Company has based these forward-looking statements on current expectations and assumptions about future events.  While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control.  With respect to the proposed OVC and MVP projects, these risks and uncertainties include, among others, the ability to obtain regulatory permits and approvals, the ability to secure customer contracts, and the availability of skilled labor, equipment and materials. Additional risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as updated by Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.
 
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.
 
In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about the Company. The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.  Accordingly, these representations and warranties alone may not describe the actual state of affairs of the Company or its affiliates as of the date they were made or at any other time. 

22

Table of Contents
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CORPORATE OVERVIEW
 
Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013
 
Income from continuing operations attributable to EQT Corporation for the three months ended September 30, 2014 was $98.6 million, $0.65 per diluted share, compared with $86.0 million, $0.57 per diluted share, for the three months ended September 30, 2013. The $12.6 million increase in income from continuing operations attributable to EQT Corporation between periods was primarily attributable to a 25% increase in natural gas and natural gas liquid (NGL) volumes sold and increases in contracted transmission capacity and gathering revenues. These factors were partially offset by a 6% decrease in the average effective sales price for natural gas, higher income tax expense, higher net income attributable to noncontrolling interests and higher operating expenses.
 
The average effective sales price to EQT Corporation for production sales volumes was $3.88 per Mcfe for the three months ended September 30, 2014 compared to $4.12 per Mcfe for the three months ended September 30, 2013.  The average New York Mercantile Exchange (NYMEX) natural gas index price was $4.06 per MMBtu during the third quarter of 2014, 13% higher than the average index price of $3.58 per MMBtu during the third quarter of 2013. The $0.24 per Mcfe decrease in the average effective sales price was primarily due to lower Appalachian Basin basis partially offset by the favorable average NYMEX natural gas price and favorable hedging impacts compared to the same period of 2013. The average effective sales price in the third quarter of 2014 included a $34.3 million gain for hedging ineffectiveness of financial hedges compared to a $3.4 million gain in the third quarter of 2013.
 
Income tax expense increased $31.0 million during the three months ended September 30, 2014 compared to the three months ended September 30, 2013 as a result of higher pre-tax income and a higher effective income tax rate. The Company’s effective income tax rate was 32.8% for the third quarter of 2014 compared to 25.0% for the third quarter of 2013. The rate was higher in the 2014 period due to increased state income taxes in 2014 as a result of higher pre-tax income in higher rate jurisdictions and the release of previously recorded income tax reserves during the 2013 period. The overall rate was lower than the federal statutory rate for both periods as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of Partnership earnings, but is not required to record an income tax provision with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners.
 
Income from discontinued operations, net of tax, was $2.3 million for the three months ended September 30, 2013. On December 17, 2013, the Company and its wholly-owned subsidiary, Distribution Holdco, LLC (Holdco), transferred 100% of their ownership interests in Equitable Gas Company, LLC (Equitable Gas) and Equitable Homeworks, LLC (Homeworks) to PNG Companies LLC (PNG Companies).
 
Net income attributable to noncontrolling interests of the Partnership was $33.7 million for the three months ended September 30, 2014 compared to $14.4 million for the three months ended September 30, 2013. The $19.3 million increase was primarily the result of increased noncontrolling interests as a result of the Jupiter Transaction and higher capacity reservation revenues in the Partnership. The Partnership completed underwritten public offerings of additional common units representing limited partner interests in the Partnership in May 2014 (in connection with the Jupiter Transaction described in Note C to the Condensed Consolidated Financial Statements) and in July 2013 (in connection with the Sunrise Transaction described in Note C to the Condensed Consolidated Financial Statements).
 
Nine Months Ended September 30, 2014 vs. Nine Months Ended September 30, 2013
 
Income from continuing operations attributable to EQT Corporation for the nine months ended September 30, 2014 was $399.9 million, $2.62 per diluted share, compared with $232.5 million, $1.54 per diluted share, for the nine months ended September 30, 2013. The $167.4 million increase in income from continuing operations attributable to EQT Corporation between periods was primarily attributable to a 23% increase in natural gas and NGL volumes sold, a 4% higher average effective sales price for natural gas and NGLs, a $37.7 million pre-tax gain recognized on the sale / exchange of assets with Range Resources Corporation (Range), a decrease in interest expense, and increases in contracted transmission capacity and gathering revenues. These factors were partially offset by higher net income attributable to noncontrolling interests, higher operating expenses and higher income tax expense.
 

23

Table of Contents
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The average effective sales price to EQT Corporation for production sales volumes was $4.34 per Mcfe for the nine months ended September 30, 2014 compared to $4.19 per Mcfe for the nine months ended September 30, 2013. The $0.15 per Mcfe increase in the average effective sales price was primarily due to an increase in the average NYMEX natural gas price net of hedging impacts and an increase in third-party gathering and transmission recoveries from the utilization of existing and new third-party transportation capacity to reach higher priced markets during the unusually cold winter in the first quarter of 2014, partially offset by lower Appalachian Basin basis compared to the same period of 2013. The NYMEX natural gas index price averaged $4.55 per MMBtu during the first nine months of 2014, 24% higher than the average index price of $3.67 per MMBtu during the first nine months of 2013.

Interest expense decreased $11.1 million during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily as a result of higher capitalized interest of $31.1 million on increased Marcellus well development in the first nine months of 2014 compared to $16.7 million in the first nine months of 2013, partially offset by additional interest expense of $3.3 million related to the Partnership's 4.00% Senior Notes due 2024 issued during the third quarter of 2014.
 
Income tax expense increased $133.6 million in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily as a result of higher pre-tax income as well as a higher effective tax rate. The Company’s effective income tax rate increased to 33.3% from 28.8%.  The increase in the effective income tax rate from the first nine months of 2013 is primarily attributable to increased state tax expense in 2014 primarily due to higher natural gas prices and production sales volumes, a reduction in a state net operating loss valuation allowance related to bonus depreciation in 2013 and a reduction to tax reserves in 2013, partially offset by the impact of the Partnership's ownership structure. For both periods, the overall rate was lower than the federal statutory rate as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of partnership earnings, but is not required to record an income tax provision with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners.
 
Income from discontinued operations, net of tax, was $1.8 million for the nine months ended September 30, 2014 compared to $42.9 million for the nine months ended September 30, 2013. On December 17, 2013, the Company and its wholly-owned subsidiary Holdco transferred 100% of their ownership interests in Equitable Gas and Homeworks to PNG Companies.
 
Net income attributable to noncontrolling interests of the Partnership was $79.8 million for the nine months ended September 30, 2014 compared to $30.6 million for the nine months ended September 30, 2013. The $49.2 million increase was primarily the result of increased noncontrolling interests and higher capacity reservation revenues in the Partnership. The Partnership completed underwritten public offerings of additional common units representing limited partner interests in the Partnership in May 2014 (in connection with the Jupiter Transaction described in Note C to the Condensed Consolidated Financial Statements) and in July 2013 (in connection with the Sunrise Transaction described in Note C to the Condensed Consolidated Financial Statements).
 
See “Investing Activities” under the caption “Capital Resources and Liquidity” for a discussion of capital expenditures.
 
Consolidated Operational Data
 
Revenues earned by the Company at the wellhead from the sale of natural gas and liquids are split between EQT Production and EQT Midstream. The split is reflected in the calculation of EQT Production’s average effective sales price.  The following operational information presents detailed gross liquid and natural gas operational information as well as midstream deductions to assist in the understanding of the Company’s consolidated operations.
 

24

Table of Contents
EQT Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
in thousands (unless noted)
 
2014
 
2013
 
%
 
2014
 
2013
 
%
LIQUIDS
 
 
 
 
 
 

 
 
 
 
 
 

NGLs:
 
 
 
 
 
 

 
 
 
 
 
 

Sales Volume (MMcfe) (a)
 
12,047

 
6,426

 
87.5

 
27,768

 
20,048

 
38.5

Sales Volume (Mbbls)
 
2,008

 
1,071

 
87.5

 
4,628

 
3,341

 
38.5

Gross Price ($/Bbl)
 
$
42.27

 
$
40.89

 
3.4

 
$
46.46

 
$
43.24

 
7.4

Gross NGL Revenue
 
$
84,868

 
$
43,786

 
93.8

 
$
215,016

 
$
144,469

 
48.8

Oil:
 
 
 
 
 
 

 
 
 
 
 
 

Sales Volume (MMcfe) (a)
 
933

 
474

 
96.8

 
1,632

 
1,169

 
39.6

Sales Volume (Mbbls)
 
155

 
79

 
96.2

 
272

 
195

 
39.5

Net Price ($/Bbl)
 
$
87.91

 
$
94.78

 
(7.2
)
 
$
87.46

 
$
87.51

 
(0.1
)
Net Oil Revenue
 
$
13,668

 
$
7,488

 
82.5

 
$
23,785

 
$
17,049

 
39.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Liquids Revenue
 
$
98,536

 
$
51,274

 
92.2

 
$
238,801

 
$
161,518

 
47.8

 
 
 
 
 
 
 
 
 
 
 
 
 
GAS
 
 
 
 
 
 

 
 
 
 
 
 

Sales Volume – Natural Gas (MMBtu)
 
110,362

 
92,075

 
19.9

 
310,201

 
253,956

 
22.1

Sales Volume – Ethane sold as natural gas (MMBtu)
 
11,039

 
8,244

 
33.9

 
26,205

 
21,623

 
21.2

Sales Volume (MMBtu)
 
121,401

 
100,319

 
21.0

 
336,406

 
275,579

 
22.1

NYMEX Price ($/MMBtu) (b)
 
$
4.05

 
$
3.58

 
13.1

 
$
4.52

 
$
3.68

 
22.8

Gas Revenue
 
$
491,864

 
$
358,911

 
37.0

 
$
1,521,859

 
$
1,014,754

 
50.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Gross Gas & Liquids Revenue (unhedged)
 
$
590,400