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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 JUNE 30, 2016
 
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 June 30, 2016, 172,747 (in thousands) shares of common stock, no par value, of the registrant were outstanding.



Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Index
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents
PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements
EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated (Loss) Income (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
304,532

 
$
373,756

 
$
668,959

 
$
960,164

Pipeline and marketing services
57,692

 
61,573

 
129,339

 
146,389

(Loss) gain on derivatives not designated as hedges
(234,693
)
 
4,259

 
(125,698
)
 
47,851

Total operating revenues
127,531

 
439,588

 
672,600

 
1,154,404

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Transportation and processing
84,207

 
69,356

 
161,400

 
135,133

Operation and maintenance
29,253

 
32,061

 
60,736

 
60,308

Production
33,044

 
31,492

 
59,940

 
62,848

Exploration
3,591

 
11,422

 
6,714

 
23,976

Selling, general and administrative
77,299

 
65,404

 
135,241

 
128,530

Depreciation, depletion and amortization
224,629

 
196,819

 
445,860

 
391,564

Impairment of long-lived assets

 

 

 
4,252

Total operating expenses
452,023

 
406,554

 
869,891

 
806,611

 
 
 
 
 
 
 
 
Operating (loss) income
(324,492
)
 
33,034

 
(197,291
)
 
347,793

 
 
 
 
 
 
 
 
Other income
7,644

 
2,689

 
12,484

 
3,628

Interest expense
36,305

 
36,833

 
72,485

 
74,049

(Loss) income before income taxes
(353,153
)
 
(1,110
)
 
(257,292
)
 
277,372

Income tax (benefit)
(172,346
)
 
(64,857
)
 
(164,910
)
 
(7,543
)
Net (loss) income
(180,807
)
 
63,747

 
(92,382
)
 
284,915

Less: Net income attributable to noncontrolling interests
77,838

 
58,211

 
160,627

 
105,952

Net (loss) income attributable to EQT Corporation
$
(258,645
)
 
$
5,536

 
$
(253,009
)
 
$
178,963

 
 
 
 
 
 
 
 
Earnings per share of common stock attributable to EQT Corporation:
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Weighted average common stock outstanding
166,801

 
152,454

 
161,909

 
152,220

Net (loss) income
$
(1.55
)
 
$
0.04

 
$
(1.56
)
 
$
1.18

Diluted:
 

 
 

 
 

 
 

Weighted average common stock outstanding
166,801

 
152,877

 
161,909

 
152,751

Net (loss) income
$
(1.55
)
 
$
0.04

 
$
(1.56
)
 
$
1.17

Dividends declared per common share
$
0.03

 
$
0.03

 
$
0.06

 
$
0.06

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

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Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Comprehensive (Loss) Income (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands)
Net (loss) income
$
(180,807
)
 
$
63,747

 
$
(92,382
)
 
$
284,915

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

 
 

 
 

Net change in cash flow hedges:
 

 
 

 
 

 
 

Natural gas, net of tax benefit of $(10,701), $(28,211), $(19,040), and $(55,211)
(15,940
)
 
(42,581
)
 
(28,364
)
 
(83,332
)
Interest rate, net of tax expense of $27, $25, $52, and $50
36

 
36

 
72

 
72

Pension and other post-retirement benefits liability adjustment, net of tax expense of $6,100, $128, $6,235, and $255
9,622

 
202

 
9,835

 
404

Other comprehensive loss
(6,282
)
 
(42,343
)
 
(18,457
)
 
(82,856
)
Comprehensive (loss) income
(187,089
)
 
21,404

 
(110,839
)
 
202,059

Less: Comprehensive income attributable to noncontrolling interests
77,838

 
58,211

 
160,627

 
105,952

Comprehensive (loss) income attributable to EQT Corporation
$
(264,927
)
 
$
(36,807
)
 
$
(271,466
)
 
$
96,107

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

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EQT CORPORATION AND SUBSIDIARIES

Statements of Condensed Consolidated Cash Flows (Unaudited)

 
Six Months Ended June 30,
 
2016
 
2015
 
(Thousands)
Cash flows from operating activities:
 
Net (loss) income
$
(92,382
)
 
$
284,915

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Deferred income tax benefit
(165,594
)
 
(195,925
)
Depreciation, depletion and amortization
445,860

 
391,564

Asset and lease impairments
4,063

 
28,428

Provision for losses on (recoveries of) accounts receivable
552

 
(1,648
)
Other income
(12,484
)
 
(3,628
)
Stock-based compensation expense
23,877

 
28,429

Loss (gain) on derivatives not designated as hedges
125,698

 
(47,851
)
Cash settlements received on derivatives not designated as hedges
195,229

 
38,775

Pension settlement charge
9,403

 

Changes in other assets and liabilities:
 

 
 

Excess tax benefits on stock-based compensation

 
(21,604
)
Accounts receivable
6,137

 
157,343

Accounts payable
(15,595
)
 
(63,390
)
Other items, net
(31,360
)
 
60,619

Net cash provided by operating activities
493,404

 
656,027

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(821,738
)
 
(1,321,002
)
Capital contributions to Mountain Valley Pipeline, LLC
(40,663
)
 
(45,885
)
Sales of interests in Mountain Valley Pipeline, LLC
12,533

 

Deposit on acquisition
(10,000
)
 

Net cash used in investing activities
(859,868
)
 
(1,366,887
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of common shares of EQT Corporation, net of issuance costs
1,226,006

 

Proceeds from the issuance of common units of EQT Midstream Partners, LP, net of issuance costs
217,102

 
696,582

Proceeds from the sale of common units of EQT GP Holdings, LP, net of sale costs

 
674,374

Increase in borrowings on EQT Midstream Partners, LP credit facility
260,000

 
434,000

Decrease in borrowings on EQT Midstream Partners, LP credit facility
(559,000
)
 
(122,000
)
Dividends paid
(9,776
)
 
(9,141
)
Distributions to noncontrolling interests
(87,911
)
 
(52,672
)
Repayments and retirements of long-term debt

 
(9,003
)
Proceeds and excess tax benefits from awards under employee compensation plans
2,040

 
27,679

Cash paid for taxes related to net settlement of share-based incentive awards
(26,195
)
 
(44,856
)
Repurchase of common stock
(17
)
 
(3,375
)
Net cash provided by financing activities
1,022,249

 
1,591,588

Net change in cash and cash equivalents
655,785

 
880,728

Cash and cash equivalents at beginning of period
1,601,232

 
1,077,429

Cash and cash equivalents at end of period
$
2,257,017

 
$
1,958,157

 
 
 
 
Cash paid during the period for:
 

 
 

Interest, net of amount capitalized
$
73,763

 
$
74,101

Income taxes, net
$
1,294

 
$
76,420

 
 
 
 
Non-cash activity during the period for:
 
 
 
Increase in Mountain Valley Pipeline, LLC investment/payable for capital contributions
$
27,052

 
$

 

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

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Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
June 30, 2016
 
December 31, 2015
 
(Thousands)
Assets
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
2,257,017

 
$
1,601,232

Accounts receivable (less accumulated provision for doubtful accounts:
$3,619 at June 30, 2016 and $3,018 at December 31, 2015)
170,268

 
176,957

Derivative instruments, at fair value
136,591

 
417,397

Prepaid expenses and other
50,013

 
55,433

Total current assets
2,613,889

 
2,251,019

 
 
 
 
Property, plant and equipment
16,439,684

 
15,635,549

Less: accumulated depreciation and depletion
4,597,653

 
4,163,528

Net property, plant and equipment
11,842,031

 
11,472,021

 
 
 
 
Investment in nonconsolidated entity
135,949

 
77,025

Other assets
191,317

 
176,107

Total assets
$
14,783,186

 
$
13,976,172

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

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Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)

 
June 30, 2016
 
December 31, 2015
 
(Thousands)
Liabilities and Stockholders’ Equity
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Credit facility borrowings
$

 
$
299,000

Accounts payable
251,654

 
291,550

Derivative instruments, at fair value
110,960

 
23,434

Other current liabilities
164,663

 
181,835

Total current liabilities
527,277

 
795,819

 
 
 
 
Long-term debt
2,795,620

 
2,793,343

Deferred income taxes
1,807,522

 
1,972,170

Other liabilities and credits
395,314

 
386,798

Total liabilities
5,525,733

 
5,948,130

 
 
 
 
Equity:
 

 
 

Stockholders’ equity:
 

 
 

Common stock, no par value, authorized 320,000 shares, shares issued:
177,897 at June 30, 2016 and 158,347 at December 31, 2015
3,402,840

 
2,153,280

Treasury stock, shares at cost: 5,150 at June 30, 2016 (including 226 held in rabbi trust) and 5,793 at December 31, 2015 (including 292 held in rabbi trust)
(92,478
)
 
(104,079
)
Retained earnings
2,719,427

 
2,982,212

Accumulated other comprehensive income
27,921

 
46,378

Total common stockholders’ equity
6,057,710

 
5,077,791

Noncontrolling interests in consolidated subsidiaries
3,199,743

 
2,950,251

Total equity
9,257,453

 
8,028,042

Total liabilities and equity
$
14,783,186

 
$
13,976,172


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


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Table of Contents



EQT CORPORATION AND SUBSIDIARIES
 
Statements of Condensed Consolidated Equity (Unaudited)
 
 
Common Stock
 
 
 
Accumulated Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
 
 
Shares
Outstanding
 
No
Par Value
 
Retained
Earnings
 
 
 
Total
Equity
 
(Thousands)
Balance, January 1, 2015
151,596

 
$
1,466,192

 
$
2,917,129

 
$
199,494

 
$
1,790,248

 
$
6,373,063

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
 

 
178,963

 
 

 
105,952

 
284,915

Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(55,211)
 
 
 
 
 
 
(83,332
)
 
 
 
(83,332
)
Interest rate, net of tax expense of $50
 
 
 
 
 
 
72

 
 
 
72

Pension and other post-retirement benefits liability adjustment,
net of tax expense of $255
 
 
 
 
 
 
404

 
 
 
404

Dividends ($0.06 per share)
 

 
 

 
(9,141
)
 
 

 
 

 
(9,141
)
Stock-based compensation plans, net
846

 
28,006

 
 

 
 

 
549

 
28,555

Distributions to noncontrolling interests ($1.19 per EQT Midstream Partners, LP common unit)
 

 
 

 
 

 
 

 
(52,672
)
 
(52,672
)
Issuance of common units of EQT Midstream Partners, LP


 


 


 


 
696,582

 
696,582

Sale of common units of EQT GP Holdings, LP
 
 
 
 
 
 
 
 
674,374

 
674,374

Changes in ownership of consolidated subsidiary, net


 
444,841

 


 
 
 
(709,045
)
 
(264,204
)
Repurchase and retirement of common stock
(38
)
 
(1,597
)
 
(1,778
)
 
 
 
 
 
(3,375
)
Balance, June 30, 2015
152,404

 
$
1,937,442

 
$
3,085,173

 
$
116,638

 
$
2,505,988

 
$
7,645,241

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
152,554

 
$
2,049,201

 
$
2,982,212

 
$
46,378

 
$
2,950,251

 
$
8,028,042

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 

 
 

 
(253,009
)
 
 

 
160,627

 
(92,382
)
Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(19,040)
 
 
 
 
 
 
(28,364
)
 
 
 
(28,364
)
Interest rate, net of tax expense of $52
 
 
 
 
 
 
72

 
 
 
72

Pension and other post-retirement benefits liability adjustment,
net of tax expense of $6,235
 
 
 
 
 
 
9,835

 
 
 
9,835

Dividends ($0.06 per share)
 

 
 

 
(9,776
)
 
 

 
 

 
(9,776
)
Stock-based compensation plans, net
643

 
9,862

 
 

 
 

 
161

 
10,023

Distributions to noncontrolling interests ($1.455 and $0.256 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively)
 

 
 

 
 

 
 

 
(87,911
)
 
(87,911
)
Issuance of common shares of EQT Corporation
19,550

 
1,226,006

 
 
 
 
 


 
1,226,006

Issuance of common units of EQT Midstream Partners, LP
 

 
 

 
 

 
 

 
217,102

 
217,102

Changes in ownership of consolidated subsidiaries
 
 
25,293

 
 
 
 
 
(40,487
)
 
(15,194
)
Balance, June 30, 2016
172,747

 
$
3,310,362

 
$
2,719,427

 
$
27,921

 
$
3,199,743

 
$
9,257,453

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


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


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 June 30, 2016 and December 31, 2015, the results of its operations for the three and six month periods ended June 30, 2016 and 2015 and its cash flows for the six month periods ended June 30, 2016 and 2015.  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 was not material to any of the previously issued financial statements.

The balance sheet at December 31, 2015 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.

On May 2, 2016, the Company entered into an Underwriting Agreement with Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC, as representatives of the several underwriters named in the Underwriting Agreement (the Underwriters), providing for the offer and sale by the Company (the May Offering), and the purchase by the Underwriters, of 10,500,000 shares of the Company's common stock, no par value (Common Stock), at a price to the public of $67.00 per share. Pursuant to the Underwriting Agreement, the Company also granted the Underwriters an option for a period of 30 days to purchase up to an additional 1,575,000 shares of Common Stock (the May Option Shares) on the same terms. On May 3, 2016, the Underwriters exercised in full their option to purchase the May Option Shares. The May Offering closed on May 6, 2016, and the Company received net proceeds from the May Offering of approximately $795.6 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company used a portion of the net proceeds from the May Offering to fund the Statoil acquisition discussed in Note N, and intends to use the remainder for general corporate purposes.

On February 19, 2016, the Company entered into an Underwriting Agreement with Goldman, Sachs & Co. (Goldman) providing for the offer and sale by the Company (February Offering), and the purchase by Goldman, of 6,500,000 shares of Common Stock, at a price to the public of $58.50 per share. Pursuant to the Underwriting Agreement, the Company also granted Goldman an option for a period of 30 days to purchase up to 975,000 additional shares of Common Stock (February Option Shares) on the same terms. On February 22, 2016, Goldman exercised in full its option to purchase the February Option Shares. The February Offering closed on February 24, 2016, and the Company received net proceeds from the February Offering of approximately $430.4 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds from the February Offering for general corporate purposes.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 23 of this Quarterly Report on Form 10-Q.

B.                        EQT GP Holdings, LP

In January 2015, the Company formed EQT GP Holdings, LP (EQGP) (NYSE: EQGP), a Delaware limited partnership, to own the Company's partnership interests in EQT Midstream Partners, LP (EQM) (NYSE: EQM). EQGP owned the following EQM partnership interests as of June 30, 2016, which represent EQGP’s only cash-generating assets: 21,811,643 EQM common units, representing a 26.6% limited partner interest in EQM; 1,443,015 EQM general partner units, representing a 1.8% general partner interest in EQM; and all of EQM’s incentive distribution rights, or IDRs, which entitle EQGP to receive up to 48.0% of all incremental cash distributed in a quarter after $0.5250 has been distributed in respect of each common unit and general partner unit of EQM for that quarter. The Company is the ultimate parent company of EQGP and EQM.


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

On May 15, 2015, EQGP completed an underwritten initial public offering (IPO) of 26,450,000 common units representing limited partner interests in EQGP, which represented 9.9% of EQGP’s outstanding limited partner interests. The Company retained 239,715,000 common units, which represented a 90.1% limited partner interest, and a non-economic general partner interest, in EQGP. EQT Gathering Holdings, LLC, an indirect wholly owned subsidiary of the Company, was the selling unitholder and sold all of the EQGP common units in the offering. The IPO resulted in net proceeds to the Company of approximately $674.0 million after deducting the underwriters' discount of approximately $37.5 million and structuring fees of approximately $2.7 million. EQGP did not receive any of the proceeds from, or incur any expenses in connection with the IPO.

The Company continues to consolidate the results of EQGP, but records an income tax provision only as to its ownership percentage.  The Company records the noncontrolling interest of the EQGP and EQM public limited partners in its financial statements.

On July 26, 2016, the Board of Directors of EQGP’s general partner declared a cash distribution to EQGP’s unitholders for the second quarter of 2016 of $0.15 per common unit, or approximately $39.9 million.  The distribution will be paid on August 22, 2016 to unitholders of record, including the Company, at the close of business on August 5, 2016.

Net income attributable to noncontrolling interests (i.e., to the EQGP limited partner interests not owned by the Company and the EQM limited partner interests not owned by EQGP) was $77.8 million and $160.6 million for the three and six months ended June 30, 2016, respectively. Net income attributable to noncontrolling interests was $58.2 million and $106.0 million for the three and six months ended June 30, 2015, respectively.

C.                        EQT Midstream Partners, LP
 
In January 2012, the Company formed EQM to own, operate, acquire and develop midstream assets in the Appalachian Basin. EQM provides midstream services to the Company and other third parties. EQM is consolidated in the Company’s consolidated financial statements. The Company records the noncontrolling interest of the EQM public limited partners in its financial statements.

On March 30, 2015, the Company assigned 100% of the membership interest in MVP Holdco, LLC (MVP Holdco), which at the time was an indirect wholly owned subsidiary of the Company, to EQM. EQM paid the Company $54.2 million, which represented EQM's reimbursement to the Company for 100% of the capital contributions made by the Company to Mountain Valley Pipeline, LLC (MVP Joint Venture) as of March 30, 2015. As of June 30, 2016, MVP Holdco owned a 45.5% interest (MVP Interest) in the MVP Joint Venture. The MVP Joint Venture plans to construct the Mountain Valley Pipeline (MVP), an estimated 300-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. The MVP Joint Venture has secured a total of  2.0 Bcf per day of 20-year firm capacity commitments, including a 1.29 Bcf per day firm capacity commitment by the Company. The MVP project is subject to Federal Energy Regulatory Commission (FERC) approval. The MVP Joint Venture submitted the MVP certificate application to the FERC in October 2015, and the FERC issued the Notice of Schedule for Environmental Review (NOS) on June 28, 2016.  Based on the schedule provided in the NOS, the MVP Joint Venture anticipates receiving the certificate and commencing construction in mid-year 2017. The pipeline is expected to be in-service during the fourth quarter of 2018.

During 2015, EQM entered into an equity distribution agreement that established an “At the Market” (ATM) common unit offering program, pursuant to which a group of managers, acting as EQM’s sales agents, may sell EQM common units having an aggregate offering price of up to $750 million (the $750 million ATM Program). During the three months ended June 30, 2016, EQM issued 2,949,309 common units at an average price per unit of $74.42 under the $750 million ATM Program, for which EQM received net proceeds of approximately $217.1 million after deducting commissions of approximately $2.2 million and other offering expenses of approximately $0.2 million. EQM intends to use the net proceeds from the sales for general partnership purposes. In connection with the sale during the second quarter 2016, the Company recorded a $24.9 million gain to additional paid-in-capital, a decrease in noncontrolling interest in consolidated subsidiary of $39.9 million and an increase to deferred tax liability of $15.0 million.

On July 26, 2016, the Board of Directors of EQM’s general partner declared a cash distribution to EQM’s unitholders for the second quarter of 2016 of $0.78 per common unit. The cash distribution will be paid on August 12, 2016 to unitholders of record, including EQGP, at the close of business on August 5, 2016. Based on the 80,581,758 EQM common units outstanding on July 28, 2016, the aggregate cash distributions by EQM to EQGP would be approximately $40.8 million consisting of: $17.0 million in respect of its limited partner interest, $1.6 million in respect of its general partner interest and $22.2 million in respect of its IDRs. The distributions to EQGP in respect of its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the second quarter 2016 distribution.

10

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



D.        Equity in Nonconsolidated Investments

The Company, through its ownership interest in EQM, has an ownership interest in the MVP Joint Venture, a nonconsolidated investment that is accounted for under the equity method of accounting. The following table summarizes the Company's equity in the nonconsolidated investment:
 
 
 
 
Interest
 
Ownership % as of
 
Equity as of
 
Equity as of
Investee
 
Location
 
Type
 
June 30, 2016
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
 
(Thousands)
MVP Joint Venture
 
USA
 
Joint
 
45.5%
 
$
135,949

 
$
77,025


The Company’s ownership share of the earnings for the six months ended June 30, 2016 and 2015 related to the total investments accounted for under the equity method was $3.4 million and $0.6 million, respectively, reported in other income on the Statements of Consolidated (Loss) Income.

The MVP Joint Venture has been determined to be a variable interest entity because the MVP Joint Venture has insufficient equity to finance activities during the construction stage of the project. EQM is not the primary beneficiary because it does not have the power to direct the activities of the MVP Joint Venture that most significantly impact its economic performance. Certain business decisions, including, but not limited to, decisions with respect to operating and construction budgets, project construction schedule, material contracts or precedent agreements, indebtedness, significant acquisitions or dispositions, material regulatory filings and strategic decisions, require the approval of owners holding a super majority percentage in the MVP Joint Venture and no one member individually owns such super majority interest. Beginning on the date it was assumed from the Company, EQM accounted for its interest in the MVP Joint Venture as an equity method investment as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.

On January 21, 2016, affiliates of Consolidated Edison, Inc. (ConEd) acquired a 12.5% interest in the MVP Joint Venture and entered into 20-year firm capacity commitments for approximately 0.25 Bcf per day on both the MVP and EQM’s transmission system (ConEd Transaction). As a result of the ConEd Transaction, EQM’s interest in the MVP Joint Venture decreased by 8.5% to 45.5%, and during the first quarter of 2016, ConEd reimbursed EQM $12.5 million related to the proportionate reduction in EQM’s interest in the joint venture. ConEd has the right to terminate its purchase of the interest in the MVP Joint Venture and be reimbursed for the purchase price and all capital contributions made to the MVP Joint Venture for a period ending no later than December 31, 2016.

As of June 30, 2016, EQM had issued a $91 million performance guarantee in favor of the MVP Joint Venture to provide performance assurances for MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP. Upon the FERC’s initial release to begin construction of the MVP, EQM's guarantee will terminate; EQM will then be obligated to issue a new guarantee in an amount equal to 33% of MVP Holdco’s remaining obligations to make capital contributions to the MVP Joint Venture in connection with the then remaining construction budget, less, subject to certain limits, any credit assurances issued by any affiliate of EQM under such affiliate's precedent agreement with the MVP Joint Venture.

As of June 30, 2016, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $227 million, which included the investment balance of $136 million on the Consolidated Balance Sheet as of June 30, 2016 and amounts which could have become due under the performance guarantee as of that date.

E.     Consolidated Variable Interest Entities

The Company adopted Accounting Standard Update (ASU) No. 2015-02, Consolidation in the first quarter of 2016 and, as a result, EQT determined EQGP and EQM to be variable interest entities. Through EQT's ownership and control of EQGP's general partner and control of EQM's general partner, EQT has the power to direct the activities that most significantly impact their economic performance. In addition, through EQT's general partner interest and limited partner interest in EQGP and EQGP's general partner interest, limited partner interest and incentive distribution rights in EQM, EQT has the obligation to absorb the losses of EQGP and EQM and the right to receive benefits from EQGP and EQM, in accordance with such interests. Therefore, EQT has a controlling financial interest in EQGP and EQM, is the primary beneficiary of EQGP and EQM and consolidates EQGP and EQM.


11

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



The risks associated with the operations of EQGP and EQM are discussed in their respective Annual Reports on Form 10-K for the year ended December 31, 2015 and Quarterly Reports on Form 10-Q for the quarter ended March 31, 2016. See further discussion of the impact that EQT's involvement in EQGP and EQM have on EQT's financial position, results of operations and cash flows included in EQT's Annual Report on Form 10-K for the year ended December 31, 2015, including in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. See Notes B and C for further discussion of EQGP and EQM, respectively.

The following table presents amounts included in EQT's Consolidated Balance Sheets that were for the use or obligation of EQGP and EQM as of June 30, 2016 and December 31, 2015.

Classification
 
June 30, 2016
 
December 31, 2015
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
84,356

 
$
350,815

Accounts receivable
 
15,749

 
17,131

Prepaid expenses and other
 
2,341

 
2,111

Property, plant and equipment, net
 
2,276,474

 
1,969,993

Other assets
 
156,033

 
91,975

Liabilities:
 
 
 
 
Accounts payable
 
$
71,818

 
$
35,909

Credit facility borrowings
 

 
299,000

Other current liabilities
 
43,543

 
15,722

Long-term debt
 
493,786

 
493,401

Other liabilities and credits
 
9,333

 
7,834


The following table summarizes the EQGP Statements of Consolidated Operations and Cash Flows for the three and six months ended June 30, 2016 and 2015, inclusive of affiliate amounts.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands)
Operating revenues
$
172,004

 
$
144,613

 
$
352,605

 
$
299,424

Operating expenses
(48,483
)
 
(44,255
)
 
(97,855
)
 
(86,314
)
Other income (expenses)
469

 
(15,513
)
 
(2,651
)
 
(46,590
)
Net income
$
123,990

 
$
84,845

 
$
252,099

 
$
166,520

 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
149,855

 
$
124,443

 
$
267,426

 
$
239,102

Net cash used in investing activities
(200,284
)
 
(233,448
)
 
(303,958
)
 
(765,883
)
Net cash provided by (used in) financing activities
$
134,410

 
$
(101,601
)
 
$
(229,927
)
 
$
356,500


F.                        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, development and production of and sales of, natural gas and natural gas liquids (NGLs) in the Appalachian and Permian Basins.  The EQT Midstream segment’s operations include the natural gas gathering, transmission and storage activities of the Company, including ownership and operation of EQGP and EQM. EQT Midstream also provides marketing services for the benefit of EQT Production.


12

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

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.
 
Substantially all of the Company’s operating revenues, income from operations and assets are generated or located in the United States.
Three Months Ended June 30, 2016
EQT
Production
 
EQT Midstream
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
304,532

 
$

 
$

 
$
304,532

Pipeline and marketing services
2,123

 
214,298

 
(158,729
)
 
57,692

Loss on derivatives not designated as hedges
(234,693
)
 

 

 
(234,693
)
Total operating revenues
$
71,962

 
$
214,298

 
$
(158,729
)
 
$
127,531

Three Months Ended June 30, 2015
EQT
Production (a)
 
EQT Midstream
 
Intersegment Eliminations (a)
 
EQT Corporation
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
373,756

 
$

 
$

 
$
373,756

Pipeline and marketing services
9,822

 
193,348

 
(141,597
)
 
61,573

Gain (loss) on derivatives not designated as hedges
5,177

 
(918
)
 

 
4,259

Total operating revenues
$
388,755

 
$
192,430

 
$
(141,597
)
 
$
439,588

Six Months Ended June 30, 2016
EQT Production
 
EQT Midstream
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
668,959

 
$

 
$

 
$
668,959

Pipeline and marketing services
6,709

 
439,027

 
(316,397
)
 
129,339

Loss on derivatives not designated as hedges
(125,698
)
 

 

 
(125,698
)
Total operating revenues
$
549,970

 
$
439,027

 
$
(316,397
)
 
$
672,600


Six Months Ended June 30, 2015
EQT
Production (a)
 
EQT Midstream
 
Intersegment Eliminations (a)
 
EQT Corporation
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
960,164

 
$

 
$

 
$
960,164

Pipeline and marketing services
22,959

 
402,228

 
(278,798
)
 
146,389

Gain (loss) on derivatives not designated as hedges
49,423

 
(1,572
)
 

 
47,851

Total operating revenues
$
1,032,546

 
$
400,656

 
$
(278,798
)
 
$
1,154,404


(a)
For the three and six months ended June 30, 2016,  EQT Production presented affiliated gathering and transmission costs as operating expenses for consistency with the presentation of third party costs.  Historically, these affiliated costs have been presented as revenue deductions.  Certain previously reported amounts have been reclassified to conform with current year presentation.


13

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands)
Operating (loss) income:
 

 
 

 
 

 
 

EQT Production
$
(444,000
)
 
$
(66,886
)
 
$
(455,254
)
 
$
118,957

EQT Midstream
124,528

 
108,192

 
266,387

 
237,931

Unallocated expenses (b)
(5,020
)
 
(8,272
)
 
(8,424
)
 
(9,095
)
Total operating (loss) income
$
(324,492
)
 
$
33,034

 
$
(197,291
)
 
$
347,793


(b)
Unallocated expenses consist primarily of incentive compensation expense and administrative costs.

Reconciliation of operating (loss) income to net (loss) income:
Total operating (loss) income
$
(324,492
)
 
$
33,034

 
$
(197,291
)
 
$
347,793

Other income
7,644

 
2,689

 
12,484

 
3,628

Interest expense
36,305

 
36,833

 
72,485

 
74,049

Income tax benefit
(172,346
)
 
(64,857
)
 
(164,910
)
 
(7,543
)
Net (loss) income
$
(180,807
)
 
$
63,747

 
$
(92,382
)
 
$
284,915

 
As of June 30, 2016
 
As of December 31, 2015
 
(Thousands)
Segment assets:
 

 
 

EQT Production
$
8,800,022

 
$
8,995,853

EQT Midstream
3,576,276

 
3,226,138

Total operating segments
12,376,298

 
12,221,991

Headquarters assets, including cash and short-term investments
2,406,888

 
1,754,181

Total assets
$
14,783,186

 
$
13,976,172

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands)
Depreciation, depletion and amortization:
 

 
 

 
 

 
 

EQT Production
$
197,864

 
$
173,331

 
$
392,700

 
$
344,794

EQT Midstream
26,678

 
23,393

 
53,011

 
46,588

Other
87

 
95

 
149

 
182

Total
$
224,629

 
$
196,819

 
$
445,860

 
$
391,564

 
 
 
 
 
 
 
 
Expenditures for segment assets (c):
 

 
 

 
 

 
 

EQT Production (d)
$
237,043

 
$
520,315

 
$
468,656

 
$
1,002,289

EQT Midstream
201,211

 
164,542

 
342,131

 
237,117

Other
1,175

 
716

 
2,188

 
1,609

Total
$
439,429

 
$
685,573

 
$
812,975

 
$
1,241,015

 
(c)
Includes a portion of non-cash stock-based compensation expense and the impact of capital accruals.
(d)
Expenditures for segment assets in the EQT Production segment include $34.8 million and $88.1 million for property acquisitions during the three months ended June 30, 2016 and 2015, respectively, and $68.1 million and $139.1 million for property acquisitions during the six months ended June 30, 2016 and 2015, respectively.


14

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

G.                        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. The creditworthiness of all counterparties is regularly monitored. 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 sells call options that require the Company to pay the counterparty if the index price rises above the strike price. The Company 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.

The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. 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 had been designated and qualified 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 (Loss) Income in the same period or periods during which the forecasted transaction affects earnings. 

In prior periods, 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 EQT Production's produced volumes and forecasted natural gas purchases and sales were designated and qualified as cash flow hedges. As of June 30, 2016 and December 31, 2015, the Company deferred net gains of $36.4 million and $64.8 million, respectively, in accumulated OCI, net of tax, related to the effective portion of the change in fair value of its derivative commodity instruments designated as cash flow hedges. Effective December 31, 2014, the Company elected to de-designate all cash flow hedges and discontinue the use of cash flow hedge accounting. As of June 30, 2016 and December 31, 2015, the forecasted transactions that were hedged as of December 31, 2014 remained probable of occurring and as such, the amounts in accumulated OCI will continue to be reported in accumulated OCI and will be reclassified into earnings in future periods when the underlying hedged transactions occur. The forecasted transactions extend through December 2018. The Company estimates that approximately $28.9 million of net gains on its derivative commodity instruments reflected in accumulated OCI, net of tax, as of June 30, 2016 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions. As a result of the discontinuance of cash flow hedge accounting, beginning in 2015, all changes in fair value of the Company’s derivative instruments are recognized within operating revenues in the Statements of Consolidated (Loss) Income.

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.
 

15

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

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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Thousands)
Commodity derivatives designated as cash flow hedges
 
Amount of gain reclassified from accumulated OCI, net of tax, into sales of natural gas, oil and NGLs (effective portion)
$
15,940

 
$
42,581

 
$
28,364

 
$
83,332

 
 
 
 
 
 
 
 
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
)
 
$
(72
)
 
$
(72
)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

Amount recognized in (loss) gain on derivatives not designated as hedges
$
(234,693
)
 
$
4,259

 
$
(125,698
)
 
$
47,851


The absolute quantities of the Company’s derivative commodity instruments totaled 665 Bcf and 676 Bcf as of June 30, 2016 and December 31, 2015, respectively, and were primarily related to natural gas swaps, basis swaps and collars. The open natural gas positions at June 30, 2016 and December 31, 2015 had maturities extending through December 2020 and December 2019, respectively. The Company also had 548 Mbbls of propane swaps as of June 30, 2016, which had maturities extending through December 2017.

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 June 30, 2016 and December 31, 2015
As of June 30, 2016
 
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
 
$
136,591

 
$
(70,234
)
 
$

 
$
66,357

 
 
 
 
 
 
 
 
 
Liability derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
110,960

 
$
(70,234
)
 
$

 
$
40,726

As of December 31, 2015
 
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
 
$
417,397

 
$
(19,909
)
 
$

 
$
397,488

 
 
 
 
 
 
 
 
 
Liability derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
23,434

 
$
(19,909
)
 
$

 
$
3,525

 

16

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

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 may be required to be deposited with the counterparty.  The additional collateral can be up to 100% of the derivative liability.  As of June 30, 2016, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $42.0 million, for which the Company had no collateral posted on June 30, 2016.  If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade on June 30, 2016, the Company would not have been required to post any 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 June 30, 2016.  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. Having a non-investment grade rating would result in greater borrowing costs and collateral requirements than would be available if all credit ratings were investment grade. See also "Security Ratings and Financing Triggers" under Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

H.            Fair Value Measurements
 
The Company records its financial instruments, principally derivative instruments, at fair value in its Condensed Consolidated Balance Sheets.  The Company estimates the fair value using quoted market prices, where available.  If quoted market prices are not available, fair value is based upon models that use market-based parameters as inputs, including 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 and credit default swaps rates where available.

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 in Level 2 primarily include the Company’s swap and collar agreements. There were no transfers between Level 1 and 2 during the periods presented. There were no transfers into or out of Level 3 during the periods presented. The Company recognizes transfers between Levels as of the actual date of the event or change in circumstances that caused the transfer.

The fair value of the commodity swaps included in Level 2 is based on standard industry income approach models that use significant observable inputs, including New York Mercantile Exchange (NYMEX) forward curves, LIBOR-based discount rates, basis forward curves and propane forward curves.  The Company’s collars and options are valued using standard industry income approach option models. The significant observable inputs utilized by the option pricing models include NYMEX forward curves, natural gas volatilities and LIBOR-based discount rates. The NYMEX forward curves, LIBOR-based discount rates, natural gas volatilities, basis forward curves and propane 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 June 30, 2016
 
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
 
$
136,591

 
$

 
$
136,591

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 
 
 

Derivative instruments, at fair value
 
$
110,960

 
$

 
$
110,960

 
$



17

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

 
 
 
 
Fair value measurements at reporting date using
Description
 
As of December 31, 2015
 
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
 
$
417,397

 
$

 
$
417,397

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
23,434

 
$

 
$
23,434

 
$

 
The carrying value of cash equivalents, accounts receivable, amounts due to/from related parties and accounts payable approximate fair value due to the short-term maturity of the instruments. The carrying value of borrowings under EQM’s credit facility approximates fair value as the interest rates are based on prevailing market rates.
 
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 total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.0 billion at June 30, 2016 and $2.8 billion at December 31, 2015. The carrying value of total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $2.8 billion at June 30, 2016 and December 31, 2015.

I.                       Income Taxes
 
Prior to 2016, the Company had historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring items) for the reporting period. The Company used a discrete effective tax rate method to calculate taxes for the six month period ended June 30, 2016. The Company determined that the historical method would not provide a reliable estimate for the six month period ended June 30, 2016, as small fluctuations in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate.

All of EQGP’s income is included in the Company’s net income. However, the Company is not required to record income tax expense with respect to the portion of EQGP’s income allocated to the noncontrolling public limited partners of EQGP and EQM, which reduces the Company’s effective tax rate in periods when the Company has consolidated pretax income and increases the Company's effective tax rate in periods when the Company has consolidated pretax loss.
 
The Company’s effective income tax rate for the six months ended June 30, 2016 was 64.1%, compared to negative 2.7% for the six months ended June 30, 2015. The effective income tax rate for the six months ended June 30, 2016 was higher than the U.S. federal statutory rate of 35% primarily driven by the effect of income allocated to the noncontrolling limited partners of EQGP and EQM. Due to the Company's consolidated pretax loss for the six months ended June 30, 2016, primarily caused by lower realized commodity prices and losses on derivatives not designated as hedges at the EQT Production segment, EQGP's income allocated to the noncontrolling limited partners increased the effective income tax rate for the period. The increase in the effective income tax rate was also partly attributable to the tax benefit generated from a pre-tax loss on state income tax paying entities.

Excluding the impact of the Internal Revenue Service (IRS) guidance received by the Company (discussed below), the effective income tax rate for the six months ended June 30, 2015 was 10.5%. The effective income tax rate differed from the U.S. federal statutory rate of 35% primarily attributable to income allocated to the noncontrolling limited partners of EQGP and EQM.


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

The Company’s income tax expense was lower for the three and six months ended June 30, 2015 due to a realized $35.7 million tax benefit in connection with IRS guidance received by the Company in 2015 regarding the Company’s sale of Equitable Gas Company, LLC, a regulated entity, in 2013. The transaction included a partial like-kind exchange of assets that resulted in tax deferral for the Company. However, in order to be in compliance with the normalization rules of the Internal Revenue Code, the IRS guidance held that the deferred tax liability associated with the exchanged regulatory assets should not be considered for ratemaking purposes. As a result, during the second quarter of 2015, the Company recorded a regulatory asset equal to the taxes deferred from the exchange and an associated income tax benefit. The regulatory asset and deferred taxes will be recognized when the assets are disposed of in a taxable transaction such as a drop down transaction or amortized over the 32-year remaining life of the assets received in the exchange, in either event increasing tax expense at that time.

There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended June 30, 2016.  The Company believes that it is appropriately reserved for uncertain tax positions. 

J.                       Revolving Credit Facilities

The Company has a $1.5 billion unsecured revolving credit facility that expires in February 2019. The Company had no borrowings or letters of credit outstanding under its revolving credit facility as of June 30, 2016 or December 31, 2015 or at any time during the three and six months ended June 30, 2016 and 2015.
 
EQM has a $750 million credit facility that expires in February 2019, and EQM had no borrowings and no letters of credit outstanding under its revolving credit facility as of June 30, 2016. As of December 31, 2015, EQM had $299 million of borrowings and no letters of credit outstanding under its revolving credit facility. The maximum amount of outstanding borrowings under EQM’s revolving credit facility at any time during the three and six months ended June 30, 2016 was $128 million and $299 million, respectively. The maximum amount of outstanding borrowings under EQM’s revolving credit facility at any time during the three and six months ended June 30, 2015 was $323.0 million and $390.0 million, respectively. The average daily balance of loans outstanding under EQM’s credit facility was approximately $33 million and $83 million at a weighted average annual interest rate of 1.9% for the three and six months ended June 30, 2016. The average daily balance of loans outstanding under EQM’s credit facility was approximately $302 million and $182 million during the three and six months ended June 30, 2015, respectively, at a weighted average annual interest rate of 1.7% for both periods.
 
The Company incurred commitment fees averaging approximately 6 basis points for each of the three months ended June 30, 2016 and 2015, and 11 basis points for each of the six months ended June 30, 2016 and 2015, to maintain credit availability under its revolving credit facility. EQM incurred commitment fees averaging approximately 6 basis points for each of the three months ended June 30, 2016 and 2015, and 11 basis points for each of the six months ended June 30, 2016 and 2015, to maintain credit availability under its revolving credit facility.

K.                            Earnings Per Share
 
In periods when the Company reports a net loss, all options and restricted stock are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on loss per share. As a result, due to the Company being in a net loss position for the three and six months ended June 30, 2016, all options and all restricted stock were excluded from the calculation of diluted earnings per share and totaled 1,760,780 and 1,859,890 for the three and six months ended June 30, 2016, respectively. Potentially dilutive securities, consisting of options and restricted stock, which were included in the calculation of diluted earnings per share totaled 422,170 and 530,972 for the three and six months ended June 30, 2015, respectively. Options to purchase common stock which were excluded from potentially dilutive securities because they were anti-dilutive totaled 133,500 for the three and six months ended June 30, 2015. The impact of EQM’s and EQGP’s dilutive units did not have a material impact on the Company’s earnings per share calculations for any of the periods presented.


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

L.         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 June 30, 2016
 
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, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of April 1, 2016
$
52,338

 
$
(807
)
 
$
(17,328
)
 
$
34,203

(Gains) losses reclassified from accumulated OCI, net of tax
(15,940
)
(a)
36

(a)
9,622

(b)
(6,282
)
Accumulated OCI (loss), net of tax, as of June 30, 2016
$
36,398

 
$
(771
)
 
$
(7,706
)
 
$
27,921


 
Three Months Ended June 30, 2015
 
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, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of April 1, 2015
$
176,370

 
$
(951
)
 
$
(16,438
)
 
$
158,981

(Gains) losses reclassified from accumulated OCI, net of tax
(42,581
)
(a)
36

(a)
202

(b)
(42,343
)
Accumulated OCI (loss), net of tax, as of June 30, 2015
$
133,789

 
$
(915
)
 
$
(16,236
)
 
$
116,638


 
Six Months Ended June 30, 2016
 
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, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2016
$
64,762

 
$
(843
)
 
$
(17,541
)
 
$
46,378

(Gains) losses reclassified from accumulated OCI, net of tax
(28,364
)
(a)
72

(a)
9,835

(b)
(18,457
)
Accumulated OCI (loss), net of tax, as of June 30, 2016
$
36,398

 
$
(771
)
 
$
(7,706
)
 
$
27,921


 
Six Months Ended June 30, 2015
 
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, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2015
$
217,121

 
$
(987
)
 
$
(16,640
)
 
$
199,494

(Gains) losses reclassified from accumulated OCI, net of tax
(83,332
)
(a)
72

(a)
404

(b)
(82,856
)
Accumulated OCI (loss), net of tax, as of June 30, 2015
$
133,789

 
$
(915
)
 
$
(16,236
)
 
$
116,638

       
(a)   See Note G 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 14 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and Note M for additional information.

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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



M.         Pension Termination

In December 2015, the Company announced the termination of the EQT Corporation Retirement Plan for Employees (Retirement Plan) effective December 31, 2015, subject to regulatory approval. On March 2, 2016, the IRS issued a favorable determination letter for the termination of the Retirement Plan. On June 28, 2016, the Company purchased annuities from, and transferred the Retirement Plan assets and liabilities to, American General Life Insurance Company (AGL). As a result, the Company reclassified actuarial loss remaining in accumulated other comprehensive loss of approximately $9.4 million to earnings and approximately $5.1 million to a regulatory asset that will be amortized for rate recovery purposes over a period of 16 years. In connection with the purchase of annuities, the Company made a cash payment of approximately $5.4 million to fully fund the Retirement Plan upon liquidation during the second quarter of 2016.

N.         Subsequent Event

On July 8, 2016, the Company acquired approximately 62,500 net acres primarily in Wetzel, Tyler, and Harrison Counties of West Virginia, from Statoil USA Onshore Properties, Inc. (Statoil) in exchange for cash of approximately $407.0 million, subject to post-closing purchase price adjustments. The acreage includes current natural gas production of approximately 50 MMcfe per day. The acquisition also includes drilling rights on an estimated 53,000 net acres that are undeveloped and prospective for the deep Utica.

The inputs required for the completion of the purchase price allocation were unavailable prior to the filing of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission. As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major asset classes acquired and liabilities assumed, including the information required for the valuation of intangible assets and goodwill (if any). The Company will include this information in its Quarterly Report on Form 10-Q for the quarter ending September 30, 2016.

O.        Recently Issued Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (FASB) issued 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 supersede most of the existing revenue recognition requirements in United States GAAP when it becomes effective and is required to be adopted using one of two retrospective application methods. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which approved a one year deferral of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which improves the understandability of the implementation guidance on principal versus agent considerations. In March 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance. Early application of these ASUs are permitted as of the original effective date for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related disclosures.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation. The standard changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The Company adopted this standard in the first quarter of 2016 which had no significant impact on reported results. See Note E for additional disclosures required as a result of the adoption of this standard.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The changes promulgated by this standard primarily affect the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, with early adoption of certain provisions permitted. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.
 

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EQT Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The ASU will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. While the Company is currently evaluating the provisions of this ASU to determine the impact this standard will have on its financial statements and related disclosures, the primary effect of adopting the new standard will be to record assets and obligations for instruments currently designated as operating leases.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU is part of the initiative to reduce complexity in accounting standards. The areas for simplification in this ASU involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.


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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, Utica 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; 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 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 (EQM) and other asset sales, joint ventures or other transactions involving the Company’s assets; acquisition transactions; natural gas prices and changes in basis; potential future impairments of the Company's assets; reserves; projected capital expenditures; the expected use of proceeds from equity offerings; 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. 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, many of which are difficult to predict and beyond the Company’s control.  The 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”, and elsewhere in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
 
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. 

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

CORPORATE OVERVIEW
 
Three Months Ended June 30, 2016 vs. Three Months Ended June 30, 2015
 
Net loss attributable to EQT Corporation for the three months ended June 30, 2016 was $258.6 million, a loss of $1.55 per diluted share, compared with net income attributable to EQT Corporation of $5.5 million, $0.04 per diluted share, for the three months ended June 30, 2015. The $264.2 million decrease between periods was primarily attributable to a loss on derivatives not designated as hedges, a 23% decrease in the average realized price for production sales volumes, higher operating expenses and higher net income attributable to noncontrolling interests, partially offset by larger income tax benefit, increased production sales volumes and increased gathering and transmission revenues.

The $234.7 million loss on derivatives not designated as hedges for the three months ended June 30, 2016 primarily related to unfavorable changes in the fair market value of EQT Production's New York Mercantile Exchange (NYMEX) swaps due to an increase in forward NYMEX prices during the second quarter of 2016.
 
The average realized price to EQT Corporation for production sales volumes was $2.11 per Mcfe for the three months ended June 30, 2016 compared to $2.75 per Mcfe for the three months ended June 30, 2015. The decrease in the average realized price was driven by lower NYMEX natural gas prices including the impact of cash settled derivatives and lower natural gas liquids (NGLs) prices partly offset by an increase in average differential to NYMEX.

The average NYMEX natural gas index price was $1.95 per MMBtu during the second quarter of 2016, 26% lower than the average index price of $2.64 per MMBtu during the second quarter of 2015. However, the average differential increased $0.19 per Mcf primarily as a result of higher basis in the Appalachian Basin. The average NGL price was $15.53 per barrel for the three months ended June 30, 2016 compared to $18.67 per barrel for the three months ended June 30, 2015.

Net income attributable to noncontrolling interests of EQT GP Holdings, LP (EQGP) and EQM was $77.8 million for the three months ended June 30, 2016 compared to $58.2 million for the three months ended June 30, 2015. The $19.6 million increase was primarily the result of increased net income at EQM and increased noncontrolling interests as a result of EQM’s November 2015 public offering of common units, EQGP’s May 2015 initial public offering (IPO), and EQM’s issuances of common units in connection with the $750 million ATM Program (as defined in Note C to the Condensed Consolidated Financial Statements). During 2016 and 2015, EQM issued 2,949,309 common units and 1,162,475 common units, respectively, pursuant to the $750 million ATM Program. In May 2015, EQGP completed an IPO of 26,450,000 common units representing limited partner interests in EQGP, which represented 9.9% of EQGP’s outstanding limited partner interests. The Company retained a 90.1% limited partner interest and a non-economic general partner interest in EQGP. In November 2015, EQM completed a public offering of 5,650,000 common units.

Income tax benefit was $172.3 million for the three months ended June 30, 2016, compared to income tax benefit of $64.9 million for the three months ended June 30, 2015. The increase in the income tax benefit was primarily attributable to the reduction in EQT Production segment operating income resulting primarily from lower realized commodity prices, the 2016 mark to market loss on derivatives not designated as hedges and a pre-tax loss recorded on state income tax paying entities. The Company’s effective income tax rate differed from the U.S. Federal statutory rate of 35% for both periods as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of EQGP income, but is not required to record an income tax provision with respect to the portion of the income allocated to EQGP and EQM noncontrolling public limited partners. The income tax benefit during the three months ended June 30, 2015 was primarily attributable to a $35.7 million tax benefit received in connection with Internal Revenue Service (IRS) guidance received by the Company in 2015 regarding the Company’s 2013 sale of Equitable Gas Company, LLC, a regulated entity, and the impact of the income allocated to the EQGP and EQM noncontrolling public limited partners.


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

On May 2, 2016, the Company entered into an Underwriting Agreement with Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC, as representatives of the several underwriters named in the Underwriting Agreement (the Underwriters), providing for the offer and sale by the Company (the May Offering), and the purchase by the Underwriters, of 10,500,000 shares of the Company's common stock, no par value (Common Stock), at a price to the public of $67.00 per share. Pursuant to the Underwriting Agreement, the Company also granted the Underwriters an option for a period of 30 days to purchase up to an additional 1,575,000 shares of Common Stock (the May Option Shares) on the same terms. On May 3, 2016, the Underwriters exercised in full their option to purchase the May Option Shares. The May Offering closed on May 6, 2016, and the Company received net proceeds from the May Offering of approximately $795.6 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company used a portion of the net proceeds from the May Offering to fund the Statoil acquisition discussed in Note N to the Condensed Consolidated Financial Statements, and intends to use the remainder for general corporate purposes.

Six Months Ended June 30, 2016 vs. Six Months Ended June 30, 2015
 
Net loss attributable to EQT Corporation for the six months ended June 30, 2016 was $253.0 million, a loss of $1.56 per diluted share, compared with net income attributable to EQT Corporation for the six months ended June 30, 2015 of $179.0 million, $1.17 per diluted share. The $432.0 million decrease between periods was primarily attributable to a 30% decrease in the average realized price for production sales volumes, a loss on derivatives not designated as hedges, higher operating expenses and higher net income attributable to noncontrolling interests partially offset by increased production sales volumes, higher income tax benefit and increased gathering and transmission revenues.
 
The average realized price to EQT Corporation for production sales volumes was $2.37 per Mcfe for the six months ended June 30, 2016 compared to $3.40 per Mcfe for the six months ended June 30, 2015. The decrease in the average realized price was driven by lower NYMEX natural gas prices including the impact of cash settled derivatives, a lower average differential to NYMEX and lower NGL prices.

The average NYMEX natural gas index price was $2.02 per MMBtu during the six months ended June 30, 2016, 28% lower than the average index price of $2.81 per MMBtu during the six months ended June 30, 2015. In addition, the average differential decreased $0.09 per Mcf as a result of lower ultimate sales prices, particularly in the United States Northeast region in the first quarter 2016, partly offset by favorable cash settled basis swaps. The average NGL price was $15.23 per barrel for the six months ended June 30, 2016 compared to $21.87 per barrel for the six months ended June 30, 2015.

The $125.7 million loss on derivatives not designated as hedges for the six months ended June 30, 2016 primarily related to unfavorable changes in the fair market value of EQT Production's NYMEX swaps due to an increase in forward NYMEX prices during the first half of 2016.

Net income attributable to noncontrolling interests of EQGP and EQM was $160.6 million for the six months ended June 30, 2016 compared to $106.0 million for the six months ended June 30, 2015. The $54.7 million increase was primarily the result of increased net income at EQM and increased noncontrolling interests as a result of EQM’s March 2015 and November 2015 public offerings of common units, EQGP’s May 2015 IPO, and EQM’s issuances of common units in connection with the $750 million ATM Program. During 2016 and 2015, EQM issued 2,949,309 common units and 1,162,475 common units, respectively, pursuant to the $750 million ATM Program. In March 2015, EQM completed a public offering of 9,487,500 EQM common units in connection with EQM's acquisition of the Northern West Virginia Marcellus gathering system from the Company. In May 2015, EQGP completed an IPO of 26,450,000 common units representing limited partner interests in EQGP, which represented 9.9% of EQGP’s outstanding limited partner interests. The Company retained a 90.1% limited partner interest and a non-economic general partner interest in EQGP. In November 2015, EQM completed a public offering of 5,650,000 common units.


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

Income tax benefit was $164.9 million for the six months ended June 30, 2016, compared to income tax benefit of $7.5 million for the six months ended June 30, 2015. The Company’s effective income tax rate was 64.1% and negative 2.7% for the six months ended June 30, 2016 and 2015, respectively. The increase in income tax benefit was primarily attributable to the effect of income allocated to the noncontrolling limited parters of EQGP and EQM, a reduction in EQT Production segment operating income primarily resulting from lower realized commodity prices and a mark to market loss on derivatives not designated as hedges. The Company’s effective tax rate differed from the U.S Federal statutory rate of 35% for both periods as the Company consolidates 100% of the pre-tax income related to the noncontrolling public limited partners’ share of EQGP income, but is not required to record an income tax provision with respect to the portion of the income allocated to EQGP and EQM noncontrolling public limited partners. The income tax benefit during the six months ended June 30, 2015 was primarily attributable to a $35.7 million tax benefit received in connection with IRS guidance received by the Company in 2015 regarding the Company’s 2013 sale of Equitable Gas Company, LLC, a regulated entity, and the impact of the income allocated to the EQGP and EQM noncontrolling public limited partners.

On May 2, 2016, the Company entered into an Underwriting Agreement with Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC, as representatives of the Underwriters, providing for the offer and sale by the Company, and the purchase by the Underwriters, of 10,500,000 shares of Common Stock, at a price to the public of $67.00 per share. Pursuant to the Underwriting Agreement, the Company also granted the Underwriters an option for a period of 30 days to purchase the May Option Shares on the same terms. On May 3, 2016, the Underwriters exercised in full their option to purchase the May Option Shares. The May Offering closed on May 6, 2016, and the Company received net proceeds from the May Offering of approximately $795.6 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company used a portion of the net proceeds from the May Offering to fund the Statoil acquisition, and intends to use the remainder for general corporate purposes.

On February 19, 2016, the Company entered into an Underwriting Agreement with Goldman, Sachs & Co. (Goldman) providing for the offer and sale by the Company (February Offering), and the purchase by Goldman, of 6,500,000 Common Stock, at a price to the public of $58.50 per share. Pursuant to the Underwriting Agreement, the Company also granted Goldman an option for a period of 30 days to purchase up to 975,000 additional shares of Common Stock (February Option Shares) on the same terms. On February 22, 2016, Goldman exercised in full its option to purchase the February Option Shares. The February Offering closed on February 24, 2016, and the Company received net proceeds from the February Offering of approximately $430.4 million, after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds from the February Offering for general corporate purposes.

As a result of declining production volumes in the Company’s non-core Huron play and the depressed commodity price environment, the Company consolidated its Huron operations in Kentucky, Virginia, and southern West Virginia during the first quarter of 2016. The consolidation is expected to improve the Company’s cost structure for its Huron operations.  The Company recorded restructuring charges of $4.2 million related to the Huron operations consolidation in March 2016.

See “Business Segment Results of Operations” for a discussion of production sales volumes and gathering and transmission firm reservation revenues.

See “Investing Activities” under the caption “Capital Resources and Liquidity” for a discussion of capital expenditures.

Consolidated Operational Data
 
The following operational information presents detailed liquid and natural gas operational information to assist in the understanding of the Company’s consolidated operations. The operational information in the table below presents an average realized price ($/Mcfe), which is based on EQT Production adjusted operating revenues, a non-GAAP supplemental financial measure. EQT Production adjusted operating revenues is presented because it is an important measure used by the Company’s management to evaluate period-to-period comparisons of earnings trends. EQT Production adjusted operating revenues should not be considered as an alternative to EQT Corporation total operating revenues as reported in the Statements of Consolidated (Loss) Income, the most directly comparable GAAP financial measure. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of EQT Production adjusted operating revenues to EQT Corporation total operating revenues.

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
in thousands (unless noted)
 
2016
 
2015
 
%
 
2016
 
2015
 
%
NATURAL GAS
 
 
 
 
 
 

 
 
 
 
 
 
Sales volume (MMcf)
 
167,741

 
133,469

 
25.7

 
333,015

 
264,376

 
26.0

NYMEX price ($/MMBtu) (a)
 
$
1.95

 
$
2.64

 
(26.1
)
 
$
2.02

 
$
2.81

 
(28.1
)
Btu uplift
 
$
0.16

 
$
0.23

 
(30.4
)
 
$
0.17

 
$
0.25

 
(32.0
)
Natural gas price ($/Mcf)
 
$
2.11

 
$
2.87

 
(26.5
)
 
$
2.19

 
$
3.06

 
(28.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basis ($/Mcf) (b)
 
$
(0.75
)
 
$
(0.96
)
 
(21.9
)
 
$
(0.58
)
 
$
(0.37
)
 
56.8

Cash settled basis swaps (not designated as hedges) ($/Mcf)
 
(0.04
)
 
(0.02
)
 
100.0

 
0.08

 
(0.04
)
 
(300.0
)
Average differential, including cash settled basis swaps ($/Mcf)
 
$
(0.79
)
 
$
(0.98
)
 
(19.4
)
 
$
(0.50
)
 
$
(0.41
)
 
22.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Average adjusted price ($/Mcf)
 
$
1.32

 
$
1.89

 
(30.2
)
 
$
1.69

 
$
2.65

 
(36.2
)
Cash settled derivatives (cash flow hedges) ($/Mcf)
 
0.16

 
0.53