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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   x
 
 
Accelerated Filer                  ¨
 
Emerging Growth Company       ¨
Non-Accelerated Filer     ¨
(Do not check if a
smaller reporting company)
 
Smaller Reporting Company  ¨
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
 
As of September 30, 2017, 173,343 (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 Operations (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, oil and NGLs
$
552,953

 
$
403,939

 
$
1,803,132

 
$
1,072,898

Pipeline and net marketing services
71,735

 
59,431

 
222,904

 
188,770

Gain (loss) on derivatives not designated as hedges
35,625

 
93,356

 
222,693

 
(32,342
)
Total operating revenues
660,313

 
556,726

 
2,248,729

 
1,229,326

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Transportation and processing
136,219

 
89,883

 
404,743

 
251,283

Operation and maintenance
20,604

 
18,198

 
61,471

 
51,687

Production
39,630

 
38,999

 
129,812

 
126,092

Exploration
2,436

 
2,671

 
9,039

 
9,385

Selling, general and administrative
77,170

 
61,430

 
206,237

 
196,765

Depreciation, depletion and amortization
246,560

 
237,088

 
719,295

 
682,948

Total operating expenses
522,619

 
448,269

 
1,530,597

 
1,318,160

 
 
 
 
 
 
 
 
Operating income (loss)
137,694

 
108,457

 
718,132

 
(88,834
)
 
 
 
 
 
 
 
 
Other income
6,859

 
10,715

 
16,878

 
23,199

Interest expense
50,377

 
35,984

 
137,110

 
108,469

Income (loss) before income taxes
94,176

 
83,188

 
597,900

 
(174,104
)
Income tax (benefit) expense
(11,281
)
 
13,084

 
119,093

 
(151,826
)
Net income (loss)
105,457

 
70,104

 
478,807

 
(22,278
)
Less: Net income attributable to noncontrolling interests
82,117

 
78,120

 
250,349

 
238,747

Net income (loss) attributable to EQT Corporation
$
23,340

 
$
(8,016
)
 
$
228,458

 
$
(261,025
)
 
 
 
 
 
 
 
 
Earnings per share of common stock attributable to EQT Corporation:
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

Weighted average common stock outstanding
173,476

 
172,867

 
173,368

 
165,197

Net income (loss)
$
0.13

 
$
(0.05
)
 
$
1.32

 
$
(1.58
)
Diluted:
 

 
 

 
 

 
 

Weighted average common stock outstanding
173,675

 
172,867

 
173,572

 
165,197

Net income (loss)
$
0.13

 
$
(0.05
)
 
$
1.32

 
$
(1.58
)
Dividends declared per common share
$
0.03

 
$
0.03

 
$
0.09

 
$
0.09

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

3

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EQT CORPORATION AND SUBSIDIARIES
 
Statements of Consolidated Comprehensive Income (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands)
Net income (loss)
$
105,457

 
$
70,104

 
$
478,807

 
$
(22,278
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 

 
 

 
 

 
 

Net change in cash flow hedges:
 

 
 

 
 

 
 

Natural gas, net of tax benefit of $(955), $(9,894), $(2,640), and $(28,934)
(1,451
)
 
(14,740
)
 
(4,011
)
 
(43,104
)
Interest rate, net of tax expense of $26, $26, $78, and $78
36

 
36

 
108

 
108

Pension and other post-retirement benefits liability adjustment,
net of tax expense of $49, $52, $148, and $6,287
77

 
82

 
230

 
9,917

Other comprehensive loss
(1,338
)
 
(14,622
)
 
(3,673
)
 
(33,079
)
Comprehensive income (loss)
104,119

 
55,482

 
475,134

 
(55,357
)
Less: Comprehensive income attributable to noncontrolling interests
82,117

 
78,120

 
250,349

 
238,747

Comprehensive income (loss) attributable to EQT Corporation
$
22,002

 
$
(22,638
)
 
$
224,785

 
$
(294,104
)
 
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)

 
Nine Months Ended September 30,
 
2017
 
2016
 
(Thousands)
Cash flows from operating activities:
 
Net income (loss)
$
478,807

 
$
(22,278
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Deferred income taxes
121,704

 
(145,739
)
Depreciation, depletion and amortization
719,295

 
682,948

Lease impairments
5,053

 
5,498

(Recoveries of) provision for losses on accounts receivable
(1,230
)
 
1,165

Other income
(16,878
)
 
(23,199
)
Stock-based compensation expense
27,894

 
34,551

(Gain) loss on derivatives not designated as hedges
(222,693
)
 
32,342

Cash settlements (paid) received on derivatives not designated as hedges
(6,837
)
 
222,516

Pension settlement charge

 
9,403

Changes in other assets and liabilities:
 

 
 

Accounts receivable
64,057

 
(11,521
)
Accounts payable
(15,446
)
 
(12,916
)
Other items, net
57,646

 
(5,071
)
Net cash provided by operating activities
1,211,372

 
767,699

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(1,152,865
)
 
(1,193,321
)
Capital expenditures for acquisitions
(818,957
)
 
(412,348
)
Sales of investments in trading securities
283,758

 

Capital contributions to Mountain Valley Pipeline, LLC
(103,448
)
 
(76,297
)
Sales of interests in Mountain Valley Pipeline, LLC

 
12,533

Restricted cash, net
75,000

 

Net cash used in investing activities
(1,716,512
)
 
(1,669,433
)
 
 
 
 
Cash flows from financing activities:
 

 
 

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

 
1,225,999

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

 
217,102

Increase in borrowings on EQT Midstream Partners, LP credit facilities
334,000

 
430,000

Decrease in borrowings on EQT Midstream Partners, LP credit facilities
(229,000
)
 
(638,000
)
Dividends paid
(15,620
)
 
(14,966
)
Distributions to noncontrolling interests
(172,498
)
 
(137,719
)
Proceeds from awards under employee compensation plans

 
2,040

Cash paid for taxes related to net settlement of share-based incentive awards
(18,030
)
 
(26,517
)
Debt issuance costs and revolving credit facility origination fees
(13,679
)
 

Repurchase of common stock
(15
)
 
(23
)
Net cash (used in) provided by financing activities
(114,842
)
 
1,057,916

Net change in cash and cash equivalents
(619,982
)
 
156,182

Cash and cash equivalents at beginning of period
1,103,540

 
1,601,232

Cash and cash equivalents at end of period
$
483,558

 
$
1,757,414

 
 
 
 
Cash paid during the period for:
 

 
 

Interest, net of amount capitalized
$
113,618

 
$
88,281

Income taxes, net
$
9,702

 
$
1,294

 

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

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EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
September 30, 2017
 
December 31, 2016
 
(Thousands)
Assets
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
483,558

 
$
1,103,540

Trading securities

 
286,396

Accounts receivable (less accumulated provision for doubtful accounts:
$5,663 at September 30, 2017 and $6,923 at December 31, 2016)
279,201

 
341,628

Derivative instruments, at fair value
67,555

 
33,053

Prepaid expenses and other
28,144

 
63,602

Total current assets
858,458

 
1,828,219

 
 
 
 
Property, plant and equipment
20,296,620

 
18,216,775

Less: accumulated depreciation and depletion
5,755,358

 
5,054,559

Net property, plant and equipment
14,541,262

 
13,162,216

 
 
 
 
Restricted cash

 
75,000

Investment in nonconsolidated entity
339,978

 
184,562

Other assets
244,950

 
222,925

Total assets
$
15,984,648

 
$
15,472,922

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

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EQT CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)

 
September 30, 2017
 
December 31, 2016
 
(Thousands)
Liabilities and Shareholders’ Equity
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Current portion of long-term debt
$
707,470

 
$

Accounts payable
388,059

 
309,978

Derivative instruments, at fair value
71,374

 
257,943

Other current liabilities
268,356

 
236,719

Total current liabilities
1,435,259

 
804,640

 
 
 
 
Credit facility borrowings
105,000

 

Long-term debt
2,586,041

 
3,289,459

Deferred income taxes
1,866,208

 
1,760,004

Other liabilities and credits
567,463

 
499,572

Total liabilities
6,559,971

 
6,353,675

 
 
 
 
Equity:
 

 
 

Shareholders’ equity:
 

 
 

Common stock, no par value, authorized 320,000 shares, shares issued:
177,896 at September 30, 2017 and 177,896 at December 31, 2016
3,449,119

 
3,440,185

Treasury stock, shares at cost: 4,553 at September 30, 2017 (including 251 held in
rabbi trust) and 5,069 at December 31, 2016 (including 226 held in rabbi trust)
(81,729
)
 
(91,019
)
Retained earnings
2,721,911

 
2,509,073

Accumulated other comprehensive (loss) income
(1,631
)
 
2,042

Total common shareholders’ equity
6,087,670

 
5,860,281

Noncontrolling interests in consolidated subsidiaries
3,337,007

 
3,258,966

Total equity
9,424,677

 
9,119,247

Total liabilities and equity
$
15,984,648

 
$
15,472,922


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 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, 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
 

 
 

 
(261,025
)
 
 

 
238,747

 
(22,278
)
Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(28,934)
 
 
 
 
 
 
(43,104
)
 
 
 
(43,104
)
Interest rate, net of tax expense of $78
 
 
 
 
 
 
108

 
 
 
108

Pension and other post-retirement benefits liability adjustment, net of tax expense of $6,287
 
 
 
 
 
 
9,917

 
 
 
9,917

Dividends ($0.09 per share)
 

 
 

 
(14,966
)
 
 

 
 

 
(14,966
)
Stock-based compensation plans, net
654

 
26,211

 
 

 
 

 
161

 
26,372

Distributions to noncontrolling interests ($2.235 and $0.406 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively)
 

 
 

 
 

 
 

 
(137,719
)
 
(137,719
)
Issuance of common shares of EQT Corporation
19,550

 
1,225,999

 
 
 
 
 
 
 
1,225,999

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, September 30, 2016
172,758

 
$
3,326,704

 
$
2,706,221

 
$
13,299

 
$
3,228,055

 
$
9,274,279

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
172,827

 
$
3,349,166

 
$
2,509,073

 
$
2,042

 
$
3,258,966

 
$
9,119,247

Comprehensive income (net of tax):
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
 

 
228,458

 
 

 
250,349

 
478,807

Net change in cash flow hedges:
 

 
 

 
 

 
 
 
 

 
 
Natural gas, net of tax benefit of $(2,640)
 
 
 
 
 
 
(4,011
)
 
 
 
(4,011
)
Interest rate, net of tax expense of $78
 
 
 
 
 
 
108

 
 
 
108

Other post-retirement benefit liability adjustment, net of tax expense of $148
 
 
 
 
 
 
230

 
 
 
230

Dividends ($0.09 per share)
 

 
 

 
(15,620
)
 
 

 
 

 
(15,620
)
Stock-based compensation plans, net
516

 
18,224

 
 

 
 

 
190

 
18,414

Distributions to noncontrolling interests ($2.675 and $0.578 per common unit from EQT Midstream Partners, LP and EQT GP Holdings, LP, respectively)
 

 
 

 
 

 
 

 
(172,498
)
 
(172,498
)
Balance, September 30, 2017
173,343

 
$
3,367,390

 
$
2,721,911

 
$
(1,631
)
 
$
3,337,007

 
$
9,424,677

 
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 September 30, 2017 and December 31, 2016, the results of its operations for the three and nine month periods ended September 30, 2017 and 2016 and its cash flows and equity for the nine month periods ended September 30, 2017 and 2016.  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.
 
As of December 31, 2016, the Company reports its results of operations through three business segments: EQT Production, EQT Gathering and EQT Transmission. The segment disclosures and discussions contained in this Quarterly Report on Form 10-Q have been recast to reflect the current reporting structure for all periods presented. Certain previously reported amounts have been reclassified to conform to the current year presentation under the current segment reporting structure.

The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.

For further information on the Company, 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, 2016, 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 September 30, 2017, 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. Through EQGP's general partner interest, limited partner interest and IDRs in EQM, EQGP has a controlling financial interest in EQM; therefore, EQGP consolidates EQM. The Company is the ultimate parent company of EQGP and EQM.

The Company consolidates the results of EQGP but records an income tax provision only on its ownership percentage of EQGP earnings.  The Company records the noncontrolling interest of the EQGP and EQM public limited partners (i.e., the EQGP limited partner interests not owned by the Company and the EQM limited partner interests not owned by EQGP) in its financial statements.

On October 24, 2017, the Board of Directors of EQGP's general partner declared a cash distribution to EQGP’s unitholders for the third quarter of 2017 of $0.228 per common unit, or approximately $60.7 million.  The distribution will be paid on November 22, 2017 to unitholders of record, including the Company, at the close of business on November 3, 2017.

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 financial statements. The Company records the noncontrolling interest of the EQM public limited partners in its financial statements.

On October 24, 2017, the Board of Directors of EQM's general partner declared a cash distribution to EQM’s unitholders for the third quarter of 2017 of $0.980 per common unit. The cash distribution will be paid on November 14, 2017 to unitholders of record, including EQGP, at the close of business on November 3, 2017. Based on the 80,581,758 EQM common units outstanding on October 26, 2017, the aggregate cash distributions by EQM to EQGP for the third quarter 2017 will be approximately $61.1 million consisting of: $21.4 million in respect of its limited partner interest, $2.1 million in respect of its general partner interest and $37.6

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

million in respect of its IDRs. These distribution amounts to EQGP related to 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 third quarter 2017 distribution.

D.        Investment in Nonconsolidated Entity

As of September 30, 2017, EQM owned a 45.5% interest (the MVP Interest) in Mountain Valley Pipeline, LLC (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. On October 13, 2017, the Federal Energy Regulatory Commission (FERC) issued the Certificate of Public Convenience and Necessity for the project. The pipeline is targeted to be placed in-service during the fourth quarter of 2018.

The MVP Joint Venture has been determined to be a variable interest entity because it has insufficient equity to finance its 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 require the approval of owners holding more than a 66 2/3% interest in the MVP Joint Venture and no one member owns more than a 66 2/3% interest. The Company, through its ownership interest in EQM, accounts for the 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.

In August 2017, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for $48.0 million, of which $27.2 million was paid in October 2017 and the remaining $20.8 million is expected to be paid in November 2017. The capital contribution payable has been reflected on the Condensed Consolidated Balance Sheet as of September 30, 2017 with a corresponding increase to the Company's investment in the MVP Joint Venture.

EQM’s ownership share of the MVP Joint Venture's earnings for the three months ended September 30, 2017 and 2016 was $6.0 million and $2.7 million, respectively. EQM’s ownership share of the earnings for the nine months ended September 30, 2017 and 2016 was $15.4 million and $6.1 million, respectively. These earnings are reported in other income on the Statements of Consolidated Operations for the periods presented.

As of September 30, 2017, 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 proportionate share of 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 September 30, 2017, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $431 million, which consists of the investment in nonconsolidated entity balance on the Condensed Consolidated Balance Sheet as of September 30, 2017 and amounts which could have become due under EQM's performance guarantee as of that date.

E.     Consolidated Variable Interest Entities

The Company 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 limited partner interest in EQGP and EQGP's general partner interest, limited partner interest and IDRs 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. As EQT has a controlling financial interest in EQGP, and is the primary beneficiary of EQGP, EQT consolidates EQGP and EQGP consolidates EQM. See Note 12 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information related to the consolidated variable interest entities.

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, 2016, as updated by any Quarterly Reports on Form 10-Q. See further discussion of the impact that EQT's ownership and control of 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, 2016, including in the section captioned "Management's

10

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




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 the Company's Condensed Consolidated Balance Sheets that were for the use or obligation of EQGP or EQM as of September 30, 2017 and December 31, 2016.
Classification
 
September 30, 2017
 
December 31, 2016
 
 
(Thousands)
Assets:
 
 

 
 

Cash and cash equivalents
 
$
6,933

 
$
60,453

Accounts receivable
 
21,768

 
20,662

Prepaid expenses and other
 
4,196

 
5,745

Property, plant and equipment, net
 
2,745,509

 
2,578,834

Other assets
 
363,186

 
206,104

Liabilities:
 
 
 
 
Accounts payable
 
$
37,494

 
$
35,831

Other current liabilities
 
70,960

 
32,242

Credit facility borrowings
 
105,000

 

Long-term debt
 
986,947

 
985,732

Other liabilities and credits
 
9,877

 
9,562


The following table summarizes EQGP's Statements of Consolidated Operations and Cash Flows for the three and nine months ended September 30, 2017 and 2016, inclusive of affiliate amounts.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands)
Operating revenues
$
207,193

 
$
176,772

 
$
609,585

 
$
540,600

Operating expenses
62,230

 
51,138

 
180,218

 
150,548

Other expenses (income)
2,556

 
(7,452
)
 
6,418

 
(9,900
)
Net income
$
142,407

 
$
133,086

 
$
422,949

 
$
399,952

 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
159,911

 
$
102,923

 
$
479,566

 
$
378,042

Net cash used in investing activities
(117,637
)
 
(204,470
)
 
(324,936
)
 
(541,369
)
Net cash (used in) provided by financing activities
(48,128
)
 
17,454

 
(208,150
)
 
(197,367
)

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 three segments, which reflect its lines of business: EQT Production, EQT Gathering and EQT Transmission.  The EQT Production segment includes the Company’s exploration for, and development and production of, natural gas, natural gas liquids (NGLs) and a limited amount of crude oil, primarily in the Appalachian Basin.  The EQT Production segment also includes the marketing activities of the Company. The operations of EQT Gathering include the natural gas gathering activities of the Company, consisting solely of assets that are owned and operated by EQM. The operations of EQT Transmission include the natural gas transmission and storage activities of the Company, consisting solely of assets that are owned and operated by EQM.

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.

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

 
Substantially all of the Company’s operating revenues, income from operations and assets are generated or located in the United States.
Three Months Ended September 30, 2017
EQT Production
 
EQT Gathering
 
EQT Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
552,953

 
$

 
$

 
$

 
$
552,953

Pipeline and net marketing services
9,140

 
116,522

 
90,671

 
(144,598
)
 
71,735

Gain on derivatives not designated as hedges
35,625

 

 

 

 
35,625

Total operating revenues
$
597,718

 
$
116,522

 
$
90,671

 
$
(144,598
)
 
$
660,313


Three Months Ended September 30, 2016
EQT Production
 
EQT Gathering
 
EQT Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
403,939

 
$

 
$

 
$

 
$
403,939

Pipeline and net marketing services
10,797

 
99,141

 
77,631

 
(128,138
)
 
59,431

Gain on derivatives not designated as hedges
93,356

 

 

 

 
93,356

Total operating revenues
$
508,092

 
$
99,141

 
$
77,631

 
$
(128,138
)
 
$
556,726


Nine Months Ended September 30, 2017
EQT Production
 
EQT Gathering
 
EQT Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
1,803,132

 
$

 
$

 
$

 
$
1,803,132

Pipeline and net marketing services
31,656

 
330,996

 
278,589

 
(418,337
)
 
222,904

Gain on derivatives not designated as hedges
222,693

 

 

 

 
222,693

Total operating revenues
$
2,057,481

 
$
330,996

 
$
278,589

 
$
(418,337
)
 
$
2,248,729


Nine Months Ended September 30, 2016
EQT Production
 
EQT Gathering
 
EQT Transmission
 
Intersegment Eliminations
 
EQT Corporation
Revenues:
(Thousands)
Sales of natural gas, oil and NGLs
$
1,072,898

 
$

 
$

 
$

 
$
1,072,898

Pipeline and net marketing services
28,196

 
297,305

 
243,295

 
(380,026
)
 
188,770

Loss on derivatives not designated as hedges
(32,342
)
 

 

 

 
(32,342
)
Total operating revenues
$
1,068,752

 
$
297,305

 
$
243,295

 
$
(380,026
)
 
$
1,229,326


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands)
Operating income (loss):
 

 
 

 
 
 
 
EQT Production
$
12,082

 
$
(15,465
)
 
$
322,277

 
$
(468,678
)
EQT Gathering
85,817

 
72,495

 
242,716

 
218,274

EQT Transmission
59,689

 
53,715

 
188,995

 
174,085

Unallocated expenses (a)
(19,894
)
 
(2,288
)
 
(35,856
)
 
(12,515
)
Total operating income (loss)
$
137,694

 
$
108,457

 
$
718,132

 
$
(88,834
)

(a)
Unallocated expenses consist primarily of compensation expense and administrative costs, including the Rice Merger (defined in Note N) acquisition-related expenses.


12

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

Reconciliation of operating income (loss) to net income (loss):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands)
 
 
 
 
Total operating income (loss)
$
137,694

 
$
108,457

 
$
718,132

 
$
(88,834
)
Other income
6,859

 
10,715

 
16,878

 
23,199

Interest expense
50,377

 
35,984

 
137,110

 
108,469

Income tax (benefit) expense
(11,281
)
 
13,084

 
119,093

 
(151,826
)
Net income (loss)
$
105,457

 
$
70,104

 
$
478,807

 
$
(22,278
)

 
As of September 30, 2017
 
As of December 31, 2016
 
(Thousands)
Segment assets:
 

 
 

EQT Production
$
12,071,776

 
$
10,923,824

EQT Gathering
1,367,487

 
1,225,686

EQT Transmission
1,442,068

 
1,399,201

Total operating segments
14,881,331

 
13,548,711

Headquarters assets, including cash and short-term investments
1,103,317

 
1,924,211

Total assets
$
15,984,648

 
$
15,472,922


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands)
Depreciation, depletion and amortization:
 

 
 

 
 
 
 
EQT Production
$
224,103

 
$
220,768

 
$
654,411

 
$
635,253

EQT Gathering
9,983

 
7,663

 
28,398

 
22,520

EQT Transmission
12,261

 
6,976

 
35,793

 
20,657

Other
213

 
1,681

 
693

 
4,518

Total
$
246,560

 
$
237,088

 
$
719,295

 
$
682,948

 
 
 
 
 
 
 
 
Expenditures for segment assets (b):
 

 
 

 
 
 
 
EQT Production (c)
$
449,303

 
$
622,856

 
$
1,850,482

 
$
1,094,747

EQT Gathering
48,182

 
88,390

 
150,728

 
247,755

EQT Transmission
22,312

 
77,940

 
73,679

 
253,957

Other
2,502

 
4,693

 
7,097

 
10,395

Total
$
522,299

 
$
793,879

 
$
2,081,986

 
$
1,606,854

 
(b)
Includes the capitalized portion of non-cash stock-based compensation expense and the impact of capital accruals.
(c)
Expenditures for segment assets in the EQT Production segment included $52.1 million and $30.1 million for general leasing activity during the three months ended September 30, 2017 and 2016, respectively, and $147.0 million and $98.2 million for general leasing activity during the nine months ended September 30, 2017 and 2016, respectively. The three and nine months ended September 30, 2017 includes $7.8 million and $819.0 million of cash capital expenditures, respectively, for the acquisitions discussed in Note M. The three and nine months ended September 30, 2016 includes $412.3 million of cash capital expenditures for the acquisitions discussed in Note M. During the nine months ended September 30, 2017 and 2016, the Company also incurred $7.5 million and $6.2 million of non-cash capital expenditures for the acquisitions discussed in Note M.


13

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 typically 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 has also engaged in a limited number of swaptions and power-indexed natural gas sales and swaps that are treated as derivative commodity instruments for accounting purposes.

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 Company discontinued cash flow hedge accounting in 2014; therefore, all changes in fair value of the Company’s derivative instruments are recognized within operating revenues in the Statements of Consolidated Operations.

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 September 30, 2017 and December 31, 2016, the forecasted transactions that were hedged as of December 31, 2014 remained probable of occurring and as such, the amounts in accumulated other comprehensive income (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. As of September 30, 2017 and December 31, 2016, the Company deferred net gains of $5.6 million and $9.6 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. The Company estimates that approximately $1.9 million of net gains on its derivative commodity instruments reflected in accumulated OCI, net of tax, as of September 30, 2017 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions.

Contracts which result in physical delivery of a commodity expected to be used or sold by the Company in the normal course of business are designated as normal purchases and sales and are exempt from derivative accounting.
 
OTC arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows. 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Thousands)
Commodity derivatives designated as cash flow hedges
 
Amount of gain reclassified from accumulated OCI, net of tax, into operating revenues (effective portion)
$
1,451

 
$
14,740

 
$
4,011

 
$
43,104

 
 
 
 
 
 
 
 
Interest rate derivatives designated as cash flow hedges
 

 
 

 
 
 
 
Amount of loss reclassified from accumulated OCI, net of tax, into interest expense (effective portion)
$
(36
)
 
$
(36
)
 
$
(108
)
 
$
(108
)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

Amount of gain (loss) recognized in operating revenues
$
35,625

 
$
93,356

 
$
222,693

 
$
(32,342
)


14

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

With respect to the derivative commodity instruments held by the Company, the Company hedged portions of expected sales of equity production and portions of its basis exposure covering approximately 470 Bcf of natural gas and 1,189 Mbbls of NGLs as of September 30, 2017, and 646 Bcf of natural gas and 1,095 Mbbls of NGLs as of December 31, 2016. The open positions at September 30, 2017 and December 31, 2016 had maturities extending through December 2020.

The Company has netting agreements with financial institutions and its brokers that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The table below reflects the impact of netting agreements and margin deposits on gross derivative assets and liabilities as of September 30, 2017 and December 31, 2016
As of September 30, 2017
 
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
 
$
67,555

 
$
(42,886
)
 
$

 
$
24,669

Liability derivatives:
 
 
 
 
 
 

 
 

Derivative instruments, at fair value
 
$
71,374

 
$
(42,886
)
 
$

 
$
28,488

As of December 31, 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
 
$
33,053

 
$
(23,373
)
 
$

 
$
9,680

Liability derivatives:
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
257,943

 
$
(23,373
)
 
$

 
$
234,570

 

Certain of the Company’s derivative instrument contracts provide that if the Company’s credit ratings by Standard & Poor’s Rating Service (S&P) or Moody’s Investors Service (Moody’s) are lowered below investment grade, additional collateral must be deposited with the counterparty if the amounts outstanding on those contracts exceed certain thresholds.  The additional collateral can be up to 100% of the derivative liability.  As of September 30, 2017, the aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was $12.8 million, for which the Company had no collateral posted on September 30, 2017.  If the Company’s credit rating by S&P or Moody’s had been downgraded below investment grade on September 30, 2017, the Company would not have been required to post any additional collateral under the agreements with the respective counterparties. The required margin on the Company’s derivative instruments is subject to significant change as a result of factors other than credit rating, such as gas prices and credit thresholds set forth in agreements between the hedging counterparties and the Company. Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies. The Company’s senior unsecured debt was rated BBB by S&P and Baa3 by Moody’s at September 30, 2017.  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. See also "Security Ratings and Financing Triggers" under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."


15

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

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.

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 but not limited to New York Mercantile Exchange (NYMEX) natural gas and propane forward curves, LIBOR-based discount rates and basis forward curves. The Company’s collars, options and swaptions 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 natural gas and propane forward curves, LIBOR-based discount rates, natural gas volatilities and basis forward curves are validated to external sources at least monthly.

The following assets and liabilities were measured at fair value on a recurring basis during the applicable period:
 
 
 
 
Fair value measurements at reporting date using
Description
 
As of September 30, 2017
 
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
 
$
67,555

 
$

 
$
67,555

 
$

Liabilities
 
 
 
 
 
 
 
 
Derivative instruments, at fair value
 
$
71,374

 
$

 
$
71,374

 
$


 
 
 
 
Fair value measurements at reporting date using
Description
 
As of December 31, 2016
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
(Thousands)
Assets
 
 

 
 

 
 

 
 

Trading securities
 
$
286,396

 
$

 
$
286,396

 
$

Derivative instruments, at fair value
 
$
33,053

 
$

 
$
33,053

 
$

Liabilities
 
 

 
 

 
 

 
 

Derivative instruments, at fair value
 
$
257,943

 
$

 
$
257,943

 
$

 
The carrying values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments. The carrying values of borrowings under EQM’s credit facilities approximate fair value as the interest rates are based on prevailing market rates. These are Level 1 fair values.

As of December 31, 2016, the Company reflected its investment in trading securities as Level 2 fair value measurements. The fair values of trading securities classified as Level 2 are priced using nonbinding market prices that are corroborated by observable

16

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

market data. Inputs into these valuation techniques include actual trade data, broker/dealer quotes and other similar data. As of March 31, 2017, the Company closed its positions on all trading securities.
 
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 $3.5 billion at September 30, 2017 and December 31, 2016. The carrying value of total debt (including EQM’s long-term debt) on the Condensed Consolidated Balance Sheets was approximately $3.3 billion at September 30, 2017 and December 31, 2016.

The Company recognizes transfers between Levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Levels 1, 2 and 3 during the periods presented.

I.                       Income Taxes
 
For the nine months ended September 30, 2017, the Company calculated the provision for income taxes by applying the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring items) for the quarter. For the nine months ended September 30, 2016, the Company determined small fluctuations in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate and thus an estimated annual effective tax rate would not provide a reliable estimate for that period. As a consequence, the Company used a discrete effective tax rate method to calculate taxes for the nine months ended September 30, 2016.

All of EQGP’s income is included in the Company’s pre-tax 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 pre-tax income and increases the Company's effective tax rate in periods when the Company has consolidated pre-tax loss. The Company had consolidated pre-tax income for the nine months ended September 30, 2017, compared to a consolidated pre-tax loss for the nine months ended September 30, 2016. The Company’s effective tax rate for the nine months ended September 30, 2017 was 19.9% compared to 87.2% for the nine months ended September 30, 2016.

There were no material changes to the Company’s methodology for determining unrecognized tax benefits during the three months ended September 30, 2017

J.                       Revolving Credit Facilities

In July 2017, the Company amended and restated its $1.5 billion revolving credit facility to extend the term to July 2022.  In addition, following the closing of the Rice Merger (defined in Note N) and subject to the satisfaction of certain conditions, the borrowing capacity under the revolving credit facility will automatically increase to $2.5 billion.  The Company had no borrowings or letters of credit outstanding under its revolving credit facility as of September 30, 2017 or December 31, 2016 or at any time during the three and nine months ended September 30, 2017 and 2016.
 
In July 2017, EQM amended and restated its credit facility to increase the borrowing capacity under the facility from $750 million to $1 billion and to extend the term to July 2022. Subject to certain terms and conditions, the $1 billion credit facility has an accordion feature that allows EQM to increase the available borrowings under the facility by up to an additional $500 million. EQM had $105 million in borrowings and no letters of credit outstanding under the credit facility as of September 30, 2017. EQM had no borrowings and no letters of credit outstanding under the credit facility as of December 31, 2016. The maximum amount of outstanding borrowings under EQM’s revolving credit facility at any time during each of the three and nine months ended September 30, 2017 was $177 million. The maximum amount of EQM's outstanding borrowings under the credit facility at any time during the three and nine months ended September 30, 2016 was $91 million and $299 million, respectively. The average daily balance of loans outstanding under EQM's credit facility was approximately $95 million and $32 million during the three and nine months ended September 30, 2017, respectively, at a weighted average annual interest rate of 2.7% for both periods. The average daily balance of loans outstanding under EQM's credit facility was approximately $34 million and $67 million at weighted average annual interest rates of 2.0% and 1.9% for the three and nine months ended September 30, 2016, respectively.

17

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

K.                            Earnings Per Share
 
Potentially dilutive securities (options and restricted stock awards) included in the calculation of diluted earnings per share totaled 199,376 and 204,080 for the three and nine months ended September 30, 2017, respectively. Options to purchase common stock excluded from potentially dilutive securities because they were anti-dilutive totaled 425,100 and 431,190 for the three and nine months ended September 30, 2017, respectively. In periods when the Company reports a net loss, all options and restricted stock awards are excluded from the calculation of diluted weighted average shares outstanding because of their anti-dilutive effect on loss per share. Due to the Company's net loss for the three and nine months ended September 30, 2016, all outstanding options and restricted stock awards were excluded from the calculation of diluted earnings per share. The excluded options and restricted stock awards totaled 1,712,527 and 1,812,142 for the three and nine months ended September 30, 2016, respectively. 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.

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 September 30, 2017
 
Natural gas cash
flow hedges, net of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Other post-
retirement
benefit liability
adjustment,
net of tax
 
Accumulated
OCI, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of July 1, 2017
$
7,047

 
$
(627
)
 
$
(6,713
)
 
$
(293
)
(Gains) losses reclassified from accumulated OCI, net of tax
(1,451
)
(a)
36

(a)
77

(b)
(1,338
)
Accumulated OCI (loss), net of tax, as of September 30, 2017
$
5,596

 
$
(591
)
 
$
(6,636
)
 
$
(1,631
)
 
Three Months Ended September 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 July 1, 2016
$
36,398

 
$
(771
)
 
$
(7,706
)
 
$
27,921

(Gains) losses reclassified from accumulated OCI, net of tax
(14,740
)
(a)
36

(a)
82

(b)
(14,622
)
Accumulated OCI (loss), net of tax, as of September 30, 2016
$
21,658

 
$
(735
)
 
$
(7,624
)
 
$
13,299

 
Nine Months Ended September 30, 2017
 
Natural gas cash
flow hedges, net of tax
 
Interest rate
cash flow
hedges, net
of tax
 
Other post-
retirement
benefit liability
adjustment,
net of tax
 
Accumulated
OCI, net of tax
 
(Thousands)
Accumulated OCI (loss), net of tax, as of January 1, 2017
$
9,607

 
$
(699
)
 
$
(6,866
)
 
$
2,042

(Gains) losses reclassified from accumulated OCI, net of tax
(4,011
)
(a)
108

(a)
230

(b)
(3,673
)
Accumulated OCI (loss), net of tax, as of September 30, 2017
$
5,596

 
$
(591
)
 
$
(6,636
)
 
$
(1,631
)

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Notes to the Condensed Consolidated Financial Statements (Unaudited) 

 
Nine Months Ended September 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
(43,104
)
(a)
108

(a)
9,917

(b)
(33,079
)
Accumulated OCI (loss), net of tax, as of September 30, 2016
$
21,658

 
$
(735
)
 
$
(7,624
)
 
$
13,299


(a)   See Note G for additional information.
(b)   The accumulated OCI reclassification for the three and nine months ended September 30, 2017 is attributable to the net actuarial loss and net prior service cost related to the Company’s post-retirement benefit plans. The accumulated OCI reclassification for the three and nine months ended September 30, 2016 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 15 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information.

M.         Acquisitions

On February 1, 2017, the Company acquired approximately 14,000 net Marcellus acres located in Marion, Monongalia and Wetzel Counties of West Virginia from a third-party for $132.9 million.

On February 27, 2017, the Company acquired approximately 85,000 net Marcellus acres, including drilling rights on approximately 44,000 net Utica acres and current natural gas production of approximately 110 MMcfe per day, from Stone Energy Corporation for $523.5 million. The acquired acres are primarily located in Wetzel, Marshall, Tyler and Marion Counties of West Virginia. The acquired assets also include 174 operated Marcellus wells and 20 miles of gathering pipeline.

On June 30, 2017, the Company acquired approximately 11,000 net Marcellus acres, and the associated Utica drilling rights, from a third-party for $83.7 million. The acquired acres are primarily located in Allegheny, Washington and Westmoreland Counties of Pennsylvania. 

The Company paid net cash of $740.1 million for the 2017 acquisitions during the nine months ended September 30, 2017. The purchase prices remain subject to customary post-closing adjustments as of September 30, 2017. The preliminary fair value assigned to the acquired property, plant and equipment as of the opening balance sheet dates totaled $750.1 million. In connection with the 2017 acquisitions, the Company assumed approximately $5.3 million of net current liabilities and $4.7 million of non-current liabilities. The amounts presented in the financial statements represent the Company's estimates based on preliminary valuations of acquired assets and liabilities and are subject to change based on the Company's finalization of asset and liability valuations.

As a result of post-closing adjustments on its 2016 acquisitions, the Company paid $78.9 million for additional undeveloped acreage and recorded other non-cash adjustments which reduced the preliminary fair values assigned to the acquired property, plant and equipment by $2.5 million during the nine months ended September 30, 2017. With the exception of the Company's acquisition of Marcellus acreage and other assets from Statoil USA Onshore Properties, Inc., which closed on July 8, 2016, the purchase prices for the Company’s 2016 acquisitions, as well as the fair values assigned to the acquired assets and assumed liabilities, remained preliminary as of September 30, 2017.

N.                        Rice Merger

On June 19, 2017, the Company entered into an Agreement and Plan of Merger (the Rice Merger Agreement) with Rice Energy Inc. (Rice) (NYSE: RICE), pursuant to which Rice will merge with and into a wholly owned indirect subsidiary of EQT through a series of transactions (the Rice Merger).  If the Rice Merger is completed, each share of the common stock of Rice (Rice Common Stock) issued and outstanding immediately prior to the effective time (the Effective Time) of the Rice Merger (other than shares excluded by the Rice Merger Agreement) will be converted into the right to receive 0.37 of a share of the common stock of the Company (EQT Common Stock) and $5.30 in cash (collectively, the Merger Consideration). 

Based on the closing price of EQT Common Stock on the New York Stock Exchange on June 16, 2017, the last trading day before the public announcement of the Rice Merger, the aggregate value of the Merger Consideration payable to Rice stockholders was

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Notes to Condensed Consolidated Financial Statements (Unaudited)




approximately $6.7 billion.  The Company will also assume or refinance approximately $2.2 billion of net debt and preferred equity (based on anticipated balances as of the expected closing date) of Rice and its subsidiaries and will assume other assets and liabilities of Rice and its subsidiaries at the Effective Time. Based on the estimated number of shares of EQT Common Stock and Rice Common Stock that will be outstanding immediately prior to the Effective Time, the Company estimates that, upon the closing of the Rice Merger, existing EQT shareholders and former Rice stockholders will own approximately 65% and 35%, respectively, of the Company’s outstanding shares.

The waiting period applicable to the Rice Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 was terminated by the Federal Trade Commission on July 18, 2017. The Rice Merger is expected to close in mid-November 2017 following the satisfaction of certain customary closing conditions, including the approval by the Company’s shareholders of the issuance of shares of EQT Common Stock as Merger Consideration and the adoption of the Rice Merger Agreement by Rice stockholders. The special meetings of the shareholders of EQT and the stockholders of Rice are scheduled to be held for these purposes on November 9, 2017.

On June 19, 2017, in connection with its entry into the Rice Merger Agreement, the Company entered into a commitment letter (the Commitment Letter) with Citigroup Global Markets Inc. (Citi), pursuant to which Citi and its affiliates committed to provide, subject to the terms and conditions set forth therein, up to $1.4 billion of senior unsecured bridge loans (the Bridge Facility).  On July 14, 2017, the Company entered into a joinder letter to the Commitment Letter, pursuant to which 16 additional banks assumed a portion of Citi’s commitment under the Bridge Facility. The lenders’ commitments under the Bridge Facility terminated upon the closing of the 2017 Notes Offering (as defined in Note O).  The Company expensed $7.6 million in debt issuance costs related to the Bridge Facility during the nine months ended September 30, 2017.

The Rice Merger Agreement provides for certain termination rights for both the Company and Rice, including the right of either party to terminate the Rice Merger Agreement if the Rice Merger is not consummated by February 19, 2018 (which may be extended by either party to May 19, 2018 under certain circumstances). Upon termination of the Rice Merger Agreement under certain specified circumstances, the Company may be required to pay Rice, or Rice may be required to pay the Company, a termination fee of $255.0 million. In addition, if the Rice Merger Agreement is terminated because of a failure of a party’s shareholders to approve the proposals required to complete the Rice Merger, that party may be required to reimburse the other party for its transaction expenses in an amount equal to $67.0 million.

The Company expects to finance the cash portion of the Merger Consideration and the transactions related to the Rice Merger with cash on hand (including from the proceeds of the 2017 Notes Offering) and borrowings under the Company’s revolving credit facility.

O.                        Subsequent Event

On October 4, 2017, the Company completed the public offering (the 2017 Notes Offering) of $500 million aggregate principal amount of Floating Rate Notes due 2020 (the Floating Rate Notes), $500 million aggregate principal amount of 2.50% Senior Notes due 2020 (the 2020 Notes), $750 million aggregate principal amount of 3.00% Senior Notes due 2022 (the 2022 Notes) and $1.25 billion aggregate principal amount of 3.90% Senior Notes due 2027 (the 2027 Notes and, together with the Floating Rate Notes, the 2020 Notes and the 2023 Notes, the 2017 Notes).  The Company received net proceeds from the 2017 Notes Offering of approximately $2,974.3 million, which the Company expects to use, together with other cash on hand and borrowings under the Company’s revolving credit facility, to fund the cash portion of the Merger Consideration, to pay expenses related to the Rice Merger and other transactions contemplated by the Rice Merger Agreement (including the refinancing of certain indebtedness of Rice and its subsidiaries), to redeem or repay certain Company senior notes and medium term notes due in 2018 and for other general corporate purposes.  In October 2017, the Company delivered redemption notices pursuant to which the Company expects to redeem all of its outstanding $200 million aggregate principal amount 5.15% Senior Notes due 2018 and $500 million aggregate principal amount 6.50% Senior Notes due 2018 in November 2017. Upon redemption, the Company will pay make whole call premiums based upon prevailing rates on U.S. government securities at the time of redemption.

The indentures related to the 2017 Notes contain covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions and enter into certain consolidations, mergers or sales other than for cash or leases of the Company’s assets substantially as an entirety.  In addition, if the Rice Merger does not occur on or before May 19, 2018 or the Company notifies the trustee under the indenture governing the 2017 Notes that the Company will not pursue the consummation of the Rice Merger, the Company will be required to redeem the Floating Rate Notes, the 2020 Notes and the 2027 Notes (but not the 2022 Notes) then outstanding at a redemption price equal to 101% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

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Notes to Condensed Consolidated Financial Statements (Unaudited)




P.        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. 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 for annual reporting periods beginning after December 15, 2017. The Company expects to adopt the ASUs using the modified retrospective method of adoption on January 1, 2018. During the third quarter of 2017, the Company substantially completed its detailed review of the impact of the standard on each of its contracts. Based on this review, the Company does not expect the standard to have a significant impact on net income. The Company is currently evaluating the impact of the standard on its internal controls and disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The changes primarily affect the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This standard will eliminate the cost method of accounting for equity investments. 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 will adopt this standard in the first quarter of 2018 and does not expect that the adoption will have a material impact on its financial statements and related disclosures.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases. The primary effect of adopting the new standard will be to record assets and obligations for contracts currently recognized as operating leases. 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. The Company has completed a high level identification of agreements covered by this standard and will continue to evaluate the impact this standard will have on its financial statements and related disclosures.

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 FASB 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 Company adopted this standard in the first quarter of 2017 with no significant impact on its reported results or 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 ASU will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the presentation and classification of eight specific cash flow issues. The amendments in the ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted this standard in the second quarter of 2017 with no material impact on its financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company anticipates this standard will not have a material impact on its financial statements and related disclosures.


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Notes to Condensed Consolidated Financial Statements (Unaudited)




In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU provides additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company anticipates this standard will not have a material impact on its financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance regarding which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU will be effective for annual reporting periods beginning after December 15, 2017, 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.

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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
 
You should read the following discussion and analysis of financial condition and results of operations in conjunction with the Condensed Consolidated Financial Statements, and the notes thereto, included elsewhere in this report.

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, Upper Devonian 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; infrastructure programs (including the timing, cost and capacity of the gathering and transmission expansion projects); the cost, capacity, timing of regulatory approvals for, and anticipated in-service date of, the Mountain Valley Pipeline (MVP) project; monetization transactions, including asset sales, joint ventures or other transactions involving the Company’s assets; acquisition transactions; the Company's ability to complete and the timing of the Rice Merger (as defined in Note N to the Condensed Consolidated Financial Statements), including whether the Company will sell Rice Energy Inc.'s (Rice) retained midstream assets to EQM; the amount of net debt and preferred equity of Rice and its subsidiaries the Company will assume or refinance; the timing of the Company's redemption of its senior notes due in 2018; natural gas prices, changes in basis and the impact of commodity prices on the Company's business; potential future impairments of the Company's assets; projected capital expenditures and capital contributions; 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, 2016, as updated by Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q.
 
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.
 
In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about the Company. The agreements may contain representations and warranties by the Company, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.  Accordingly, these representations and warranties alone may not describe the actual state of affairs of the Company or its affiliates as of the date they were made or at any other time. 

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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 September 30, 2017 vs. Three Months Ended September 30, 2016
 
Net income attributable to EQT Corporation for the three months ended September 30, 2017 was $23.3 million, $0.13 per diluted share, compared with net loss attributable to EQT Corporation of $8.0 million, a loss of $0.05 per diluted share, for the three months ended September 30, 2016. The increase was primarily attributable to a $0.56 increase in the average realized price, a 5% increase in production sales volumes, an income tax benefit for the three months ended September 30, 2017 compared to income tax expense for the three months ended September 30, 2016 and higher pipeline and net marketing services revenue, partly offset by higher operating expenses, lower gains on derivatives not designated as hedges, higher interest expense and higher net income attributable to noncontrolling interests of EQGP and EQM.

EQT Production received $13.3 million and $27.3 million of net cash settlements for derivatives not designated as hedges for the three months ended September 30, 2017 and 2016, respectively, that are included in the average realized price but are not in GAAP operating revenues.

Net income attributable to noncontrolling interests of EQGP and EQM was $82.1 million for the three months ended September 30, 2017 compared to $78.1 million for the three months ended September 30, 2016. The $4.0 million increase was primarily the result of increased net income at EQM.

In connection with the Rice Merger, the Company recorded $10.8 million in acquisition-related expenses during the three months ended September 30, 2017 that are included in selling, general and administrative expenses. The Company also expensed approximately $6.8 million of the Bridge Facility debt issuance costs during the three months ended September 30, 2017.

Nine Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016
 
Net income attributable to EQT Corporation for the nine months ended September 30, 2017 was $228.5 million, $1.32 per diluted share, compared with net loss attributable to EQT Corporation of $261.0 million, a loss of $1.58 per diluted share, for the nine months ended September 30, 2016. The increase was primarily attributable to a $0.72 increase in the average realized price, gains on derivatives not designated as hedges for the nine months ended September 30, 2017 compared to losses on derivatives not designated as hedges for the nine months ended September 30, 2016, a 6% increase in production sales volumes and higher pipeline and net marketing services revenue, partly offset by income tax expense for the nine months ended September 30, 2017 compared to a benefit for the nine months ended September 30, 2016, higher operating expenses, higher interest expense and higher net income attributable to noncontrolling interests of EQGP and EQM.

EQT Production paid $6.8 million and received $222.5 million of net cash settlements for derivatives not designated as hedges for the nine months ended September 30, 2017 and 2016, respectively, that are included in the average realized price but are not in GAAP operating revenues.

Net income attributable to noncontrolling interests of EQGP and EQM was $250.3 million for the nine months ended September 30, 2017 compared to $238.7 million for the nine months ended September 30, 2016. The $11.6 million increase was primarily the result of increased net income at EQM and increased ownership of EQM common units by third-parties.

In connection with the Rice Merger, the Company recorded $15.0 million in acquisition-related expenses during the nine months ended September 30, 2017 that are included in selling, general and administrative expenses. The Company also expensed $7.6 million in debt issuance costs related to the Bridge Facility during the nine months ended September 30, 2017.

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

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

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Operational Data
 
The following table presents detailed natural gas and liquids operational information to assist in the understanding of the Company’s consolidated operations, including the calculation of the Company's 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 Production total operating revenues. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of EQT Production adjusted operating revenues to EQT Production total operating revenues.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
in thousands (unless noted)
 
2017
 
2016
 
%
 
2017
 
2016
 
%
NATURAL GAS
 
 
 
 
 
 

 
 
 
 
 
 
Sales volume (MMcf)
 
176,311

 
175,191

 
0.6

 
508,457

 
508,206

 

NYMEX price ($/MMBtu) (a)
 
$
3.00

 
$
2.81

 
6.8

 
$
3.16

 
$
2.29

 
38.0

Btu uplift
 
0.30

 
0.27

 
11.1

 
0.28

 
0.21

 
33.3

Natural gas price ($/Mcf)
 
$
3.30

 
$
3.08

 
7.1

 
$
3.44

 
$
2.50

 
37.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Basis ($/Mcf) (b)
 
$
(0.81
)
 
$
(1.21
)
 
(33.1
)
 
$
(0.53
)
 
$
(0.80
)
 
(33.8
)
Cash settled basis swaps (not designated as hedges) ($/Mcf)
 
(0.04
)
 

 
(100.0
)
 
(0.02
)
 
0.05

 
(140.0
)
Average differential, including cash settled basis swaps ($/Mcf)
 
$
(0.85
)
 
$
(1.21
)
 
(29.8
)
 
$
(0.55
)
 
$
(0.75
)
 
(26.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Average adjusted price ($/Mcf)
 
$
2.45

 
$
1.87

 
31.0

 
$
2.89

 
$
1.75

 
65.1

Cash settled derivatives (cash flow hedges) ($/Mcf)
 
0.01

 
0.14

 
(92.9
)
 
0.01

 
0.14

 
(92.9
)
Cash settled derivatives (not designated as hedges) ($/Mcf)
 
0.13

 
0.15

 
(13.3
)
 
0.01

 
0.38

 
(97.4
)
Average natural gas price, including cash settled derivatives ($/Mcf)
 
$
2.59

 
$
2.16

 
19.9

 
$
2.91

 
$
2.27

 
28.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas sales, including cash settled derivatives
 
$
456,347

 
$
378,484

 
20.6

 
$
1,484,711

 
$
1,155,898

 
28.4

 
 
 
 
 
 
 
 
 
 
 
 
 
LIQUIDS
 
 
 
 
 
 

 
 
 
 
 
 
NGLs (excluding ethane):