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EQT Corporation (NYSE:EQT)

Analyst Briefing Conference Call

December 20, 2012 10:00 am ET

Executives

Patrick Kane – Chief Investor Relations Officer

David L. Porges – Chairman, President and Chief Executive Officer

Philip P. Conti – Senior Vice President and Chief Financial Officer

Randall L. Crawford – Senior Vice President and President-Midstream, Commercial and Distribution

Analysts

Scott Hanold – RBC Capital Markets Corp.

Neal Dingmann – SunTrust Robinson Humphrey

Christine Cho – Barclays Capital, Inc.

Amir Arif – Stifel, Nicolaus & Co., Inc.

Michael A. Hall – Robert W. Baird & Co.

Becca Followill – US Capital Advisors

Harry Mateer – Barclays Capital, Inc.

Operator

Good morning, and welcome to the EQT Analyst Briefing. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Patrick Kane. Please go ahead.

Patrick Kane

Thanks, Andrew. Good morning, everyone, and thank you for participating in today’s call to discuss the sale of Equitable Gas Company. With me today are Dave Porges, President and Chief Executive Officer; Phil Conti, Senior Vice President and Chief Financial Officer; and Randy Crawford, Senior Vice President and President of Midstream, Distribution and Commercial.

This call will be replayed for a seven-day period beginning at approximately 1:30 p.m. Eastern Time today. The phone number for the replay is 412-317-0088. The confirmation code is 10022541. The call will also be replayed for seven days on our website.

As you saw this morning, we announced the sale of Equitable Gas Company to Peoples Gas. In just a moment, Dave will provide a brief opening statement. Following Dave’s remarks, Dave, Phil, and Randy will be available to answer your questions. The call will end at 10:30.

First, I’d like to remind you that today’s call may contain forward-looking statements related to future events and expectations. You can find factors that could cause the company’s actual results to differ materially from these forward-looking statements listed in today’s press release and under Risk Factors in EQT’s Form 10-K for the year ended December 31, 2011 filed with the SEC, as updated by any subsequent Form 10-Qs, which are also on file with the SEC and available on our website.

And now I’d like to turn the call over to Dave Porges.

David L. Porges

Thank you, Pat. As you know, we have entered into a definitive agreement for the transfer of our natural gas distribution business, Equitable Gas Company, LLC, the parent company of Peoples Natural Gas. As part of the transaction, EQT will receive cash proceeds of $720 million, subject to certain adjustments, and select midstream assets and commercial arrangements, which are expected to generate at least $40 million in EBITDA per year.

Today’s announcement is another step toward achieving our objective, maximizing shareholder value via an overarching strategy of economically accelerating demonetization of our asset base and prudent pursuit of investment opportunities while living within our means.

We have been investing more than our cash flow for several years, redeploying capital into our highest return opportunities, which are Marcellus shale development and the build-out of our complementary midstream business. We finance this outspent by monetizing our lower return assets and assets which are more valuable to others than they are to us, and we’ve begun the process of refinancing our midstream assets through a lower cost of capital structure and MLP.

Today’s announcement is another step to achieving our objectives. Not only are we receiving cash, which provides visibility for funding our capital programs beyond 2013, but the transaction increases our midstream platform in the heart of the Marcellus play. From our perspective, the midstream assets that we are receiving are similar to the midstream assets that our gas distribution company had before they were separated to form Equitrans many years ago.

We believe that we can replicate that value creation model with these assets. Given the time constraints of this call, I will not rehash the deal terms that were described in the press release and Form 8-K that we issued this morning. Rather, we will try to answer any specific questions that you may have.

And so now, we’ll turn the call back over to Pat.

Patrick Kane

Thanks, Dave. This concludes the comments portion of the call. Andrew, can we please now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Scott Hanold of RBC Capital. Please go ahead.

Scott Hanold – RBC Capital Markets Corp.

Thanks. Good morning guys.

David L. Porges

Good morning, Scott.

Philip P. Conti

Good morning.

Scott Hanold – RBC Capital Markets Corp.

So when you look at this transaction, can you talk about any kind of regulatory issues or hurdles that you overcome? I know obviously we gone just once before when you looked at it and is there going to be any kind of cash tax leakage on the sale?

David L. Porges

The regulatory issues first. Look we didn’t have regulatory approvals. I think I just – I comment on that just by saying that we’ve learned some lessons on that we think since the transaction probably referring to years ago and that was of course entirely at the federal level. We received all the state approvals. So we think we’ve got a better idea of how to go about addressing concerns at that level. On the cash tax side, I think I will turn it over to Phil.

Philip P. Conti

Okay. So at this point in time, it’s really too early to give a precise estimate of the expected cash tax that would be associated with this transaction. We do expect the transaction to generate a taxable gain for EQT, but the actual cash taxes that we would pay will be a function of a variety of variables as you can imagine first value and that’s certainly subject to interpretation. How much like kind of exchange treatment we might get for some of the assets that we received as part of the consideration and then what our tax attributes are in the period that we actually closed the deal which is not starting at this point either.

Nobody like IDCs, other taxable income and that given your gas prices all kinds of things like that will affect that. We do expect some IDC offset regardless of the period and we also like with the pace of AMT taxes. We would estimate that around the 20% range on that, but it’s again too early really to give a precise estimate on cash tax like we did this time.

Scott Hanold – RBC Capital Markets Corp.

Would you just say the gain list? Did you say what the gain list that you are reporting?

Philip P. Conti

I can’t say what the gain is because it would be subject to the interpretation of value. The tax base is right now is a $160 million, so you will have to determine what the value is to start fill-in from here.

Scott Hanold – RBC Capital Markets Corp.

And one other question if I could, cutting the dividend is probably something that was kind of tough for you guys to think about. Obviously there is a lot of investors in EQT that appreciates those in E&P Company with a very high rated dividend. What is your view on sort of that dividend cut to the extent you did it and is there view of going forward is there the capability of growing that as the Marcellus becomes a better funding asset – so from more of a self funding asset.

David L. Porges

Well, our track record I would say have been is – some of you probably know I came in as CFO in 1998. And our track record has been to figure out ways to create value for the shareholders. However, it is the best way to do it at that time. And when we first get in, we didn’t increase the dividend at all. We used share repurchases instead as a way to return money. And if you look way back at those calls and people what asked us about that, we would say the reason was the high tax rates on dividends and the fact that we weren’t able to control the timing of the recognition of that gain. And of course, but we did have capital available. When things turned and we want of having more investment opportunities when cash available. Therefore we started looking and we thought that would be and then the tax laws changed, then of course, we want to put the dividend that was probably higher than the business warranted at that time.

So we increased the dividend because of the tax law changes. Our business opportunities changed, so that we probably were really looking to retain more of the money. And it went up that really the cash was being, but the dividend was being provided by the utility.

So what the utility going, we don't have as much justification for having the dividend up where it was. And we have to decide in the future when cash exceeds investment opportunities; cash flow exceeds investment opportunities, whether the right answer is increase dividend or return the money to the shareholders in a different form. And that of course is going to be influenced by tax issues just as it was when we went from share repurchases to increasing dividend as our preferred means of returning capital back several years ago.

Scott Hanold – RBC Capital Markets Corp.

Okay. So if I could correct, try and interpret those comments, I mean, obviously, the dividend of $0.12, I mean at this point and there is really no view on having a plan of increasing at that, it’s the dividend that’s going away as part of the…

David L. Porges

I’d say, the construct I’d say you should look at is, we are flowing money from that EQT is receiving from EQM to shareholders as dividends. So the construct that you might have until the production business becomes more of a cash (inaudible) growth business would be flowing the distributions from the LP and GP interests in EQM through to our shareholders at EQT.

Scott Hanold – RBC Capital Markets Corp.

Understood.

David L. Porges

So, yeah, I do expect growth there. And you can use your own models to figure out how much you think that will lead to.

Scott Hanold – RBC Capital Markets Corp.

I appreciate it. Thank you.

Operator

The next question comes from Neal Dingmann of SunTrust. Please go ahead.

Neal Dingmann – SunTrust Robinson Humphrey

Good morning, gentlemen, thanks for the call. Say, Dave, just kind of question, obviously this gives you quite a bit of a more drive patter your thoughts on, number one, just the Marcellus midstream assets obviously, you got a good collection now.

How aggressive is there, I guess in your opinion still need for sufficiently more or materially more assets in your region that, I guess what I’m trying to get at is, now if you change your allocation just how much do you sort of envision going towards midstream and then, when you talk to yourself and Steve and the guys over on the upstream side, how much more aggressive, would you get especially in some of your core areas there?

David L. Porges

We are still going to make investment decisions based on where we think the best returns exist. And that's really what we would say has been a hallmark of the company for the last 14 years is that regardless of whether that means that expenditures are fall short, our desired expenditures fall short of cash flows or exceed cash flows, we will try to operate in a manner that allows us to only pursue the attractive investment opportunities, but to be able to pursue all of the really attractive investment opportunities.

So I’d say the base case would have been that we continue to ramp up both the production of midstream business and depending on what gas prices do that could continue to lead to some form of cash shortfall versus operating cash flow in 2014 and beyond. In 2013, we would say it’s put to bed, but this transaction is thinking about beyond that.

Neal Dingmann – SunTrust Robinson Humphrey

Absolutely, that's a great color.

David L. Porges

Yeah, change, if anything I’d say over the course of time what we’re doing is, we’re just continuing to focus tighter and tighter on what we know how to do.

Neal Dingmann – SunTrust Robinson Humphrey

And just sort of last question kind of follow-up to that, just when you look at I guess, I don’t know if that’s probably for ‘13, but give us an idea you mentioned once before I think on the prior conference call, talking about sort of asset drop-downs, now that you have available, and I know may be no immediate plans on that, but it certainly seems like you have a lot of opportunities there, how do you kind of view that now for the next couple of years.

David L. Porges

Even before this transaction, the view would have been that we do have a variety of assets that have the potential to be dropped into that MLP over the course of time. In some cases, the right answer is to invest in them more and then firm up the contractual arrangements et cetera, so there are more appropriate for arms like than they are for affiliated and for companies that are in the same corporate umbrella. And I would say that that mindset is still the same, and we're going to have to make an assessment of these midstream assets as far as what the best use of them is, but almost certainly we are going to want to make investments in these assets, if we are going to follow that Equitrans model that I alluded to in my comments.

Neal Dingmann – SunTrust Robinson Humphrey

That's a great point, thanks and congrats on the deal.

David L. Porges

Thank you.

Operator

The next question comes from Christine Cho of Barclays. Please go ahead.

Christine Cho – Barclays Capital, Inc.

Hi, everyone, congrats on the deal. I just have a couple of follow-up questions. Are all of the midstream assets regulated, there is nothing unregulated in there, right?

David L. Porges

That is correct as a matter of fact they are all regulated by at the state level right now.

Christine Cho – Barclays Capital, Inc.

Okay and then, is that $40 million EBITDA number, that you’ve talked about current or do you have to spend any money to get to that level?

David L. Porges

Not really. Those are the assets and their deliverability today and so those are firm contracts that will go into effect when the transaction is approved.

Philip P. Conti

And the EBITDA is certainly the combination coming from the assets and the contractual arrangements.

Christine Cho – Barclays Capital, Inc.

Right. Okay yeah, but I just want to make sure the contractual need any CapEx. Okay and then the supply deal of 35 Bcf, is that contingent on this deal actually going through or do you get that no matter what?

David L. Porges

Well, there is portion that are contingent on the deal, and there are other circumstances where they would continue going forward as well.

Christine Cho – Barclays Capital, Inc.

Okay. And then can you talk a little bit about where exactly the midstream assets are and how they, where they connect your existing assets.

David L. Porges

Sure, we're going to be acquiring 200 miles of transmission pipe as we’ve said in the press release that extends our footprint both North and East and to Allegheny County, Beaver, Armstrong, Indiana, Clarion and Westmoreland, and as we said they are great fit to our – complement to our Equitrans System and it's going to open up a lot of development areas for our productions whilst third-party. Our analyst presentation we posted on our website the map and you can see how they integrate in with our current midstream assets.

Philip P. Conti

Yeah, some of those are going to require investments, the same way Equitrans did years ago to make them fully valuable to the Marcellus producers, that is not factored into the $40 million plus of EBITDA that we referred to.

Christine Cho – Barclays Capital, Inc.

Okay and then just a little clarification from a comment before, but you do expect to get some like kind of exchange treatment for the midstream assets right.

Philip P. Conti

We are attempting to.

Christine Cho – Barclays Capital, Inc.

Okay, all right, that's it from me. Thanks.

Operator

The next question comes from Amir Arif of Stifel. Please go ahead.

Amir Arif – Stifel, Nicolaus & Co., Inc.

Thanks, good morning guys. Just a question on, as we look at 2014, some of the capital constraints start to go away. How much would you want to accelerate your activity levels from current levels relative to ‘13?

Philip P. Conti

That’s something we will have to assess, our first priority is working on what we kind of referred to is that Tier 1 Marcellus, but we do see that we’ve got other opportunities. And at this point, I’d say we’ll spend part of 2013 figuring out of the right approach forward is to the best way to exploit that asset. I don’t think it’s fair to assume that we can keep growing Marcellus in a way that we contribute to a 30% growth rate for the overall cooperation forever, because you start looking at certainly the issue they’re going to turn into operational issues. So then we have to take that into account, we’re looking at pacing. But we do have other opportunities as well, and we have never had a view with this company as well as I’ve been here that the money burns a hole in our pocket. When we got the good opportunities, we invest in them, and if we don’t have good opportunities, then we figure out some other way to get back to the shareholder.

Amir Arif – Stifel, Nicolaus & Co., Inc.

Okay. And the mix from assets, so it sounds like you need to put or you will be putting some capital to try to make it a little more favorable for the Marcellus production development. but beyond that, is there a reason to keep it up to Sea Corp or would it be good dropdown for your MLP?

David L. Porges

For a variety of reasons where it’s probably not best for us to get into that, I mean, conceptually, we’re happy to talk about the similarities from the current assets at EQT. And with those assets, our experience has been that we’re best of investing in them and get, so that most of the capital investment occurs at the Sea Corp that’s what we’ve done at the – for the existing EQT assets. And moving into more specifics about what the right thing to do at these assets are as we move forward, if that’s okay.

Amir Arif – Stifel, Nicolaus & Co., Inc.

Perfect. And then just one final question, any color or comments timing on the Huron/Berea in terms of what’s your thinking on that?

David L. Porges

No. And I don’t think it’s fair to assume that this transaction itself impacts that. We do have a number of Huron/Berea investment that do make sense at today’s strip. But frankly, we’ve gotten spoiled and we’re interested in opportunities that have a lighter gap between the expected return and the cost of capital than those have right now. Even though it is true that at today strip, those do own a return that are in excess of the cost of capital. I think it’s fair to say that we will look at other ways to source low-cost capital through our Huron/Berea.

Amir Arif – Stifel, Nicolaus & Co., Inc.

Yeah. That’s what I was getting at, any update on that front; I mean you had mentioned you were looking at alternatives, any update if right is there?

David L. Porges

We’ve been preoccupied recently.

Amir Arif – Stifel, Nicolaus & Co., Inc.

Okay, it sounds good. Thanks guys.

Operator

The next question comes from Michael Hall of Robert W. Baird. Please go ahead.

Michael A. Hall – Robert W. Baird & Co.

Thanks, good morning and congrats on the deal. First, I guess it’s a kind of housekeeping one from me. in terms of what you’re selling with this distribution business, is it anything other than the EBITDA stream that you had historically reported as the EQT distribution or is that that’s all the story?

David L. Porges

A matter of fact that there’s a couple of small things that we’re holding back. I mean that these are – this isn’t, it would be probably flattering to them to call them rounding.

Michael A. Hall – Robert W. Baird & Co.

Okay, all right.

David L. Porges

Yeah. The natural gas fueling station that we have in the Strip District in Pittsburgh, we’ll remain with EQT Corp. They won’t go with the LDC. There is a training center that we’ve got that will remain with EQT Corp rather than go with the LDC. And incidentally is looking that like their business opportunities around that, because it’s really a very nice training facility. So that sort of stuff, but generally speaking, when you look at EBITDA for Equitable Gas, you would not be over or certainly wouldn’t be understating what is going.

Michael A. Hall – Robert W. Baird & Co.

Okay and that helps that. And then I guess just more on a bigger picture front. I understand obviously the rationale to sell the business and bringing capital and accelerate the upstream side of things, and certainly that makes sense on its own. But is there also a thought process behind this from a larger structural perspective in terms of disclaiming up the corporate structure and perhaps bettering it for marketability down the road as an outright sale or is that play into to your thinking at all or how does this influence that if any?

David L. Porges

It’s going to sound coy, but the stock is for sale every day.

Michael A. Hall – Robert W. Baird & Co.

Yeah, and does this put an exclamation point on that statement I guess?

David L. Porges

I’d say strategically my view for a long time has been most companies are better off if they figure out what they do best compared to others. It’s not good enough to simply be good at something. But what do you do best compare to other companies and focuses tightly as you can on that.

Then that was the logic way back for us getting out of the Gulf of Mexico. That was the logic for getting rid of the training business. That was the logic for getting out of the energy services business. That was the logic for getting out of the processing business. So back in 2011 and that still the case. So I mean does that make it more attractive to investor. I would hope that it would make a more attractive to institutional investors, not just kind of investors you’re talking about.

Michael A. Hall – Robert W. Baird & Co.

All right.

David L. Porges

But we just think that’s a good strategy. So if you’re looking at a broader strategic issue, beyond what the cash availability…

Michael A. Hall – Robert W. Baird & Co.

Yeah.

David L. Porges

Yeah, there was a sense that we are better off focusing on fewer things where we have more distinctive advantages. But I would say that was really the strategic. That’s the strategic point of driver. And I understand you could have said that a few years ago too about us, I mean I get that. But so you had the cash part of it probably accentuated, but…

Michael A. Hall – Robert W. Baird & Co.

That’s very helpful. That gets that what I was wondering. And I guess just as you think about cash allocation, I mean you’ve got now quite a bit of cash in hand. You’re still talking about a potential drop down of size from the midstream in 2013, as I understand it…

David L. Porges

Yeah.

Michael A. Hall – Robert W. Baird & Co.

How quickly do you think you plow this into the ground if you will?

David L. Porges

We are not going to let this and putting a hole in our pocket. We did not do that back if maybe you can get some insurance, something to look back at team history since, management team and I don’t expect you folks that I would say a lot bigger companies to worry about. But we don’t let the money burning a hole in our pocket, we never did and we’re not going to now. We’re going to make the investment decisions that we think are going to create value. We are excited here to create value for shareholders over time and that’s what we’re going to continue to do, and having a bigger bank account isn’t going to affect that drive.

Michael A. Hall – Robert W. Baird & Co.

Very good. That’s helpful. Thank you very much and congrats again.

Operator

The next question comes from Becca Followill of US Capital Advisors. Please go ahead.

Becca Followill – US Capital Advisors

My questions have been asked and answered. Thank you.

David L. Porges

Thanks Becca.

Becca Followill – US Capital Advisors

I have one, so that I’d call it (inaudible) understood.

Operator

The next question comes from Harry Mateer of Barclays. Please go ahead.

Harry Mateer – Barclays Capital, Inc.

Hi guys, good morning. Let’s talk about the balance sheet a little bit. So Moody’s already come out and put their ratings under view for downgrade. so I assume this is run by them out of time, but would appreciate if you can confirm that. And then second where are you targeting your ratings, do you still want to be an investment-grade company or are you comfortable going down the high yield? And then lastly, is there any debt reduction plan as part of this or should we just assume all the proceeds will ultimately be directed to capital spending?

Philip P. Conti

Okay. first of all, there is no intention of reducing debt as part of this transaction. Obviously, we don’t even have the cash for probably 12 months to 18 months, so that’s down the road for another day. We have been in contact with the rating agencies and the anticipation of this announcement today. I’ve seen in the Moody’s press release; I guess, it was just released while we’re on the call. I’ve also seen a draft of S&P’s, which I won’t comment on, I don’t want to talk on them. But suffice it to say; Equitable Gas would become increasingly less important to the rating agencies due to the diminished relative contribution of cash flow, earnings et cetera. Also a positive factor is over $100 million roughly of EBITDA how that’s being replaced almost immediately with the $40 million of stable fee-based income coming in. We’re comfortable with whatever they do with the rating, we’d like to be investment-grade if we can, but we’ve had…

David L. Porges

That’s AAA if they…

Philip P. Conti

I don’t know AAA’s on, I’m not sure that kind of the alternatives, but working out at the rating process play out. I think the S&P would be a little more positive than Moody’s as again, we have to look at come out on its own. [Fixture isn’t going to] make an assessment until later today. But I think, I would say as we’ve always been prudent and financially disciplined, and we really have no concerns about being able to certainly service our debt obligations regardless of what letters they put after our name. But I think the main factor is that is, I mean Equitable Gas for all three agencies have become less important over time as we grew the rest of the business.

Harry Mateer – Barclays Capital, Inc.

Was the dividend cut in anyway, intended to help easy impact on your credit metrics?

Philip P. Conti

It does ease the impact, but it wasn’t part of the analysis.

David L. Porges

Yeah. That was never hurt the driver even though we are always aware that we’re moving a fix charge is always a positive from a rating agency perspective. It was really just kind of fact that corporate finance one-on-one on Brealey & Myers or whatever you want to call it, what’s the right dividend level to be at given the mix of businesses that you have?

Harry Mateer – Barclays Capital, Inc.

Okay. and then last question just how should we think about, are there any target metrics you can give us a sense for that the company targets whether it’s debt to production or debt-to-EBITDA?

Philip P. Conti

We haven’t already talked about our targets we do have, we’re not prepared to talk about it, but we’ve been in discussions with the rating agencies, and I would say the sort of the debt-to-EBITDA that we’re at now is a good place for us. And so regardless of what the letters they put after that we’re comfortable with that.

David L. Porges

And the metrics we look at or the metrics they look at, and if they change the metrics they look at that we change the metrics that we look at, that’s just, that is the way it has gone. And so if you’re trying to figure out which metrics are most important to us, I’d say look at what is most important to them and that’s what we’re looking at.

Philip P. Conti

One thing they all will say that they expect maybe that metric to improve a little bit over time, but sort of way as we sort of plough this capital back into the higher return opportunities, we expect the metrics to improve as well, obviously dependent upon gas prices.

Harry Mateer – Barclays Capital, Inc.

Okay, thank you.

Operator

At this time, I would like to turn the conference back over to Patrick Kane for any closing remarks.

Patrick Kane

Thanks, Andrew. That concludes today’s call. Thank you all for participating.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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