Item 1.
Financial Statements
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Operations (Unaudited)
(1)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
|
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2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands, except per unit amounts)
|
Operating revenues
(2)
|
$
|
269,761
|
|
|
$
|
196,815
|
|
|
$
|
556,323
|
|
|
$
|
396,887
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
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Operating and maintenance
(3)
|
24,587
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|
|
18,315
|
|
|
44,047
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|
35,132
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|
Selling, general and administrative
(3)
|
24,438
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|
15,812
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|
43,436
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|
33,212
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Depreciation
|
28,076
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21,400
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55,461
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41,947
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Amortization of intangible assets
|
10,387
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|
|
—
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|
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20,773
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|
|
—
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Total operating expenses
|
87,488
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|
|
55,527
|
|
|
163,717
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|
110,291
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Operating income
|
182,273
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|
141,288
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|
392,606
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|
286,596
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Equity income
(4)
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10,938
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|
5,111
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19,749
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|
|
9,388
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Other income
|
944
|
|
|
1,402
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|
|
1,842
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|
|
2,939
|
|
Net interest expense
(5)
|
20,683
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|
|
8,662
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|
31,399
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|
16,588
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Net income
|
173,472
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|
139,139
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382,798
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|
282,335
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Net income attributable to noncontrolling interests
|
853
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—
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3,346
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—
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Net income attributable to EQM
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$
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172,619
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$
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139,139
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$
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379,452
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$
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282,335
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Calculation of limited partner interest in net income:
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Net income attributable to EQM
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$
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172,619
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$
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139,139
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$
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379,452
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$
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282,335
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Less pre-acquisition net income allocated to parent
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(11,407
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)
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—
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(41,022
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)
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—
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Less general partner interest in net income – general partner units
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(1,700
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)
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(2,448
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)
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(4,791
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)
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(4,967
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)
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Less general partner interest in net income – IDRs
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(68,121
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)
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(34,150
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)
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(112,285
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)
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(64,836
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)
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Limited partner interest in net income
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$
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91,391
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$
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102,541
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$
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221,354
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$
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212,532
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Net income per limited partner unit – basic and diluted
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$
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1.09
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$
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1.27
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$
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2.69
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$
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2.64
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Weighted average limited partner units outstanding – basic and diluted
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83,553
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80,603
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82,290
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80,602
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Cash distributions declared per unit
(6)
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$
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1.09
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$
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0.935
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$
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2.155
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$
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1.825
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(1)
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As discussed in Note A, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of
Rice Olympus Midstream LLC (ROM), Strike Force Midstream Holdings LLC (Strike Force) and Rice West Virginia Midstream LLC (Rice WV)
, which were acquired by EQM effective on May 1, 2018 (the May 2018 Acquisition), because this transaction was between entities under common control.
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(2)
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Operating revenues included affiliate revenues from EQT Corporation and subsidiaries (collectively, EQT) of
$180.4 million
and
$148.2 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$361.6 million
and
$291.6 million
for
six months ended June 30, 2018
and
2017
, respectively. See Note F.
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(3)
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Operating and maintenance expense included charges from EQT of
$11.3 million
and
$9.3 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$21.8 million
and
$19.2 million
for the
six months ended June 30, 2018
and
2017
, respectively. Selling, general and administrative expense included charges from EQT of
$19.0 million
and
$15.2 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$36.6 million
and
$31.6 million
for the
six months ended June 30, 2018
and
2017
, respectively. See Note F.
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(4)
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Represents equity income from Mountain Valley Pipeline, LLC (the MVP Joint Venture). See Note G.
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(5)
|
Net interest expense included interest income on the Preferred Interest in EES of
$1.7 million
and
$1.7 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$3.3 million
and
$3.4 million
for the
six months ended June 30, 2018
and
2017
, respectively.
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(6)
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Represents the cash distributions declared related to the period presented. See Note J.
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The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Cash Flows (Unaudited)
(1)
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Six Months Ended
June 30,
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2018
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|
2017
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(Thousands)
|
Cash flows from operating activities:
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|
|
|
|
Net income
|
$
|
382,798
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|
$
|
282,335
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|
Adjustments to reconcile net income to net cash provided by operating activities:
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|
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Depreciation
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55,461
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41,947
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|
Amortization of intangible assets
|
20,773
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|
|
—
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|
Equity income
|
(19,749
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)
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(9,388
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)
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AFUDC – equity
|
(2,137
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)
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(3,297
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)
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Non-cash long-term compensation expense
|
331
|
|
|
225
|
|
Changes in other assets and liabilities:
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Accounts receivable
|
718
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(599
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)
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Accounts payable
|
8,019
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2,426
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Due to/from EQT affiliates
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(11,210
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)
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1,410
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Other assets and other liabilities
|
6,642
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5,246
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Net cash provided by operating activities
|
441,646
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320,305
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|
Cash flows from investing activities:
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|
|
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|
Capital expenditures
|
(302,876
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)
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(149,413
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)
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Capital contributions to the MVP Joint Venture
|
(182,805
|
)
|
|
(59,940
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)
|
May 2018 Acquisition from EQT
|
(1,193,160
|
)
|
|
—
|
|
Principal payments received on the Preferred Interest
|
2,172
|
|
|
2,054
|
|
Net cash used in investing activities
|
(1,676,669
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)
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(207,299
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)
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Cash flows from financing activities:
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|
|
|
|
Proceeds from credit facility borrowings
|
2,000,500
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|
|
150,000
|
|
Payments on credit facility borrowings
|
(2,180,500
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)
|
|
(110,000
|
)
|
Proceeds from issuance of long-term debt
|
2,500,000
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|
|
—
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|
Debt discount and issuance costs
|
(30,295
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)
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—
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|
Distributions paid to unitholders
|
(258,211
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)
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(202,060
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)
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Distributions to noncontrolling interest
|
(750
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)
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—
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|
Acquisition of 25% of Strike Force Midstream LLC
|
(175,000
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)
|
|
—
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|
Capital contributions
|
15,672
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|
216
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|
Net contributions from EQT
|
3,660
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|
|
—
|
|
Net cash provided by (used in) financing activities
|
1,875,076
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(161,844
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)
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|
Net change in cash and cash equivalents
|
640,053
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|
(48,838
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)
|
Cash and cash equivalents at beginning of period
|
44,062
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|
|
60,368
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|
Cash and cash equivalents at end of period
|
$
|
684,115
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|
$
|
11,530
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|
Cash paid during the period for:
|
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|
Interest, net of amount capitalized
|
$
|
29,961
|
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|
$
|
20,996
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|
|
|
|
|
Non-cash activity during the period for
:
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|
|
|
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|
(Decrease) increase in capital contribution receivable from EQT
|
$
|
(12,251
|
)
|
|
$
|
758
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(1)
|
As discussed in Note A, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of the May 2018 Acquisition because this transaction was between entities under common control.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(1)
|
|
|
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|
|
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|
June 30,
2018
|
|
December 31,
2017
|
|
(Thousands, except number of units)
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
684,115
|
|
|
$
|
44,062
|
|
Accounts receivable (net of allowance for doubtful accounts of $1,400 and $446 as of June 30, 2018 and December 31, 2017, respectively)
|
47,587
|
|
|
48,305
|
|
Accounts receivable – affiliate
|
119,097
|
|
|
110,292
|
|
Other current assets
|
14,085
|
|
|
12,754
|
|
Total current assets
|
864,884
|
|
|
215,413
|
|
|
|
|
|
Property, plant and equipment
|
4,363,068
|
|
|
4,077,282
|
|
Less: accumulated depreciation
|
(440,924
|
)
|
|
(398,245
|
)
|
Net property, plant and equipment
|
3,922,144
|
|
|
3,679,037
|
|
|
|
|
|
Investment in unconsolidated entity
|
1,003,299
|
|
|
460,546
|
|
Goodwill
|
37,954
|
|
|
37,954
|
|
Intangible assets, net
|
596,887
|
|
|
617,660
|
|
Other assets
|
137,257
|
|
|
136,966
|
|
Total assets
|
$
|
6,562,425
|
|
|
$
|
5,147,576
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
84,969
|
|
|
$
|
80,637
|
|
Due to related party
|
41,519
|
|
|
31,673
|
|
Capital contribution payable to MVP Joint Venture
|
445,933
|
|
|
105,734
|
|
Accrued interest
|
12,309
|
|
|
10,926
|
|
Accrued liabilities
|
25,144
|
|
|
16,936
|
|
Total current liabilities
|
609,874
|
|
|
245,906
|
|
|
|
|
|
Credit facility borrowings
|
—
|
|
|
180,000
|
|
Senior notes
|
3,453,975
|
|
|
987,352
|
|
Regulatory and other long-term liabilities
|
21,442
|
|
|
20,273
|
|
Total liabilities
|
4,085,291
|
|
|
1,433,531
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Predecessor equity
|
—
|
|
|
1,391,615
|
|
Noncontrolling interest
|
—
|
|
|
173,472
|
|
Common (86,480,648 and 80,581,758 units issued and outstanding at June 30, 2018 and December 31, 2017, respectively)
|
2,448,531
|
|
|
2,147,706
|
|
General partner (1,443,015 units issued and outstanding at June 30, 2018 and December 31, 2017)
|
28,603
|
|
|
1,252
|
|
Total equity
|
2,477,134
|
|
|
3,714,045
|
|
Total liabilities and equity
|
$
|
6,562,425
|
|
|
$
|
5,147,576
|
|
|
|
(1)
|
As discussed in Note A, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of the May 2018 Acquisition because this transaction was between entities under common control.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Equity (Unaudited)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Equity
|
|
Noncontrolling Interest
|
|
Limited Partners
Common
|
|
General
Partner
|
|
Total Equity
|
|
(Thousands)
|
Balance at January 1, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,008,510
|
|
|
$
|
(14,956
|
)
|
|
$
|
1,993,554
|
|
Net income
|
—
|
|
|
—
|
|
|
212,532
|
|
|
69,803
|
|
|
282,335
|
|
Capital contributions
|
—
|
|
|
—
|
|
|
956
|
|
|
18
|
|
|
974
|
|
Equity-based compensation plans
|
—
|
|
|
—
|
|
|
225
|
|
|
—
|
|
|
225
|
|
Distributions paid to unitholders
|
—
|
|
|
—
|
|
|
(140,212
|
)
|
|
(61,848
|
)
|
|
(202,060
|
)
|
Balance at June 30, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,082,011
|
|
|
$
|
(6,983
|
)
|
|
$
|
2,075,028
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
$
|
1,391,615
|
|
|
$
|
173,472
|
|
|
$
|
2,147,706
|
|
|
$
|
1,252
|
|
|
$
|
3,714,045
|
|
Net income
|
41,022
|
|
|
3,346
|
|
|
221,354
|
|
|
117,076
|
|
|
382,798
|
|
Capital contributions
|
—
|
|
|
—
|
|
|
3,361
|
|
|
60
|
|
|
3,421
|
|
Equity-based compensation plans
|
—
|
|
|
—
|
|
|
331
|
|
|
—
|
|
|
331
|
|
Distributions paid to unitholders
|
—
|
|
|
—
|
|
|
(168,426
|
)
|
|
(89,785
|
)
|
|
(258,211
|
)
|
Net contributions from EQT
|
3,660
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,660
|
|
Distributions to noncontrolling interests
|
—
|
|
|
(750
|
)
|
|
—
|
|
|
—
|
|
|
(750
|
)
|
Acquisition of 25% of Strike Force Midstream LLC
|
—
|
|
|
(176,068
|
)
|
|
1,068
|
|
|
—
|
|
|
(175,000
|
)
|
May 2018 Acquisition from EQT
(2)
|
(1,436,297
|
)
|
|
—
|
|
|
243,137
|
|
|
—
|
|
|
(1,193,160
|
)
|
Balance at June 30, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,448,531
|
|
|
$
|
28,603
|
|
|
$
|
2,477,134
|
|
|
|
(1)
|
As discussed in Note A, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of the May 2018 Acquisition because this transaction was between entities under common control.
|
|
|
(2)
|
Under common control accounting, any difference between consideration transferred and the net assets received at historical cost is recorded as an equity transaction. In addition, equity issued in a common control transaction is recorded at an amount equal to the carrying value of the net assets transferred, even if the equity issued has a readily determinable fair value. As a result, the EQM common units issued in the May 2018 Acquisition are valued at the excess of the net assets received by EQM over the cash consideration.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Organization and Basis of Presentation
EQM is a growth-oriented Delaware limited partnership. EQT Midstream Services, LLC (EQM General Partner) is a direct wholly owned subsidiary of EQT GP Holdings, LP (EQGP) and is the general partner of EQM.
The accompanying unaudited consolidated financial statements have been prepared in accordance with 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 GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements include all adjustments (consisting of only normal recurring adjustments, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQM as of
June 30, 2018
and
December 31, 2017
, the results of its operations for the
three and six
months ended
June 30, 2018
and
2017
, and its cash flows and equity for the six months ended
June 30, 2018
and
2017
. Certain previously reported amounts have been reclassified to conform to the current year presentation. The balance sheet at
December 31, 2017
has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
EQM's consolidated financial statements have been retrospectively recast to include the pre-acquisition results of the
May 2018 Acquisition
because this transaction was between entities under common control. The recast is for the period the acquired businesses were under the common control of EQT, which began on November 13, 2017 as a result of EQT's merger with Rice Energy Inc. (Rice) (the Rice Merger). EQM recorded the assets and liabilities acquired in the
May 2018 Acquisition
at their carrying amounts to EQT on the effective date of the transaction. The consolidated financial statements are not necessarily indicative of the actual results of operations if EQM and the assets acquired in the
May 2018 Acquisition
been operated together during the pre-acquisition periods.
Due to the seasonal nature of EQM's utility customer contracts, the interim statements for the
three and six
months ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
For further information, refer to the consolidated financial statements and related footnotes for the year ended December 31, 2017 and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in each case as included in EQM's Current Report on Form 8-K as filed with the SEC on June 12, 2018.
Recently Issued Accounting Standards
In May 2014, the 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 the entity expects in exchange for those goods or services. EQM adopted this standard on January 1, 2018 using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity. EQM does not expect the standard to have a significant effect on its results of operations, liquidity or financial position. EQM implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the disclosures required under the new standard in the first quarter of 2018. For the disclosures required by this ASU, see Note C.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. The standard primarily affects accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments, and eliminates the cost method of accounting for equity investments. EQM adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The standard requires an entity to record assets and obligations for contracts currently recognized as operating leases. Lessees and lessors must apply a modified retrospective transition approach. 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. EQM has performed a high-level identification of agreements covered by this standard, is currently evaluating processes and internal controls and is in the process of implementing a third-party supported lease accounting information system to facilitate the accounting and financial reporting requirements.
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. EQM is currently evaluating the effect this standard will have on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test of Goodwill Impairment
. ASU 2017-04 simplifies the quantitative goodwill impairment test requirements by eliminating the requirement to calculate the implied fair value of goodwill (Step 2 of the current goodwill impairment test). Instead, a company would record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value (measured in Step 1 of the current goodwill impairment test). Entities will apply the standard’s provisions prospectively. EQM adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.
|
|
B.
|
Acquisitions and Merger
|
May 2018 Acquisition
On April 25, 2018, EQT, Rice Midstream Holdings LLC, a wholly owned subsidiary of EQT, EQM and EQM Gathering Holdings, LLC (EQM Gathering), a wholly owned subsidiary of EQM, entered into a Contribution and Sale Agreement pursuant to which EQM Gathering acquired from EQT all of EQT's interests in ROM, Strike Force and Rice WV in exchange for an aggregate of
5,889,282
EQM common units and aggregate cash consideration of
$1.15 billion
, plus working capital adjustments. ROM owns a natural gas gathering system that gathers gas from wells located primarily in Belmont County, Ohio.
Strike Force
owns a
75%
limited liability company interest in Strike Force Midstream LLC (Strike Force Midstream). The
May 2018 Acquisition
closed on
May 22, 2018
with an effective date of
May 1, 2018
.
As a result of the recast, EQM recognized approximately
$38.0 million
of goodwill. The goodwill value was based on a valuation performed by EQT as of November 13, 2017 with regard to the Rice Merger. EQT recorded goodwill as the excess of the estimated enterprise value of ROM, Strike Force and Rice WV over the sum of the fair value amounts allocated to the assets and liabilities of ROM, Strike Force and Rice WV. Goodwill was allocated to the value attributed to additional growth opportunities, synergies and operating leverage within the Gathering segment. Prior to the recast, EQM had no goodwill. The following table summarizes the allocation of the fair value of the assets and liabilities of ROM, Strike Force and Rice WV as of November 13, 2017 through pushdown accounting from EQT. The preliminary allocation to certain assets and/or liabilities may be adjusted by material amounts as EQT continues to finalize the fair value estimates.
|
|
|
|
|
|
|
|
At November 13, 2017
|
|
|
(Thousands)
|
Estimated fair value of ROM, Strike Force and Rice WV
(1)
|
|
$
|
1,514,743
|
|
|
|
|
Estimated Fair Value of Assets Acquired and Liabilities Assumed:
|
|
|
Current assets
(2)
|
|
66,586
|
|
Intangible assets
(3)
|
|
623,200
|
|
Property and equipment, net
(4)
|
|
846,823
|
|
Other non-current assets
|
|
71
|
|
Current liabilities
(2)
|
|
(59,891
|
)
|
Total estimated fair value of assets acquired and liabilities assumed
|
|
$
|
1,476,789
|
|
Goodwill
|
|
37,954
|
|
|
|
(1)
|
Includes the estimated fair value attributable to noncontrolling interest of
$166 million
.
|
|
|
(2)
|
The fair value of current assets and current liabilities were assumed to approximate their carrying values.
|
|
|
(3)
|
The identifiable intangible assets for customer relationships were estimated by applying a discounted cash flow approach which was adjusted for customer attrition assumptions and projected market conditions.
|
|
|
(4)
|
The estimated fair value of long-lived property and equipment were determined utilizing estimated replacement cost adjusted for a usage or obsolescence factor.
|
As a result of the recast, EQM also recognized approximately
$623.2 million
in intangible assets. These intangible assets were valued by EQT based upon the estimated fair value of the customer contracts as of November 13, 2017. The customer contracts were assigned a useful life of
15
years and are amortized on a straight-line basis. Amortization expense for the three and six
months ended June 30, 2018 was
$10.4 million
and
$20.8 million
, respectively. As of June 30, 2018 and December 31, 2017, accumulated amortization was
$26.3 million
and
$5.5 million
, respectively. There was
no
amortization expense recognized for the three and six months ended June 30, 2017. The estimated annual amortization expense over the next five years is
$41.5 million
.
Gulfport Transaction
On May 1, 2018, pursuant to the Purchase and Sale Agreement dated April 25, 2018, by and among EQM, EQM Gathering, Gulfport Energy Corporation (Gulfport) and an affiliate of Gulfport, EQM Gathering acquired the remaining
25%
limited liability company interest in Strike Force Midstream not owned by
Strike Force
for
$175 million
(the Gulfport Transaction). As a result, EQM owned
100%
of Strike Force Midstream effective as of May 1, 2018.
EQM-RMP Merger
On April 25, 2018, EQM entered into an Agreement and Plan of Merger (the Merger Agreement) with Rice Midstream Partners LP (RMP), Rice Midstream Management LLC, the general partner of RMP (the RMP General Partner), the EQM General Partner, EQM Acquisition Sub, LLC, a wholly owned subsidiary of EQM (Merger Sub), EQM GP Acquisition Sub, LLC, a wholly owned subsidiary of EQM (GP Merger Sub), and, solely for certain limited purposes set forth therein, EQT. Pursuant to the Merger Agreement, on July 23, 2018, Merger Sub and GP Merger Sub merged with and into RMP and the RMP General Partner, respectively, with RMP and the RMP General Partner surviving as wholly owned subsidiaries of EQM (the EQM-RMP Merger). Pursuant to the Merger Agreement, each RMP common unit issued and outstanding immediately prior to the effective time of the EQM-RMP Merger was converted into the right to receive
0.3319
EQM common units (the Merger Consideration), the issued and outstanding incentive distributions rights of RMP were canceled and each outstanding award of phantom units in respect of RMP common units fully vested and converted into the right to receive the Merger Consideration, less applicable tax withholding, in respect of each RMP common unit subject thereto. The aggregate Merger Consideration consisted of approximately
34 million
EQM common units. As a result of the EQM-RMP Merger, RMP's common units are no longer publicly traded.
Also in connection with the completion of the EQM-RMP Merger, on July 23, 2018, EQM repaid the approximately
$260 million
of borrowings outstanding under the Credit Agreement, dated as of December 22, 2014, by and among RMP, as parent guarantor, Rice Midstream OpCo LLC, a wholly owned subsidiary of RMP, as borrower, Wells Fargo Bank, N.A., as administrative agent, and the lenders and other parties from time to time party thereto (the RMP Credit Agreement), and the RMP Credit Agreement was terminated.
|
|
C.
|
Revenue from Contracts with Customers
|
As discussed in Note A, EQM adopted ASU No. 2014-09,
Revenue from Contracts with Customers
, on January 1, 2018 using the modified retrospective method of adoption. EQM applied the ASU to all open contracts as of the date of initial application. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not materially change EQM's amount and timing of revenues.
EQM provides gathering, transmission and storage services in two manners: firm service and interruptible service. Firm service contracts are typically long term and include firm reservation fees, which are fixed, monthly charges for the guaranteed reservation of pipeline or storage capacity. Volumetric based fees under firm contracts include usage fees and charges for actual volumes transported, gathered or stored in excess of the firm contracted volume. Interruptible service contracts include volumetric based fees, which are charges for the volume of gas actually gathered, transported or stored and do not guarantee access to the pipeline or storage facility. These contracts can be short or long term. Firm and interruptible contracts are billed at the end of each calendar month, with payment typically due within
21
days.
Under a firm contract, EQM has a stand-ready obligation to provide the service over the life of the contract. The performance obligation for firm reservation fee revenue is satisfied over time as the pipeline capacity is made available to the customer. As such, EQM recognizes firm reservation fee revenue evenly over the contract period, using a time-elapsed output method to measure progress. The performance obligation for volumetric based fee revenues for usage fees under firm and interruptible contracts is generally satisfied upon EQM's monthly billing to the customer for actual volumes gathered, transported or stored during the month. The amount billed corresponds directly to the value of EQM's performance to date as the customer obtains value as each volume is gathered, transported or stored.
Certain of EQM's gas gathering agreements are structured with minimum volume commitments (MVC), which specify minimum quantities for which a customer will be charged regardless of actual quantities gathered under the contract. Revenue is recognized for MVCs when the performance obligation has been met, which is the earlier of when the gas is gathered or when it is remote that the producer will be able to meet its MVC.
For the
three and six
months ended
June 30, 2018
and
2017
, all revenues recognized on EQM's statements of consolidated operations are from contracts with customers. As of
June 30, 2018
and
December 31, 2017
, all receivables recorded on EQM's consolidated balance sheets represent performance obligations that have been satisfied and for which an unconditional right to consideration exists.
The table below provides disaggregated revenue information by EQM business segment for the
three and six
months ended
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
111,702
|
|
|
$
|
82,222
|
|
|
$
|
193,924
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
|
9,956
|
|
|
4,828
|
|
|
14,784
|
|
Usage fees under interruptible contracts
(2)
|
|
58,958
|
|
|
2,095
|
|
|
61,053
|
|
Total volumetric based fee revenues
|
|
68,914
|
|
|
6,923
|
|
|
75,837
|
|
Total operating revenues
|
|
$
|
180,616
|
|
|
$
|
89,145
|
|
|
$
|
269,761
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
221,635
|
|
|
$
|
179,997
|
|
|
$
|
401,632
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
|
22,064
|
|
|
8,650
|
|
|
30,714
|
|
Usage fees under interruptible contracts
(2)
|
|
116,545
|
|
|
7,432
|
|
|
123,977
|
|
Total volumetric based fee revenues
|
|
138,609
|
|
|
16,082
|
|
|
154,691
|
|
Total operating revenues
|
|
$
|
360,244
|
|
|
$
|
196,079
|
|
|
$
|
556,323
|
|
|
|
(1)
|
Includes fees on volumes gathered and transported in excess of firm contracted capacity and also for transmission includes commodity charges and fees on all volumes transported under firm contracts.
|
|
|
(2)
|
Includes volumes from contracts under which EQM has agreed to hold capacity available but for which it does not receive a capacity reservation fee.
|
Based on total projected contractual revenues and including contracts associated with expected future capacity from expansion projects that are not yet fully constructed but for which EQM has entered into firm contracts, EQM's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately
8
and
15
years, respectively, as of
December 31, 2017
.
The following table summarizes the transaction price allocated to EQM's remaining performance obligations under all contracts with firm reservation fees and MVCs as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
(Thousands)
|
Gathering firm reservation fees
|
|
$
|
223,806
|
|
|
$
|
471,226
|
|
|
$
|
547,153
|
|
|
$
|
557,152
|
|
|
$
|
557,152
|
|
|
$
|
2,841,279
|
|
|
$
|
5,197,768
|
|
Gathering revenues supported by MVCs
|
|
—
|
|
|
65,700
|
|
|
71,370
|
|
|
71,175
|
|
|
71,175
|
|
|
136,875
|
|
|
416,295
|
|
Transmission firm reservation fees
|
|
179,786
|
|
|
347,061
|
|
|
347,261
|
|
|
341,769
|
|
|
338,010
|
|
|
2,602,572
|
|
|
4,156,459
|
|
Total
|
|
$
|
403,592
|
|
|
$
|
883,987
|
|
|
$
|
965,784
|
|
|
$
|
970,096
|
|
|
$
|
966,337
|
|
|
$
|
5,580,726
|
|
|
$
|
9,770,522
|
|
|
|
D.
|
Equity and Net Income per Limited Partner Unit
|
The following table summarizes EQM's limited partner common units and general partner units issued from January 1,
2018
through
June 30, 2018
. There were
no
issuances in
2017
.
|
|
|
|
|
|
|
|
|
|
|
Limited Partner Common Units
|
|
General Partner Units
|
|
Total
|
Balance at January 1, 2018
|
80,581,758
|
|
|
1,443,015
|
|
|
82,024,773
|
|
Common units issued
(1)
|
9,608
|
|
|
—
|
|
|
9,608
|
|
May 2018 Acquisition consideration
|
5,889,282
|
|
|
—
|
|
|
5,889,282
|
|
Balance at June 30, 2018
|
86,480,648
|
|
|
1,443,015
|
|
|
87,923,663
|
|
|
|
(1)
|
Units issued upon a resignation from the EQM General Partner's Board of Directors in February 2018.
|
As of
June 30, 2018
, EQGP owned
21,811,643
EQM common units, representing a
24.8%
limited partner interest,
1,443,015
EQM general partner units, representing a
1.6%
general partner interest, and all of the IDRs in EQM. As of
June 30, 2018
, EQT owned
5,889,282
EQM common units, representing a
6.7%
limited partner interest in EQM,
100%
of the non-economic general partner interest in EQGP and a
91.3%
limited partner interest in EQGP.
As a result of the EQM-RMP Merger, on July 23, 2018, an indirect wholly owned subsidiary of EQT received
9,544,530
EQM common units as Merger Consideration.
Net Income per Limited Partner Unit.
Net income attributable to the
May 2018 Acquisition
for the periods prior to May 1, 2018, was not allocated to the limited partners for purposes of calculating net income per limited partner unit as these pre-acquisition amounts were not available to the unitholders. The weighted average phantom unit awards included in the calculation of basic weighted average limited partner units outstanding was
17,369
and
21,041
for the
three months ended June 30, 2018
and
2017
, respectively, and
20,467
and
20,506
for the
six months ended June 30, 2018
and
2017
, respectively.
|
|
E.
|
Financial Information by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Revenues from external customers (including affiliates):
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
180,616
|
|
|
$
|
112,145
|
|
|
$
|
360,244
|
|
|
$
|
214,474
|
|
Transmission
|
89,145
|
|
|
84,670
|
|
|
196,079
|
|
|
182,413
|
|
Total operating revenues
|
$
|
269,761
|
|
|
$
|
196,815
|
|
|
$
|
556,323
|
|
|
$
|
396,887
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
121,631
|
|
|
$
|
83,425
|
|
|
$
|
252,513
|
|
|
$
|
157,129
|
|
Transmission
|
60,642
|
|
|
57,863
|
|
|
140,093
|
|
|
129,467
|
|
Total operating income
|
$
|
182,273
|
|
|
$
|
141,288
|
|
|
$
|
392,606
|
|
|
$
|
286,596
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income to net income:
|
|
|
|
|
|
|
|
|
|
|
Equity income
(1)
|
10,938
|
|
|
5,111
|
|
|
19,749
|
|
|
9,388
|
|
Other income
|
944
|
|
|
1,402
|
|
|
1,842
|
|
|
2,939
|
|
Net interest expense
|
20,683
|
|
|
8,662
|
|
|
31,399
|
|
|
16,588
|
|
Net income
|
$
|
173,472
|
|
|
$
|
139,139
|
|
|
$
|
382,798
|
|
|
$
|
282,335
|
|
|
|
(1)
|
Equity income is included in the Transmission segment.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(Thousands)
|
Segment assets:
|
|
|
|
|
|
Gathering
|
$
|
3,250,242
|
|
|
$
|
3,020,491
|
|
Transmission
(1)
|
2,505,947
|
|
|
1,948,047
|
|
Total operating segments
|
5,756,189
|
|
|
4,968,538
|
|
Headquarters, including cash
|
806,236
|
|
|
179,038
|
|
Total assets
|
$
|
6,562,425
|
|
|
$
|
5,147,576
|
|
|
|
(1)
|
The equity investment in the MVP Joint Venture was included in the headquarters segment prior to June 30, 2018. As of June 30, 2018, the investment in the MVP Joint Venture was included in the Transmission segment and the amount at December 31, 2017 has been recast to confirm with this presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
15,646
|
|
|
$
|
9,555
|
|
|
$
|
30,590
|
|
|
$
|
18,415
|
|
Transmission
|
12,430
|
|
|
11,845
|
|
|
24,871
|
|
|
23,532
|
|
Total
|
$
|
28,076
|
|
|
$
|
21,400
|
|
|
$
|
55,461
|
|
|
$
|
41,947
|
|
|
|
|
|
|
|
|
|
Expenditures for segment assets:
|
|
|
|
|
|
|
|
Gathering
|
$
|
139,099
|
|
|
$
|
53,708
|
|
|
$
|
252,297
|
|
|
$
|
102,546
|
|
Transmission
|
27,962
|
|
|
29,978
|
|
|
46,891
|
|
|
51,367
|
|
Total
(1)
|
$
|
167,061
|
|
|
$
|
83,686
|
|
|
$
|
299,188
|
|
|
$
|
153,913
|
|
|
|
(1)
|
EQM accrues capital expenditures when work has been completed but the associated bills have not yet been paid. These accrued amounts are excluded from capital expenditures in the statements of consolidated cash flows until they are paid in a subsequent period. Accrued capital expenditures were approximately
$62.3 million
,
$60.3 million
and
$66.0 million
at
June 30, 2018
, March 31, 2018 and
December 31, 2017
, respectively. Accrued capital expenditures were approximately
$31.2 million
,
$34.0 million
and
$26.7 million
at
June 30, 2017
,
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
F.
|
Related Party Transactions
|
In the ordinary course of business, EQM engages in transactions with EQT and its affiliates including, but not limited to, gas gathering agreements, transportation service and precedent agreements and storage agreements. Pursuant to an omnibus agreement, EQT performs centralized corporate, general and administrative services for EQM and provides a license for the use of the name "EQT" and related marks in connection with EQM's business. In exchange, EQM reimburses EQT for the expenses incurred by EQT in providing these services. The omnibus agreement also provides for certain indemnification obligations between EQM and EQT. Pursuant to a secondment agreement, employees of EQT and its affiliates may be seconded to EQM to provide operating and other services with respect to EQM's business under the direction, supervision and control of EQM. EQM reimburses EQT and its affiliates for the services provided by the seconded employees. The expenses for which EQM reimburses EQT and its affiliates may not necessarily reflect the actual expenses that EQM would incur on a stand-alone basis. EQM is unable to estimate what those expenses would be on a stand-alone basis.
|
|
G.
|
Investment in Unconsolidated Entity
|
The MVP Joint Venture is constructing the Mountain Valley Pipeline (MVP), an estimated
300
-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. EQM is the operator of the MVP and owned a
45.5%
interest in the MVP Joint Venture as of
June 30, 2018
. The MVP Joint Venture is 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 MVP Joint Venture is an equity method investment for accounting purposes as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.
In
May 2018
, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for
$445.9 million
, of which
$193.4 million
was paid in
July 2018
and
$252.5 million
is expected to be paid in the third quarter of 2018. The capital contribution payable has been reflected on the consolidated balance sheet as of
June 30, 2018
with a corresponding increase to EQM's investment in the MVP Joint Venture.
Equity income is primarily EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP.
As of
June 30, 2018
, 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. As of
June 30, 2018
, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately
$1,094 million
, which consists of the investment in unconsolidated entity balance on the consolidated balance sheet as of
June 30, 2018
and amounts that could have become due under EQM's performance guarantee as of that date.
The following tables summarize the unaudited condensed financial statements for the MVP Joint Venture.
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(Thousands)
|
Current assets
|
$
|
1,161,641
|
|
|
$
|
330,271
|
|
Noncurrent assets
|
1,334,266
|
|
|
747,728
|
|
Total assets
|
$
|
2,495,907
|
|
|
$
|
1,077,999
|
|
|
|
|
|
Current liabilities
|
$
|
290,855
|
|
|
$
|
65,811
|
|
Equity
|
2,205,052
|
|
|
1,012,188
|
|
Total liabilities and equity
|
$
|
2,495,907
|
|
|
$
|
1,077,999
|
|
Condensed Statements of Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Net interest income
|
$
|
7,732
|
|
|
$
|
2,730
|
|
|
$
|
13,915
|
|
|
$
|
4,977
|
|
AFUDC - equity
|
16,307
|
|
|
8,503
|
|
|
29,489
|
|
|
15,656
|
|
Net income
|
$
|
24,039
|
|
|
$
|
11,233
|
|
|
$
|
43,404
|
|
|
$
|
20,633
|
|
Credit Facility Borrowings
$1
Billion Facility.
EQM has a
$1 billion
credit facility that expires in July 2022. The
$1
Billion Facility is available to fund working capital requirements and capital expenditures, to purchase assets, to pay distributions and repurchase units and for general partnership purposes (including purchasing assets from EQT and other third parties). EQM's
$1
Billion Facility contains various provisions that, if violated, could result in termination of the credit facility, require early payment of amounts outstanding or similar actions. The most significant covenants and events of default relate to maintenance of a permitted leverage ratio, limitations on transactions with affiliates, limitations on restricted payments, insolvency events, nonpayment of scheduled principal or interest payments, acceleration of and certain other defaults under other financial obligations and change of control provisions. Under the
$1
Billion Facility, EQM is required to maintain a consolidated leverage ratio of not more than
5.00
to 1.00 (or not more than
5.50
to 1.00 for certain measurement periods following the consummation of certain acquisitions).
EQM had
no
letters of credit outstanding under its credit facility as of
June 30, 2018
and
December 31, 2017
. During the
three and six
months ended
June 30, 2018
, the maximum amount of EQM's outstanding borrowings under EQM's credit facility at any time was
$338 million
and
$420 million
, respectively, and the average daily balance was approximately
$122 million
and
$211 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
3.4%
and
3.2%
for the
three and six
months ended
June 30, 2018
, respectively. There were
no
borrowings outstanding at any time during the
three and six
months ended
June 30, 2017
. During the third quarter, EQM intends to increase its borrowing capacity from
$1 billion
up to
$2 billion
.
364
-Day Facility.
EQM has a
$500 million
,
364
-day, uncommitted revolving loan agreement with EQT that matures on October 24, 2018 and will automatically renew for successive
364
-day periods unless EQT delivers a non-renewal notice at least
60
days prior to the then current maturity date. Interest accrues on outstanding borrowings at an interest rate equal to the rate then applicable to similar loans under the
$1
Billion Facility, or a successor revolving credit facility, less the sum of (i) the then applicable commitment fee under the
$1
Billion Facility and (ii) 10 basis points.
EQM had
no
borrowings outstanding on the
364
-Day Facility as of
June 30, 2018
and
December 31, 2017
. There were
no
borrowings outstanding at any time during the
three and six
months ended
June 30, 2018
. During the
three and six
months ended
June 30, 2017
, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was
$100 million
and the average daily balances were approximately
$55 million
and
$40 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
2.2%
and
2.1%
for the
three and six
months ended
June 30, 2017
, respectively. EQM expects EQT to terminate the 364-Day Facility at or prior to the proposed separation of EQT's production and midstream businesses (the Separation).
EQM Term Loan Facility
. On April 25, 2018, EQM entered into a
$2.5 billion
unsecured multi-draw
364
-day term loan facility with a syndicate of lenders. The EQM Term Loan Facility was used to fund the cash consideration for the
May 2018 Acquisition
, to repay borrowings under EQM's
$1
Billion Facility and for other general partnership purposes. During the second quarter 2018, the balance outstanding under the EQM Term Loan Facility was repaid, and the EQM Term Loan Facility was terminated on
June 25, 2018
in connection with EQM's issuance of the 2018 Senior Notes (defined below). As a result of the termination, EQM expensed
$3 million
of deferred issuance costs. From April 25, 2018 through
June 25, 2018
, the maximum amount of EQM's outstanding borrowings under the EQM Term Loan Facility at any time was
$1,825 million
and the average daily balance was approximately
$1,231 million
. EQM incurred interest at a weighted average annual interest rate of approximately
3.3%
for the period from April 25, 2018 through
June 25, 2018
.
2018 Senior Notes.
During the second quarter of 2018, EQM issued
4.75%
senior notes due July 15, 2023 in the aggregate principal amount of
$1.1 billion
,
5.50%
senior notes due July 15, 2028 in the aggregate principal amount of
$850 million
and
6.50%
senior notes due July 15, 2048 in the aggregate principal amount of
$550 million
(collectively, the 2018 Senior Notes). EQM received net proceeds from the offering of approximately
$2,465.8 million
, inclusive of a discount of
$11.8 million
and estimated debt issuance costs of
$22.4 million
. The net proceeds were used to repay the balance outstanding under the EQM Term Loan Facility and the RMP Credit Agreement and the remainder is expected to be used for general partnership purposes. The 2018 Senior Notes were issued pursuant to new supplemental indentures to EQM's existing indenture dated August 1, 2014. The 2018 Senior Notes contain covenants that limit EQM's ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of the EQM's assets.
As of
June 30, 2018
, EQM was in compliance with all debt provisions and covenants.
|
|
I.
|
Fair Value Measurements
|
The carrying values of cash and cash equivalents, accounts receivable, amounts due to/from related parties and accounts payable approximate fair value due to the short maturity of the instruments; these are considered Level 1 fair value measurements. The carrying value of the credit facility borrowings approximates fair value as the interest rates are based on prevailing market rates; this is considered a Level 1 fair value measurement. As EQM's senior notes are not actively traded, their fair values are considered Level 2 fair value measurements and are estimated using a standard industry income approach model that applies a discount rate based on market rates for debt with similar remaining time to maturity and credit risk. As of
June 30, 2018
and
December 31, 2017
, the estimated fair value of EQM's senior notes was approximately
$3,454 million
and
$1,006 million
, respectively, and the carrying value of EQM's senior notes was approximately
$3,454 million
and
$987 million
, respectively. The fair value of the Preferred Interest is a Level 3 fair value measurement and is estimated using an income approach model that applies a market-based discount rate. As of
June 30, 2018
and
December 31, 2017
, the estimated fair value of the Preferred Interest was approximately
$125 million
and
$133 million
, respectively, and the carrying value of the Preferred Interest was approximately
$117 million
and
$119 million
, respectively.
On
July 24, 2018
, the Board of Directors of the EQM General Partner declared a cash distribution to EQM's unitholders for the
second quarter
of
2018
of
$1.09
per common unit. The cash distribution will be paid on
August 14, 2018
to unitholders of record at the close of business on
August 3, 2018
. Based on the EQM common units outstanding on
July 26, 2018
, cash distributions to EQGP will be approximately
$23.8 million
related to its limited partner interest,
$2.4 million
related to its general partner interest and
$68.1 million
related to its IDRs in EQM. The 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
second quarter
2018
distribution.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations in conjunction with the 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 "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 EQM and its subsidiaries, including guidance regarding EQM's gathering, transmission and storage and water revenue and volume growth; the weighted average contract life of gathering, transmission and storage contracts; infrastructure programs (including the timing, cost, capacity and sources of funding with respect to gathering, transmission and water expansion projects); the cost, capacity, timing of regulatory approvals and anticipated in-service date of the MVP and MVP Southgate; the ultimate terms, partners and structure of the MVP Joint Venture; expansion projects in EQM's operating areas and in areas that would provide access to new markets; asset acquisitions, including EQM's ability to complete asset acquisitions; the impact and outcome of pending and future litigation; the timing of the proposed separation of EQT's production and midstream businesses (the Separation) and the parties' ability to complete the Separation; the amount and timing of distributions, including expected increases; the amounts and timing of projected capital contributions and operating and capital expenditures, including the amount of capital expenditures reimbursable by EQT; the impact of commodity prices on EQM's business; liquidity and financing requirements, including sources and availability and EQM's plan to increase its borrowing capacity up to $2 billion; the effects of government regulation; 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. EQM has based these forward-looking statements on current expectations and assumptions about future events. While EQM 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 are beyond EQM's control. The risks and uncertainties that may affect the operations, performance and results of EQM's business and forward-looking statements include, but are not limited to, those set forth under Item 1A, "Risk Factors" in EQM's Annual Report on Form 10-K for the year ended
December 31, 2017
, as updated by Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q.
Any forward-looking statement speaks only as of the date on which such statement is made and EQM 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 that 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 EQM. The agreements may contain representations and warranties by EQM, 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 EQM or its affiliates as of the date they were made or at any other time.
EXECUTIVE OVERVIEW
For the
three months ended June 30, 2018
, net income attributable to EQM was
$172.6 million
compared to
$139.1 million
for the
three months ended June 30, 2017
.
The increase resulted primarily from higher gathering and transmission revenues, which were driven mainly by the May 2018 Acquisition which supports affiliate and third party production development, and higher equity income, partly offset by higher operating expenses and higher net interest expense.
For the
six months ended June 30, 2018
, net income attributable to EQM was
$379.5 million
compared to
$282.3 million
for the
six months ended June 30, 2017
.
The increase primarily resulted from higher gathering and transmission revenues, which
were driven mainly by the May 2018 Acquisition which supports affiliate and third party production development, and higher equity income, partly offset by an increase in operating expenses and higher net interest expense.
EQM declared a cash distribution to its unitholders of
$1.09
per unit on
July 24, 2018
, which was
2%
higher than the first quarter 2018 distribution of
$1.065
per unit and
17%
higher than the
second quarter
2017
distribution of
$0.935
per unit.
Business Segment Results
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources. Other income and net interest expense are managed on a consolidated basis. EQM has presented each segment's operating income and various operational measures in the following sections. Management believes that the presentation of this information provides useful information to management and investors regarding the financial condition, results of operations and trends of segments. EQM has reconciled each segment's operating income to EQM's consolidated operating income and net income in Note E to the consolidated financial statements.
GATHERING RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
(1)
|
|
2017
|
|
% Change
|
|
2018
(1)
|
|
2017
|
|
% Change
|
|
(Thousands, except per day amounts)
|
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
Firm reservation fee revenues
|
$
|
111,702
|
|
|
$
|
101,858
|
|
|
9.7
|
|
$
|
221,635
|
|
|
$
|
196,129
|
|
|
13.0
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Usage fees under firm contracts
(2)
|
9,956
|
|
|
6,479
|
|
|
53.7
|
|
22,064
|
|
|
11,300
|
|
|
95.3
|
Usage fees under interruptible contracts
(3)
|
58,958
|
|
|
3,808
|
|
|
1,448.3
|
|
116,545
|
|
|
7,045
|
|
|
1,554.3
|
Total volumetric based fee revenues
|
68,914
|
|
|
10,287
|
|
|
569.9
|
|
138,609
|
|
|
18,345
|
|
|
655.6
|
Total operating revenues
|
180,616
|
|
|
112,145
|
|
|
61.1
|
|
360,244
|
|
|
214,474
|
|
|
68.0
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
15,777
|
|
|
10,293
|
|
|
53.3
|
|
27,686
|
|
|
20,633
|
|
|
34.2
|
Selling, general and administrative
|
17,175
|
|
|
8,872
|
|
|
93.6
|
|
28,682
|
|
|
18,297
|
|
|
56.8
|
Depreciation
|
15,646
|
|
|
9,555
|
|
|
63.7
|
|
30,590
|
|
|
18,415
|
|
|
66.1
|
Amortization of intangible assets
|
10,387
|
|
|
—
|
|
|
100.0
|
|
20,773
|
|
|
—
|
|
|
100.0
|
Total operating expenses
|
58,985
|
|
|
28,720
|
|
|
105.4
|
|
107,731
|
|
|
57,345
|
|
|
87.9
|
Operating income
|
$
|
121,631
|
|
|
$
|
83,425
|
|
|
45.8
|
|
$
|
252,513
|
|
|
$
|
157,129
|
|
|
60.7
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathered volumes (BBtu per day)
|
|
|
|
|
|
|
|
|
|
|
|
Firm capacity reservation
|
2,007
|
|
|
1,780
|
|
|
12.8
|
|
1,986
|
|
|
1,754
|
|
|
13.2
|
Volumetric based services
(4)
|
2,494
|
|
|
281
|
|
|
787.5
|
|
2,514
|
|
|
253
|
|
|
893.7
|
Total gathered volumes
|
4,501
|
|
|
2,061
|
|
|
118.4
|
|
4,500
|
|
|
2,007
|
|
|
124.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
$
|
139,099
|
|
|
$
|
53,708
|
|
|
159.0
|
|
$
|
252,297
|
|
|
$
|
102,546
|
|
|
146.0
|
|
|
(1)
|
Includes the pre-acquisition results of the May 2018 Acquisition, which was effective on May 1, 2018. The recast is for the period the acquired businesses were under the common control of EQT, which began on November 13, 2017 as a result of the Rice Merger.
|
|
|
(2)
|
Includes fees on volumes gathered in excess of firm contracted capacity.
|
|
|
(3)
|
Includes volumes from contracts under which EQM has agreed to hold capacity available but for which it does not receive a capacity reservation fee.
|
|
|
(4)
|
Includes volumes gathered under interruptible contracts and volumes gathered in excess of firm contracted capacity.
|
Three Months Ended June 30, 2018
Compared to
Three Months Ended June 30, 2017
Gathering revenues increased by
$68.5 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
primarily driven by the May 2018 Acquisition and affiliate and third party production development in the Marcellus Shale. Firm reservation fee revenues increased primarily as a result of increased affiliate and third party contracted gathering capacity, including that on the Range Resources Corporation (Range Resources) header pipeline project, and higher rates on various affiliate wellhead expansion projects in the current period. Usage fees under firm contracts increased due to increased third party and affiliate volumes gathered in excess of firm contracted capacity. Usage fees under interruptible contracts increased as a result of the May 2018 Acquisition, which added revenues of $55.3 million for the three months ended June 30, 2018.
Operating expenses increased by
$30.3 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
.
Operating and maintenance expense increased as a result of the May 2018 Acquisition as well as an increase in repairs and maintenance expense consistent with the growth of the business. Selling, general and administrative increased as a result of the May 2018 Acquisition and transaction costs associated with that acquisition and the EQM-RMP Merger. Depreciation expense increased primarily as a result of the May 2018 Acquisition and additional assets placed in-service, including those associated with the Range Resources header pipeline project and various wellhead gathering expansion projects. Amortization of intangible assets relates to the May 2018 Acquisition.
Six Months Ended June 30, 2018
Compared to
Six Months Ended June 30, 2017
Gathering revenues increased by
$145.8 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
primarily driven by the May 2018 Acquisition and affiliate and third party production development in the Marcellus Shale. Firm reservation fee revenues increased primarily as a result of increased affiliate and third party contracted gathering capacity, including that on the Range Resources header pipeline project, and higher rates on various affiliate wellhead expansion projects in the current period. Usage fees under firm contracts increased due to increased third party and affiliate volumes gathered in excess of firm contracted capacity. Usage fees under interruptible contracts increased as a result of the May 2018 Acquisition, which added revenues of $109.0 million for the six months ended June 30, 2018.
Operating expenses increased by
$50.4 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
.
Operating and maintenance expense increased as a result of the May 2018 Acquisition as well as an increase in repairs and maintenance expense consistent with the growth of the business. Selling, general and administrative increased as a result of the May 2018 Acquisition and transaction costs associated with that acquisition and the EQM-RMP Merger. Depreciation expense increased primarily as a result of the May 2018 Acquisition and additional assets placed in-service, including those associated with the Range Resources header pipeline project and various wellhead gathering expansion projects. Amortization of intangible assets relates to the May 2018 Acquisition.
TRANSMISSION RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
% Change
|
|
2018
|
|
2017
|
|
% Change
|
|
(Thousands, except per day amounts)
|
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
Firm reservation fee revenues
|
$
|
82,222
|
|
|
$
|
79,512
|
|
|
3.4
|
|
|
$
|
179,997
|
|
|
$
|
171,786
|
|
|
4.8
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
4,828
|
|
|
3,503
|
|
|
37.8
|
|
|
8,650
|
|
|
6,360
|
|
|
36.0
|
|
Usage fees under interruptible contracts
|
2,095
|
|
|
1,655
|
|
|
26.6
|
|
|
7,432
|
|
|
4,267
|
|
|
74.2
|
|
Total volumetric based fee revenues
|
6,923
|
|
|
5,158
|
|
|
34.2
|
|
|
16,082
|
|
|
10,627
|
|
|
51.3
|
|
Total operating revenues
|
89,145
|
|
|
84,670
|
|
|
5.3
|
|
|
196,079
|
|
|
182,413
|
|
|
7.5
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
8,810
|
|
|
8,022
|
|
|
9.8
|
|
|
16,361
|
|
|
14,499
|
|
|
12.8
|
|
Selling, general and administrative
|
7,263
|
|
|
6,940
|
|
|
4.7
|
|
|
14,754
|
|
|
14,915
|
|
|
(1.1
|
)
|
Depreciation
|
12,430
|
|
|
11,845
|
|
|
4.9
|
|
|
24,871
|
|
|
23,532
|
|
|
5.7
|
|
Total operating expenses
|
28,503
|
|
|
26,807
|
|
|
6.3
|
|
|
55,986
|
|
|
52,946
|
|
|
5.7
|
|
Operating income
|
$
|
60,642
|
|
|
$
|
57,863
|
|
|
4.8
|
|
|
$
|
140,093
|
|
|
$
|
129,467
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income
|
$
|
10,938
|
|
|
$
|
5,111
|
|
|
114.0
|
|
|
$
|
19,749
|
|
|
$
|
9,388
|
|
|
110.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission pipeline throughput (BBtu per day)
|
|
|
|
|
|
|
|
|
|
|
|
Firm capacity reservation
|
2,826
|
|
|
2,218
|
|
|
27.4
|
|
|
2,821
|
|
|
2,171
|
|
|
29.9
|
|
Volumetric based services
(2)
|
41
|
|
|
21
|
|
|
95.2
|
|
|
41
|
|
|
24
|
|
|
70.8
|
|
Total transmission pipeline throughput
|
2,867
|
|
|
2,239
|
|
|
28.0
|
|
|
2,862
|
|
|
2,195
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average contracted firm transmission reservation commitments (BBtu per day)
|
3,607
|
|
|
3,341
|
|
|
8.0
|
|
|
3,873
|
|
|
3,542
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
$
|
27,962
|
|
|
$
|
29,978
|
|
|
(6.7
|
)
|
|
$
|
46,891
|
|
|
$
|
51,367
|
|
|
(8.7
|
)
|
|
|
(1)
|
Includes fees on volumes transported in excess of firm contracted capacity as well as commodity charges and fees on all volumes transported under firm contracts.
|
|
|
(2)
|
Includes volumes transported under interruptible contracts and volumes transported in excess of firm contracted capacity.
|
Three Months Ended June 30, 2018
Compared to
Three Months Ended June 30, 2017
Transmission and storage revenues increased by
$4.5 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
.
Firm reservation fee revenues increased due to higher contractual rates on existing contracts with affiliates and third parties in the current period. Usage fees under firm contracts increased primarily due to increased commodity charges on higher firm contracted volumes. The increase in usage fees under interruptible contracts primarily relates to higher parking revenue, which does not have associated pipeline throughput.
Operating expenses increased by
$1.7 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
consistent with the growth of the business.
The increase in equity income of
$5.8 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
was primarily related to the increase in the MVP Joint Venture's AFUDC on the MVP.
Six Months Ended June 30, 2018
Compared to
Six Months Ended June 30, 2017
Transmission and storage revenues increased by
$13.7 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
.
Firm reservation fee revenues increased due to higher contractual rates on existing contracts with third parties and affiliates in the current period, and third parties contracting for additional firm capacity. Usage fees under firm contracts increased primarily due to increased commodity charges. The increase in usage fees under interruptible contracts primarily relates to higher parking revenue, which does not have associated pipeline throughput.
Operating expenses increased by
$3.0 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
consistent with the growth of the business.
Equity income increased
$10.4 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
primarily due to the increase in the MVP Joint Venture's AFUDC on the MVP.
Other Income Statement Items
Other income decreased by
$0.5 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
and
$1.1 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
as a result of lower AFUDC – equity, which was related to the timing of spending on regulated projects.
The increase in net interest expense of
$12.0 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
and
$14.8 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
was primarily due to increased interest of $7.6 million and $9.9 million, respectively, on higher borrowings on EQM's credit facilities, deferred issuance costs expensed in the second quarter of 2018 associated with the termination of the EQM Term Loan and interest incurred on the 2018 Senior Notes.
Net income attributable to noncontrolling interest for the
three and six
months ended
June 30, 2018
was
$0.9 million
and
$3.3 million
, respectively. As discussed in Note A, on May 1, 2018, EQM acquired the remaining 25% limited liability company interest in Strike Force Midstream. As a result, EQM owned
100%
of Strike Force Midstream effective as of May 1, 2018.
See "Investing Activities" and "Capital Requirements" in the "Capital Resources and Liquidity" section below for a discussion of capital expenditures.
Non-GAAP Financial Measures
Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of EQM's consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess:
|
|
•
|
EQM's operating performance as compared to other publicly traded partnerships in the midstream energy industry without regard to historical cost basis or, in the case of adjusted EBITDA, financing methods;
|
|
|
•
|
the ability of EQM's assets to generate sufficient cash flow to make distributions to EQM's unitholders;
|
|
|
•
|
EQM's ability to incur and service debt and fund capital expenditures; and
|
|
|
•
|
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
|
EQM believes that adjusted EBITDA and distributable cash flow provide useful information to investors in assessing its financial condition and results of operations. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because adjusted EBITDA and distributable cash flow may be defined differently by other companies in its industry, EQM's adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing the utility of the measures. Distributable cash flow should not be viewed as indicative of the actual amount of cash that EQM has available for distributions from operating surplus or that it plans to distribute.
Reconciliation of Non-GAAP Financial Measures
The following table presents a reconciliation of EQM's non-GAAP financial measures of adjusted EBITDA and distributable cash flow with the most directly comparable EQM GAAP financial measures of net income attributable to EQM and net cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Net income attributable to EQM
|
$
|
172,619
|
|
|
$
|
139,139
|
|
|
$
|
379,452
|
|
|
$
|
282,335
|
|
Add:
|
|
|
|
|
|
|
|
Net interest expense
|
20,683
|
|
|
8,662
|
|
|
31,399
|
|
|
16,588
|
|
Depreciation
|
28,076
|
|
|
21,400
|
|
|
55,461
|
|
|
41,947
|
|
Amortization of intangible assets
|
10,387
|
|
|
—
|
|
|
20,773
|
|
|
—
|
|
Preferred Interest payments
|
2,746
|
|
|
2,746
|
|
|
5,492
|
|
|
5,492
|
|
Non-cash long-term compensation expense
|
—
|
|
|
—
|
|
|
331
|
|
|
225
|
|
Transaction costs
(1)
|
3,424
|
|
|
—
|
|
|
3,424
|
|
|
—
|
|
Less:
|
|
|
|
|
|
|
|
Equity income
|
(10,938
|
)
|
|
(5,111
|
)
|
|
(19,749
|
)
|
|
(9,388
|
)
|
AFUDC – equity
|
(1,072
|
)
|
|
(1,598
|
)
|
|
(2,137
|
)
|
|
(3,297
|
)
|
Adjusted EBITDA attributable to the May 2018 Acquisition
(2)
|
(16,417
|
)
|
|
—
|
|
|
(60,507
|
)
|
|
—
|
|
Adjusted EBITDA
|
$
|
209,508
|
|
|
$
|
165,238
|
|
|
$
|
413,939
|
|
|
$
|
333,902
|
|
Less:
|
|
|
|
|
|
|
|
Net interest expense excluding interest income on the Preferred Interest
|
(22,336
|
)
|
|
(10,374
|
)
|
|
(34,836
|
)
|
|
(20,026
|
)
|
Capitalized interest and AFUDC – debt
|
(1,940
|
)
|
|
(1,008
|
)
|
|
(2,757
|
)
|
|
(2,608
|
)
|
Ongoing maintenance capital expenditures net of expected reimbursements
(3)
|
(7,115
|
)
|
|
(3,462
|
)
|
|
(10,980
|
)
|
|
(6,070
|
)
|
Transaction costs
|
(3,424
|
)
|
|
—
|
|
|
(3,424
|
)
|
|
—
|
|
Distributable cash flow
|
$
|
174,693
|
|
|
$
|
150,394
|
|
|
$
|
361,942
|
|
|
$
|
305,198
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
220,225
|
|
|
$
|
158,883
|
|
|
$
|
441,646
|
|
|
$
|
320,305
|
|
Adjustments:
|
|
|
|
|
|
|
|
Capitalized interest and AFUDC – debt
|
(1,940
|
)
|
|
(1,008
|
)
|
|
(2,757
|
)
|
|
(2,608
|
)
|
Principal payments received on the Preferred Interest
|
1,093
|
|
|
1,034
|
|
|
2,172
|
|
|
2,054
|
|
Ongoing maintenance capital expenditures net of expected reimbursements
(3)
|
(7,115
|
)
|
|
(3,462
|
)
|
|
(10,980
|
)
|
|
(6,070
|
)
|
Adjusted EBITDA attributable to the May 2018 Acquisition
(2)
|
(16,417
|
)
|
|
—
|
|
|
(60,507
|
)
|
|
—
|
|
Other, including changes in working capital
|
(21,153
|
)
|
|
(5,053
|
)
|
|
(7,632
|
)
|
|
(8,483
|
)
|
Distributable cash flow
|
$
|
174,693
|
|
|
$
|
150,394
|
|
|
$
|
361,942
|
|
|
$
|
305,198
|
|
|
|
(1)
|
There were no transaction costs for the
three and six
months ended
June 30, 2017
.
|
|
|
(2)
|
Adjusted EBITDA attributable to the
May 2018 Acquisition
for the period prior to May 1, 2018 was excluded from EQM's adjusted EBITDA calculations as these amounts were generated by the
May 2018 Acquisition
prior to acquisition by EQM; therefore, the amounts could not have been distributed to EQM's unitholders. Adjusted EBITDA attributable to the May 2018 Acquisition for the
three and six
months ended
June 30, 2018
was calculated as net income of
$11.4 million
and
$41.0 million
, respectively, plus depreciation expense of
$1.6 million
and
$5.8 million
, respectively, plus amortization of intangible assets of
$3.5 million
and
$13.8 million
, respectively, less interest income of less than
$0.1 million
and
$0.1 million
, respectively.
|
|
|
(3)
|
Ongoing maintenance capital expenditures net of expected reimbursements excludes ongoing maintenance that EQM expects to be reimbursed or that was reimbursed by EQT under the terms of EQM's omnibus agreement of
$0.6 million
and
zero
for the
three months
|
ended June 30, 2018
and
2017
, respectively, and
$3.4 million
and
$1.0 million
for the
six months ended June 30, 2018
and
2017
, respectively.
See "Executive Overview" above for a discussion of net income attributable to EQM, the GAAP financial measure most directly comparable to adjusted EBITDA. EQM's adjusted EBITDA increased by
$44.3 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
and
$80.0 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
primarily as a result of higher operating income on increased revenues driven by production development in the Marcellus Shale.
Net cash provided by operating activities, the GAAP financial measure most directly comparable to distributable cash flow, increased by
$121.3 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
as discussed in "Capital Resources and Liquidity." Distributable cash flow increased by
$24.3 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
and
$56.7 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
mainly attributable to the increase in EQM's adjusted EBITDA, partly offset by increased net interest expense and ongoing maintenance capital expenditures.
Outlook
On February 21, 2018, EQT announced a plan to separate its upstream and midstream businesses, creating a standalone publicly traded corporation (SpinCo) that will focus on midstream operations. Following the Separation, SpinCo will own the midstream interests held by EQT, including the interests in EQM and EQGP.
See Note B to the consolidated financial statements for a discussion of the EQM-RMP Merger, which was completed on July 23, 2018.
EQM's principal business objective is to increase the quarterly cash distributions it pays to its unitholders over time while ensuring the ongoing growth of its business. EQM believes that it is well positioned to achieve growth based on its strategically located assets, which cover portions of the Marcellus, Utica and Upper Devonian Shales that lack substantial natural gas pipeline infrastructure. EQM believes it has a competitive advantage in pursuing economically attractive organic expansion projects in its areas of operations, which EQM believes will be a key driver of growth in the future. EQM is also currently pursuing organic growth projects that are expected to provide access to markets in the Gulf Coast and Southeast regions. Additionally, EQM may pursue asset acquisitions from third parties.
EQM expects that the following expansion projects will allow it to capitalize on drilling activity by EQT and third party producers:
|
|
•
|
Mountain Valley Pipeline
.
The MVP Joint Venture is a joint venture with affiliates of each of NextEra Energy, Inc., Consolidated Edison, Inc., WGL Holdings, Inc. and RGC Resources, Inc. EQM is the operator of the MVP and owned a 45.5% interest in the MVP Joint Venture as of
June 30, 2018
.
The 42 inch diameter MVP has a targeted capacity of 2.0 Bcf per day and is estimated to span 300 miles extending from EQM's existing transmission and storage system in Wetzel County, West Virginia to Pittsylvania County, Virginia, providing access to the growing Southeast demand markets.
As currently designed, the total cost for the MVP is estimated to be $3.5 billion to $3.7 billion, excluding AFUDC, with EQM funding its proportionate share through capital contributions made to the MVP Joint Venture.
In 2018, EQM expects to provide capital contributions of $1.0 billion to $1.2 billion to the MVP Joint Venture. The MVP Joint Venture has secured a total of 2.0 Bcf per day of firm capacity commitments at 20-year terms, including an initial 1.29 Bcf per day firm capacity commitment by EQT, and is currently in negotiation with additional shippers who have expressed interest in the MVP project.
In October 2017, the FERC issued the Certificate of Public Convenience and Necessity for the MVP project. In the first quarter of 2018, the MVP Joint Venture received limited notice to proceed with certain construction activities from the FERC and commenced construction.
The MVP Joint Venture is targeted to be placed in-service during the first quarter of 2019.
In April 2018, the MVP Joint Venture announced the MVP Southgate project, a proposed 70-mile interstate pipeline that will extend from the MVP at Pittsylvania County, Virginia to new delivery points in Rockingham and Alamance Counties, North Carolina. The MVP Southgate project is anchored by a firm capacity commitment from PSNC Energy. The preliminary MVP Southgate project cost estimate is $350 million to $500 million, which is expected to be spent in 2019 and 2020. EQM is expected to have between 33% and 48% ownership in the MVP Southgate project and will operate the pipeline. Subject to approval by the FERC, the MVP Southgate has a targeted in-service date of the fourth quarter 2020.
|
|
|
•
|
Affiliate Wellhead Gathering Expansion
.
EQM plans to invest approximately $750 million during 2018 in gathering expansion projects, primarily wellhead and header projects in Pennsylvania, West Virginia and Ohio, including
|
commencing preliminary construction activities on the Hammerhead project, a 1.2 Bcf per day gathering header pipeline connecting natural gas produced in Pennsylvania and West Virginia to the MVP.
|
|
•
|
Transmission Expansion
.
EQM plans to invest approximately $100 million during 2018 in other transmission expansion projects, primarily the Equitrans Expansion project, which is designed to provide north-to-south capacity on the mainline Equitrans system for deliveries to the MVP.
|
|
|
•
|
Water Projects.
In 2018, EQM plans to invest approximately $25 million on water infrastructure projects.
|
See further discussion of capital expenditures in the "Capital Requirements" section below.
Capital Resources and Liquidity
EQM's principal liquidity requirements are to finance its operations, fund capital expenditures, acquisitions and capital contributions to the MVP Joint Venture, make cash distributions and satisfy any indebtedness obligations. EQM's ability to meet these liquidity requirements will depend on its ability to generate cash in the future as well as its ability to raise capital in banking, capital and other markets. EQM's available sources of liquidity include cash generated from operations, borrowing under EQM's credit facilities, cash on hand, debt offerings and issuances of additional EQM partnership units.
Operating Activities
Net cash flows provided by operating activities was
$441.6 million
for the
six months ended June 30, 2018
compared to
$320.3 million
for the
six months ended June 30, 2017
.
The increase was primarily driven by higher operating income for which contributing factors are discussed in the "Executive Overview" and "Business Segment Results of Operations" sections herein.
Investing Activities
Net cash flows used in investing activities was
$1,676.7 million
for the
six months ended June 30, 2018
compared to
$207.3 million
for the
six months ended June 30, 2017
.
The increase was primarily attributable to the net assets acquired from EQT in the May 2018 Acquisition, increased capital contributions to the MVP Joint Venture consistent with the start of construction on the MVP and increased capital expenditures as further described in
"Capital Requirements."
Financing Activities
Net cash provided by financing activities was
$1,875.1 million
for the
six months ended June 30, 2018
compared to net cash used in financing activities of
$161.8 million
for the
six months ended June 30, 2017
. For the
six months ended June 30, 2018
, the primary source of financing cash flows was net proceeds from the 2018 Senior Notes offering, while the primary uses of financing cash flows were distributions paid to unitholders, net repayments on EQM's credit facilities and the Gulfport Transaction. For the
six months ended June 30, 2017
, the primary use of financing cash flows was distributions paid to unitholders.
Capital Requirements
The gathering, transmission and storage businesses are capital intensive, requiring significant investment to develop new facilities and to maintain and upgrade existing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Expansion capital expenditures
(1)
|
$
|
159,968
|
|
|
$
|
80,224
|
|
|
$
|
284,787
|
|
|
$
|
146,869
|
|
Ongoing maintenance
|
7,093
|
|
|
3,462
|
|
|
14,401
|
|
|
7,044
|
|
Total capital expenditures
(2)
|
$
|
167,061
|
|
|
$
|
83,686
|
|
|
$
|
299,188
|
|
|
$
|
153,913
|
|
|
|
(1)
|
Expansion capital expenditures do not include capital contributions made to the MVP Joint Venture of
$65.8 million
and
$40.2 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$182.8 million
and
$59.9 million
for the six months ended June 30, 2018 and 2017, respectively.
|
|
|
(2)
|
EQM accrues capital expenditures when work has been completed but the associated bills have not yet been paid. These accrued amounts are excluded from capital expenditures in the statements of consolidated cash flows until they are paid in a subsequent period. See Note E to the consolidated financial statements.
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Expansion capital expenditures increased by
$79.7 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
and
$137.9 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
primarily as a result of increased spending on the Hammerhead project, various wellhead gathering expansion projects and the Equitrans Expansion project, partly offset by decreased spending on the Range Resources header pipeline project. The final phase of the Range Resources header pipeline project was placed in-service during the second quarter of 2017.
Ongoing maintenance increased by
$3.6 million
for the
three months ended June 30, 2018
compared to the
three months ended June 30, 2017
and
$7.4 million
for the
six months ended June 30, 2018
compared to the
six months ended June 30, 2017
primarily as a result of higher assets in service and timing of ongoing maintenance projects.
In 2018, capital contributions to the MVP Joint Venture are expected to be $1.0 billion to $1.2 billion, depending on the timing of the construction of the MVP, expansion capital expenditures are expected to be approximately $875 million and ongoing maintenance capital expenditures are expected to be approximately $45 million, net of reimbursements. As a result of the closing of the EQM-RMP Merger on July 23, 2018, capital expenditures include expected capital expenditures of RMP
. EQM's future capital investments may vary significantly from period to period based on the available investment opportunities and the timing of construction for the MVP. Maintenance related capital expenditures are also expected to vary quarter to quarter. EQM may fund future capital expenditures primarily through cash generated from operations, availability under its credit facilities, debt offerings and issuances of additional EQM partnership units. EQM does not forecast capital expenditures associated with potential projects not committed as of the filing of this Quarterly Report on Form 10-Q.
Credit Facility Borrowings
See Note H to the consolidated financial statements for discussion of EQM's credit facilities.
Security Ratings
The table below sets forth the credit ratings for debt instruments of EQM at
June 30, 2018
.
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Rating Service
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Senior Notes
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Outlook
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Moody's Investors Service (Moody's)
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Ba1
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Stable
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Standard & Poor's Ratings Services (S&P)
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BBB-
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Stable
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Fitch Ratings (Fitch)
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BBB-
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Stable
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EQM's credit ratings are subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating. EQM cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a credit rating agency if, in its judgment, circumstances so warrant. If any credit rating agency downgrades EQM's ratings, EQM's access to the capital markets may be limited, borrowing costs could increase, EQM may be required to provide additional credit assurances in support of commercial agreements such as joint venture agreements and construction contracts, the amount of which may be substantial, and the potential pool of investors and funding sources may decrease. In order to be considered investment grade, a company must be rated Baa3 or higher by Moody's, BBB- or higher by S&P or BBB- or higher by Fitch. Anything below these ratings, including EQM's current credit rating of Ba1 by Moody's, is considered non-investment grade.
$750 Million ATM Program
As of
July 26, 2018
, EQM had approximately
$443 million
in remaining capacity under the $750 Million ATM Program.
Distributions
See Note J to the consolidated financial statements for discussion of distributions.
Commitments and Contingencies
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against EQM. While the amounts claimed may be substantial, EQM is unable to predict with certainty the ultimate outcome of such claims and proceedings. EQM accrues legal and other direct costs related to loss contingencies when actually incurred. EQM has established reserves it believes to be appropriate for pending matters; furthermore, after consultation with counsel and giving appropriate consideration to available insurance, EQM believes that the ultimate outcome of any matter currently pending against it will not materially affect its business, financial condition, results of operations, liquidity or ability to make distributions.
Off-Balance Sheet Arrangements
See Note G to the consolidated financial statements for discussion of the MVP Joint Venture guarantee.
Critical Accounting Policies
EQM's critical accounting policies are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in EQM's recast Current Report on Form 8-K for the year ended
December 31, 2017
as filed with the SEC on June 12, 2018. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to EQM's consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the period ended
June 30, 2018
. The application of EQM's critical accounting policies may require management to make judgments and estimates about the amounts reflected in the consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Changes in interest rates affect the amount of interest EQM earns on cash, cash equivalents and short-term investments and the interest rates EQM pays on borrowings under its credit facilities. EQM's senior notes are fixed rate and thus do not expose EQM to fluctuations in its results of operations or liquidity from changes in market interest rates. Changes in interest rates do affect the fair value of EQM's fixed rate debt. See Note H to the consolidated financial statements for discussion of EQM's borrowings and Note I to the consolidated financial statements for a discussion of fair value measurements. EQM may from time to time hedge the interest on portions of its borrowings under the credit facilities in order to manage risks associated with floating interest rates.
Credit Risk
EQM is exposed to credit risk, which is the risk that EQM may incur a loss if a counterparty fails to perform under a contract. EQM manages its exposure to credit risk associated with customers through credit analysis, credit approval, credit limits and monitoring procedures. For certain transactions, EQM may request letters of credit, cash collateral, prepayments or guarantees as forms of credit support. EQM's FERC tariffs require tariff customers that do not meet specified credit standards to provide three months of credit support; however, EQM is exposed to credit risk beyond this three-month period when its tariffs do not require its customers to provide additional credit support. For some of EQM's more recent long-term contracts associated with system expansions, it has entered into negotiated credit agreements that provide for enhanced forms of credit support if certain credit standards are not met. EQM has historically experienced only minimal credit losses in connection with its receivables. For the
six months ended June 30, 2018
, approximately
77%
of revenues were from investment grade counterparties. EQM is exposed to the credit risk of EQT, its largest customer. In connection with EQM's IPO in 2012, EQT guaranteed all payment obligations, up to a maximum of $50 million, due and payable to Equitrans, L.P., EQM's wholly owned FERC-regulated subsidiary, by EQT Energy, LLC, one of Equitrans, L.P.'s largest customers and a wholly owned subsidiary of EQT. The EQT guaranty will terminate on November 30, 2023 unless terminated earlier by EQT upon 10 days written notice. At
June 30, 2018
, EQT's public senior debt had an investment grade credit rating.
Commodity Prices
EQM's business is dependent on the continued availability of natural gas production and reserves in its areas of operation. Low prices for natural gas, including those resulting from regional basis differentials, could adversely affect development of additional reserves and production that is accessible by EQM's pipeline and storage assets. Lower regional natural gas prices could cause producers to determine in the future that drilling activities in areas outside of EQM's current areas of operation are strategically more attractive to them. EQT, or third party customers on EQM's systems, may reduce capital spending in the future based on commodity prices or other factors. Unless EQM is successful in attracting and retaining unaffiliated third party customers, which accounted for
47%
of transmission and storage revenues and
28%
of gathering revenues for the
six months ended June 30, 2018
, its ability to maintain or increase the capacity subscribed and volumes transported under service arrangements on its transmission and storage system as well as the volumes gathered on its gathering systems will be dependent on receiving consistent or increasing commitments from EQT. While EQT has dedicated acreage to EQM and has entered into long-term firm transmission and gathering contracts on certain EQM systems, EQT may determine in the future that drilling in EQM's areas of operations does not provide an adequate return or that drilling in areas outside of EQM's current areas of operations is strategically more attractive to it. EQT is under no contractual obligation to continue to develop its acreage dedicated to EQM.
For the year ended December 31, 2017, approximately 89% of EQM’s total revenues were derived from firm reservation fees. On a pro forma basis following the closing of the EQM-RMP Merger, approximately 60% of EQM’s total revenues would have been derived from firm reservation fees for the year ended December 31, 2017. This decrease is primarily driven by the fact that RMP’s gathering systems have not been supported by contracts with firm capacity reservation components. Rather, all of RMP’s gathering and compression revenues were generated under long-term contracts which provide for a fixed price per unit for volumes of natural gas actually gathered. As a result, following the EQM-RMP Merger, EQM has greater exposure to short and medium term declines in volumes of gas produced and gathered on its systems than it has historically. With respect to its firm contracts, EQM believes that short and medium term declines in volumes of gas produced, gathered, transported or stored on its systems will have a limited financial impact on EQM because the firm reservation fees associated with these contracts are paid regardless of volumes supplied to the system by customers. Longer term price declines could have an impact on customer creditworthiness and related ability to pay firm reservation fees under long-term contracts, which could impact EQM's results of operations, liquidity, financial position or ability to pay distributions to its unitholders. Additionally, long term declines in gas production in EQM's areas of operations would limit EQM's growth potential.
Other Market Risks
EQM's
$1
Billion Facility is underwritten by a syndicate of financial institutions, each of which is obligated to fund its pro-rata portion of any borrowings by EQM. No one lender of the financial institutions in the syndicate holds more than 10% of the facility. EQM's large syndicate group and relatively low percentage of participation by each lender is expected to limit EQM's exposure to disruption or consolidation in the banking industry.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management of the EQM General Partner, including the EQM General Partner's Principal Executive Officer and Principal Financial Officer, an evaluation of EQM's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) was conducted as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer of the EQM General Partner concluded that EQM's disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
Management’s assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of the entities acquired in the May 2018 Acquisition, which were initially acquired by EQT from Rice on November 13, 2017. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for a period of up to one year following an acquisition while integrating the acquired company. EQM is in the process of integrating its internal controls over financial reporting with those of the entities acquired in the May 2018 Acquisition. As a result of these integration activities, certain controls will be evaluated and may be changed. Except as noted above, there were no changes in EQM's internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
second quarter
of
2018
that have materially affected, or are reasonably likely to materially affect, EQM's internal control over financial reporting.