Item 1.
Financial Statements
EQM MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Operations (Unaudited)
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Thousands, except per unit amounts)
|
Operating revenues
(b)
|
$
|
406,167
|
|
|
$
|
374,697
|
|
|
$
|
795,949
|
|
|
$
|
745,723
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
(c)
|
46,556
|
|
|
43,270
|
|
|
74,439
|
|
|
70,442
|
|
Selling, general and administrative
(c)
|
26,406
|
|
|
27,712
|
|
|
59,326
|
|
|
54,102
|
|
Separation and other transaction costs
|
15,358
|
|
|
5,350
|
|
|
18,871
|
|
|
5,350
|
|
Depreciation
|
56,515
|
|
|
42,110
|
|
|
103,580
|
|
|
83,390
|
|
Amortization of intangible assets
|
13,750
|
|
|
10,387
|
|
|
24,137
|
|
|
20,773
|
|
Impairment of long-lived assets
(d)
|
80,135
|
|
|
—
|
|
|
80,135
|
|
|
—
|
|
Total operating expenses
|
238,720
|
|
|
128,829
|
|
|
360,488
|
|
|
234,057
|
|
Operating income
|
167,447
|
|
|
245,868
|
|
|
435,461
|
|
|
511,666
|
|
Equity income
(e)
|
36,782
|
|
|
10,938
|
|
|
67,845
|
|
|
19,749
|
|
Other income
|
1,959
|
|
|
944
|
|
|
4,169
|
|
|
1,848
|
|
Net interest expense
(f)
|
49,717
|
|
|
23,065
|
|
|
99,073
|
|
|
35,735
|
|
Net income
|
156,471
|
|
|
234,685
|
|
|
408,402
|
|
|
497,528
|
|
Net income attributable to noncontrolling interests
|
4,033
|
|
|
853
|
|
|
4,033
|
|
|
3,346
|
|
Net income attributable to EQM
|
$
|
152,438
|
|
|
$
|
233,832
|
|
|
$
|
404,369
|
|
|
$
|
494,182
|
|
|
|
|
|
|
|
|
|
Calculation of limited partner common unit interest in net income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to EQM
|
$
|
152,438
|
|
|
$
|
233,832
|
|
|
$
|
404,369
|
|
|
$
|
494,182
|
|
Less: Series A Preferred Units interest in net income
|
(22,979
|
)
|
|
—
|
|
|
(22,979
|
)
|
|
—
|
|
Less: pre-acquisition net income allocated to EQT
|
—
|
|
|
(72,620
|
)
|
|
—
|
|
|
(155,752
|
)
|
Less: general partner interest in net income – general partner units
|
—
|
|
|
(1,700
|
)
|
|
—
|
|
|
(4,791
|
)
|
Less: general partner interest in net income – IDRs
|
—
|
|
|
(68,121
|
)
|
|
—
|
|
|
(112,285
|
)
|
Limited partner interest in net income
|
$
|
129,459
|
|
|
$
|
91,391
|
|
|
$
|
381,390
|
|
|
$
|
221,354
|
|
|
|
|
|
|
|
|
|
Net income per limited partner common unit – basic
(g)
|
$
|
0.65
|
|
|
$
|
1.09
|
|
|
$
|
2.15
|
|
|
$
|
2.69
|
|
Net income per limited partner common unit – diluted
(g)
|
$
|
0.62
|
|
|
$
|
1.09
|
|
|
$
|
2.07
|
|
|
$
|
2.69
|
|
|
|
|
|
|
|
|
|
Weighted average limited partner common units outstanding – basic
|
200,482
|
|
|
83,553
|
|
|
177,498
|
|
|
82,290
|
|
Weighted average limited partner common units outstanding – diluted
|
207,482
|
|
|
83,553
|
|
|
195,645
|
|
|
82,290
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per common unit
(h)
|
$
|
1.160
|
|
|
$
|
1.09
|
|
|
$
|
2.305
|
|
|
$
|
2.155
|
|
|
|
(a)
|
As discussed in Notes
1
and
2
, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of EQM Olympus Midstream LLC (EQM Olympus), Strike Force Midstream Holdings LLC (Strike Force) and EQM West Virginia Midstream LLC (EQM WV), which were acquired by EQM effective on May 1, 2018 (the Drop-Down Transaction), and Rice Midstream Partners LP (RMP), which was acquired by EQM effective on July 23, 2018 (the EQM-RMP Merger), because these transactions were between entities under common control.
|
|
|
(b)
|
Operating revenues included related party revenues from EQT Corporation (NYSE: EQT) (EQT) of
$284.0 million
and
$285.3 million
for the
three months ended June 30, 2019
and
2018
, respectively, and
$568.5 million
and
$550.9 million
for the
six months ended June 30, 2019
, respectively. See Note
8
.
|
|
|
(c)
|
For the
three and six
months ended
June 30, 2019
, operating and maintenance expense included
$15.2 million
and
$26.2 million
of charges from Equitrans Midstream Corporation (Equitrans Midstream), respectively. For the
three and six
months ended
June 30, 2018
, operating and maintenance expense included charges from EQT of
$12.3 million
and
$24.4 million
, respectively. For the
three and six
months ended
June 30, 2019
, selling, general and administrative expense included charges from Equitrans Midstream of
$23.5 million
and
$51.4 million
, respectively. For the
three and six
months ended
June 30, 2018
, selling, general and administrative expense included charges from EQT of
$25.6 million
and
$49.4 million
, respectively. See Note
8
.
|
|
|
(d)
|
See Note
3
for disclosure regarding impairment of certain of EQM's long-lived assets.
|
|
|
(e)
|
Represents equity income from Mountain Valley Pipeline, LLC (the MVP Joint Venture). See Note
9
.
|
|
|
(f)
|
Net interest expense included interest income on the Preferred Interest in EQT Energy Supply, LLC (EES) of
$1.6 million
and
$1.7 million
for the
three months ended June 30, 2019
and
2018
, respectively, and
$3.2 million
and
$3.3 million
for the
six months ended June 30, 2019
and
2018
, respectively.
|
|
|
(g)
|
See Note
12
for further disclosure on EQM's calculation of net income per limited partner unit (basic and diluted).
|
|
|
(h)
|
Represents the cash distributions declared related to the period presented. See Note
12
.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQM MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Cash Flows (Unaudited)
(a)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
(Thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
408,402
|
|
|
$
|
497,528
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
103,580
|
|
|
83,390
|
|
Amortization of intangible assets
|
24,137
|
|
|
20,773
|
|
Impairment of long-lived assets
(b)
|
80,135
|
|
|
—
|
|
Equity income
|
(67,845
|
)
|
|
(19,749
|
)
|
AFUDC – equity
|
(4,453
|
)
|
|
(2,137
|
)
|
Non-cash long-term compensation expense
|
255
|
|
|
639
|
|
Changes in other assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(3,583
|
)
|
|
3,947
|
|
Accounts payable
|
(23,231
|
)
|
|
39,728
|
|
Other assets and other liabilities
|
(7,154
|
)
|
|
(1,212
|
)
|
Net cash provided by operating activities
|
510,243
|
|
|
622,907
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(527,803
|
)
|
|
(382,946
|
)
|
Capital contributions to the MVP Joint Venture
|
(301,175
|
)
|
|
(182,805
|
)
|
Bolt-on Acquisition (defined in Note 2), net of cash acquired
|
(848,625
|
)
|
|
—
|
|
Drop-Down Transaction
|
—
|
|
|
(1,193,160
|
)
|
Principal payments received on the Preferred Interest
|
2,298
|
|
|
2,172
|
|
Net cash used in investing activities
|
(1,675,305
|
)
|
|
(1,756,739
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from credit facility borrowings
|
1,047,000
|
|
|
2,390,500
|
|
Payments on credit facility borrowings
|
(572,000
|
)
|
|
(2,596,500
|
)
|
Pay-down of long-term debt associated with Bolt-on Acquisition (Note 2)
|
(28,325
|
)
|
|
—
|
|
Proceeds from issuance of long-term debt
|
—
|
|
|
2,500,000
|
|
Debt discount and issuance costs
|
—
|
|
|
(30,295
|
)
|
Proceeds from issuance of Series A Preferred Units, net of offering costs
|
1,158,313
|
|
|
—
|
|
Distributions paid to common unitholders
|
(440,816
|
)
|
|
(326,601
|
)
|
Distributions paid to noncontrolling interest
|
—
|
|
|
(750
|
)
|
Acquisition of 25% of Strike Force Midstream LLC
|
—
|
|
|
(175,000
|
)
|
Capital contributions
|
—
|
|
|
15,672
|
|
Net contributions from EQT
|
—
|
|
|
3,660
|
|
Net cash provided by financing activities
|
1,164,172
|
|
|
1,780,686
|
|
|
|
|
|
Net change in cash and cash equivalents
|
(890
|
)
|
|
646,854
|
|
Cash and cash equivalents at beginning of period
|
17,515
|
|
|
54,600
|
|
Cash and cash equivalents at end of period
|
$
|
16,625
|
|
|
$
|
701,454
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest, net of amount capitalized
|
$
|
106,001
|
|
|
$
|
33,621
|
|
|
|
|
|
Non-cash activity during the period for
:
|
|
|
|
|
|
Increase (decrease) in capital contribution receivable from Equitrans Midstream/EQT
|
$
|
497
|
|
|
$
|
(12,251
|
)
|
|
|
(a)
|
As discussed in Notes
1
and
2
, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of the Drop-Down Transaction and the EQM-RMP Merger because these transactions were between entities under common control.
|
|
|
(b)
|
See Note
3
for disclosure regarding impairment of certain of EQM's long-lived assets.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQM MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(Thousands, except number of units)
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
16,625
|
|
|
$
|
17,515
|
|
Accounts receivable (net of allowance for doubtful accounts of $138 and $75 as of June 30, 2019 and December 31, 2018, respectively)
(a)
|
274,790
|
|
|
254,390
|
|
Other current assets
|
21,971
|
|
|
14,909
|
|
Total current assets
|
313,386
|
|
|
286,814
|
|
|
|
|
|
Property, plant and equipment
|
8,158,272
|
|
|
6,367,530
|
|
Less: accumulated depreciation
|
(783,130
|
)
|
|
(560,902
|
)
|
Net property, plant and equipment
|
7,375,142
|
|
|
5,806,628
|
|
|
|
|
|
Investment in unconsolidated entity
|
2,066,330
|
|
|
1,510,289
|
|
Goodwill
|
1,237,456
|
|
|
1,123,813
|
|
Net intangible assets
|
868,965
|
|
|
576,113
|
|
Other assets
|
201,891
|
|
|
152,464
|
|
Total assets
|
$
|
12,063,170
|
|
|
$
|
9,456,121
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
(b)
|
$
|
179,448
|
|
|
$
|
207,877
|
|
Due to Equitrans Midstream
|
76,863
|
|
|
44,509
|
|
Capital contribution payable to the MVP Joint Venture
|
356,223
|
|
|
169,202
|
|
Accrued interest
|
73,443
|
|
|
80,199
|
|
Accrued liabilities
|
38,265
|
|
|
20,672
|
|
Total current liabilities
|
724,242
|
|
|
522,459
|
|
|
|
|
|
Credit facility borrowings
|
1,372,500
|
|
|
625,000
|
|
Senior notes
|
3,459,323
|
|
|
3,456,639
|
|
Regulatory and other long-term liabilities
|
81,093
|
|
|
38,724
|
|
Total liabilities
|
5,637,158
|
|
|
4,642,822
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Series A Preferred Units (24,605,291 and 0 units issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
|
1,181,292
|
|
|
—
|
|
Common (200,457,630 and 120,457,638 units issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
|
4,748,269
|
|
|
4,783,673
|
|
Class B (7,000,000 and 0 units issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
|
6,356
|
|
|
—
|
|
General partner (0 and 1,443,015 units issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
|
—
|
|
|
29,626
|
|
Noncontrolling interest
(c)
|
490,095
|
|
|
—
|
|
Total equity
|
6,426,012
|
|
|
4,813,299
|
|
Total liabilities and equity
|
$
|
12,063,170
|
|
|
$
|
9,456,121
|
|
|
|
(a)
|
Accounts receivable as of
June 30, 2019
and December 31, 2018 included approximately
$126.7 million
and
$174.8 million
, respectively, of related party accounts receivable from EQT.
|
|
|
(b)
|
Accounts payable as of December 31, 2018 included approximately
$34.0 million
of related party accounts payable to EQT. There was no related party balance with EQT included in accounts payable as of
June 30, 2019
.
|
|
|
(c)
|
Noncontrolling interest as of
June 30, 2019
represents third-party ownership in Eureka Midstream Holdings, LLC (Eureka Midstream). See Note
2
for further information.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQM MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Equity (Unaudited)
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners
|
|
|
|
|
|
|
|
Predecessor Equity
|
|
Series A Preferred Units
|
|
Common Units
|
|
Class B Units
|
|
General Partner
|
|
Noncontrolling Interest
|
|
Total Equity
|
Balance at January 1, 2018
|
$
|
3,916,434
|
|
|
$
|
—
|
|
|
$
|
2,147,706
|
|
|
$
|
—
|
|
|
$
|
1,252
|
|
|
$
|
173,472
|
|
|
$
|
6,238,864
|
|
Net income
|
83,132
|
|
|
—
|
|
|
129,937
|
|
|
—
|
|
|
47,281
|
|
|
2,493
|
|
|
262,843
|
|
Capital contributions
|
—
|
|
|
—
|
|
|
2,749
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
2,799
|
|
Equity-based compensation plans
|
168
|
|
|
—
|
|
|
331
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
499
|
|
Distributions paid to unitholders
($1.025 per common unit)
|
(32,845
|
)
|
|
—
|
|
|
(82,596
|
)
|
|
—
|
|
|
(43,294
|
)
|
|
—
|
|
|
(158,735
|
)
|
Net contributions from EQT
|
1,015
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,015
|
|
Distributions paid to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(750
|
)
|
|
(750
|
)
|
Balance at March 31, 2018
|
$
|
3,967,904
|
|
|
$
|
—
|
|
|
$
|
2,198,127
|
|
|
$
|
—
|
|
|
$
|
5,289
|
|
|
$
|
175,215
|
|
|
$
|
6,346,535
|
|
Net income
|
72,620
|
|
|
—
|
|
|
91,417
|
|
|
—
|
|
|
69,795
|
|
|
853
|
|
|
234,685
|
|
Acquisition of 25% of Strike Force Midstream LLC
|
—
|
|
|
—
|
|
|
1,068
|
|
|
—
|
|
|
—
|
|
|
(176,068
|
)
|
|
(175,000
|
)
|
Drop-Down Transaction
|
(1,436,297
|
)
|
|
—
|
|
|
243,137
|
|
|
|
|
|
|
—
|
|
|
(1,193,160
|
)
|
Capital contributions
|
—
|
|
|
—
|
|
|
612
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
622
|
|
Equity-based compensation plans
|
140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
140
|
|
Distributions paid to unitholders
($1.065 per common unit)
|
(35,545
|
)
|
|
—
|
|
|
(85,830
|
)
|
|
—
|
|
|
(46,491
|
)
|
|
—
|
|
|
(167,866
|
)
|
Net contributions from EQT
|
2,645
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,645
|
|
Balance at June 30, 2018
|
$
|
2,571,467
|
|
|
$
|
—
|
|
|
$
|
2,448,531
|
|
|
$
|
—
|
|
|
$
|
28,603
|
|
|
$
|
—
|
|
|
$
|
5,048,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners
|
|
|
|
|
|
|
|
Predecessor Equity
|
|
Series A Preferred Units
|
|
Common Units
|
|
Class B Units
|
|
General Partner
|
|
Noncontrolling Interest
|
|
Total Equity
|
Balance at January 1, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,783,673
|
|
|
$
|
—
|
|
|
$
|
29,626
|
|
|
$
|
—
|
|
|
$
|
4,813,299
|
|
Net income
|
—
|
|
|
—
|
|
|
246,699
|
|
|
3,465
|
|
|
1,767
|
|
|
—
|
|
|
251,931
|
|
Equity-based compensation plans
|
—
|
|
|
—
|
|
|
255
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
255
|
|
Distributions paid to unitholders
($1.13 per common unit)
|
—
|
|
|
—
|
|
|
(136,117
|
)
|
|
—
|
|
|
(75,175
|
)
|
|
—
|
|
|
(211,292
|
)
|
Equity restructuring associated with the EQM IDR Transaction
|
—
|
|
|
—
|
|
|
(42,305
|
)
|
|
(1,477
|
)
|
|
43,782
|
|
|
—
|
|
|
—
|
|
Balance at March 31, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,852,205
|
|
|
$
|
1,988
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,854,193
|
|
Net income
|
—
|
|
|
22,979
|
|
|
125,091
|
|
|
4,368
|
|
|
—
|
|
|
4,033
|
|
|
156,471
|
|
Capital contributions
|
—
|
|
|
—
|
|
|
497
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
497
|
|
Distributions paid to unitholders
($1.145 per common unit)
|
—
|
|
|
—
|
|
|
(229,524
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(229,524
|
)
|
Issuance of Series A Preferred Units, net of offering costs
|
—
|
|
|
1,158,313
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,158,313
|
|
Bolt-on Acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
486,062
|
|
|
486,062
|
|
Balance at June 30, 2019
|
$
|
—
|
|
|
$
|
1,181,292
|
|
|
$
|
4,748,269
|
|
|
$
|
6,356
|
|
|
$
|
—
|
|
|
$
|
490,095
|
|
|
$
|
6,426,012
|
|
|
|
(a)
|
As discussed in Notes
1
and
2
, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of the Drop-Down Transaction and the EQM-RMP Merger because these transactions were between entities under common control.
|
The accompanying notes are an integral part of these consolidated financial statements.
EQM MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Organization
EQM is a growth-oriented Delaware limited partnership formed by EQT in January 2012. Prior to the completion of the EQM IDR Transaction (defined below), EQM Midstream Services, LLC was the general partner of EQM (the Former EQM General Partner). Following the consummation of the EQM IDR Transaction, EQGP Services, LLC, a wholly-owned indirect subsidiary of Equitrans Midstream, became the general partner of EQM (the New EQM General Partner). References in these consolidated financial statements to Equitrans Midstream refer collectively to Equitrans Midstream Corporation and its consolidated subsidiaries.
On February 21, 2018, EQT announced its plan to separate its midstream business, which was composed of the separately-operated natural gas gathering, transmission and storage and water services operations of EQT (collectively, the Midstream Business), from its upstream business, which was composed of the natural gas, oil and natural gas liquids development, production and sales and commercial operations of EQT (collectively, the Upstream Business) (the Separation). On November 12, 2018, the Separation was effected through a series of transactions that culminated in EQT's contribution of the Midstream Business to Equitrans Midstream.
On February 22, 2019, Equitrans Midstream completed its previously announced simplification transaction pursuant to that certain Agreement and Plan of Merger, dated as of February 13, 2019 (the IDR Merger Agreement), by and among Equitrans Midstream, EQM, the Former EQM General Partner, EQGP, the New EQM General Partner, Equitrans Merger Sub, LP, a Delaware limited partnership (Merger Sub), and certain other parties thereto. Pursuant to the IDR Merger Agreement, on February 22, 2019, (i) Merger Sub merged with and into EQGP (the Merger) with EQGP continuing as the surviving limited partnership and a wholly-owned subsidiary of EQM following the Merger, and (ii) each of (a) the incentive distribution rights (IDRs) in EQM, (b) the economic portion of the general partner interest in EQM and (c) the issued and outstanding common units representing limited partner interests in EQGP were canceled, and, as consideration for such cancellation, certain affiliates of Equitrans Midstream received on a pro rata basis
80,000,000
newly-issued EQM common units and
7,000,000
newly-issued Class B units (Class B units), both representing limited partner interests in EQM, and the New EQM General Partner retained the non-economic general partner interest in EQM (the EQM IDR Transaction). Additionally, as part of the EQM IDR Transaction, the
21,811,643
EQM common units held by EQGP were canceled and
21,811,643
EQM common units were issued pro rata to certain affiliates of Equitrans Midstream. See Note
5
for further information on the EQM IDR Transaction and Class B Units.
The EQM IDR Transaction constituted an exchange of equity interests between entities under common control and not a transfer of a business. Therefore, the exchange resulted in a reclassification, as of February 22, 2019, of a
$43.8 million
deficit capital balance from the general partner line item to the common and Class B line items in EQM's consolidated balance sheets based on the respective limited partner ownership interests. The reclassification represented an allocation of the carrying value of the exchanged general partner interest. Prior to the EQM IDR Transaction, when distributions related to the general partner interest and IDRs were made, earnings equal to the amount of distributions were allocated to the general partner before the remaining earnings were allocated to the limited partner unitholders based on their respective ownership percentages. Subsequent to the EQM IDR Transaction, no earnings will be allocated to the general partner. The allocation of net income attributable to EQM for purposes of calculating net income per limited partner unit is described in Note
12
.
On March 13, 2019, EQM entered into a Convertible Preferred Unit Purchase Agreement (inclusive of certain Joinder Agreements entered into on March 18, 2019, the Preferred Unit Purchase Agreement) with certain investors to issue and sell in a private placement (the Private Placement) an aggregate of
24,605,291
Series A Perpetual Convertible Preferred Units (Series A Preferred Units) representing limited partner interests in EQM for a cash purchase price of
$48.77
per Series A Preferred Unit, resulting in total gross proceeds of approximately
$1.2 billion
. The net proceeds from the Private Placement were used in part to fund the purchase price in the Bolt-on Acquisition (defined in Note
2
) and to pay certain fees and expenses related to the Bolt-on Acquisition, and the remainder was used for general partnership purposes. The Private Placement closed concurrently with the closing of the Bolt-on Acquisition on
April 10, 2019
. See Note
5
for further information on the Series A Preferred Units and the Bolt-on Acquisition.
Following the EQM IDR Transaction and the closing of the Private Placement, and as of
June 30, 2019
, Equitrans Midstream held a
53.5%
limited partner interest (after taking into account the Series A Preferred Units issued in the Private Placement on an as-converted basis) and the non-economic general partner interest in EQM. See Note
5
for further information on the EQM IDR Transaction and Private Placement.
Basis of Presentation
EQM's consolidated financial statements have been retrospectively recast to include the pre-acquisition results of the
Drop-Down Transaction
and the
EQM-RMP Merger
because these transactions represented business combinations 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 acquisition of Rice Energy Inc. (Rice) (the Rice Merger). EQM recorded the assets and liabilities acquired in the
Drop-Down Transaction
and the
EQM-RMP Merger
at their carrying amounts to EQT on the effective dates of the transactions. The consolidated financial statements are not necessarily indicative of the actual results of operations if EQM and the assets acquired in the
Drop-Down Transaction
and the
EQM-RMP Merger
had been operated together during the pre-acquisition periods.
Following the completion of the Bolt-on Acquisition, EQM evaluated Eureka Midstream for consolidation and determined that Eureka Midstream does not meet the criteria for variable interest entity classification due to its ability to independently finance its operations through the Eureka Credit Facility (as defined in Note
10
), as well as each member having proportional voting rights through their equity investments. As such, as of
June 30, 2019
, EQM consolidates Eureka Midstream using the voting interest model, recording noncontrolling interest related to the third-party ownership interests in Eureka Midstream.
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, 2019
and
December 31, 2018
, the results of its operations and equity for the
three and six
months ended
June 30, 2019
and
2018
, and its cash flows for the six months ended
June 30, 2019
and
2018
. The balance sheet at
December 31, 2018
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.
Due to the seasonal nature of EQM's utility customer contracts, the interim statements for the
three and six
months ended
June 30, 2019
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
.
EQM does not have any employees. Operational, management and other services for EQM are provided by the directors and officers of the New EQM General Partner and employees of Equitrans Midstream.
For further information, refer to the consolidated financial statements and related footnotes for the year ended December 31, 2018, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02,
Leases
. The standard requires entities to record assets and obligations for contracts currently recognized as operating leases. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
. The update provides an optional transition method of adoption that permits entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under the optional transition method, comparative financial information and disclosures are not required. The update also provides transition practical expedients. The standard requires disclosures of the nature, maturity and value of an entity's lease liabilities and elections taken by the entity. In March 2019, the FASB issued ASU 2019-01,
Leases (Topic 842): Codification Improvements
, which, among other things, clarifies interim disclosure requirements in the year of ASU 2016-02 adoption.
EQM adopted ASU 2016-02, ASU 2018-11 and ASU 2019-01 on January 1, 2019 using the optional transition method. EQM uses a lease accounting system to monitor its current population of lease contracts. EQM implemented processes and controls to review new lease contracts for appropriate accounting treatment in the context of the standards and to generate disclosures required under the standards. For the disclosures required by the standards, see Note
4
.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.
The standard 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 standard eliminates the probable initial recognition threshold in current GAAP, and, in its place, requires an entity to recognize 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 of the standard that have the contractual right to receive cash. The standard 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 August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement, Changes to the Disclosure Requirements for Fair Value Measurement
, which makes a number of changes to the hierarchy associated with Level 1, 2 and 3 fair value measurements and the related disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. EQM is currently evaluating the effect this standard will have on its financial statements and related disclosures but does not expect the adoption of this standard to have a material effect on its financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15,
Intangibles—Goodwill and Other: Internal-Use Software
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. EQM early-adopted the standard using the prospective method of adoption on January 1, 2019.
Following the adoption of ASU 2018-15, EQM began capitalizing certain implementation costs related to cloud computing arrangements that are service contracts. The capitalized portion of these costs are included in the property, plant and equipment line on the consolidated balance sheets and will be amortized over the term of EQM's hosting arrangement, which has a fixed term of
seven years
. For the three and six months ended
June 30, 2019
, EQM did
no
t recognize any amortization expense related to implementation costs on its cloud computing arrangements as such assets were not in use. The costs will be included in the selling, general and administrative expense line on the accompanying statements of consolidated operations when recognized.
In August 2018, the U.S. Securities and Exchange Commission (SEC) adopted a final rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements, in that registrants must now analyze changes in stockholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018 and EQM assessed the impact on its consolidated financial statements disclosures to be not significant. EQM adopted the final rule and began applying this disclosure change to its statement of consolidated equity in the first quarter of 2019.
|
|
2
.
|
Acquisitions and Mergers
|
Bolt-on Acquisition
On March 13, 2019, EQM entered into a Purchase and Sale Agreement (the Purchase and Sale Agreement) with North Haven Infrastructure Partners II Buffalo Holdings, LLC (NHIP), an affiliate of Morgan Stanley Infrastructure Partners, pursuant to which EQM acquired from NHIP a
60%
Class A interest in Eureka Midstream Holdings, LLC (Eureka Midstream) and a
100%
interest in Hornet Midstream Holdings, LLC (Hornet Midstream) (collectively, the Bolt-on Acquisition) for total consideration of approximately
$1.03 billion
, composed of approximately
$864 million
in cash and approximately
$167 million
in assumed pro-rata debt, subject to certain adjustments set forth in the Purchase and Sale Agreement. Eureka Midstream owns a
190
-mile gathering header pipeline system in Ohio and West Virginia that services both dry Utica and wet Marcellus Shale production. Hornet Midstream owns a
15
-mile, high-pressure gathering system in West Virginia that connects to the Eureka Midstream system. The Bolt-on Acquisition closed on April 10, 2019 and was funded through proceeds from the Private Placement that closed concurrently with the Bolt-on Acquisition. See Notes
1
and
5
for further information on the Private Placement.
On the closing of the Bolt-on Acquisition, a subsidiary of Hornet Midstream terminated all of its obligations under its term loan credit agreement and repaid the
$28.2 million
outstanding principal balance and
$0.1 million
in related interest and fees.
EQM recorded
$15.2 million
and
$16.7 million
in acquisition-related expenses related to the Bolt-on Acquisition during the three and
six months ended June 30, 2019
, respectively. The Bolt-on Acquisition acquisition-related expenses included
$13.5 million
for professional fees and
$1.7 million
for compensation arrangements for the
three months ended June 30, 2019
and
$15.0 million
for professional fees and
$1.7 million
for compensation arrangements for the
six months ended June 30, 2019
and are included in separation and other transaction costs in the statements of consolidated operations.
Allocation of Purchase Price.
The Bolt-on Acquisition was accounted for as a business combination using the acquisition method. The following table summarizes the preliminary purchase price and preliminary estimated fair values of assets and liabilities assumed as of April 10, 2019, with any excess of purchase price over estimated fair value of the identified net assets
acquired recorded as goodwill. The
$113.6 million
of goodwill has been allocated to the Gathering segment. Such goodwill primarily relates to additional commercial opportunities, a diversified producer customer mix, increased exposure to dry Utica and wet Marcellus acreage and operating leverage within the Gathering segment. The purchase price remains subject to post-closing purchase price adjustments; thus, the purchase price adjustments included in the financial statements are preliminary as of
June 30, 2019
. EQM expects to complete the purchase price allocation once EQM has received all of the necessary information, at which time the value of the assets and liabilities will be revised as appropriate. The following table summarizes the preliminary allocation of the fair value of the assets and liabilities of the Bolt-on Acquisition as of April 10, 2019 by EQM.
|
|
|
|
|
|
(in thousands)
|
|
Preliminary Purchase Price Allocation
|
Consideration given:
|
|
|
Cash consideration
|
|
$
|
861,250
|
|
Buyout of Eureka Midstream Class B Units and incentive compensation
|
|
2,530
|
|
Total consideration
|
|
863,780
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
Current liabilities
|
|
52,458
|
|
Long-term debt
|
|
300,825
|
|
Other long-term liabilities
|
|
10,203
|
|
Amount attributable to liabilities assumed
|
|
363,486
|
|
|
|
|
Fair value of assets acquired:
|
|
|
Cash
|
|
15,145
|
|
Accounts receivable
|
|
16,817
|
|
Inventory
|
|
12,991
|
|
Other current assets
|
|
882
|
|
Net property, plant and equipment
|
|
1,222,284
|
|
Intangible assets
|
|
317,000
|
|
Other assets
|
|
14,567
|
|
Amount attributable to assets acquired
|
|
1,599,686
|
|
|
|
|
Noncontrolling interest
|
|
(486,062
|
)
|
|
|
|
Goodwill
|
|
$
|
113,642
|
|
The estimated fair value of midstream facilities and equipment, generally consisting of pipeline systems and compression stations, were estimated using the cost approach. Significant unobservable inputs in the estimate of fair value include management's assumptions about the replacement costs for similar assets, the relative age of the acquired assets and any potential economic or functional obsolescence associated with the acquired assets. As a result, the estimated fair value of the midstream facilities and equipment represent a Level 3 fair value measurement.
The non-controlling interest in Eureka Midstream is estimated to be
$486.1 million
. The fair value of the noncontrolling interest was calculated based on the enterprise value of Eureka Midstream and the percentage ownership not acquired by EQM. Significant unobservable inputs in the enterprise value of Eureka Midstream include the future revenue estimates and future cost assumptions, which remain subject to future refinement. As a result, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement.
As part of the preliminary purchase price allocation, EQM identified intangible assets for customer relationships with third-party customers. The fair value of the customer relationships with third-party customers was determined using the income approach, which requires a forecast of the expected future cash flows generated and an estimated market-based weighted average cost of capital. Significant unobservable inputs in the determination of fair value include future revenue estimates, future cost assumptions and estimated customer retention rates. As a result, the estimated fair value of the identified intangible assets represents a Level 3 fair value measurement. Differences between the preliminary purchase price allocation and the final purchase price allocation may change the amount of intangible assets and goodwill ultimately recognized in conjunction with the Bolt-on Acquisition. EQM calculates amortization of intangible assets using the straight-line method over the estimated useful life of the intangible assets which is
20 years
. Amortization expense recorded in the consolidated statements of operations for the
three and six
months ended
June 30, 2019
was
$3.4 million
. The estimated annual amortization expense over
the next five years is as follows: 2019
$8.1 million
, 2020
$15.8 million
, 2021
$15.8 million
, 2022
$15.8 million
and 2023
$15.8 million
.
Intangible assets, net as of
June 30, 2019
are detailed below.
|
|
|
|
|
|
(in thousands)
|
|
As of June 30, 2019
|
Intangible assets
|
|
317,000
|
|
Less: accumulated amortization
|
|
3,375
|
|
Intangible assets, net
|
|
$
|
313,625
|
|
Post-Acquisition Operating Results.
Subsequent to the completion of the Bolt-on Acquisition, Eureka Midstream and Hornet Midstream collectively contributed the following to both the Gathering segment and EQM's consolidated operating results for the period from April 10, 2019 through
June 30, 2019
.
|
|
|
|
|
|
(in thousands)(unaudited)
|
|
April 10, 2019 through June 30, 2019
|
Operating revenues
|
|
$
|
28,928
|
|
Operating income attributable to EQM
|
|
$
|
12,496
|
|
Net income attributable to noncontrolling interests
|
|
$
|
4,033
|
|
Net income attributable to EQM
|
|
$
|
6,506
|
|
Unaudited Pro Forma Information.
The following unaudited pro forma combined financial information presents EQM's results as though the EQM IDR Transaction and Bolt-on Acquisition had been completed at January 1, 2018. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the EQM IDR Transaction and Bolt-on Acquisition taken place on January 1, 2018; furthermore, the financial information is not intended to be a projection of future results.
|
|
|
|
|
|
(in thousands, except per unit data)(unaudited)
|
|
Three Months Ended March 31, 2019
|
Pro forma operating revenues
|
|
$
|
421,362
|
|
Pro forma net income
|
|
$
|
264,215
|
|
Pro forma net income attributable to noncontrolling interests
|
|
$
|
3,205
|
|
Pro forma net income attributable to EQM
|
|
$
|
261,010
|
|
Pro forma income per unit (basic)
|
|
$
|
1.17
|
|
Pro forma income per unit (diluted)
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per unit data)(unaudited)
|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2018
|
Pro forma operating revenues
|
|
$
|
406,920
|
|
|
$
|
803,945
|
|
Pro forma net income
|
|
$
|
242,587
|
|
|
$
|
509,403
|
|
Pro forma net income attributable to noncontrolling interests
|
|
$
|
4,303
|
|
|
$
|
8,710
|
|
Pro forma net income attributable to EQM
|
|
$
|
238,284
|
|
|
$
|
500,693
|
|
Pro forma income per unit (basic)
|
|
$
|
1.06
|
|
|
$
|
2.24
|
|
Pro forma income per unit (diluted)
|
|
$
|
1.03
|
|
|
$
|
2.16
|
|
Shared Assets Transaction
On March 31, 2019, EQM entered into an Assignment and Bill of Sale (the Assignment and Bill of Sale) with Equitrans Midstream pursuant to which EQM acquired certain assets and assumed certain leases that primarily support EQM’s operations for an aggregate cash purchase price of
$49.7 million
(the initial purchase price), which reflected the net book value of in-service assets and expenditures made for assets not yet in-service (collectively, and inclusive of the additional assets subsequently acquired as described in the following sentences, the Shared Assets Transaction). Further, pursuant to the Assignment and Bill of Sale, EQM acquired, effective on the first day of the second quarter of 2019, certain additional assets from Equitrans Midstream for
$8.9 million
cash consideration (the subsequent purchase price), reflecting the net book value of in-service assets and expenditures made in respect of assets not yet in-service as of
June 30, 2019
, which subsequent purchase
price is subject to certain adjustments. EQM may, pursuant to the Assignment and Bill of Sale, acquire certain additional assets from Equitrans Midstream for additional cash consideration reflecting the net book value of in-service assets and expenditures made with respect to assets not yet in-service and/or may assume an additional facilities lease. The initial and subsequent purchase prices were funded utilizing EQM’s
$3
Billion Facility (defined in Note
10
). Prior to the Shared Assets Transaction, EQM made quarterly payments to Equitrans Midstream based on fees allocated from Equitrans Midstream for use of in-service assets transferred to EQM in the Shared Assets Transaction. In connection with the entry into the Assignment and Bill of Sale, that certain omnibus agreement (ETRN Omnibus Agreement) among Equitrans Midstream, EQM and the New EQM General Partner (as successor to the Former EQM General Partner) was amended and restated in order to, among other things, govern Equitrans Midstream’s use of the acquired assets following their conveyance to EQM and provide for reimbursement of EQM by Equitrans Midstream for expenses incurred by EQM in connection with such use.
EQM-RMP Merger
On April 25, 2018, EQM entered into an Agreement and Plan of Merger (the Merger Agreement) with RMP, Rice Midstream Management LLC, the general partner of RMP (the RMP General Partner), the Former 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. 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 IDRs 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 of which
9,544,530
EQM common units were received by an indirect wholly-owned subsidiary of EQT. As a result of the
EQM-RMP Merger
, RMP's common units are no longer publicly traded.
Drop-Down Transaction
On April 25, 2018, EQT, Rice Midstream Holdings LLC (Rice Midstream Holdings), 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 EQM Olympus, Strike Force and EQM WV in exchange for an aggregate of
5,889,282
EQM common units and aggregate cash consideration of approximately
$1.15 billion
. EQM Olympus 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
Drop-Down Transaction
closed on
May 22, 2018
with an effective date of
May 1, 2018
.
As a result of the recast associated with the EQM-RMP Merger and the Drop-Down Transaction, EQM recognized approximately
$1,384.9 million
of goodwill, all of which was allocated to
two
reporting units within the Gathering segment. 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 RMP, EQM Olympus, Strike Force and EQM WV over the sum of the fair value amounts allocated to the assets and liabilities of RMP, EQM Olympus, Strike Force and EQM WV. Goodwill was attributed to additional growth opportunities, synergies and operating leverage within the Gathering segment. Prior to the recast, EQM had no goodwill.
Following EQT's initial valuation, certain estimates used in the purchase price allocation were updated. The net impact of these measurement period adjustments increased goodwill by approximately
$0.9 million
. The purchase price allocation was finalized and the measurement period adjustments were recorded as current period adjustments. The following table summarizes the allocation of the fair value of the assets and liabilities of RMP, EQM Olympus, Strike Force and EQM WV as of November 13, 2017 through pushdown accounting from EQT, as well as certain measurement period adjustments made subsequent to EQT's initial valuation.
|
|
|
|
|
|
|
|
Goodwill and Purchase Price Allocation
|
|
|
(Thousands)
|
Estimated fair value of RMP, EQM Olympus, Strike Force
(a)
and EQM WV
|
|
$
|
4,014,984
|
|
|
|
|
Estimated Fair Value of Assets Acquired and Liabilities Assumed:
|
|
|
Current assets
(b)
|
|
132,459
|
|
Intangible assets
(c)
|
|
623,200
|
|
Property and equipment, net
(d)
|
|
2,265,900
|
|
Other non-current assets
|
|
118
|
|
Current liabilities
(b)
|
|
(117,124
|
)
|
RMP $850 Million Facility
(e)
|
|
(266,000
|
)
|
Other non-current liabilities
(e)
|
|
(9,323
|
)
|
Total estimated fair value of assets acquired and liabilities assumed
|
|
2,629,230
|
|
Goodwill as of November 13, 2017
(f)
|
|
1,385,754
|
|
Impairment of goodwill
(g)
|
|
261,941
|
|
Goodwill as of December 31, 2018
|
|
$
|
1,123,813
|
|
|
|
(a)
|
Includes the estimated fair value attributable to noncontrolling interest of
$166 million
.
|
|
|
(b)
|
The fair value of current assets and current liabilities were assumed to approximate their carrying values.
|
|
|
(c)
|
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.
|
|
|
(d)
|
The estimated fair value of long-lived property and equipment were determined utilizing estimated replacement cost adjusted for a usage or obsolescence factor.
|
|
|
(e)
|
The estimated fair value of long-term liabilities was determined utilizing observable market inputs where available or estimated based on their then current carrying values.
|
|
|
(f)
|
Reflected the value of perceived growth opportunities, synergies and operating leverage anticipated through the acquisition and ownership of the acquired gathering assets as of November 13, 2017.
|
|
|
(g)
|
During its annual goodwill assessment for the year ended December 31, 2018, EQM determined that carrying value of the RMP PA Gas Gathering reporting unit, which comprises the Pennsylvania gathering assets acquired in the Rice Merger, was greater than its fair value. As a result, EQM recognized an impairment to goodwill of approximately
$261.9 million
.
|
The 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.
RMP and the entities part of the Drop-Down Transaction were businesses and the related acquisitions were transactions between entities under common control; therefore, EQM recorded the assets and liabilities of these entities at their carrying amounts to EQT on the date of the respective transactions. The difference between EQT's net carrying amount and the total consideration paid to EQT was recorded as a capital transaction with EQT, which resulted in a reduction in equity. This portion of the consideration was recorded in financing activities in the statements of consolidated cash flows. EQM recast its consolidated financial statements to retrospectively reflect the EQM-RMP Merger and the Drop-Down Transaction for the periods the acquired businesses were under the common control of EQT; however, the consolidated financial statements are not necessarily indicative of the results of operations that would have occurred if EQM had owned the acquired businesses during the periods reported.
|
|
3
.
|
Impairment of Long-Lived Assets
|
EQM evaluates long-lived assets, including related intangibles, for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. Asset recoverability is measured by comparing the carrying value of the asset or asset group with its expected future pre-tax undiscounted cash flows. These cash flow estimates require EQM to make projections and assumptions for many years into the future for pricing, demand, competition, operating cost and other factors. If the carrying amount exceeds the expected future undiscounted cash flows, EQM recognizes an impairment equal to the excess of net book value over fair value as determined by quoted market prices in active markets or present value techniques if quotes are unavailable. The determination of the fair value using present value techniques requires EQM to make projections and assumptions regarding the probability of a range of outcomes and the rates of interest used in the present value calculations. Any changes EQM makes to these projections and assumptions could result in significant revisions to its evaluation of recoverability of its property, plant and equipment and the recognition of additional impairments.
During the second quarter of 2019, EQM reassessed its asset groupings for its regulated pipelines due to certain regulatory ratemaking policy changes affecting the regulated pipelines, changes in strategic focus and plans for segmentation of operations. Prior to the second quarter of 2019, EQM defined its regulated asset grouping to include the FERC-regulated transmission and storage assets, integrated with the low-pressure gathering assets due to overlapping operations, shared costs structure and similar ratemaking structures. During the second quarter, EQM reached a settlement related to its FERC Form 501-G report, which was focused solely on EQM’s FERC-regulated transmission and storage assets. The settlement further differentiated the rate structures, which are primarily negotiated rates for the FERC-regulated transmission assets versus the tariff-based rate structure for the FERC-regulated low-pressure gathering assets. Further, management increased its operational focus and emphasis on high-pressure gathering assets as illustrated by the consummation of the Bolt-on Acquisition. As a result of these regulatory changes and shift in operational focus, beginning with the second quarter of 2019, EQM groups its FERC-regulated assets in two asset groupings: FERC-regulated transmission and storage assets and FERC-regulated low-pressure gathering assets. Upon the change in asset grouping, management evaluated whether any indicators of impairment were present and in conjunction with the evaluation, EQM determined that the carrying values for the non-core FERC-regulated low-pressure gathering assets exceeded their undiscounted cash flows. Additionally, following the settlement related to the FERC Form 501-G report, management does not currently plan to seek to recover the deficient cash flows through a future rate proceeding. EQM therefore estimated the fair values of FERC-related low-pressure gathering assets and determined that their fair values were not in excess of the assets’ carrying values, which resulted in recognized impairments of property and equipment of approximately
$80.1 million
related to the assets within EQM's Gathering segment. As a result of the impairment, the assets carry no book value.
As discussed in Note
1
, EQM adopted ASU 2016-02, ASU 2018-11 and ASU 2019-01 on January 1, 2019 (the Adoption Date) using the optional transition method of adoption.
EQM elected a package of practical expedients that allows an entity to not reassess (i) whether a contract is or contains a lease, (ii) lease classification and (iii) initial direct costs. In addition, EQM elected the following practical expedients: (i) to not reassess certain land easements, (ii) to not apply the recognition requirements under the standard to short-term leases and (iii) to combine and account for lease and nonlease contract components as a lease, which requires the capitalization of fixed nonlease payments on the Adoption Date or lease effective date and the recognition of variable nonlease payments as variable lease expense. Nonlease payments include payments for property taxes and other operating and maintenance expenses incurred by the lessor but payable by EQM in connection with the leasing arrangement.
On the Adoption Date, EQM recorded on its consolidated balance sheet an operating lease right-of-use asset and a corresponding operating lease liability of
$2.3 million
, reflecting the present value of future lease payments on EQM's facility and compressor lease contracts. The discount rate used to determine present value, referred to as the incremental borrowing rate, was based on the rate of interest that EQM estimated it would have to pay to borrow (on a collateralized-basis over a similar term) an amount equal to the lease payments in a similar economic environment as of the Adoption Date. EQM is required to reassess the incremental borrowing rate for any new and modified lease contracts as of the contract effective date. Adoption of the standard did not require an adjustment to the opening balance of retained earnings. As of the Adoption Date and
June 30, 2019
, EQM had no lease contracts classified as financing leases and was neither a lessor nor party to a subleasing arrangement.
In connection with the Shared Assets Transaction discussed in Note
2
, on March 31, 2019, Equitrans Midstream assigned to EQM
two
lease agreements that support EQM operations (the Shared Leases Assignment), one of which provides rights to a
facility and the other to a compressor station. As a result of the Shared Leases Assignment, EQM recorded
$33.0 million
of right-of-use assets and corresponding operating lease liabilities.
In addition, in connection with the Bolt-on Acquisition discussed in Note
2
, EQM acquired
10
compressor leases and
one
facilities lease for which it recorded approximately
$1.3 million
in operating lease expenses during the
three and six
months ended
June 30, 2019
. EQM recorded operating lease right-of-use assets and a corresponding operating lease liability of approximately
$20.0 million
for these acquired leases.
The following table summarizes operating lease cost for the
three and six
months ended
June 30, 2019
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
|
(Thousands)
|
Operating lease cost
|
$
|
2,852
|
|
|
$
|
4,149
|
|
Short-term lease cost
|
1,512
|
|
|
1,880
|
|
Variable lease cost
|
4
|
|
|
12
|
|
Total lease cost
|
$
|
4,368
|
|
|
$
|
6,041
|
|
Operating lease expense related to EQM's compressor lease contracts and facility lease contracts is reported in operating and maintenance expense and selling, general and administrative expense, respectively, on EQM's statements of consolidated operations.
For the
three and six
months ended
June 30, 2019
, cash paid for operating lease liabilities was
$2.5 million
and
$3.8 million
, respectively, which was reported in cash flows provided by operating activities on EQM's statements of consolidated cash flows.
The operating lease right-of-use assets are reported in other assets and the current and noncurrent portions of the operating lease liabilities are reported in accrued liabilities and regulatory and other long-term liabilities, respectively. As of
June 30, 2019
, the operating lease right-of-use assets were
$52.8 million
and operating lease liabilities were
$53.1 million
, of which
$8.8 million
was classified as current. As of
June 30, 2019
, the weighted average remaining lease term was
8 years
and the weighted average discount rate was
6.0%
.
Schedule of Operating Lease Liability Maturities.
The following table summarizes undiscounted cash flows owed by EQM to lessors pursuant to contractual agreements in effect as of
June 30, 2019
and related imputed interest. The majority of EQM's lease agreements have multiple renewal periods at EQM's option; however, because
none
of the renewal periods are reasonably assured to be exercised, the associated operating lease payments have not been included in the table below.
|
|
|
|
|
|
June 30, 2019
|
|
(Thousands)
|
2019
|
$
|
5,619
|
|
2020
|
10,937
|
|
2021
|
9,161
|
|
2022
|
7,694
|
|
2023
|
5,607
|
|
2024
|
3,966
|
|
Thereafter
|
24,728
|
|
Total
|
67,712
|
|
Less: imputed interest
|
14,597
|
|
Present value of operating lease liability
|
$
|
53,115
|
|
The following table summarizes changes in EQM's Series A Preferred Units, common units and Class B units, each representing limited partner interests in EQM, and general partner units during the year ended December 31, 2018 and from January 1,
2019
through
June 30, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partner Interests
|
|
|
|
|
|
Series A Preferred Units
|
|
Common Units
|
|
Class B Units
|
|
General Partner Units
|
|
Total
|
Balance at January 1, 2018
|
—
|
|
|
80,581,758
|
|
|
—
|
|
|
1,443,015
|
|
|
82,024,773
|
|
Common units issued
(1)
|
—
|
|
|
10,821
|
|
|
—
|
|
|
—
|
|
|
10,821
|
|
Drop-Down Transaction consideration
|
—
|
|
|
5,889,282
|
|
|
—
|
|
|
—
|
|
|
5,889,282
|
|
Common units issued in the EQM-RMP Merger
|
—
|
|
|
33,975,777
|
|
|
—
|
|
|
—
|
|
|
33,975,777
|
|
Balance at December 31, 2018
|
—
|
|
|
120,457,638
|
|
|
—
|
|
|
1,443,015
|
|
|
121,900,653
|
|
Unit cancellation
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
EQM IDR Transaction
(2)
|
—
|
|
|
80,000,000
|
|
|
7,000,000
|
|
|
(1,443,015
|
)
|
|
85,556,985
|
|
Issuance of Series A Preferred Units
|
24,605,291
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,605,291
|
|
Balance at June 30, 2019
|
24,605,291
|
|
|
200,457,630
|
|
|
7,000,000
|
|
|
—
|
|
|
232,062,921
|
|
|
|
(1)
|
Units issued upon the resignation of a member of the Board of Directors of EQM's general partner.
|
|
|
(2)
|
In exchange for the cancellation of the EQM IDRs, EQM issued
87,000,000
EQM common units (the Exchange Consideration) to the Former EQM General Partner. At the effective time of the EQM IDR Merger, (i) the Exchange Consideration held by the Former EQM General Partner was canceled, (ii)
80,000,000
EQM common units and
7,000,000
Class B units were issued on a pro rata basis to certain affiliates of Equitrans Midstream, and (iii)
21,811,643
EQM common units held by EQGP were canceled and
21,811,643
EQM common units were issued pro rata to certain affiliates of Equitrans Midstream.
|
As of
June 30, 2019
, Equitrans Gathering Holdings, LLC (Equitrans Gathering Holdings), EQM GP Corporation (EQM GP Corp) and Equitrans Midstream Holdings, LLC (EMH), each a wholly-owned subsidiary of Equitrans Midstream, held
89,505,616
,
89,536
and
27,650,303
EQM common units, respectively. Additionally, Equitrans Gathering Holdings, EQM GP Corp and EMH held
6,153,907
,
6,155
and
839,938
Class B units, respectively. As of
June 30, 2019
, Equitrans Midstream owned, directly or indirectly,
117,245,455
EQM common units and
7,000,000
Class B units (collectively representing, after taking into account the Series A Preferred Units issued in the Private Placement on an as-converted basis, a
53.5%
limited partner interest in EQM) and the entire non-economic general partner interest in EQM, while the public owned a
46.5%
limited partner interest in EQM. Following the completion of the Private Placement, certain investors owned an aggregate of
24,605,291
Series A Preferred Units.
Class B Units
As discussed above and in Note
1
, in February 2019, EQM issued
7,000,000
Class B units representing a new class of limited partner interests in EQM as partial consideration for the EQM IDR Transaction. The Class B units are substantially similar in all respects to EQM's common units, except that the Class B units are not entitled to receive distributions of available cash until the applicable Class B unit conversion date (or, if earlier, a change of control). The Class B units are divided into three tranches, with the first tranche of
2,500,000
Class B units becoming convertible at the holder’s option into EQM common units on April 1, 2021, the second tranche of
2,500,000
Class B units becoming convertible at the holder’s option into EQM common units on April 1, 2022, and the third tranche of
2,000,000
Class B units becoming convertible at the holder’s option on April 1, 2023 (each, a Class B unit conversion date). Additionally, the Class B units will become convertible at the holder’s option into EQM common units immediately before a change of control of EQM. After the applicable Class B unit conversion date (or, if earlier, a change of control), whether or not such Class B units have been converted into EQM common units, the Class B units will participate pro rata with the EQM common units in distributions of available cash.
The holders of Class B units vote together with the holders of EQM common units as a single class, except that Class B units owned by the general partner of EQM and its affiliates are excluded from voting if EQM common units owned by such parties are excluded from voting. Holders of Class B units are entitled to vote as a separate class on any matter that adversely affects the rights or preferences of the Class B units in relation to other classes of EQM partnership interests in any material respect or as required by law.
Series A Preferred Units
As discussed in Note
1
, in March 2019, EQM entered into the Preferred Unit Purchase Agreement with certain investors to issue and sell in a private placement an aggregate of
24,605,291
Series A Preferred Units representing limited partner interests in EQM for a cash purchase price of
$48.77
per Series A Preferred Unit, resulting in total gross proceeds of approximately
$1.2 billion
. The net proceeds from the Private Placement were used in part to fund the purchase price in the Bolt-on Acquisition and
to pay certain fees and expenses related to the Bolt-on Acquisition, and the remainder was used for general partnership purposes. The Private Placement closed concurrently with the closing of the Bolt-on Acquisition on
April 10, 2019
.
The Series A Preferred Units rank senior to all common units and Class B units representing limited partner interests in EQM with respect to distribution rights and rights upon liquidation. The Series A Preferred Units will vote on an as-converted basis with the EQM common units and Class B units and will have certain other class voting rights with respect to any amendment to EQM's partnership agreement or its certificate of limited partnership that would be adverse (other than in a
de minimis
manner) to any of the rights, preferences or privileges of the Series A Preferred Units.
The holders of the Series A Preferred Units are entitled to receive cumulative quarterly distributions at a rate of
$1.0364
per Series A Preferred Unit for the first twenty distribution periods, and thereafter the quarterly distributions on the Series A Preferred Units will be an amount per Series A Preferred Unit for such quarter equal to (i) the Series A Preferred Unit purchase price of
$48.77
per such unit, multiplied by (ii) a percentage equal to the sum of (A) the greater of (x) the 3-month LIBOR as of the second London banking day prior to the beginning of the applicable quarter and (y)
2.59%
, and (B)
6.90%
, multiplied by (iii)
25%
. EQM will not be entitled to pay any distributions on any junior securities, including any EQM common units, prior to paying the quarterly distributions payable to the holders of Series A Preferred Units, including any previously accrued and unpaid distributions.
Each holder of the Series A Preferred Units may elect to convert all or any portion of the Series A Preferred Units owned by it into EQM common units initially on a one-for-one basis, subject to customary anti-dilution adjustments and an adjustment for any distributions that have accrued but have not been paid when due and partial period distributions, at any time (but not more often than once per fiscal quarter) after April 10, 2021 (or earlier liquidation, dissolution or winding up of EQM), provided that any conversion is for at least
$30 million
(calculated based on the closing price of the EQM common units on the trading day preceding notice of conversion) or such lesser amount if such conversion relates to all of a holder’s remaining Series A Preferred Units.
EQM may elect to convert all or any portion of the Series A Preferred Units into EQM common units at any time (but not more often than once per quarter) after April 10, 2021 if (i) the common units are listed for, or admitted to, trading on a national securities exchange, (ii) the closing price per common unit on the national securities exchange on which the common units are listed for, or admitted to, trading exceeds
140%
of the Series A Preferred Unit purchase price of
$48.77
per such unit for the
20
consecutive trading days immediately preceding notice of the conversion, (iii) the average daily trading volume of the common units on the national securities exchange on which the common units are listed for, or admitted to, trading exceeds
500,000
common units for the
20
consecutive trading days immediately preceding notice of the conversion, (iv) EQM has an effective registration statement on file with the SEC covering resales of the common units to be received by such holders upon any such conversion and (v) EQM has paid all accrued quarterly distributions in cash to the holders. In addition, upon certain events involving a change in control, the holders of Series A Preferred Units may elect, among other potential elections, to convert their preferred units into EQM common units at a certain conversion rate.
|
|
6
.
|
Financial Information by Business Segment
|
EQM reports its operations in
three
segments that reflect its
three
lines of business: Gathering, Transmission and Water. Gathering includes EQM's high-pressure gathering lines and FERC-regulated low-pressure gathering line; Transmission includes EQM's FERC-regulated interstate pipelines and storage system; and Water consists of EQM's water pipelines, impoundment facilities, pumping stations, take point facilities and measurement facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Thousands)
|
Revenues from customers (including related parties):
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
285,666
|
|
|
$
|
241,189
|
|
|
$
|
547,547
|
|
|
$
|
478,579
|
|
Transmission
|
92,767
|
|
|
89,145
|
|
|
202,626
|
|
|
196,079
|
|
Water
|
27,734
|
|
|
44,363
|
|
|
45,776
|
|
|
71,065
|
|
Total operating revenues
|
$
|
406,167
|
|
|
$
|
374,697
|
|
|
$
|
795,949
|
|
|
$
|
745,723
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
94,131
|
|
|
$
|
161,818
|
|
|
$
|
276,209
|
|
|
$
|
332,853
|
|
Transmission
|
63,244
|
|
|
60,642
|
|
|
147,994
|
|
|
140,093
|
|
Water
|
10,072
|
|
|
23,408
|
|
|
11,258
|
|
|
38,720
|
|
Total operating income
|
$
|
167,447
|
|
|
$
|
245,868
|
|
|
$
|
435,461
|
|
|
$
|
511,666
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income to net income:
|
|
|
|
|
|
|
|
|
|
|
Equity income
(a)
|
$
|
36,782
|
|
|
$
|
10,938
|
|
|
$
|
67,845
|
|
|
$
|
19,749
|
|
Other income
|
1,959
|
|
|
944
|
|
|
4,169
|
|
|
1,848
|
|
Net interest expense
|
49,717
|
|
|
23,065
|
|
|
99,073
|
|
|
35,735
|
|
Net income
|
$
|
156,471
|
|
|
$
|
234,685
|
|
|
$
|
408,402
|
|
|
$
|
497,528
|
|
|
|
(a)
|
Equity income is included in the Transmission segment.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(Thousands)
|
Segment assets:
|
|
|
|
|
|
Gathering
|
$
|
8,031,401
|
|
|
$
|
6,011,654
|
|
Transmission
(a)
|
3,636,355
|
|
|
3,066,659
|
|
Water
|
262,773
|
|
|
237,602
|
|
Total operating segments
|
11,930,529
|
|
|
9,315,915
|
|
Headquarters, including cash
|
132,641
|
|
|
140,206
|
|
Total assets
|
$
|
12,063,170
|
|
|
$
|
9,456,121
|
|
|
|
(a)
|
The equity investment in the MVP Joint Venture is included in the Transmission segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Thousands)
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
37,443
|
|
|
$
|
23,882
|
|
|
$
|
65,559
|
|
|
$
|
46,950
|
|
Transmission
|
12,594
|
|
|
12,430
|
|
|
25,127
|
|
|
24,871
|
|
Water
|
6,478
|
|
|
5,798
|
|
|
12,894
|
|
|
11,569
|
|
Total
|
$
|
56,515
|
|
|
$
|
42,110
|
|
|
$
|
103,580
|
|
|
$
|
83,390
|
|
|
|
|
|
|
|
|
|
Expenditures for segment assets:
|
|
|
|
|
|
|
|
Gathering
(1)(2)
|
$
|
265,198
|
|
|
$
|
186,457
|
|
|
$
|
472,915
|
|
|
$
|
320,595
|
|
Transmission
(3)
|
11,229
|
|
|
27,962
|
|
|
29,991
|
|
|
46,891
|
|
Water
|
8,849
|
|
|
7,002
|
|
|
18,024
|
|
|
9,377
|
|
Total
(4)
|
$
|
285,276
|
|
|
$
|
221,421
|
|
|
$
|
520,930
|
|
|
$
|
376,863
|
|
|
|
(1)
|
Includes approximately
$8.9 million
and
$58.6 million
for the
three and six
months ended
June 30, 2019
, respectively, related to non-operating assets acquired from Equitrans Midstream in the Shared Assets Transaction that primarily support EQM's gathering activities.
|
|
|
(2)
|
Includes approximately
$10.9 million
of capital expenditures related to noncontrolling interests in Eureka Midstream for the
three and six
months ended
June 30, 2019
.
|
|
|
(3)
|
Transmission capital expenditures do not include capital contributions made to the MVP Joint Venture for the MVP and MVP Southgate projects of approximately
$156.4 million
and
$65.8 million
for the
three months ended June 30, 2019
and
2018
, respectively, and approximately
$301.2 million
and
$182.8 million
for the
six months ended
June 30, 2019
and
2018
, respectively.
|
|
|
(4)
|
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. Accrued capital expenditures were approximately
$110.8 million
,
$137.8 million
and
$108.9 million
at
June 30, 2019
, March 31, 2019 and
December 31, 2018
, respectively. Accrued capital expenditures were approximately
$84.6 million
,
$75.5 million
and
$90.7 million
at
June 30, 2018
, March 31, 2018 and
December 31, 2017
, respectively. On April 10, 2019, as a result of the Bolt-on Acquisition, EQM assumed
$8.8 million
of Eureka Midstream accrued capital expenditures.
|
|
|
7
.
|
Revenue from Contracts with Customers
|
For the
three and six
months ended
June 30, 2019
and
2018
, all revenues recognized on EQM's statements of consolidated operations are from contracts with customers. As of
June 30, 2019
and
December 31, 2018
, 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.
Summary of disaggregated revenues
.
The tables below provide disaggregated revenue information by business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Gathering
|
|
Transmission
|
|
Water
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
147,771
|
|
|
$
|
81,836
|
|
|
$
|
—
|
|
|
$
|
229,607
|
|
Volumetric-based fee revenues
|
|
137,895
|
|
|
10,931
|
|
|
—
|
|
|
148,826
|
|
Water services revenues
|
|
—
|
|
|
—
|
|
|
27,734
|
|
|
27,734
|
|
Total operating revenues
|
|
$
|
285,666
|
|
|
$
|
92,767
|
|
|
$
|
27,734
|
|
|
$
|
406,167
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Water
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
111,702
|
|
|
$
|
82,222
|
|
|
$
|
—
|
|
|
$
|
193,924
|
|
Volumetric-based fee revenues
|
|
129,487
|
|
|
6,923
|
|
|
—
|
|
|
136,410
|
|
Water services revenues
|
|
—
|
|
|
—
|
|
|
44,363
|
|
|
44,363
|
|
Total operating revenues
|
|
$
|
241,189
|
|
|
$
|
89,145
|
|
|
$
|
44,363
|
|
|
$
|
374,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Gathering
|
|
Transmission
|
|
Water
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
276,730
|
|
|
$
|
181,060
|
|
|
$
|
—
|
|
|
$
|
457,790
|
|
Volumetric-based fee revenues
|
|
270,817
|
|
|
21,566
|
|
|
—
|
|
|
292,383
|
|
Water service revenues
|
|
—
|
|
|
—
|
|
|
45,776
|
|
|
45,776
|
|
Total operating revenues
|
|
$
|
547,547
|
|
|
$
|
202,626
|
|
|
$
|
45,776
|
|
|
$
|
795,949
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Water
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
221,635
|
|
|
$
|
179,997
|
|
|
$
|
—
|
|
|
$
|
401,632
|
|
Volumetric-based fee revenues
|
|
256,944
|
|
|
16,082
|
|
|
—
|
|
|
273,026
|
|
Water service revenues
|
|
—
|
|
|
—
|
|
|
71,065
|
|
|
71,065
|
|
Total operating revenues
|
|
$
|
478,579
|
|
|
$
|
196,079
|
|
|
$
|
71,065
|
|
|
$
|
745,723
|
|
Summary of Remaining Performance Obligations.
The following table summarizes the transaction price allocated to EQM's remaining performance obligations under all contracts with firm reservation fees and minimum volume commitments (MVCs)
as of
June 30, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
(a)
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
(Thousands)
|
Gathering firm reservation fees
|
|
$
|
253,531
|
|
|
$
|
566,813
|
|
|
$
|
614,356
|
|
|
$
|
614,356
|
|
|
$
|
614,264
|
|
|
$
|
2,647,183
|
|
|
$
|
5,310,503
|
|
Gathering revenues supported by MVCs
|
|
45,877
|
|
|
95,294
|
|
|
100,715
|
|
|
100,715
|
|
|
100,715
|
|
|
309,214
|
|
|
752,530
|
|
Transmission firm reservation fees
|
|
163,370
|
|
|
334,627
|
|
|
345,527
|
|
|
340,453
|
|
|
336,333
|
|
|
2,478,310
|
|
|
3,998,620
|
|
Total
|
|
$
|
462,778
|
|
|
$
|
996,734
|
|
|
$
|
1,060,598
|
|
|
$
|
1,055,524
|
|
|
$
|
1,051,312
|
|
|
$
|
5,434,707
|
|
|
$
|
10,061,653
|
|
|
|
(a)
|
July 1, 2019 through December 31, 2019.
|
Based on total projected contractual revenues, including projected contractual revenues from future capacity expected from expansion projects that are not yet fully constructed for which EQM has executed firm contracts, EQM's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately
11
years and
15
years, respectively, as of
June 30, 2019
.
|
|
8
.
|
Related Party Transactions
|
Pursuant to an omnibus agreement (the ETRN Omnibus Agreement), Equitrans Midstream performs centralized corporate, general and administrative services for EQM. In exchange, EQM reimburses Equitrans Midstream for the expenses incurred by Equitrans Midstream in providing these services. In connection with the entry into the Assignment and Bill of Sale, the ETRN Omnibus Agreement was amended and restated, to, among other things, govern Equitrans Midstream's use, and payment for such use, of the acquired assets following their conveyance to EQM. Pursuant to a secondment agreement, employees of Equitrans Midstream 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 Equitrans Midstream and its affiliates for the services provided by the seconded employees. The expenses for which EQM reimburses Equitrans Midstream 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. In connection with the Separation, Equitrans Midstream assumed certain obligations from EQT to indemnify and reimburse EQM.
As of
June 30, 2019
, EQT remained a related party following the Separation due to its
19.9%
ownership interest in Equitrans Midstream. In the ordinary course of business, EQM engaged, and continues to engage, in transactions with EQT and its affiliates, including, but not limited to and as applicable, gathering agreements, transportation service and precedent agreements, storage agreements and water service agreements.
|
|
9
.
|
Investment in Unconsolidated Entity
|
The MVP Joint Venture is constructing the Mountain Valley Pipeline (MVP), an estimated
300
-mile natural gas interstate pipeline that will span from northern West Virginia to southern Virginia. EQM is the operator of the MVP and owned a
45.5%
interest in the MVP project as of
June 30, 2019
. 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 of the MVP Joint Venture because it does not have the power to direct the activities that most significantly affect the MVP Joint Venture's economic performance. Certain business decisions, such as decisions to make distributions of cash, require a greater than 66 2/3% ownership interest approval, and no one member owns more than a 66 2/3% interest.
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. As of
June 30, 2019
, EQM had a
47.2%
ownership interest in the MVP Southgate project and will operate the pipeline.
In
May 2019
, the MVP Joint Venture issued a capital call notice for the funding of the MVP project to MVP Holdco, LLC (MVP Holdco), a direct, wholly-owned subsidiary of EQM, for
$352.3 million
, of which
$93.4 million
was paid in
July 2019
and
$114.3 million
and
$144.5 million
is expected to be paid in
August 2019
and
September 2019
, respectively. In addition, in May 2019, the MVP Joint Venture issued a capital call notice for the funding of the MVP Southgate project to MVP Holdco for
$4.0 million
, of which
$0.9 million
was paid in July 2019 and
$1.6 million
and
$1.5 million
is expected to be paid in
August 2019
and
September 2019
, respectively. The capital contribution payable and the corresponding increase to the investment balance are reflected on the consolidated balance sheet as of
June 30, 2019
.
The interests in MVP and MVP Southgate are equity method investments for accounting purposes because EQM has the ability to exercise significant influence, but not control, over the MVP Joint Venture's operating and financial policies. Accordingly,
EQM records adjustments to the investment balance for contributions to or distributions from the MVP Joint Venture and for EQM's pro-rata share of MVP Joint Venture earnings.
Equity income, which is primarily related to EQM's pro-rata share of the MVP Joint Venture's AFUDC on the construction of the MVP, is reported in equity income in EQM's statements of consolidated operations.
Pursuant to the MVP Joint Venture's limited liability company agreement, EQM is obligated to issue a performance guarantee in favor of the MVP Joint Venture to provide performance assurances of MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP project. In January 2019, EQM issued a performance guarantee in an amount equal to
33%
of EQM's proportionate share of the then-remaining construction budget for the MVP project, which was
$261 million
at the time of issuance. As of
June 30, 2019
, EQM was obligated to issue a performance guarantee in an amount equal to approximately
$280 million
based on the updated construction budget for the MVP project and capital contributions made during the first and second quarters of 2019. Effective July 1, 2019, EQM restated the performance guarantee to an amount equal to approximately
$249 million
, which reflected a decrease as result of a capital contribution made on July 1, 2019.
In addition, in February 2019, EQM issued a performance guarantee of
$14 million
in favor of the MVP Joint Venture for the MVP Southgate project. Upon the FERC's initial release to begin construction of the MVP Southgate project, EQM's current MVP Southgate performance guarantee will be terminated, and EQM will be obligated to issue a new guarantee in an amount equal to
33%
of EQM's proportionate share of the remaining capital obligations for the MVP Southgate project.
As of
June 30, 2019
, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately
$2,004 million
, which consists of the investment in unconsolidated entity balance on the consolidated balance sheet as of
June 30, 2019
, net of capital contributions payable, and amounts that could have become due under EQM's performance guarantees as of that date.
The following tables summarize the unaudited condensed consolidated financial statements of the MVP Joint Venture.
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(Thousands)
|
Current assets
|
$
|
836,397
|
|
|
$
|
687,657
|
|
Non-current assets
|
4,033,475
|
|
|
3,223,220
|
|
Total assets
|
$
|
4,869,872
|
|
|
$
|
3,910,877
|
|
|
|
|
|
Current liabilities
|
$
|
420,534
|
|
|
$
|
617,355
|
|
Non-current liabilities
|
2,166
|
|
|
—
|
|
Equity
|
4,447,172
|
|
|
3,293,522
|
|
Total liabilities and equity
|
$
|
4,869,872
|
|
|
$
|
3,910,877
|
|
Condensed Statements of Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Thousands)
|
Environmental remediation reserve
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
(2,166
|
)
|
|
$
|
—
|
|
Other income
|
1,785
|
|
|
743
|
|
|
4,698
|
|
|
1,277
|
|
Net interest income
|
23,700
|
|
|
6,989
|
|
|
43,935
|
|
|
12,638
|
|
AFUDC - equity
|
55,298
|
|
|
16,307
|
|
|
102,514
|
|
|
29,489
|
|
Net income
|
$
|
80,809
|
|
|
$
|
24,039
|
|
|
$
|
148,981
|
|
|
$
|
43,404
|
|
10
. Debt
$3
Billion Facility.
On October 31, 2018, EQM amended and restated its credit facility to increase the borrowing capacity from
$1 billion
to
$3 billion
and extend the term to October 2023 (the
$3
Billion Facility). The
$3
Billion Facility is available for general partnership purposes, including to purchase assets, and to fund working capital requirements and capital expenditures,
pay distributions and repurchase units. Subject to satisfaction of certain conditions, the
$3
Billion Facility has an accordion feature that allows EQM to increase the available borrowings under the facility by up to an additional
$750 million
. The
$3
Billion Facility has a sublimit of up to
$250 million
for same-day swing line advances and a sublimit of up to
$400 million
for letters of credit. In addition, EQM has the ability to request that one or more lenders make available term loans under the
$3
Billion Facility, subject to the satisfaction of certain conditions. Such term loans would be secured by cash and qualifying investment grade securities. EQM's obligations under the revolving portion of the
$3
Billion Facility are unsecured.
EQM's
$3
Billion Facility contains negative covenants that, among other things, limit restricted payments, the incurrence of debt, dispositions, mergers and fundamental changes, and transactions with affiliates. In addition, the
$3
Billion Facility contains events of default such as insolvency, nonpayment of scheduled principal or interest obligations, change of control and cross-default related to the acceleration or default of certain other financial obligations. Under the
$3
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).
As of
June 30, 2019
, EQM had approximately
$1.1 billion
of borrowings outstanding and
$1 million
of letters of credit outstanding under the
$3
Billion Facility. As of
December 31, 2018
, EQM had approximately
$625 million
of borrowings outstanding and
$1 million
of letters of credit outstanding under the
$3
Billion Facility. During the
three and six
months ended
June 30, 2019
, the maximum amount of EQM's outstanding borrowings under the
$3
Billion Facility at any time was approximately
$1.2 billion
and the average daily balance was approximately
$1,043 million
and
$993 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
3.8%
and
3.9%
for the
three and six
months ended
June 30, 2019
, respectively. During the
three and six
months ended
June 30, 2018
, the maximum amount of EQM's outstanding borrowings under the
$3
Billion Facility at any time was approximately
$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.
Eureka Credit Facility.
Eureka Midstream, LLC (Eureka), a wholly owned subsidiary of Eureka Midstream, has a
$400 million
revolving credit facility, which is available for general business purposes, including financing maintenance and expansion capital expenditures related to the Eureka system and providing working capital for Eureka’s operations (the Eureka Credit Facility). Subject to satisfaction of certain conditions, the Eureka Credit Facility has an accordion feature that allows Eureka to increase the available borrowings under the facility by an additional
$100 million
to an aggregate
$500 million
of total commitments.
Under the terms of the Eureka Credit Facility, Eureka can obtain base rate loans or Eurodollar rate loans. Base rate loans are denominated in dollars and bear interest at an adjusted base rate, which was equal to the higher of (i) JPMorgan Chase Bank, N.A.'s prime rate, (ii) the one-month Adjusted Eurodollar Rate (as defined in the Eureka Credit Facility credit agreement) plus
1.0%
or (iii) the Federal Funds effective rate plus
0.5%
per annum; plus the Applicable Margin, as described below. Eurodollar rate loans bear interest at the Adjusted Eurodollar Rate per annum, which rate is to be determined by the administrative agent pursuant to a prescribed calculation based on the ICE Benchmark Administration LIBOR Rate plus the Applicable Margin. The Applicable Margin ranged from
0.75%
to
2.0%
in the case of base rate loans and from
1.75%
to
3.0%
in the case of Eurodollar loans, in each case, depending on the amount of the loan outstanding in relation to the borrowing base.
The Eureka Credit Facility contains negative covenants that, among other things, limit restricted payments, the incurrence of debt, dispositions, mergers and fundamental changes, securities issuances, and transactions with affiliates. In addition, the Eureka Credit Facility contains events of default such as insolvency, nonpayment of scheduled principal or interest obligations, loss of material contracts, change of control and cross-default related to the acceleration or default of certain other financial obligations. Under the Eureka Credit Facility, Eureka is required to maintain a consolidated leverage ratio of not more than
4.75
to
1.00
(or not more than
5.25
to
1.00
for certain measurement periods following the consummation of certain acquisitions). Additionally, as of the end of any fiscal quarter, Eureka will not permit the ratio of consolidated EBITDA (as defined in the Eureka Credit Facility) for the four fiscal quarters then ending to consolidated interest charges to be less than
2.50
to
1.00
.
As of
June 30, 2019
, Eureka had approximately
$293 million
of borrowings outstanding under the Eureka Credit Facility. For the period from April 10, 2019 through
June 30, 2019
, the maximum amount of outstanding borrowings under the Eureka Credit Facility at any time was approximately
$293 million
, the average daily balance was approximately
$277 million
and Eureka incurred interest at a weighted average annual interest rate of approximately
4.5%
.
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). The EQM Term Loan Facility was used to fund the cash consideration for the
Drop-Down Transaction
, to repay borrowings under EQM's then-existing revolving credit facility and for other general partnership purposes. In connection with EQM's issuance of the 2018 Senior Notes (defined below), on June 25,
2018, the balance outstanding under the EQM Term Loan Facility was repaid and the EQM Term Loan Facility was terminated. 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 approximately
$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.
RMP
$850
Million Facility.
RM Operating LLC (formerly Rice Midstream OpCo LLC), a wholly-owned subsidiary of RMP, had an
$850
million credit facility (the RMP
$850 million
Facility). 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 RMP
$850
Million Facility and the RMP
$850
Million Facility was terminated. Prior to its termination, the RMP
$850
Million Facility was available for general partnership purposes, including to purchase assets, and to fund working capital requirements and capital expenditures, pay distributions and repurchase units. The RMP
$850
Million Facility was secured by mortgages and other security interests on substantially all of RMP's properties and was guaranteed by RMP and its restricted subsidiaries. During the
three and six
months ended
June 30, 2018
, the maximum outstanding borrowings were approximately
$325 million
and
$336 million
, respectively, the average daily balance was approximately
$305 million
and
$306 million
, respectively, and the weighted average annual interest rate for the period was approximately
3.9%
and
3.8%
, respectively.
EQM
4.125%
and
4.00%
Senior Notes.
In the fourth quarter of 2016, EQM issued
$500 million
aggregate principal amount of
4.125%
senior notes due December 2026 (the
4.125%
Senior Notes). EQM used the net proceeds from the offering to repay the then outstanding borrowings under a predecessor to the
$3
Billion Facility and for general partnership purposes. In the third quarter of 2014, EQM issued
$500 million
aggregate principal amount of
4.00%
senior notes due August 2024 (the
4.00%
Senior Notes). EQM used the net proceeds from the offering to repay the outstanding borrowings under a predecessor to the
$3
Billion Facility and for general partnership purposes.
Both the
4.125%
Senior Notes and the
4.00%
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 EQM's assets.
2018 Senior Notes.
During the second quarter of 2018, EQM issued
4.75%
senior notes due July 2023 in the aggregate principal amount of
$1.1 billion
,
5.50%
senior notes due July 2028 in the aggregate principal amount of
$850 million
and
6.50%
senior notes due July 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 approximately
$22.4 million
. The net proceeds were used to repay the balances outstanding under the EQM Term Loan Facility and the RMP
$850
Million Facility, and the remainder was 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 EQM's assets.
As of
June 30, 2019
, EQM and Eureka were in compliance with all debt provisions and covenants.
|
|
11
.
|
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; as such, their fair values are 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 estimated using an income approach model that applies a discount rate based on prevailing market rates for debt with similar remaining time-to-maturity and credit risk; as such, their fair values are Level 2 fair value measurements. As of
June 30, 2019
and
December 31, 2018
, the estimated fair value of EQM's senior notes was approximately
$3,612 million
and
$3,425 million
, respectively, and the carrying value of EQM's senior notes was approximately
$3,459 million
and
$3,457 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, 2019
and
December 31, 2018
, the estimated fair value of the Preferred Interest was approximately
$127 million
and
$122 million
, respectively, and the carrying value of the Preferred Interest was approximately
$112 million
and
$115 million
, respectively.
|
|
12
.
|
Net Income per Limited Partner Unit and Cash Distributions
|
Net Income per Limited Partner Unit.
Net income per limited partner unit is calculated utilizing the two-class method by dividing the limited partner interest in net income by the weighted average number of limited partner units outstanding during the period. The two-class method uses an earnings allocation method under which earnings per limited partner unit are
calculated for each class of common unit and any participating security considering all distributions declared and participation rights in undistributed earnings as if all earnings had been distributed during the period. Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units were exercised, settled or converted into EQM common units. EQM uses the if-converted method to compute potential common units from phantom units granted to independent and non-employee directors and the if-converted method to compute potential common units related to the conversion of Series A Preferred Units and Class B units. Under the if-converted method, dilutive convertible securities are assumed to be converted from the date of the issuance, and the resulting common units are included in the denominator of the diluted net income per unit calculation for the period being presented. Each series of potential common units is evaluated in sequence from the most dilutive to the least dilutive. Distributions declared in the period and undeclared distributions on the cumulative Series A Preferred Units that accumulated during the period are added back to the numerator for purposes of the if-converted calculation.
As a result of the EQM IDR Transaction, EQM’s common unitholders are entitled to all distributions until the Class B units are converted to common units (other than distributions in respect of the Series A Preferred Units following the initial distribution period for such Series A Preferred Units commencing with the quarter ended
June 30, 2019
). Class B unitholders have no rights to distributions until they are convertible into common units. Accordingly, for all periods prior to the date such Class B units are convertible, the Class B units are not considered participating securities under the two-class method. In addition, the Series A Preferred Units are not considered a participating security as they only have distribution rights up to the specified per-unit quarterly distribution and have no rights to EQM’s undistributed earnings prior to conversion of the Series A Preferred Units into EQM common units, as discussed in Note
5
.
For the
three and six
months ended
June 30, 2019
, limited partner interest in net income, which excludes the Series A Preferred Units interest in net income, was fully allocated to EQM’s common unitholders. For the
three and six
months ended
June 30, 2018
, net income attributable to EQM was allocated to the general partner and limited partners in accordance with their respective ownership percentages. Any common units issued during the relevant periods are included on a monthly weighted-average basis for the periods in which they were outstanding.
The phantom units granted to the independent and non-employee directors of EQM's general partner will be paid in common units on a director’s termination of service on the Board of Directors of EQM's general partner. The weighted average phantom unit awards included in the calculation of basic weighted average limited partner units outstanding were
24,007
and
21,041
for the
three months ended June 30, 2019
and
2018
, respectively, and
22,896
and
20,506
for the six months ended June 30, 2019 and 2018, respectively.
The following table presents EQM's calculation of net income per limited partner unit for common and Class B limited partner units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
(1)
|
|
2019
|
|
2018
(1)
|
|
(Thousands, except per unit data)
|
Net income attributable to EQM
|
$
|
152,438
|
|
|
$
|
233,832
|
|
|
$
|
404,369
|
|
|
$
|
494,182
|
|
Less: Series A Preferred Units interest in net income
|
(22,979
|
)
|
|
—
|
|
|
(22,979
|
)
|
|
—
|
|
Less: pre-acquisition net income allocated to parent
|
—
|
|
|
(72,620
|
)
|
|
—
|
|
|
(155,752
|
)
|
Less: general partner interest in net income – general partner units
|
—
|
|
|
(1,700
|
)
|
|
—
|
|
|
(4,791
|
)
|
Less: general partner interest in net income – IDRs
|
—
|
|
|
(68,121
|
)
|
|
—
|
|
|
(112,285
|
)
|
Limited partner interest in net income
|
$
|
129,459
|
|
|
$
|
91,391
|
|
|
$
|
381,390
|
|
|
$
|
221,354
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to common units
|
$
|
129,459
|
|
|
$
|
91,391
|
|
|
$
|
381,390
|
|
|
$
|
221,354
|
|
Net income allocable to Class B units
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited partner common units outstanding - basic
|
200,482
|
|
|
83,553
|
|
|
177,498
|
|
|
82,290
|
|
Weighted average limited partner common units outstanding - diluted
(2)
|
207,482
|
|
|
83,553
|
|
|
195,645
|
|
|
82,290
|
|
|
|
|
|
|
|
|
|
Net income per limited partner common unit - basic
|
$
|
0.65
|
|
|
$
|
1.09
|
|
|
$
|
2.15
|
|
|
$
|
2.69
|
|
Net income per limited partner common unit - diluted
|
$
|
0.62
|
|
|
$
|
1.09
|
|
|
$
|
2.07
|
|
|
$
|
2.69
|
|
|
|
(1)
|
Net income attributable to the Drop-Down Transaction and the EQM-RMP Merger for the periods prior to May 1, 2018 and July 23, 2018, respectively, 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 EQM unitholders.
|
|
|
(2)
|
For the three months ended June 30, 2019,
7,000,000
Class B units were included in the calculation of diluted weighted average limited partner units outstanding based upon the application of the if-converted method. The effect of Series A Preferred Units was anti-dilutive. For the six months ended June 30, 2019,
7,000,000
Class B units and
11,147,148
Series A Preferred Units and Class B units were included in the calculation of diluted weighted average limited partner units outstanding based upon the application of the if-converted method. Class B units are not a participating security as they do not participate in distributions.
|
Distributions to common unitholders.
On
July 24, 2019
, the Board of Directors of EQM's general partner declared a cash distribution to EQM's unitholders for the
second quarter
of
2019
of
$1.160
per common unit. The cash distribution will be paid on
August 13, 2019
to common unitholders of record at the close of business on
August 2, 2019
. Based on the EQM common units outstanding on
July 30, 2019
, cash distributions paid by EQM to Equitrans Midstream will be approximately
$136.0 million
related to Equitrans Midstream's limited partner interest in EQM.
Distributions to Series A Preferred Unit holders.
On
July 24, 2019
, the Board of Directors of EQM's general partner declared a quarterly cash distribution on the Series A Preferred Units for the second quarter of 2019 of
$0.9339
per Series A Preferred Unit, which amount reflected pro-ration in accordance with the Fourth Amended and Restated Agreement of Limited Partnership of EQM, dated April 10, 2019. The cash distribution will be paid on
August 13, 2019
to Series A Preferred unitholders of record at the close of business on
August 2, 2019
.
For the quarter ended
June 30, 2019
, no distributions were declared on the Class B units as none of these units were convertible into EQM common units.
EQM MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
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 (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (the Securities Act). 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 service revenue and volume growth; projected revenue (including from firm reservation fees) and expenses; the weighted average contract life of gathering, transmission and storage and water services contracts; infrastructure programs (including the timing, cost, capacity and sources of funding with respect to gathering, transmission and storage and water expansion projects); the cost, capacity, timing of regulatory approvals, final design and targeted in-service dates of current projects; the ability of the MVP Joint Venture to satisfy the applicable federal agencies' land exchange procedures and consummate the land exchange on a timely basis or at all; the ultimate terms, partners and structure of the MVP Joint Venture and ownership interests therein; expansion and integration and optimization projects in EQM's operating areas and in areas that would provide access to new markets; EQM's ability to provide produced water handling services and realize expansion and optimization and integration opportunities and related capital avoidance; acquisitions and other strategic transactions, including joint ventures and the completed acquisition of interests in Eureka Midstream and Hornet Midstream, and EQM's ability to identify and complete transactions, and effectively integrate transactions (including Eureka Midstream and Hornet Midstream) into EQM's operations, and achieve anticipated synergies, system optionality and accretion associated with transactions, including through increased scale; EQM's ability to access commercial opportunities and new customers for its water services business; credit rating impacts associated with MVP, customer credit ratings, acquisitions and financings and changes in EQM’s credit ratings; the timing and amount of future issuances of securities; effects of conversion, if at all, of EQM securities; effects of seasonality; expected cash flows and MVCs; capital commitments; projected capital contributions and capital and operating expenditures, including the amount and timing of reimbursable capital expenditures, capital budget and sources of funds for capital expenditures; distribution amounts and timing, rates and growth; the effect and outcome of pending and future litigation and regulatory proceedings; the effect of commodity prices on EQM's business; liquidity and financing requirements, including sources and availability; EQM’s and its subsidiaries’ respective abilities to service debt under, and comply with the covenants contained in, their respective credit agreements; expectations regarding production volumes in EQM's areas of operations; impacts of the change of control of EQT Corporation; the effects of government regulation and tariffs; 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 the current expectations and assumptions of the management of EQM's general partner 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 businesses 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, 2018
, as may be updated by any subsequent Quarterly Reports 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 unless required by securities law, whether as a result of new information, future events or otherwise.
EXECUTIVE OVERVIEW
For the
three months ended June 30, 2019
, net income attributable to EQM was
$152.4 million
compared to
$233.8 million
for the
three months ended June 30, 2018
. The decrease resulted from impairment expense associated with certain Gathering
assets, higher net interest expense and higher operating expenses, partly offset by higher gathering revenues and higher equity income.
For the
six months ended June 30, 2019
, net income attributable to EQM was
$404.4 million
compared to
$494.2 million
for the
six months ended June 30, 2018
. The decrease resulted from impairment expense associated with certain gathering assets, higher net interest expense and higher operating expenses, partly offset by higher gathering revenues and higher equity income.
On
July 24, 2019
, the Board of Directors of EQM's general partner declared a cash distribution to EQM's common unitholders of
$1.160
per unit, which was
2.7%
higher than the fourth quarter 2018 distribution of
$1.13
per unit and
6.4%
higher than the
second quarter
2018
distribution of
$1.09
per unit.
In addition, on
July 24, 2019
, the Board of Directors of EQM's general partner declared a quarterly cash distribution on the Series A Preferred Units for the second quarter of 2019 of
$0.9339
per Series A Preferred Unit, which amount reflected pro-ration in accordance with the Fourth Amended and Restated Agreement of Limited Partnership of EQM, dated April 10, 2019.
For the quarter ended
June 30, 2019
, no distributions were declared on the Class B units as none of these units were convertible into EQM common units.
Business Segment Results
Operating segments are revenue-producing components of an 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 is useful to management and investors regarding the financial condition, results of operations and trends of its segments. EQM has reconciled each segment's operating income to EQM's consolidated operating income and net income in Note
6
to the consolidated financial statements.
GATHERING RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
(1)
|
|
% Change
|
|
2019
|
|
2018
(1)
|
|
% Change
|
|
(Thousands, except per day amounts)
|
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
Firm reservation fee revenues
(2)
|
$
|
147,771
|
|
|
$
|
111,702
|
|
|
32.3
|
|
|
$
|
276,730
|
|
|
$
|
221,635
|
|
|
24.9
|
|
Volumetric-based fee revenues
|
137,895
|
|
|
129,487
|
|
|
6.5
|
|
|
270,817
|
|
|
256,944
|
|
|
5.4
|
|
Total operating revenues
|
285,666
|
|
|
241,189
|
|
|
18.4
|
|
|
547,547
|
|
|
478,579
|
|
|
14.4
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
25,480
|
|
|
20,588
|
|
|
23.8
|
|
|
40,733
|
|
|
35,701
|
|
|
14.1
|
|
Selling, general and administrative
|
19,369
|
|
|
19,164
|
|
|
1.1
|
|
|
41,903
|
|
|
36,952
|
|
|
13.4
|
|
Separation and other transaction costs
|
15,358
|
|
|
5,350
|
|
|
187.1
|
|
|
18,871
|
|
|
5,350
|
|
|
252.7
|
|
Depreciation
|
37,443
|
|
|
23,882
|
|
|
56.8
|
|
|
65,559
|
|
|
46,950
|
|
|
39.6
|
|
Amortization of intangible assets
|
13,750
|
|
|
10,387
|
|
|
32.4
|
|
|
24,137
|
|
|
20,773
|
|
|
16.2
|
|
Impairment of long-lived assets
|
80,135
|
|
|
—
|
|
|
100.0
|
|
|
80,135
|
|
|
—
|
|
|
100.0
|
|
Total operating expenses
|
191,535
|
|
|
79,371
|
|
|
141.3
|
|
|
271,338
|
|
|
145,726
|
|
|
86.2
|
|
Operating income
|
$
|
94,131
|
|
|
$
|
161,818
|
|
|
(41.8
|
)
|
|
$
|
276,209
|
|
|
$
|
332,853
|
|
|
(17.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathered volumes (BBtu per day)
|
|
|
|
|
|
|
|
|
|
|
|
Firm capacity reservation
(2)
|
3,555
|
|
|
2,007
|
|
|
77.1
|
|
|
3,067
|
|
|
1,986
|
|
|
54.4
|
|
Volumetric-based services
|
4,350
|
|
|
4,202
|
|
|
3.5
|
|
|
4,272
|
|
|
4,217
|
|
|
1.3
|
|
Total gathered volumes
|
7,905
|
|
|
6,209
|
|
|
27.3
|
|
|
7,339
|
|
|
6,203
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(3)(4)
|
$
|
265,198
|
|
|
$
|
186,457
|
|
|
42.2
|
|
|
$
|
472,915
|
|
|
$
|
320,595
|
|
|
47.5
|
|
|
|
(1)
|
Includes the pre-acquisition results of the Drop-Down Transaction and the EQM-RMP Merger, which were effective on May 1, 2018 and July 23, 2018, respectively. 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 revenues and volumes from contracts with MVCs.
|
|
|
(3)
|
Includes approximately
$8.9 million
and
$58.6 million
for the
three and six
months ended
June 30, 2019
, respectively, related to non-operating assets acquired from Equitrans Midstream in the Shared Assets Transaction that primarily support EQM's gathering activities. See Note 2 for further detail.
|
|
|
(4)
|
Includes approximately
$10.9 million
of capital expenditures related to noncontrolling interests in Eureka Midstream for the
three and six
months ended
June 30, 2019
.
|
Three Months Ended June 30, 2019
Compared to
Three Months Ended June 30, 2018
Gathering revenues increased by approximately
$44.5 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
primarily driven by production development in the Marcellus and Utica Shales. Firm reservation fee revenues increased approximately
$36.1 million
primarily as a result of increased revenues generated under agreements with MVCs and revenues generated by the entities acquired in the Bolt-on Acquisition, as well as higher rates on various wellhead expansion projects in the second quarter of 2019. Volumetric-based fee revenues increased approximately
$8.4 million
due to increased usage fees.
Operating expenses increased by approximately
$112.2 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
primarily as a result of an approximate
$80.1 million
impairment charge to certain gathering assets (as discussed in Note
3
), an approximate
$13.6 million
increase in depreciation expense as a result of additional assets placed in-service, as well as depreciation on assets acquired in the Bolt-on Acquisition and the Shared Assets Transaction, and an approximate
$4.9 million
increase in operating and maintenance expense primarily associated with the operations of entities acquired in the Bolt-on Acquisition. In addition, EQM recognized an increase to separation and other transaction costs of approximately
$10.0 million
in the second quarter of 2019 primarily associated with the Bolt-on Acquisition.
Six Months Ended June 30, 2019
Compared to
Six Months Ended June 30, 2018
Gathering revenues increased by approximately
$69.0 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily driven by production development in the Marcellus and Utica Shales. Firm reservation fee revenues increased approximately
$55.1 million
primarily as a result of increased revenues generated under agreements with MVCs and revenues generated by the entities acquired in the Bolt-on Acquisition, as well as higher rates on various wellhead expansion projects for the six months ended June 30, 2019. Volumetric-based fee revenues increased approximately
$13.9 million
due to increased usage fees.
Operating expenses increased by approximately
$125.6 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily as a result of an approximate
$80.1 million
impairment charge to certain gathering assets (as discussed in Note 3), an approximate
$18.6 million
increase in depreciation expense as a result of additional assets placed in-service, as well as depreciation on assets acquired in the Bolt-on Acquisition and the Shared Assets Transaction, and an approximate
$5.0 million
increase in operating and maintenance expense primarily associated with the operations of entities acquired in the Bolt-on Acquisition. In addition, EQM recognized an increase to separation and other transaction costs of approximately
$13.5 million
primarily associated with the Bolt-on Acquisition.
TRANSMISSION RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
% Change
|
|
2019
|
|
2018
|
|
% Change
|
|
(Thousands, except per day amounts)
|
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
Firm reservation fee revenues
|
$
|
81,836
|
|
|
$
|
82,222
|
|
|
(0.5
|
)
|
|
$
|
181,060
|
|
|
$
|
179,997
|
|
|
0.6
|
|
Volumetric based fee revenues
|
10,931
|
|
|
6,923
|
|
|
57.9
|
|
|
21,566
|
|
|
16,082
|
|
|
34.1
|
|
Total operating revenues
|
92,767
|
|
|
89,145
|
|
|
4.1
|
|
|
202,626
|
|
|
196,079
|
|
|
3.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
10,082
|
|
|
8,810
|
|
|
14.4
|
|
|
14,166
|
|
|
16,361
|
|
|
(13.4
|
)
|
Selling, general and administrative
|
6,847
|
|
|
7,263
|
|
|
(5.7
|
)
|
|
15,339
|
|
|
14,754
|
|
|
4.0
|
|
Depreciation
|
12,594
|
|
|
12,430
|
|
|
1.3
|
|
|
25,127
|
|
|
24,871
|
|
|
1.0
|
|
Total operating expenses
|
29,523
|
|
|
28,503
|
|
|
3.6
|
|
|
54,632
|
|
|
55,986
|
|
|
(2.4
|
)
|
Operating income
|
$
|
63,244
|
|
|
$
|
60,642
|
|
|
4.3
|
|
|
$
|
147,994
|
|
|
$
|
140,093
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income
|
$
|
36,782
|
|
|
$
|
10,938
|
|
|
236.3
|
|
|
$
|
67,845
|
|
|
$
|
19,749
|
|
|
243.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission pipeline throughput (BBtu per day)
|
|
|
|
|
|
|
|
|
|
|
|
Firm capacity reservation
|
2,647
|
|
|
2,826
|
|
|
(6.3
|
)
|
|
2,802
|
|
|
2,821
|
|
|
(0.7
|
)
|
Volumetric based services
|
211
|
|
|
41
|
|
|
414.6
|
|
|
158
|
|
|
41
|
|
|
285.4
|
|
Total transmission pipeline throughput
|
2,858
|
|
|
2,867
|
|
|
(0.3
|
)
|
|
2,960
|
|
|
2,862
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average contracted firm transmission reservation commitments
(BBtu per day)
|
3,649
|
|
|
3,607
|
|
|
1.2
|
|
|
4,045
|
|
|
3,873
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
$
|
11,229
|
|
|
$
|
27,962
|
|
|
(59.8
|
)
|
|
$
|
29,991
|
|
|
$
|
46,891
|
|
|
(36.0
|
)
|
Three Months Ended June 30, 2019
Compared to
Three Months Ended June 30, 2018
Transmission and storage revenues increased by approximately
$3.6 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
due to increased volumetric-based fee revenues due to increased usage fees.
Operating expenses increased by approximately
$1.0 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
primarily as a result of higher operating and maintenance expense, partly offset by decreased selling, general and administrative expense resulting from lower corporate allocations.
The increase in equity income of approximately
$25.8 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
was related to the increase in the MVP Joint Venture's AFUDC on the MVP.
Six Months Ended June 30, 2019
Compared to
Six Months Ended June 30, 2018
Transmission and storage revenues increased by approximately
$6.5 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
. Firm reservation fee revenues increased due to higher contractual rates on existing contracts with customers and customers contracting for additional firm transmission capacity. Volumetric-based fee revenues increased due to increased usage fees, partially offset by lower park and loan revenue.
Operating expenses decreased by approximately
$1.4 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily as a result of lower operating and maintenance expense, partly offset by increased selling, general and administrative expense resulting from higher corporate allocations.
The increase in equity income of approximately
$48.1 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
was related to the increase in the MVP Joint Venture's AFUDC on the MVP.
WATER RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
(1)
|
|
% Change
|
|
2019
|
|
2018
(1)
|
|
% Change
|
|
(Thousands)
|
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
Water services revenues
|
$
|
27,734
|
|
|
$
|
44,363
|
|
|
(37.5
|
)
|
|
$
|
45,776
|
|
|
$
|
71,065
|
|
|
(35.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
10,994
|
|
|
13,872
|
|
|
(20.7
|
)
|
|
19,540
|
|
|
18,380
|
|
|
6.3
|
|
Selling, general and administrative
|
190
|
|
|
1,285
|
|
|
(85.2
|
)
|
|
2,084
|
|
|
2,396
|
|
|
(13.0
|
)
|
Depreciation
|
6,478
|
|
|
5,798
|
|
|
11.7
|
|
|
12,894
|
|
|
11,569
|
|
|
11.5
|
|
Total operating expenses
|
17,662
|
|
|
20,955
|
|
|
(15.7
|
)
|
|
34,518
|
|
|
32,345
|
|
|
6.7
|
|
Operating income
|
$
|
10,072
|
|
|
$
|
23,408
|
|
|
(57.0
|
)
|
|
$
|
11,258
|
|
|
$
|
38,720
|
|
|
(70.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water services volumes (MMgal)
|
619
|
|
|
750
|
|
|
(17.5
|
)
|
|
988
|
|
|
1,291
|
|
|
(23.5
|
)
|
Capital expenditures
|
$
|
8,849
|
|
|
$
|
7,002
|
|
|
26.4
|
|
|
$
|
18,024
|
|
|
$
|
9,377
|
|
|
92.2
|
|
|
|
(1)
|
EQM's consolidated financial statements have been retrospectively recast to include the pre-acquisition results of the EQM-RMP Merger, which was effective July 23, 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.
|
Three Months Ended June 30, 2019
Compared to
Three Months Ended June 30, 2018
Water operating revenues decreased by
$16.6 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
primarily due to a
17.5
% decrease in fresh water distribution volumes associated with lower customer activity.
Water operating expenses decreased by
$3.3 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
primarily as a result of decreased operating and maintenance expense associated with reduced operating activity and decreased selling, general and administrative expense, partly offset by increased depreciation expense as a result of additional assets placed in-service.
Six Months Ended June 30, 2019
Compared to
Six Months Ended June 30, 2018
Water operating revenues decreased by
$25.3 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily due to a
23.5
% decrease in fresh water distribution volumes associated with lower customer activity.
Water operating expenses increased by
$2.2 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily as a result of increased operating and maintenance expense associated with timing of costs related to activities on drilling pads in the prior year and increased depreciation expense as a result of additional assets placed in-service.
Other Income Statement Items
Other income
Other income increased
$1.0 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
and
$2.3 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
due to increased AFUDC – equity.
Net interest expense
Net interest expense increased by
$26.7 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
primarily due to higher interest expense of
$31.4 million
as a result of the 2018 Senior Notes and higher interest expense of
$1.7 million
on credit facility borrowings, partly offset by increased capitalized interest and AFUDC - debt.
Net interest expense increased by
$63.3 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
primarily due to higher interest expense of
$65.1 million
as a result of the 2018 Senior Notes and higher interest expense of
$5.8 million
on credit facility borrowings, partly offset by increased capitalized interest and AFUDC - debt.
Net income attributable to noncontrolling interest
Net income attributable to noncontrolling interest for the
three and six
months ended
June 30, 2019
related to the third-party ownership interest in Eureka Midstream.
Net income attributable to noncontrolling interest for the
three and six
months ended
June 30, 2018
related to the 25% limited liability interest in Strike Force Midstream owned by Gulfport Midstream. As discussed in Note 2, on May 1, 2018, EQM acquired this interest from Gulfport 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, operating 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 or that it plans to distribute and is not intended to be a liquidity measure.
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 and net cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Thousands)
|
Net income
|
$
|
156,471
|
|
|
$
|
234,685
|
|
|
$
|
408,402
|
|
|
$
|
497,528
|
|
Add:
|
|
|
|
|
|
|
|
Net interest expense
|
49,717
|
|
|
23,065
|
|
|
99,073
|
|
|
35,735
|
|
Depreciation
|
56,515
|
|
|
42,110
|
|
|
103,580
|
|
|
83,390
|
|
Amortization of intangible assets
|
13,750
|
|
|
10,387
|
|
|
24,137
|
|
|
20,773
|
|
Impairment of long-lived assets
|
80,135
|
|
|
—
|
|
|
80,135
|
|
|
—
|
|
Preferred Interest payments
|
2,746
|
|
|
2,746
|
|
|
5,492
|
|
|
5,492
|
|
Non-cash long-term compensation expense
|
—
|
|
|
140
|
|
|
255
|
|
|
639
|
|
Separation and other transaction costs
|
15,358
|
|
|
5,350
|
|
|
18,871
|
|
|
5,350
|
|
Less:
|
|
|
|
|
|
|
|
Equity income
|
(36,782
|
)
|
|
(10,938
|
)
|
|
(67,845
|
)
|
|
(19,749
|
)
|
AFUDC – equity
|
(2,107
|
)
|
|
(1,072
|
)
|
|
(4,453
|
)
|
|
(2,137
|
)
|
Adjusted EBITDA attributable to noncontrolling interest
(1)
|
(7,916
|
)
|
|
—
|
|
|
(7,916
|
)
|
|
—
|
|
Adjusted EBITDA attributable to the Drop-Down Transaction
(2)
|
—
|
|
|
(17,270
|
)
|
|
—
|
|
|
(63,853
|
)
|
Adjusted EBITDA attributable to RMP prior to the merger
(3)
|
—
|
|
|
(79,695
|
)
|
|
—
|
|
|
(149,229
|
)
|
Adjusted EBITDA
|
$
|
327,887
|
|
|
$
|
209,508
|
|
|
$
|
659,731
|
|
|
$
|
413,939
|
|
Less:
|
|
|
|
|
|
|
|
Net interest expense excluding interest income on the Preferred Interest
(4)
|
(50,521
|
)
|
|
(22,336
|
)
|
|
(101,483
|
)
|
|
(34,836
|
)
|
Capitalized interest and AFUDC – debt
(4)
|
(7,564
|
)
|
|
(1,940
|
)
|
|
(12,251
|
)
|
|
(2,757
|
)
|
Ongoing maintenance capital expenditures net of expected reimbursements
(4)(5)
|
(8,151
|
)
|
|
(7,115
|
)
|
|
(17,549
|
)
|
|
(10,980
|
)
|
Series A Preferred Unit distributions
(6)
|
(22,979
|
)
|
|
—
|
|
|
(22,979
|
)
|
|
—
|
|
Distributable cash flow
(7)
|
$
|
238,672
|
|
|
$
|
178,117
|
|
|
$
|
505,469
|
|
|
$
|
365,366
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
349,270
|
|
|
$
|
338,950
|
|
|
$
|
510,243
|
|
|
$
|
622,907
|
|
Adjustments:
|
|
|
|
|
|
|
|
Capitalized interest and AFUDC – debt
(4)
|
(7,564
|
)
|
|
(1,940
|
)
|
|
(12,251
|
)
|
|
(2,757
|
)
|
Principal payments received on the Preferred Interest
|
1,157
|
|
|
1,093
|
|
|
2,298
|
|
|
2,172
|
|
Ongoing maintenance capital expenditures net of expected reimbursements
(4)(5)
|
(8,151
|
)
|
|
(7,115
|
)
|
|
(17,549
|
)
|
|
(10,980
|
)
|
Adjusted EBITDA attributable to noncontrolling interest
(1)
|
(7,916
|
)
|
|
—
|
|
|
(7,916
|
)
|
|
—
|
|
Adjusted EBITDA attributable to the Drop-Down Transaction
(2)
|
—
|
|
|
(17,270
|
)
|
|
—
|
|
|
(63,853
|
)
|
Adjusted EBITDA attributable to RMP prior to the merger
(3)
|
—
|
|
|
(79,695
|
)
|
|
—
|
|
|
(149,229
|
)
|
Series A Preferred Unit distributions
(6)
|
(22,979
|
)
|
|
—
|
|
|
(22,979
|
)
|
|
—
|
|
Other, including changes in working capital
|
(65,145
|
)
|
|
(55,906
|
)
|
|
53,623
|
|
|
(32,894
|
)
|
Distributable cash flow
(7)
|
$
|
238,672
|
|
|
$
|
178,117
|
|
|
$
|
505,469
|
|
|
$
|
365,366
|
|
|
|
(1)
|
Reflects adjusted EBITDA attributable to noncontrolling interest associated with the third-party ownership interest in Eureka Midstream. Adjusted EBITDA attributable to noncontrolling interest for the three and six months ended June 30, 2019 was calculated as net income of
$4.9 million
plus depreciation of
$2.2 million
and interest expense of
$0.8 million
.
|
|
|
(2)
|
Adjusted EBITDA attributable to the
Drop-Down Transaction
for the period prior to May 1, 2018 was subtracted as part of EQM's adjusted EBITDA calculations as these amounts were generated by assets acquired in the
Drop-Down Transaction
prior to acquisition by EQM; therefore, the amounts could not have been distributed to EQM's unitholders. Adjusted EBITDA attributable to the Drop-Down Transaction for the three and six months ended June 30, 2018 was calculated as net income of
$12.3 million
and
$44.4 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)
|
Adjusted EBITDA attributable to RMP for the period prior to July 23, 2018 was subtracted as part of EQM's adjusted EBITDA calculations as these amounts were generated by RMP prior to acquisition by EQM. Adjusted EBITDA attributable to RMP for the three and six months ended June 30, 2018 was calculated as net income of
$61.2 million
and
$114.7 million
, respectively, plus net interest expense of
$2.4 million
and
$4.3 million
, respectively, plus depreciation expense of
$14.0 million
and
$27.9 million
, respectively, plus non-cash compensation expense of
$0.1 million
and
$0.3 million
, respectively, plus separation and other transaction costs of
$1.9 million
.
|
|
|
(4)
|
Does not reflect amounts related to the non-controlling interest share of Eureka Midstream.
|
|
|
(5)
|
Ongoing maintenance capital expenditures net of expected reimbursements excludes ongoing maintenance that EQM expects to be reimbursed or that was reimbursed by Equitrans Midstream in 2019, or by EQT in 2018, under the terms of the EQT Omnibus Agreement of
$0.5 million
and
$0.6 million
for the
three months ended June 30, 2019
and
2018
, respectively, and
$0.5 million
and
$3.4 million
for the six months ended June 30, 2019 and 2018, respectively. For the
three and six
months ended June 30, 2018, ongoing maintenance capital expenditures net of expected reimbursements also excluded
$1.0 million
and
$1.1 million
of ongoing maintenance capital expenditures attributable to RMP prior to the EQM-RMP Merger.
|
|
|
(6)
|
Reflects the pro rata distribution to the Series A Preferred Units based on the closing of the Private Placement on April 10, 2019. The Series A Preferred Unit unitholders' distribution is payable on
August 13, 2019
.
|
|
|
(7)
|
EQM believes that calculating distributable cash flow without deducting separation and other transaction costs provides investors with greater insight into the period-to-period ability of EQM’s ongoing assets and operations to generate cash flow. If separation and other transaction costs were deducted from the calculation, EQM’s distributable cash flow for the
three and six
month periods ended
June 30, 2019
would have been
$223.3 million
and
$486.6 million
, respectively, and
$172.8 million
and
$360.0 million
for the
three and six
months ended June 30, 2018, respectively.
|
See "Executive Overview" above for a discussion of net income, the GAAP financial measure most directly comparable to adjusted EBITDA. EQM's adjusted EBITDA increased by
$118.4 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
and
$245.8 million
for the
six months ended
June 30, 2019
compared to the
six months ended
June 30, 2018
primarily as a result of the EQM-RMP Merger and the Drop-Down Transaction, which resulted in adjusted EBITDA subsequent to the transactions being reflected in adjusted EBITDA. The increase in adjusted EBITDA in
2019
is also attributable to the Bolt-on Acquisition that closed on April 10, 2019.
Net cash provided by operating activities, the GAAP financial measure most directly comparable to distributable cash flow, decreased by
$112.7 million
for the
six months ended June 30, 2019
compared to the
six months ended June 30, 2018
as discussed in "Capital Resources and Liquidity." Distributable cash flow increased by
$60.6 million
for the
three months ended June 30, 2019
compared to the
three months ended June 30, 2018
and
$140.1 million
for the
six months ended
June 30, 2019
compared to the
six months ended
June 30, 2018
mainly attributable to the increase in EQM's adjusted EBITDA, partly offset by increased net interest expense.
Outlook
EQM’s assets overlay core acreage in the prolific Appalachian Basin. The location of EQM’s assets allows it to access major demand markets in the U.S. EQM is one of the largest natural gas gatherers in the U.S., and its largest customer, EQT, is the largest natural gas producer in the U.S. based on produced volumes. EQM maintains a stable cash flow profile, with greater than 50% of its revenue for the
three and six
months ended
June 30, 2019
generated by firm reservation fees.
EQM’s principal strategy is to achieve the scale and scope of a top-tier midstream company by leveraging its existing assets and planned growth projects and seeking and executing on strategically-aligned acquisition and joint venture opportunities, such as its acquisition of interests in Eureka Midstream and Hornet Midstream. As part of its approach to organic growth, EQM is focused on building and completing its key gathering and transmission growth projects outlined below, many of which are supported by contracts with firm capacity commitments. Additionally, EQM is targeting growth from volumetric gathering opportunities and transmission and storage services and from its water services business. EQM is also focused on optimizing and integrating its Pennsylvania gathering systems to create additional system gathering capacity and provide gathering solutions for its customers. The water service business is complementary to the gathering business, and EQM recognizes an opportunity to expand its existing asset footprint and is actively pursuing solutions for produced water handling. EQM’s focus on execution of its organic projects, coupled with asset optimization efforts, disciplined capital spending and operating cost
control, is complemented by EQM’s commitment to seek, evaluate and execute on strategically-aligned acquisition and joint venture opportunities. EQM believes that this approach will enable EQM to achieve its strategic goals.
EQM expects that the following expansion projects will be its primary organic growth drivers:
|
|
•
|
Mountain Valley Pipeline
. The MVP Joint Venture is a joint venture among EQM and affiliates of each of NextEra Energy, Inc., Con Edison, AltaGas Ltd. and RGC Resources, Inc. that is constructing the MVP. As of
June 30, 2019
, EQM is the operator of the MVP and owned a
45.5%
interest in the MVP project. The MVP is an estimated
300
mile,
42
-inch diameter natural gas interstate pipeline with a targeted capacity of
2.0
Bcf per day that will span 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. During the six months ended June 30, 2019, EQM made capital contributions of approximately
$292 million
to the MVP Joint Venture for the MVP project. For the remainder of 2019, EQM expects to make capital contributions of approximately
$0.7 billion
to
$0.8 billion
to the MVP Joint Venture for purposes of the MVP, depending on the timing of the construction of the MVP. The MVP Joint Venture has secured a total of
2.0
Bcf per day of firm capacity commitments at
20
-year terms and is currently in negotiation with additional shippers that have expressed interest in the MVP project. The MVP Joint Venture is evaluating an expansion opportunity that could add approximately
0.5
Bcf per day of capacity through the installation of incremental compression. The MVP Joint Venture is also undertaking the MVP Southgate project and is evaluating other future pipeline extension projects.
|
In October 2017, the FERC issued the Certificate of Public Convenience and Necessity for the MVP. 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. As discussed under "
The regulatory approval process for the construction of new midstream assets is challenging, and recent decisions by regulatory and judicial authorities in pending proceedings could impact EQM's or the MVP Joint Venture's ability to obtain all approvals and authorizations necessary to complete certain projects on the projected time frame or at all or EQM's ability to achieve the expected investment return on the project
" included in Item 1A, "Risk Factors" in EQM’s Annual Report on Form 10-K for the year ended December 31, 2018, there are pending legal and regulatory challenges to certain aspects of the MVP project that must be resolved before the MVP project can be completed. The MVP Joint Venture is working through several alternatives to resolve these challenges, including through a land exchange proposal submitted to the federal government. In connection with the land exchange proposal and the resolution of remaining legal and regulatory components, EQM is targeting a mid-2020 full in-service date at an overall project cost of
$4.8 billion
to
$5.0 billion
, excluding AFUDC. EQM is expected to fund approximately
$2.4 billion
of the overall project cost, including approximately
$75 million
to
$90 million
in excess of EQM's ownership interest. See the discussion of the litigation and regulatory-related delays in Part II, Item 1, "Legal Proceedings."
|
|
•
|
Wellhead Gathering Expansion and Hammerhead Project.
During the six months ended June 30, 2019, EQM invested approximately
$395 million
in gathering expansion projects. For the remainder of 2019, EQM expects to invest approximately
$575 million
in gathering expansion projects, including the continued gathering infrastructure expansion of core development areas in the Marcellus and Utica Shales, primarily in southwestern Pennsylvania and eastern Ohio, for EQT, Range Resources Corporation (Range Resources) and other producers, and the Hammerhead project, a
1.6
Bcf per day gathering header pipeline that is primarily designed to connect natural gas produced in Pennsylvania and West Virginia to the MVP and is supported by a
1.2
Bcf per day firm capacity commitment from EQT. The Hammerhead project is expected to cost approximately
$555 million
. During the six months ended June 30, 2019, EQM invested approximately
$153 million
in the Hammerhead project. For the remainder of 2019, EQM expects to invest approximately
$200 million
in the Hammerhead project. A portion of the Hammerhead project is expected to be operational by year-end 2019 and will provide interruptible service until the MVP is placed in-service, at which time the firm capacity commitment will begin.
|
|
|
•
|
MVP Southgate Project.
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 backed by a
300
MMcf per day firm capacity commitment from PSNC Energy. As designed, the MVP Southgate project has expansion capabilities up to
900
MMcf per day of total capacity. The MVP Southgate project is estimated to cost a total of approximately
$450 million
to
$500 million
, which is expected to be spent primarily in 2019 and 2020. During the six months ended June 30, 2019, EQM made capital contributions of approximately
$8 million
to the MVP Joint Venture for the MVP Southgate project. For the remainder of 2019, EQM expects to provide capital contributions of approximately
$15 million
to the MVP Joint Venture for the MVP Southgate project. As of
June 30, 2019
, EQM was the operator of the MVP Southgate pipeline and owned a
47.2%
interest in the MVP Southgate project. The MVP Joint Venture submitted the MVP Southgate certificate application to the FERC in November 2018. In March 2019, the FERC issued an
|
environmental review schedule that states that the FERC plans to issue the final Environmental Impact Statement by December 19, 2019, and the FERC issued the draft Environmental Impact Statement on July 26, 2019. The schedule also identifies March 18, 2020 as the deadline for other agencies to act on other federal authorizations required for the project (the FERC, however, is not subject to this deadline). Subject to approval by the FERC and other regulatory agencies, the MVP Southgate project has a targeted in-service date of the fourth quarter of 2020.
|
|
•
|
Transmission Expansion
. During the
six months ended
June 30, 2019
, EQM invested approximately
$27 million
in transmission expansion projects. For the remainder of 2019, EQM expects to invest approximately
$25 million
in transmission expansion projects, primarily attributable to the Allegheny Valley Connector (AVC), the Equitrans, L.P. Expansion project (EEP), which is designed to provide north-to-south capacity on the mainline Equitrans, L.P. system, including for deliveries to the MVP, and power plant projects. A portion of EEP is expected to commence operations with interruptible service in the third quarter of 2019. EEP will provide capacity of approximately
600
MMcf per day and offers access to several markets through interconnects with Texas Eastern Transmission, Dominion Transmission and Columbia Gas Transmission. EEP will also provide delivery into MVP and once MVP is placed in service, firm transportation agreements for
550
MMcf per day of capacity will commence under
20
-year terms. EEP has a targeted full in-service date of mid-2020. In January 2019, EQM executed a precedent agreement with ESC Brooke County Power I, LLC to construct a natural gas pipeline for connection to a proposed
830
-Megawatt power plant in Brooke County, West Virginia. The agreement includes a ten-year firm reservation commitment for
140
MMcf per day of capacity. EQM expects to invest an estimated
$80 million
to construct the approximately
16
-mile pipeline, which has a targeted in-service date in 2023. As of June 30, 2019, EQM has invested approximately
$1 million
in the Brooke County project and expects to invest an additional
$6 million
for the remainder of 2019.
|
|
|
•
|
Water Expansion.
During the
six months ended
June 30, 2019
, EQM invested approximately
$18 million
in the expansion of its fresh water delivery infrastructure. In response to continued lower natural gas prices, several producer customers have modified their well development plans, which impacts the expected timing of EQM's fresh water delivery services. As a result, EQM now forecasts full-year 2019 water expansion capital expenditures of
$50 million
.
|
See further discussion of capital expenditures in the "Capital Requirements" section below.
See Note 2 to the consolidated financial statements for further discussion of the Bolt-on Acquisition.
See "Critical Accounting Policies and Estimates" included in EQM's Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of EQM's accounting policies and significant assumptions related to the accounting for goodwill, and EQM's policies and processes with respect to impairment reviews for goodwill. EQM did not identify an impairment indicator related to goodwill during the second quarter of 2019; however, as discussed in Note 3 to the consolidated financial statements, EQM did identify an impairment expense associated with its long-lived assets. Management will continue to monitor and evaluate the factors underlying the fair market value of acquired businesses and long-lived assets over the course of the year to determine if any interim assessments are necessary and will take any additional impairment charges required.
Commodity Prices
. EQM’s business is dependent on continued natural gas production and the availability and development of reserves in its areas of operation. Low prices for natural gas and natural gas liquids could adversely affect development of additional reserves and production that is accessible by EQM’s pipeline and storage assets, which would also negatively affect EQM’s water services business. The Henry Hub natural gas price has ranged from
$2.27
per MMbtu to
$4.25
per MMbtu between January 1, 2019 and June 30, 2019, and the natural gas forward strip price has trended downwards during the first half of 2019. Further, market prices for natural gas in the Appalachian Basin continue to be lower than Henry Hub natural gas prices. Lower natural gas prices have caused producers to determine to reduce their rig count or otherwise take actions to slow production growth and/or reduce production, which in turn reduces the demand for, and usage of, EQM’s services, including water services, and a sustained period of depressed natural gas prices could cause producers to take further actions to reduce natural gas supply in the future. EQM’s customers, including EQT, have announced reductions in their capital spending and may announce further reductions in the future based on commodity prices, access to capital or other factors. Many of EQM’s customers have entered into long-term firm transmission and gathering contracts or contracts with MVCs on EQM's systems. However, approximately
48.3%
of EQM’s gathering revenues and
11.8%
of EQM’s transmission revenues for the second quarter of 2019 were from volumetric-based fee revenues. Additionally, EQM’s water service agreements are volumetric in nature. For more information see “Risks Inherent in Our Business - Any significant decrease in production of natural gas in our areas of operation could adversely affect our business and operating results and reduce our cash available to make distributions" included in Item 1A, "Risk Factors" of EQM’s Annual Report on Form 10-K for the year ended December 31, 2018.
EQT Change of Control
. At EQT’s annual meeting held on July 10, 2019, EQT’s shareholders elected 12 individuals to the
Board of Directors of EQT (EQT Board), seven of whom were nominated by a group led by Toby Z. Rice (the Rice Group), and five of whom were nominated by the EQT Board and recommended by the Rice Group. The EQT Board subsequently made certain executive changes, including appointing Toby Z. Rice as the President and Chief Executive Officer of EQT. On July 25, 2019, EQT announced that it is suspending its outlook for 2020 and beyond as it continues to develop its operating plan under the new management team. EQT is EQM’s largest customer, accounting for approximately
71.5%
of EQM’s revenues for the six months ended June 30, 2019. For a discussion of EQM’s commercial relationship with EQT and related considerations, including risk factors, see EQM’s Annual Report on Form 10-K for the year ended December 31, 2018, as updated by this and any subsequent Quarterly Report on Form 10-Q.
EQM cannot predict the potential financial, operational or other effects on it of future actions taken by EQT’s new leadership team, including any changes to EQT’s drilling and production schedule or business strategy or actions affecting EQT’s credit rating or personnel.
Capital Resources and Liquidity
EQM's principal liquidity requirements are to finance its operations, fund capital expenditures, potential acquisitions and other strategic transactions and capital contributions to joint ventures, including the MVP Joint Venture and Eureka Midstream, pay 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 transactions and issuances of additional EQM partnership interests. Pursuant to the tax matters agreement between Equitrans Midstream and EQT entered into in connection with the Separation, Equitrans Midstream is subject to certain restrictions related to certain corporate actions, including restrictions related to the issuance of Equitrans Midstream and EQM securities beyond certain thresholds. See “
Our general partner may require us to forgo certain transactions in order to avoid the risk of Equitrans Midstream incurring material tax-related liabilities or indemnification obligations under Equitrans Midstream’s tax matters agreement with EQT
.” under “Risks Inherent in an Investment in Us” included in “Item 1A. Risk Factors” of EQM's Annual Report on Form 10-K. EQM is not forecasting any public equity issuance for currently anticipated organic growth projects.
Operating Activities
Net cash flows provided by operating activities were
$510.2 million
for the
six months ended June 30, 2019
compared to
$622.9 million
for the
six months ended June 30, 2018
. The decrease was primarily driven by the timing of working capital payments, including higher interest payments.
Investing Activities
Net cash flows used in investing activities were
$1,675.3 million
for the
six months ended June 30, 2019
compared to
$1,756.7 million
for the
six months ended June 30, 2018
. The decrease was attributable to the Drop-Down Transaction in 2018 partly offset by the Bolt-on Acquisition, increased capital expenditures as further described in "Capital Requirements" and increased capital contributions to the MVP Joint Venture consistent with construction on the MVP and MVP Southgate projects.
Financing Activities
Net cash flows provided by financing activities were
$1,164.2 million
for the
six months ended June 30, 2019
compared to
$1,780.7 million
for the
six months ended June 30, 2018
. For the
six months ended June 30, 2019
, the primary source of financing cash flows were net proceeds from the issuance of the Series A Preferred Units and borrowings on credit facilities, net of repayments, while the primary use of financing cash flows were distributions paid to unitholders. For the
six months ended June 30, 2018
, the primary source of financing cash flows were proceeds from the issuance of the 2018 Notes, while the primary use of financing cash flows were repayments on EQM's credit facility, net of borrowings, distributions paid to unitholders and the purchase of the remaining 25% interest in Strike Force Midstream.
Capital Requirements
The gathering, transmission and storage and water services 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,
|
|
2019
|
|
2018
(1)
|
|
2019
|
|
2018
(1)
|
|
(Thousands)
|
Expansion capital expenditures
(2)
|
$
|
266,970
|
|
|
$
|
213,628
|
|
|
$
|
443,479
|
|
|
$
|
361,705
|
|
Maintenance capital expenditures
|
9,426
|
|
|
7,793
|
|
|
18,854
|
|
|
15,158
|
|
Total capital expenditures
(3)(4)(5)
|
$
|
276,396
|
|
|
$
|
221,421
|
|
|
$
|
462,333
|
|
|
$
|
376,863
|
|
|
|
(1)
|
EQM's expansion and maintenance capital expenditures have been retrospectively recast to include the pre-acquisition results of the Drop-Down Transaction and the EQM-RMP Merger because these transactions were between entities under common control.
|
|
|
(2)
|
Expansion capital expenditures do not include capital contributions made to the MVP Joint Venture for the MVP and MVP Southgate projects of approximately
$156.4 million
and
$65.8 million
for the
three months ended June 30, 2019
and
2018
, respectively, and approximately
$301.2 million
and
$182.8 million
for the
six months ended
June 30, 2019
and
2018
, respectively.
|
|
|
(3)
|
Expansion capital expenditures for the three and
six months ended
June 30, 2019
do not include approximately
$8.9 million
and
$58.6 million
, respectively, of non-operating assets acquired from Equitrans Midstream in the Shared Assets Transaction that primarily support EQM's gathering activities. See Note 2 to the consolidated financial statements for further detail.
|
|
|
(4)
|
Includes approximately
$10.9 million
of capital expenditures related to noncontrolling interests in Eureka Midstream for the
three and six
months ended
June 30, 2019
.
|
|
|
(5)
|
EQM accrues capital expenditures when the 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
6
to the consolidated financial statements.
|
Expansion capital expenditures increased by approximately
$53.3 million
and
$81.8 million
for the
three and six
months ended
June 30, 2019
, respectively, as compared to the
three and six
months ended June 30, 2018, primarily due to increased spending on the Hammerhead project and various wellhead gathering expansion projects.
Maintenance capital expenditures increased by approximately
$1.6 million
and
$3.7 million
for the
three and six
months ended
June 30, 2019
, respectively, as compared to the
three and six
months ended June 30, 2018, primarily as a result of higher assets in service.
For the remainder of
2019
, EQM expects to make capital contributions to the MVP Joint Venture of approximately
$0.7 billion
to
$0.8 billion
(including approximately
$15 million
related to the MVP Southgate project) depending on the timing of construction, expansion capital expenditures are expected to be approximately $0.6 billion to
$0.7 billion
and maintenance capital expenditures are expected to be approximately
$50 million
, net of reimbursements. EQM's future capital investments may vary significantly from period to period based on the available investment opportunities and the timing of the construction of the MVP, MVP Southgate and other projects. Maintenance capital expenditures are also expected to vary quarter to quarter. EQM expects to fund future capital expenditures primarily through cash on hand, cash generated from operations, borrowings under its and its subsidiaries' credit facilities, debt transactions and issuances of additional EQM partnership units. EQM is not forecasting any public equity issuance for currently anticipated organic growth projects.
Credit Facility Borrowings
See Note
10
to the consolidated financial statements for discussion of the credit facilities.
Security Ratings
The table below sets forth the credit ratings for debt instruments of EQM at
June 30, 2019
.
|
|
|
|
|
|
Rating Service
|
|
Senior Notes
|
|
Outlook
|
Moody's Investors Service (Moody's)
|
|
Ba1
|
|
Stable
|
Standard & Poor's Ratings Services (S&P)
|
|
BBB-
|
|
Negative
|
Fitch Ratings (Fitch)
|
|
BBB-
|
|
Negative
|
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, including in connection with the MVP project or the creditworthiness of EQM's customers. 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, are considered non-investment grade.
Distributions
See Note
12
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 and its subsidiaries. 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 incurred. EQM establishes reserves whenever it believes it to be appropriate for pending matters. Furthermore, after consultation with counsel and considering 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. See Part II, Item 1. "Legal Proceedings" for a discussion of litigation and regulatory proceedings related to the MVP project.
See also "
The regulatory approval process for the construction of new midstream assets is challenging, and recent decisions by regulatory and judicial authorities in pending proceedings could impact EQM's or the MVP Joint Venture's ability to obtain all approvals and authorizations necessary to complete certain projects on the projected time frame or at all or EQM's ability to achieve the expected investment return on the project
" under Item 1A, “Risk Factors” in EQM’s Annual Report on Form 10-K for the year ended December 31, 2018 and Item 1, "Legal Proceedings" for a discussion of litigation and regulatory proceedings related to the MVP project.
Off-Balance Sheet Arrangements
See Note
9
to the consolidated financial statements for discussions regarding the MVP Joint Venture guarantees.
Critical Accounting Policies and Estimates
EQM's critical accounting policies are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in EQM's Annual Report on Form 10-K for the year ended
December 31, 2018
as filed with the SEC on February 14, 2019. 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, 2019
. 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.