Notes to Consolidated Financial Statements (Unaudited)
Organization and Basis of Presentation
EQGP owns EQT's partnership interests in EQM, a growth-oriented Delaware limited partnership. EQT Midstream Services, LLC (EQM General Partner) is a direct wholly owned subsidiary of EQGP and is the general partner of EQM. EQT GP Services, LLC (EQGP General Partner) is an indirect wholly owned subsidiary of EQT and is the general partner of EQGP.
EQGP has no independent operations or material assets other than its partnership interests in EQM and RMP IDRs (see Note G). EQGP's financial statements differ from those of EQM primarily as a result of noncontrolling interest ownership attributable to the publicly held limited partner interests in EQM and additional expenses incurred by EQGP, which include selling, general and administrative expenses and net interest expense or income.
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 EQGP as of
June 30, 2018
and
December 31, 2017
, the results of its operations for the
three and six
months ended
June 30, 2018
and
2017
, and its cash flows and equity for the six months ended June 30, 2018 and 2017. Certain previously reported amounts have been reclassified to conform to the current year presentation. The balance sheet at
December 31, 2017
has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
EQGP's consolidated financial statements have been retrospectively recast to include the pre-acquisition results of the
May 2018 Acquisition
because this transaction was between entities under common control. The recast is for the period the acquired businesses were under the common control of EQT, which began on November 13, 2017 as a result of EQT's merger with Rice Energy Inc. (Rice) (the Rice Merger). EQM recorded the assets and liabilities acquired in the
May 2018 Acquisition
at their carrying amounts to EQT on the effective date of the transaction. The consolidated financial statements are not necessarily indicative of the actual results of operations if EQM and the assets acquired in the
May 2018 Acquisition
been operated together during the pre-acquisition periods.
Due to the seasonal nature of EQM's utility customer contracts, the interim statements for the
three and six
months ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
For further information, refer to the consolidated financial statements and related footnotes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in EQGP's Annual Report on Form 10-K for the year ended
December 31, 2017
.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration the entity expects in exchange for those goods or services. EQGP adopted this standard on January 1, 2018 using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity. EQGP does not expect the standard to have a significant effect on its results of operations, liquidity or financial position. EQGP implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the disclosures required under the new standard in the first quarter of 2018. For the disclosures required by this ASU, see Note C.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. The standard primarily affects accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments, and eliminates the cost method of accounting for equity investments. EQGP adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The standard requires an entity to record assets and obligations for contracts currently recognized as operating leases. Lessees and lessors must apply a modified retrospective transition
approach. The ASU will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. EQGP has performed a high-level identification of agreements covered by this standard, is currently evaluating processes and internal controls and is in the process of implementing a third-party supported lease accounting information system to facilitate the accounting and financial reporting requirements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.
This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. EQGP is currently evaluating the effect this standard will have on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test of Goodwill Impairment
. ASU 2017-04 simplifies the quantitative goodwill impairment test requirements by eliminating the requirement to calculate the implied fair value of goodwill (Step 2 of the current goodwill impairment test). Instead, a company would record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value (measured in Step 1 of the current goodwill impairment test). Entities will apply the standard’s provisions prospectively. EQGP adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or related disclosures.
|
|
B.
|
Acquisitions and Merger
|
May 2018 Acquisition
On April 25, 2018, EQT, Rice Midstream Holdings LLC, a wholly owned subsidiary of EQT, EQM and EQM Gathering Holdings, LLC (EQM Gathering), a wholly owned subsidiary of EQM, entered into a Contribution and Sale Agreement pursuant to which EQM Gathering acquired from EQT all of EQT's interests in ROM, Strike Force and Rice WV in exchange for an aggregate of
5,889,282
EQM common units and aggregate cash consideration of
$1.15 billion
, plus working capital adjustments. ROM owns a natural gas gathering system that gathers gas from wells located primarily in Belmont County, Ohio.
Strike Force
owns a
75%
limited liability company interest in Strike Force Midstream LLC (Strike Force Midstream). The
May 2018 Acquisition
closed on
May 22, 2018
with an effective date of
May 1, 2018
.
As a result of the recast, EQM recognized approximately
$38.0 million
of goodwill. The goodwill value was based on a valuation performed by EQT as of November 13, 2017 with regard to the Rice Merger. EQT recorded goodwill as the excess of the estimated enterprise value of ROM, Strike Force and Rice WV over the sum of the fair value amounts allocated to the assets and liabilities of ROM, Strike Force and Rice WV. Goodwill was allocated to the value attributed to additional growth opportunities, synergies and operating leverage within the Gathering segment. Prior to the recast, EQM had no goodwill. The following table summarizes the allocation of the fair value of the assets and liabilities of ROM, Strike Force and Rice WV as of November 13, 2017 through pushdown accounting from EQT. The preliminary allocation to certain assets and/or liabilities may be adjusted by material amounts as EQT continues to finalize the fair value estimates.
|
|
|
|
|
|
|
|
At November 13, 2017
|
|
|
(Thousands)
|
Estimated fair value of ROM, Strike Force and Rice WV
(1)
|
|
$
|
1,514,743
|
|
|
|
|
Estimated Fair Value of Assets Acquired and Liabilities Assumed:
|
|
|
Current assets
(2)
|
|
66,586
|
|
Intangible assets
(3)
|
|
623,200
|
|
Property and equipment, net
(4)
|
|
846,823
|
|
Other non-current assets
|
|
71
|
|
Current liabilities
(2)
|
|
(59,891
|
)
|
Total estimated fair value of assets acquired and liabilities assumed
|
|
$
|
1,476,789
|
|
Goodwill
|
|
37,954
|
|
|
|
(1)
|
Includes the estimated fair value attributable to noncontrolling interest of
$166 million
.
|
|
|
(2)
|
The fair value of current assets and current liabilities were assumed to approximate their carrying values.
|
|
|
(3)
|
The identifiable intangible assets for customer relationships were estimated by applying a discounted cash flow approach which was adjusted for customer attrition assumptions and projected market conditions.
|
|
|
(4)
|
The estimated fair value of long-lived property and equipment were determined utilizing estimated replacement cost adjusted for a usage or obsolescence factor.
|
As a result of the recast, EQM also recognized approximately
$623.2 million
in intangible assets. These intangible assets were valued by EQT based upon the estimated fair value of the customer contracts as of November 13, 2017. The customer contracts were assigned a useful life of
15
years and are amortized on a straight-line basis. Amortization expense for the three and six months ended June 30, 2018 was
$10.4 million
and
$20.8 million
, respectively. As of June 30, 2018 and December 31, 2017, accumulated amortization was
$26.3 million
and
$5.5 million
, respectively. There was
no
amortization expense recognized for the three and six months ended June 30, 2017. The estimated annual amortization expense over the next five years is
$41.5 million
.
Gulfport Transaction
On May 1, 2018, pursuant to the Purchase and Sale Agreement dated April 25, 2018, by and among EQM, EQM Gathering, Gulfport Energy Corporation (Gulfport) and an affiliate of Gulfport, EQM Gathering acquired the remaining
25%
limited liability company interest in Strike Force Midstream not owned by
Strike Force
for
$175 million
(the Gulfport Transaction). As a result, EQM owned
100%
of Strike Force Midstream effective as of May 1, 2018.
EQM-RMP Merger
On April 25, 2018, EQM entered into an Agreement and Plan of Merger (the Merger Agreement) with Rice Midstream Partners LP (RMP), Rice Midstream Management LLC, the general partner of RMP (the RMP General Partner), the EQM General Partner, EQM Acquisition Sub, LLC, a wholly owned subsidiary of EQM (Merger Sub), EQM GP Acquisition Sub, LLC, a wholly owned subsidiary of EQM (GP Merger Sub), and, solely for certain limited purposes set forth therein, EQT. Pursuant to the Merger Agreement, on July 23, 2018, Merger Sub and GP Merger Sub merged with and into RMP and the RMP General Partner, respectively, with RMP and the RMP General Partner surviving as wholly owned subsidiaries of EQM (the EQM-RMP Merger). Pursuant to the Merger Agreement, each RMP common unit issued and outstanding immediately prior to the effective time of the EQM-RMP Merger was converted into the right to receive
0.3319
EQM common units (the Merger Consideration), the issued and outstanding incentive distributions rights of RMP were canceled and each outstanding award of phantom units in respect of RMP common units fully vested and converted into the right to receive the Merger Consideration, less applicable tax withholding, in respect of each RMP common unit subject thereto. The aggregate Merger Consideration consisted of approximately
34 million
EQM common units. As a result of the EQM-RMP Merger, RMP's common units are no longer publicly traded.
Also in connection with the completion of the EQM-RMP Merger, on July 23, 2018, EQM repaid the approximately
$260 million
of borrowings outstanding under the Credit Agreement, dated as of December 22, 2014, by and among RMP, as parent guarantor, Rice Midstream OpCo LLC, a wholly owned subsidiary of RMP, as borrower, Wells Fargo Bank, N.A., as administrative agent, and the lenders and other parties from time to time party thereto (the RMP Credit Agreement), and the RMP Credit Agreement was terminated.
Investment in RMP IDRs
On May 22, 2018, pursuant to an Incentive Distribution Rights Purchase and Sale Agreement dated April 25, 2018, by and among EQT, Rice Midstream GP Holdings LLC (Rice Midstream GP Holdings), a wholly owned subsidiary of EQT that owned the RMP IDRs, and EQGP (the IDR Purchase Agreement), EQGP acquired all of the issued and outstanding RMP IDRs in exchange for
36,293,766
EQGP common units (the IDR Transaction). The IDR Purchase Agreement provided for the forfeiture of a portion of the EQGP common units if the EQM-RMP Merger was not complete by December 31, 2018. The investment in RMP IDRs was a transfer of financial assets between entities under common control. The fair value of
$865 million
was based on a discounted cash flow model, which is a Level 2 measurement. Pursuant to the terms of the Merger Agreement, the RMP IDRs were canceled at the completion of the EQM-RMP Merger and the value of the RMP IDRs will be realized through the EQM IDRs.
|
|
C.
|
Revenue from Contracts with Customers
|
As discussed in Note A, EQGP adopted ASU No. 2014-09,
Revenue from Contracts with Customers
, on January 1, 2018 using the modified retrospective method of adoption. EQGP applied the ASU to all open contracts as of the date of initial application. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not materially change EQGP's amount and timing of revenues.
EQM provides gathering, transmission and storage services in two manners: firm service and interruptible service. Firm service contracts are typically long term and include firm reservation fees, which are fixed, monthly charges for the guaranteed reservation of pipeline or storage capacity. Volumetric based fees under firm contracts include usage fees and charges for actual volumes transported, gathered or stored in excess of the firm contracted volume. Interruptible service contracts include volumetric based fees, which are charges for the volume of gas actually gathered, transported or stored and do not guarantee access to the pipeline or storage facility. These contracts can be short or long term. Firm and interruptible contracts are billed at the end of each calendar month, with payment typically due within
21
days.
Under a firm contract, EQM has a stand-ready obligation to provide the service over the life of the contract. The performance obligation for firm reservation fee revenue is satisfied over time as the pipeline capacity is made available to the customer. As such, EQM recognizes firm reservation fee revenue evenly over the contract period, using a time-elapsed output method to measure progress. The performance obligation for volumetric based fee revenues for usage fees under firm and interruptible contracts is generally satisfied upon EQM's monthly billing to the customer for actual volumes gathered, transported or stored during the month. The amount billed corresponds directly to the value of EQM's performance to date as the customer obtains value as each volume is gathered, transported or stored.
Certain of EQM's gas gathering agreements are structured with minimum volume commitments (MVC), which specify minimum quantities for which a customer will be charged regardless of actual quantities gathered under the contract. Revenue is recognized for MVCs when the performance obligation has been met, which is the earlier of when the gas is gathered or when it is remote that the producer will be able to meet its MVC.
For the
three and six
months ended
June 30, 2018
and
2017
, all revenues recognized on EQM's statements of consolidated operations are from contracts with customers. As of
June 30, 2018
and
December 31, 2017
, all receivables recorded on EQM's consolidated balance sheets represent performance obligations that have been satisfied and for which an unconditional right to consideration exists.
The table below provides disaggregated revenue information by EQM business segment for the
three and six
months ended
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
111,702
|
|
|
$
|
82,222
|
|
|
$
|
193,924
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
|
9,956
|
|
|
4,828
|
|
|
14,784
|
|
Usage fees under interruptible contracts
(2)
|
|
58,958
|
|
|
2,095
|
|
|
61,053
|
|
Total volumetric based fee revenues
|
|
68,914
|
|
|
6,923
|
|
|
75,837
|
|
Total operating revenues
|
|
$
|
180,616
|
|
|
$
|
89,145
|
|
|
$
|
269,761
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
221,635
|
|
|
$
|
179,997
|
|
|
$
|
401,632
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
|
22,064
|
|
|
8,650
|
|
|
30,714
|
|
Usage fees under interruptible contracts
(2)
|
|
116,545
|
|
|
7,432
|
|
|
123,977
|
|
Total volumetric based fee revenues
|
|
138,609
|
|
|
16,082
|
|
|
154,691
|
|
Total operating revenues
|
|
$
|
360,244
|
|
|
$
|
196,079
|
|
|
$
|
556,323
|
|
|
|
(1)
|
Includes fees on volumes gathered and transported in excess of firm contracted capacity and also for transmission includes commodity charges and fees on all volumes transported under firm contracts.
|
|
|
(2)
|
Includes volumes from contracts under which EQM has agreed to hold capacity available but for which it does not receive a capacity reservation fee.
|
Based on total projected contractual revenues and including contracts associated with expected future capacity from expansion projects that are not yet fully constructed but for which EQM has entered into firm contracts, EQM's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately
8
and
15
years, respectively, as of
December 31, 2017
.
The following table summarizes the transaction price allocated to EQM's remaining performance obligations under all contracts with firm reservation fees and MVCs as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
(Thousands)
|
Gathering firm reservation fees
|
|
$
|
223,806
|
|
|
$
|
471,226
|
|
|
$
|
547,153
|
|
|
$
|
557,152
|
|
|
$
|
557,152
|
|
|
$
|
2,841,279
|
|
|
$
|
5,197,768
|
|
Gathering revenues supported by MVCs
|
|
—
|
|
|
65,700
|
|
|
71,370
|
|
|
71,175
|
|
|
71,175
|
|
|
136,875
|
|
|
416,295
|
|
Transmission firm reservation fees
|
|
179,786
|
|
|
347,061
|
|
|
347,261
|
|
|
341,769
|
|
|
338,010
|
|
|
2,602,572
|
|
|
4,156,459
|
|
Total
|
|
$
|
403,592
|
|
|
$
|
883,987
|
|
|
$
|
965,784
|
|
|
$
|
970,096
|
|
|
$
|
966,337
|
|
|
$
|
5,580,726
|
|
|
$
|
9,770,522
|
|
|
|
D.
|
Equity and Net Income per Limited Partner Unit
|
EQGP Equity.
As of
June 30, 2018
, EQT indirectly held
276,008,766
EQGP common units, representing a
91.3%
limited partner interest, and the entire non-economic general partner interest in EQGP. As discussed in Note B,
36,293,766
EQGP common units were issued to a wholly owned subsidiary of EQT in the IDR Transaction.
Net Income per Limited Partner Unit.
Net income attributable to the
May 2018 Acquisition
for the periods prior to May 1, 2018, was not allocated to the limited partners for purposes of calculating net income per limited partner unit as these pre-acquisition amounts were not available to the unitholders. The weighted average phantom unit awards included in the calculation of basic weighted average limited partner units outstanding was
30,955
and
20,593
for the
three months ended June 30, 2018
and
2017
, respectively, and
29,446
and
19,247
for the
six months ended June 30, 2018
and
2017
, respectively.
EQM Equity.
The following table summarizes EQM's limited partner common units and general partner units issued from January 1,
2018
through
June 30, 2018
. There were
no
issuances in
2017
.
|
|
|
|
|
|
|
|
|
|
|
EQM Limited Partner Common Units
|
|
EQM General Partner Units
|
|
Total
|
Balance at January 1, 2018
|
80,581,758
|
|
|
1,443,015
|
|
|
82,024,773
|
|
Common units issued
(1)
|
9,608
|
|
|
—
|
|
|
9,608
|
|
May 2018 Acquisition consideration
|
5,889,282
|
|
|
—
|
|
|
5,889,282
|
|
Balance at June 30, 2018
|
86,480,648
|
|
|
1,443,015
|
|
|
87,923,663
|
|
|
|
(1)
|
Units issued upon a resignation from the EQM General Partner's Board of Directors in February 2018.
|
As of
June 30, 2018
, EQGP owned
21,811,643
EQM common units, representing a
24.8%
limited partner interest,
1,443,015
EQM general partner units, representing a
1.6%
general partner interest, and all of the IDRs in EQM. As of
June 30, 2018
, EQT owned
5,889,282
EQM common units, representing a
6.7%
limited partner interest in EQM.
As a result of the EQM-RMP Merger, on July 23, 2018, an indirect wholly owned subsidiary of EQT received
9,544,530
EQM common units as Merger Consideration.
|
|
E.
|
Financial Information by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Revenues from external customers (including affiliates):
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
180,616
|
|
|
$
|
112,145
|
|
|
$
|
360,244
|
|
|
$
|
214,474
|
|
Transmission
|
89,145
|
|
|
84,670
|
|
|
196,079
|
|
|
182,413
|
|
Total operating revenues
|
$
|
269,761
|
|
|
$
|
196,815
|
|
|
$
|
556,323
|
|
|
$
|
396,887
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
121,631
|
|
|
$
|
83,425
|
|
|
$
|
252,513
|
|
|
$
|
157,129
|
|
Transmission
|
60,642
|
|
|
57,863
|
|
|
140,093
|
|
|
129,467
|
|
Headquarters
|
(1,931
|
)
|
|
(589
|
)
|
|
(3,158
|
)
|
|
(1,801
|
)
|
Total operating income
|
$
|
180,342
|
|
|
$
|
140,699
|
|
|
$
|
389,448
|
|
|
$
|
284,795
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income to net income:
|
|
|
|
|
|
|
|
|
|
|
Equity income
(1)
|
10,938
|
|
|
5,111
|
|
|
19,749
|
|
|
9,388
|
|
Other income
|
944
|
|
|
1,402
|
|
|
1,842
|
|
|
2,939
|
|
Net interest expense
|
20,659
|
|
|
8,658
|
|
|
31,359
|
|
|
16,580
|
|
Net income
|
$
|
171,565
|
|
|
$
|
138,554
|
|
|
$
|
379,680
|
|
|
$
|
280,542
|
|
|
|
(1)
|
Equity income is included in the Transmission segment.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(Thousands)
|
Segment assets:
|
|
|
|
|
|
Gathering
|
$
|
3,250,242
|
|
|
$
|
3,020,491
|
|
Transmission
(1)
|
2,505,947
|
|
|
1,948,047
|
|
Total operating segments
|
5,756,189
|
|
|
4,968,538
|
|
Headquarters, including cash and RMP IDRs
|
1,671,864
|
|
|
179,836
|
|
Total assets
|
$
|
7,428,053
|
|
|
$
|
5,148,374
|
|
|
|
(1)
|
The equity investment in the MVP Joint Venture was included in the headquarters segment prior to June 30, 2018. As of June 30, 2018, the investment in the MVP Joint Venture was included in the Transmission segment and the amount at December 31, 2017 has been recast to confirm with this presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
15,646
|
|
|
$
|
9,555
|
|
|
$
|
30,590
|
|
|
$
|
18,415
|
|
Transmission
|
12,430
|
|
|
11,845
|
|
|
24,871
|
|
|
23,532
|
|
Total
|
$
|
28,076
|
|
|
$
|
21,400
|
|
|
$
|
55,461
|
|
|
$
|
41,947
|
|
|
|
|
|
|
|
|
|
Expenditures for segment assets:
|
|
|
|
|
|
|
|
Gathering
|
$
|
139,099
|
|
|
$
|
53,708
|
|
|
$
|
252,297
|
|
|
$
|
102,546
|
|
Transmission
|
27,962
|
|
|
29,978
|
|
|
46,891
|
|
|
51,367
|
|
Total
(1)
|
$
|
167,061
|
|
|
$
|
83,686
|
|
|
$
|
299,188
|
|
|
$
|
153,913
|
|
|
|
(1)
|
EQM accrues capital expenditures when work has been completed but the associated bills have not yet been paid. These accrued amounts are excluded from capital expenditures in the statements of consolidated cash flows until they are paid in a subsequent period. Accrued capital expenditures were approximately
$62.3 million
,
$60.3 million
and
$66.0 million
at
June 30, 2018
,
March 31, 2018
and
December 31, 2017
, respectively. Accrued capital expenditures were approximately
$31.2 million
,
$34.0 million
and
$26.7 million
at
June 30, 2017
,
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
F.
|
Related Party Transactions
|
In the ordinary course of business, EQGP and EQM engage in transactions with EQT and its affiliates including, but not limited to, gas gathering agreements, transportation service and precedent agreements and storage agreements. EQGP and EQM each have an omnibus agreement with EQT. Pursuant to the omnibus agreements, EQT performs centralized corporate, general and administrative services for EQGP and EQM and provides a license for the use of the name "EQT" and related marks in connection with EQGP's and EQM's businesses. In exchange, EQGP and EQM reimburse EQT for the expenses incurred by EQT in providing these services. The omnibus agreements also provide for certain indemnification obligations between EQM and EQT. Pursuant to a secondment agreement, employees of EQT and its affiliates may be seconded to EQM to provide operating and other services with respect to EQM's business under the direction, supervision and control of EQM. EQM reimburses EQT and its affiliates for the services provided by the seconded employees. The expenses for which EQGP and EQM reimburse EQT and its affiliates may not necessarily reflect the actual expenses that EQGP and EQM would incur on a stand-alone basis. EQGP and EQM are unable to estimate what those expenses would be on a stand-alone basis.
|
|
G.
|
Investment in Unconsolidated Entity
|
The MVP Joint Venture is constructing the Mountain Valley Pipeline (MVP), an estimated
300
-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. EQM is the operator of the MVP and owned a
45.5%
interest in the MVP Joint Venture as of
June 30, 2018
. The MVP Joint Venture is a variable interest entity because it has insufficient equity to finance its activities during the construction stage of the project. EQM is not the primary beneficiary because it does not have the power to direct the activities of the MVP Joint Venture that most significantly impact its economic performance. Certain business decisions require the approval of owners holding more than a 66 2/3% interest in the MVP Joint Venture and no one member owns more than a 66 2/3% interest. The MVP Joint Venture is an equity method investment for accounting purposes as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.
In
May 2018
, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for
$445.9 million
, of which
$193.4 million
was paid in
July 2018
and
$252.5 million
is expected to be paid in the third quarter of 2018. The capital contribution payable has been reflected on the consolidated balance sheet as of
June 30, 2018
with a corresponding increase to EQM's investment in the MVP Joint Venture.
Equity income is primarily EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP.
As of
June 30, 2018
, EQM had issued a
$91 million
performance guarantee in favor of the MVP Joint Venture to provide performance assurances for MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP. As of
June 30, 2018
, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately
$1,094 million
, which consists of the investment in unconsolidated entity balance on the consolidated balance sheet as of
June 30, 2018
and amounts that could have become due under EQM's performance guarantee as of that date.
The following tables summarize the unaudited condensed financial statements for the MVP Joint Venture.
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(Thousands)
|
Current assets
|
$
|
1,161,641
|
|
|
$
|
330,271
|
|
Noncurrent assets
|
1,334,266
|
|
|
747,728
|
|
Total assets
|
$
|
2,495,907
|
|
|
$
|
1,077,999
|
|
|
|
|
|
Current liabilities
|
$
|
290,855
|
|
|
$
|
65,811
|
|
Equity
|
2,205,052
|
|
|
1,012,188
|
|
Total liabilities and equity
|
$
|
2,495,907
|
|
|
$
|
1,077,999
|
|
Condensed Statements of Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Net interest income
|
$
|
7,732
|
|
|
$
|
2,730
|
|
|
$
|
13,915
|
|
|
$
|
4,977
|
|
AFUDC - equity
|
16,307
|
|
|
8,503
|
|
|
29,489
|
|
|
15,656
|
|
Net income
|
$
|
24,039
|
|
|
$
|
11,233
|
|
|
$
|
43,404
|
|
|
$
|
20,633
|
|
Credit Facility Borrowings
EQGP Working Capital Facility.
EQGP has a Working Capital Loan Agreement with EQT (the Working Capital Facility) that provides for interest bearing loans of up to
$50 million
outstanding at any one time and matures on the earlier of February 18, 2019 or at least
90
days after EQT gives notice of termination. EQGP had less than
$0.1 million
and
$0.2 million
of borrowings outstanding under the Working Capital Facility as of
June 30, 2018
and
December 31, 2017
, respectively, which were included in due to related party on the consolidated balance sheets. The maximum amounts of EQGP's outstanding borrowings under the Working Capital Facility was
$0.2 million
and
$0.3 million
during the
six months ended June 30, 2018
and
2017
, respectively, and interest was incurred at weighted average annual interest rates of approximately
3.2%
and
2.4%
, respectively. During the third quarter, EQGP expects the Working Capital Facility to be terminated at or prior to the proposed separation of EQT's production and midstream businesses (the Separation).
EQM
$1
Billion Facility.
EQM has a
$1 billion
credit facility that expires in July 2022. The
$1
Billion Facility is available to fund working capital requirements and capital expenditures, to purchase assets, to pay distributions and repurchase units and for general partnership purposes (including purchasing assets from EQT and other third parties). EQM's
$1
Billion Facility contains various provisions that, if violated, could result in termination of the credit facility, require early payment of amounts outstanding or similar actions. The most significant covenants and events of default relate to maintenance of a permitted leverage ratio, limitations on transactions with affiliates, limitations on restricted payments, insolvency events, nonpayment of scheduled principal or interest payments, acceleration of and certain other defaults under other financial obligations and change of control provisions. Under the
$1
Billion Facility, EQM is required to maintain a consolidated leverage ratio of not more than
5.00
to 1.00 (or not more than
5.50
to 1.00 for certain measurement periods following the consummation of certain acquisitions).
EQM had
no
letters of credit outstanding under its credit facility as of
June 30, 2018
and
December 31, 2017
. During the
three and six
months ended
June 30, 2018
, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was
$338 million
and
$420 million
, respectively, and the average daily balance was approximately
$122 million
and
$211 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
3.4%
and
3.2%
for the
three and six
months ended
June 30, 2018
, respectively. There were
no
borrowings outstanding at any time during the
three and six
months ended
June 30, 2017
. During the third quarter, EQM intends to increase its borrowing capacity from
$1 billion
up to
$2 billion
.
EQM
364
-Day Facility.
EQM has a
$500 million
,
364
-day, uncommitted revolving loan agreement with EQT that matures on October 24, 2018 and will automatically renew for successive
364
-day periods unless EQT delivers a non-renewal notice at least
60
days prior to the then current maturity date. Interest accrues on outstanding borrowings at an interest rate equal to the rate then applicable to similar loans under the
$1
Billion Facility, or a successor revolving credit facility, less the sum of (i) the then applicable commitment fee under the
$1
Billion Facility and (ii) 10 basis points.
EQM had
no
borrowings outstanding on the
364
-Day Facility as of
June 30, 2018
and
December 31, 2017
. There were
no
borrowings outstanding at any time during the
three and six
months ended
June 30, 2018
. During the
three and six
months ended
June 30, 2017
, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was
$100 million
and the average daily balances were approximately
$55 million
and
$40 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
2.2%
and
2.1%
for the
three and six
months ended
June 30, 2017
, respectively. EQM expects EQT to terminate the
364
-Day Facility at or prior to the Separation.
EQM Term Loan Facility.
On April 25, 2018, EQM entered into a
$2.5 billion
unsecured multi-draw
364
-day term loan facility with a syndicate of lenders. The EQM Term Loan Facility was used to fund the cash consideration for the
May 2018 Acquisition
, to repay borrowings under EQM's
$1
Billion Facility and for other general partnership purposes. During the second quarter 2018, the balance outstanding under the EQM Term Loan Facility was repaid, and the EQM Term Loan Facility was terminated on June 25, 2018 in connection with EQM's issuance of the 2018 Senior Notes (defined below). As a result of the termination, EQM expensed
$3 million
of deferred issuance costs. From April 25, 2018 through June 25, 2018, the maximum amount of EQM's outstanding borrowings under the EQM Term Loan Facility at any time was
$1,825 million
and the average daily balance was approximately
$1,231 million
. EQM incurred interest at a weighted average annual interest rate of approximately
3.3%
for the period from April 25, 2018 through June 25, 2018.
2018 Senior Notes.
During the second quarter of 2018, EQM issued
4.75%
senior notes due July 15, 2023 in the aggregate principal amount of
$1.1 billion
,
5.50%
senior notes due July 15, 2028 in the aggregate principal amount of
$850 million
and
6.50%
senior notes due July 15, 2048 in the aggregate principal amount of
$550 million
(collectively, the 2018 Senior Notes). EQM received net proceeds from the offering of approximately
$2,465.8 million
, inclusive of a discount of
$11.8 million
and estimated debt issuance costs of
$22.4 million
. The net proceeds were used to repay the balance outstanding under the EQM Term Loan Facility and the RMP Credit Agreement and the remainder is expected to be used for general partnership purposes. The 2018 Senior Notes were issued pursuant to new supplemental indentures to EQM's existing indenture dated August 1, 2014. The 2018 Senior Notes contain covenants that limit EQM's ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of the EQM's assets.
As of
June 30, 2018
, EQGP and EQM were in compliance with all debt provisions and covenants.
|
|
I.
|
Fair Value Measurements
|
The carrying values of cash and cash equivalents, accounts receivable, amounts due to/from related parties and accounts payable approximate fair value due to the short maturity of the instruments; these are considered Level 1 fair value measurements. The carrying value of the credit facility borrowings approximates fair value as the interest rates are based on prevailing market rates; this is considered a Level 1 fair value measurement. As EQM's senior notes are not actively traded, their fair values are considered Level 2 fair value measurements and are estimated using a standard industry income approach model that applies a discount rate based on market rates for debt with similar remaining time to maturity and credit risk. As of
June 30, 2018
and
December 31, 2017
, the estimated fair value of EQM's senior notes was approximately
$3,454 million
and
$1,006 million
, respectively, and the carrying value of EQM's senior notes was approximately
$3,454 million
and
$987 million
, respectively. The fair value of the Preferred Interest is a Level 3 fair value measurement and is estimated using an income approach model that applies a market-based discount rate. As of
June 30, 2018
and
December 31, 2017
, the estimated fair value of the Preferred Interest was approximately
$125 million
and
$133 million
, respectively, and the carrying value of the Preferred Interest was approximately
$117 million
and
$119 million
, respectively. See Note B for the fair value of the Investment in RMP IDRs.
The following table summarizes the quarterly cash distributions declared by EQM and EQGP to their respective unitholders from January 1,
2017
through
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
EQM Distribution per Common Unit
|
|
EQM Total Distribution
|
|
EQM Total Distribution to EQGP
|
|
EQGP Distribution
per Common Unit
|
|
EQGP Total Distribution
|
|
|
(Thousands, except per unit amounts)
|
2017
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
0.89
|
|
|
$
|
104,238
|
|
|
$
|
51,933
|
|
|
$
|
0.191
|
|
|
$
|
50,838
|
|
June 30
|
|
0.935
|
|
|
111,455
|
|
|
56,505
|
|
|
0.21
|
|
|
55,895
|
|
September 30
|
|
0.98
|
|
|
118,673
|
|
|
61,078
|
|
|
0.228
|
|
|
60,686
|
|
December 31
|
|
1.025
|
|
|
125,890
|
|
|
65,651
|
|
|
0.244
|
|
|
64,944
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
1.065
|
|
|
$
|
132,321
|
|
|
$
|
69,721
|
|
|
$
|
0.258
|
|
|
$
|
68,671
|
|
June 30
(1)
|
|
1.09
|
|
|
201,805
|
|
|
94,285
|
|
|
0.306
|
|
|
92,552
|
|
|
|
(1)
|
On
July 24, 2018
, the Board of Directors of the EQM General Partner declared a cash distribution to EQM's unitholders for the
second quarter
of
2018
of
$1.09
per common unit. The cash distribution will be paid on
August 14, 2018
to unitholders of record at the close of business on
August 3, 2018
. Based on the EQM common units outstanding on
July 26, 2018
, cash distributions to EQGP will be approximately
$23.8 million
related to its limited partner interest,
$2.4 million
related to its general partner interest and
$68.1 million
related to its IDRs in EQM. The distribution amounts to EQGP related to its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the
second quarter
2018
distribution.
|
On
July 24, 2018
, the Board of Directors of the EQGP General Partner declared a cash distribution to EQGP's unitholders for the
second quarter
of
2018
of
$0.306
per common unit. The cash distribution will be paid on
August 23, 2018
to unitholders of record at the close of business on
August 3, 2018
.
|
|
K.
|
Consolidated Variable Interest Entity
|
EQM is a variable interest entity. Through EQGP's ownership and control of the EQM General Partner, EQGP has the power to direct the activities that most significantly impact EQM's economic performance. In addition, through EQGP's general partner interest, IDRs and limited partner interest in EQM, EQGP has the obligation to absorb EQM's losses and the right to receive benefits from EQM in accordance with its general partner and limited partner ownership percentages and IDRs. Therefore, EQGP consolidates EQM. For additional information, see Note 15 to the consolidated financial statements in EQGP's Annual Report on Form 10-K for the year ended
December 31, 2017
.
EQGP's only cash-generating assets consist of its partnership interests in EQM. As a result, EQGP's
results of operations do not differ materially from the results of operations of EQM. For a discussion on the risks associated with EQM's operations, see EQGP's Annual Report on Form 10-K for the year ended
December 31, 2017
and this Quarterly Report on Form 10-Q. For further discussion on the effect that EQGP's involvement in EQM has on EQGP's financial position, results of operations and cash flows, see EQGP's Annual Report on Form 10-K for the year ended
December 31, 2017
. For discussion on related party transactions, see Note 5 to the consolidated financial statements in EQGP's Annual Report on Form 10-K for the year ended
December 31, 2017
and Note F to these financial statements.
The following table presents amounts included in EQGP's consolidated balance sheets that were for the use or obligation of EQM.
|
|
|
|
|
|
|
|
|
Classification
|
June 30, 2018
|
|
December 31, 2017
|
|
(Thousands)
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
684,115
|
|
|
$
|
2,557
|
|
Accounts receivable
|
47,587
|
|
|
28,804
|
|
Accounts receivable – affiliate
|
119,097
|
|
|
103,304
|
|
Other current assets
|
14,085
|
|
|
12,662
|
|
Net property, plant and equipment
|
3,922,144
|
|
|
2,804,059
|
|
Investment in unconsolidated entity
|
1,003,299
|
|
|
460,546
|
|
Goodwill
|
37,954
|
|
|
—
|
|
Intangible assets, net
|
596,887
|
|
|
—
|
|
Other assets
|
137,257
|
|
|
136,895
|
|
Liabilities:
|
|
|
|
Accounts payable
|
$
|
84,969
|
|
|
$
|
47,040
|
|
Due to related party
|
41,519
|
|
|
31,673
|
|
Capital contribution payable to MVP Joint Venture
|
445,933
|
|
|
105,734
|
|
Accrued interest
|
12,309
|
|
|
10,926
|
|
Accrued liabilities
|
25,144
|
|
|
16,871
|
|
EQM credit facility borrowings
|
—
|
|
|
180,000
|
|
EQM senior notes
|
3,453,975
|
|
|
987,352
|
|
Regulatory and other long-term liabilities
|
21,442
|
|
|
20,273
|
|
EQT GP HOLDINGS, LP AND SUBSIDIARIES