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. EQM Midstream Services, LLC (formerly known as EQT Midstream Services, LLC) (EQM General Partner), is a direct wholly owned subsidiary of EQGP and is the general partner of EQM. EQGP Services, LLC (formerly known as EQT GP Services, LLC) (EQGP General Partner), is an indirect wholly owned subsidiary of EQT and is the general partner of EQGP. EQGP was formed under the name EQT GP Holdings, LP and changed its name to EQGP Holdings, LP in October 2018.
EQGP has no independent operations or material assets other than its partnership interests in EQM (see Note K). 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
September 30, 2018
and
December 31, 2017
, the results of its operations for the
three and nine
months ended
September 30, 2018
and
2017
, and its cash flows and equity for the
nine
months ended
September 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
and the
EQM-RMP Merger
because these transactions were 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
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
May 2018 Acquisition
and the
EQM-RMP Merger
had 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 nine
months ended
September 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, 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. In July 2018, the FASB also targeted improvements to this ASU in ASU 2018-11. This update provides entities with an optional transition method, which permits an entity to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. EQGP has elected to utilize the optional transition method. 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 is utilizing a lease accounting system to document its current population of contracts classified as leases, which will be updated as EQGP's lease population changes. EQGP continues to evaluate new business processes and related internal controls and is assessing and documenting the accounting impacts related to the new standard. Although the evaluation is ongoing, EQGP expects that the adoption will impact its financial statements as the standard requires recognition on the balance sheet of a right of use asset and corresponding lease liability.
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 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. Instead, a company would record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. The standard’s provisions are to be applied prospectively. EQGP adopted this standard in the first quarter of 2018 with no significant effect on its financial statements or 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. EQGP 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 impact on its financial statements and 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
.
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 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.
As a result of the recast, EQM recognized approximately
$1,384.9 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 RMP, ROM, Strike Force and Rice WV over the sum of the fair value amounts allocated to the assets and liabilities of RMP, ROM, Strike Force and Rice WV. Goodwill was 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 RMP, 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 RMP, ROM, Strike Force and Rice WV
(1)
|
|
$
|
4,014,984
|
|
|
|
|
Estimated Fair Value of Assets Acquired and Liabilities Assumed:
|
|
|
Current assets
(2)
|
|
132,459
|
|
Intangible assets
(3)
|
|
623,200
|
|
Property and equipment, net
(4)
|
|
2,265,900
|
|
Other non-current assets
|
|
118
|
|
Current liabilities
(2)
|
|
(116,242
|
)
|
RMP $850 Million Facility
(5)
|
|
(266,000
|
)
|
Other non-current liabilities
(5)
|
|
(9,323
|
)
|
Total estimated fair value of assets acquired and liabilities assumed
|
|
2,630,112
|
|
Goodwill
|
|
$
|
1,384,872
|
|
|
|
(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.
|
|
|
(5)
|
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.
|
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 nine
months ended
September 30, 2018
was
$10.4 million
and
$31.2 million
, respectively. As of
September 30, 2018
and December 31, 2017, accumulated amortization was
$36.7 million
and
$5.5 million
, respectively. There was
no
amortization expense recognized for the
three and nine
months ended
September 30, 2017
. The estimated annual amortization expense over the next five years is
$41.5 million
.
As a result of the recast, EQM recognized a liability for AROs related to dismantling, reclaiming and disposing of the water services assets. Based on an estimate of the timing and amount of their settlement, EQM recorded a liability and capitalized a corresponding amount to asset retirement costs. The liability was estimated using the present value of expected future cash flows, adjusted for inflation and discounted at EQM's credit-adjusted, risk-free rate. The current portion of the AROs was recorded in regulatory and other long-term liabilities on the consolidated balance sheets. The following table presents a reconciliation of the AROs for the periods from November 13, 2017 through September 30, 2018.
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
|
(Thousands)
|
Balance at November 13, 2017
|
|
$
|
9,286
|
|
Accretion expense
|
|
35
|
|
Balance at December 31, 2017
|
|
$
|
9,321
|
|
Accretion expense
|
|
321
|
|
Balance at September 30, 2018
|
|
$
|
9,642
|
|
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.
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 LP (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 standard to all open contracts as of the date of initial application. Adoption of the standard did not require an adjustment to the opening balance of equity and did not materially change EQGP's amount or timing of revenues.
For the
three and nine
months ended
September 30, 2018
and
2017
, all revenues recognized on EQM's statements of consolidated operations are from contracts with customers. As of
September 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.
Gathering, Transmission and Storage Service Contracts.
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 can also be charged under firm contracts for each firm volume actually transported, gathered or stored as well as for 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 gathered, transported or stored and generally 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 revenue is generally satisfied upon EQM's monthly billing to the customer for 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 (MVCs), which specify minimum quantities for which a customer will be charged regardless of 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.
Water Service Contracts.
EQM's water service revenues represent fees charged by EQM for the delivery of fresh water to a customer at a specified delivery point and for the collection and recycling or disposal of flowback and produced water. All of EQM’s water service revenues are generated pursuant to variable price per volume contracts with customers. For fresh water service contracts, the only performance obligation in each contract is for EQM to provide water (usually a minimum daily volume of water) to the customer at a designated delivery point. For flowback and produced water, the performance obligation is collection and disposition of the water which typically occur within the same day. For all water service arrangements, the customer is typically invoiced on a monthly basis with payment due
21
days after the receipt of the invoice.
Summary of Disaggregated Revenues.
The tables below provide disaggregated revenue information by EQM business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Water
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
112,598
|
|
|
$
|
82,669
|
|
|
$
|
—
|
|
|
$
|
195,267
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
|
8,661
|
|
|
5,331
|
|
|
—
|
|
|
13,992
|
|
Usage fees under interruptible contracts
(2)
|
|
131,602
|
|
|
1,350
|
|
|
—
|
|
|
132,952
|
|
Total volumetric based fee revenues
|
|
140,263
|
|
|
6,681
|
|
|
—
|
|
|
146,944
|
|
Water service revenues
|
|
—
|
|
|
—
|
|
|
22,373
|
|
|
22,373
|
|
Total operating revenues
|
|
$
|
252,861
|
|
|
$
|
89,350
|
|
|
$
|
22,373
|
|
|
$
|
364,584
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Gathering
|
|
Transmission
|
|
Water
|
|
Total
|
|
|
(Thousands)
|
Firm reservation fee revenues
|
|
$
|
334,233
|
|
|
$
|
262,666
|
|
|
$
|
—
|
|
|
$
|
596,899
|
|
Volumetric based fee revenues:
|
|
|
|
|
|
|
|
|
Usage fees under firm contracts
(1)
|
|
30,725
|
|
|
13,981
|
|
|
—
|
|
|
44,706
|
|
Usage fees under interruptible contracts
(2)
|
|
366,482
|
|
|
8,782
|
|
|
—
|
|
|
375,264
|
|
Total volumetric based fee revenues
|
|
397,207
|
|
|
22,763
|
|
|
—
|
|
|
419,970
|
|
Water service revenues
|
|
—
|
|
|
—
|
|
|
93,438
|
|
|
93,438
|
|
Total operating revenues
|
|
$
|
731,440
|
|
|
$
|
285,429
|
|
|
$
|
93,438
|
|
|
$
|
1,110,307
|
|
|
|
(1)
|
Includes fees on volumes gathered and transported in excess of firm contracted capacity as well as usage fees and fees on all volumes transported under firm contracts.
|
|
|
(2)
|
Includes volumes from contracts under which EQM has agreed to hold capacity available without charging a capacity reservation fee.
|
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 MVCs as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
(1)
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
(Thousands)
|
Gathering firm reservation fees
|
|
$
|
113,018
|
|
|
$
|
476,270
|
|
|
$
|
552,197
|
|
|
$
|
562,196
|
|
|
$
|
562,196
|
|
|
$
|
2,834,111
|
|
|
$
|
5,099,988
|
|
Gathering revenues supported by MVCs
|
|
—
|
|
|
65,700
|
|
|
71,370
|
|
|
71,175
|
|
|
71,175
|
|
|
136,875
|
|
|
416,295
|
|
Transmission firm reservation fees
|
|
94,077
|
|
|
346,893
|
|
|
344,328
|
|
|
339,588
|
|
|
334,522
|
|
|
2,477,808
|
|
|
3,937,216
|
|
Total
|
|
$
|
207,095
|
|
|
$
|
888,863
|
|
|
$
|
967,895
|
|
|
$
|
972,959
|
|
|
$
|
967,893
|
|
|
$
|
5,448,794
|
|
|
$
|
9,453,499
|
|
|
|
(1)
|
October 1 through December 31
|
Based on total projected contractual revenues, including projected contractual revenues from additional pipeline capacity that will result from expansion projects that are not yet fully constructed, 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
.
|
|
D.
|
Equity and Net Income per Limited Partner Unit
|
EQGP Equity.
As of
September 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.
Net Income per Limited Partner Unit.
Net income attributable to the
May 2018 Acquisition
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. The weighted average phantom unit awards included in the calculation of basic weighted average limited partner units outstanding was
31,602
and
20,750
for the
three months ended September 30, 2018
and
2017
, respectively, and
30,142
and
19,706
for the
nine months ended September 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
September 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
|
|
Common units issued with the EQM-RMP Merger
|
33,975,777
|
|
|
—
|
|
|
33,975,777
|
|
Balance at September 30, 2018
|
120,456,425
|
|
|
1,443,015
|
|
|
121,899,440
|
|
|
|
(1)
|
Units issued upon a resignation from the EQM General Partner's Board of Directors in February 2018.
|
As of
September 30, 2018
, EQGP owned
21,811,643
EQM common units, representing a
17.9%
limited partner interest,
1,443,015
EQM general partner units, representing a
1.2%
general partner interest, and all of the IDRs in EQM. As of
September 30, 2018
, EQT owned
15,433,812
EQM common units, representing a
12.7%
limited partner interest in EQM.
|
|
E.
|
Financial Information by Business Segment
|
Prior to the
EQM-RMP Merger
, all of EQM's operating activities were conducted through
two
business segments: Gathering and Transmission. Following the
EQM-RMP Merger
, EQM adjusted its internal reporting structure to incorporate the newly acquired assets consistent with how EQM's chief operating decision maker reviews its business operations. EQM now conducts its business through
three
business segments: Gathering, Transmission and Water. Gathering primarily includes high pressure gathering lines and the FERC-regulated low pressure gathering system. Transmission includes EQM's FERC-regulated interstate pipeline and storage business. Water includes water pipelines, impoundment facilities, pumping stations, take point facilities and measurement facilities. EQM has recast the corresponding segment information for the period in which RMP was under the common control of EQT, which began on November 13, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Revenues from external customers (including affiliates):
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
252,861
|
|
|
$
|
116,522
|
|
|
$
|
731,440
|
|
|
$
|
330,996
|
|
Transmission
|
89,350
|
|
|
89,771
|
|
|
285,429
|
|
|
272,184
|
|
Water
|
22,373
|
|
|
—
|
|
|
93,438
|
|
|
—
|
|
Total operating revenues
|
$
|
364,584
|
|
|
$
|
206,293
|
|
|
$
|
1,110,307
|
|
|
$
|
603,180
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
177,902
|
|
|
$
|
85,932
|
|
|
$
|
510,755
|
|
|
$
|
243,061
|
|
Transmission
|
58,691
|
|
|
59,770
|
|
|
198,784
|
|
|
189,237
|
|
Water
|
(3,093
|
)
|
|
—
|
|
|
35,627
|
|
|
—
|
|
Headquarters
|
(2,581
|
)
|
|
(543
|
)
|
|
(5,739
|
)
|
|
(2,344
|
)
|
Total operating income
|
$
|
230,919
|
|
|
$
|
145,159
|
|
|
$
|
739,427
|
|
|
$
|
429,954
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income to net income:
|
|
|
|
|
|
|
|
|
|
|
Equity income
(1)
|
16,087
|
|
|
6,025
|
|
|
35,836
|
|
|
15,413
|
|
Other income
|
1,345
|
|
|
637
|
|
|
3,193
|
|
|
3,576
|
|
Net interest expense
|
40,966
|
|
|
9,414
|
|
|
76,661
|
|
|
25,994
|
|
Net income
|
$
|
207,385
|
|
|
$
|
142,407
|
|
|
$
|
701,795
|
|
|
$
|
422,949
|
|
|
|
(1)
|
Equity income is included in the Transmission segment.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
(Thousands)
|
Segment assets:
|
|
|
|
|
|
Gathering
|
$
|
6,131,380
|
|
|
$
|
5,656,094
|
|
Transmission
(1)
|
2,833,519
|
|
|
1,947,566
|
|
Water
|
177,126
|
|
|
208,273
|
|
Total operating segments
|
9,142,025
|
|
|
7,811,933
|
|
Headquarters, including cash
|
126,115
|
|
|
187,701
|
|
Total assets
|
$
|
9,268,140
|
|
|
$
|
7,999,634
|
|
|
|
(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 conform with this presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
$
|
25,359
|
|
|
$
|
9,983
|
|
|
$
|
72,309
|
|
|
$
|
28,398
|
|
Transmission
|
12,357
|
|
|
12,261
|
|
|
37,228
|
|
|
35,793
|
|
Water
|
5,851
|
|
|
—
|
|
|
17,420
|
|
|
—
|
|
Total
|
$
|
43,567
|
|
|
$
|
22,244
|
|
|
$
|
126,957
|
|
|
$
|
64,191
|
|
|
|
|
|
|
|
|
|
Expenditures for segment assets:
|
|
|
|
|
|
|
|
Gathering
|
$
|
194,477
|
|
|
$
|
48,182
|
|
|
$
|
515,072
|
|
|
$
|
150,728
|
|
Transmission
|
37,626
|
|
|
22,312
|
|
|
84,517
|
|
|
73,679
|
|
Water
|
7,981
|
|
|
—
|
|
|
17,358
|
|
|
—
|
|
Total
(1)
|
$
|
240,084
|
|
|
$
|
70,494
|
|
|
$
|
616,947
|
|
|
$
|
224,407
|
|
|
|
(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
$91.3 million
,
$84.6 million
and
$90.7 million
at
September 30, 2018
,
June 30, 2018
and
December 31, 2017
, respectively. Accrued capital expenditures were approximately
$26.5 million
,
$31.2 million
and
$26.7 million
at
September 30, 2017
,
June 30, 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, storage agreements and water services 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. In exchange, EQGP and EQM reimburse EQT for the expenses incurred by EQT in providing these services. EQM's omnibus agreement also provides for certain indemnification obligations between EQM and EQT. Pursuant to a secondment agreement, employees of EQT and its affiliates may be seconded to EQM to provide operating and other services with respect to EQM's business under the direction, supervision and control of EQM. EQM reimburses EQT and its affiliates for the services provided by the seconded employees. The expenses for which 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.
In connection with the completion of the Rice Merger, RMP, EQT and other affiliates entered into an amended and restated omnibus agreement (the Amended RMP Omnibus Agreement). Pursuant to the Amended RMP Omnibus Agreement, EQT performed centralized corporate general and administrative services for RMP. In exchange, RMP reimbursed EQT for the expenses incurred by EQT in providing these services. Following the completion of the EQM-RMP Merger, RMP reimburses EQT for the expenses incurred by EQT providing services to RMP and its subsidiaries under the EQM Omnibus Agreement. The Amended RMP Omnibus Agreement continues in existence for purposes of certain indemnification obligations that survived the merger.
|
|
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
September 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 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
September 30, 2018
, EQM had a
32.7%
ownership interest in the MVP Southgate project and will operate the pipeline.
In
September 2018
, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for
$456.0 million
, of which
$175.2 million
was paid as of
October 2018
, and
$280.8 million
is expected to be paid in the fourth quarter of 2018. In addition, in September 2018, the MVP Joint Venture issued a capital call notice to MVP Holdco for
$7.7 million
for funding of the MVP Southgate project that is expected to be paid in the fourth quarter of 2018. The capital contribution payables have been reflected on the consolidated balance sheet as of
September 30, 2018
with corresponding increases to EQM's investment in the MVP Joint Venture.
Equity income is EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP.
As of
September 30, 2018
, EQM had issued a
$91 million
performance guarantee in favor of the MVP Joint Venture. The guarantee provides performance assurances of MVP Holdco's obligations to fund its proportionate share of the MVP construction budget. As of
September 30, 2018
, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately
$1,391 million
, which consists of the investment in unconsolidated entity balance on the consolidated balance sheet as of
September 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
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
(Thousands)
|
Current assets
|
$
|
1,260,789
|
|
|
$
|
330,271
|
|
Noncurrent assets
|
2,330,467
|
|
|
747,728
|
|
Total assets
|
$
|
3,591,256
|
|
|
$
|
1,077,999
|
|
|
|
|
|
Current liabilities
|
$
|
726,528
|
|
|
$
|
65,811
|
|
Equity
|
2,864,728
|
|
|
1,012,188
|
|
Total liabilities and equity
|
$
|
3,591,256
|
|
|
$
|
1,077,999
|
|
Condensed Statements of Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Thousands)
|
Net interest income
|
$
|
11,958
|
|
|
$
|
3,227
|
|
|
$
|
25,873
|
|
|
$
|
8,205
|
|
AFUDC - equity
|
23,417
|
|
|
10,055
|
|
|
52,906
|
|
|
25,710
|
|
Net income
|
$
|
35,375
|
|
|
$
|
13,282
|
|
|
$
|
78,779
|
|
|
$
|
33,915
|
|
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. EQGP had approximately
$0.2 million
of borrowings outstanding under the Working Capital Facility as of
September 30, 2018
and
December 31, 2017
, 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
nine months ended September 30, 2018
and
2017
, respectively, and interest was incurred at weighted average annual interest rates of approximately
3.3%
and
2.4%
, respectively. 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
$22 million
in borrowings and
$1 million
of letters of credit outstanding under its credit facility as of
September 30, 2018
. EQM had
$180 million
in borrowings and
no
letters of credit outstanding under its credit facility as of
December 31, 2017
. During the
three and nine
months ended
September 30, 2018
, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was
$74 million
and
$420 million
, respectively, and the average daily balance was approximately
$22 million
and
$147 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
3.7%
and
3.2%
for the
three and nine
months ended
September 30, 2018
, respectively. During the
three and nine
months ended
September 30, 2017
, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was
$177 million
and the average daily balances were approximately
$95 million
and
$32 million
, respectively. Interest was incurred at a weighted average annual interest rate of approximately
2.7%
for the
three and nine
months ended
September 30, 2017
. Prior to the Separation, EQM intends to increase its borrowing capacity from
$1 billion
up to
$3 billion
.
EQM
364
-Day Facility.
EQM has a
$500 million
,
364
-day, uncommitted revolving loan agreement with EQT. 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
September 30, 2018
and
December 31, 2017
. There were
no
borrowings outstanding at any time during the
three and nine
months ended
September 30, 2018
. During the
three and nine
months ended
September 30, 2017
, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was
$40 million
and
$100 million
, respectively, and the average daily balances were approximately
$11 million
and
$30 million
, respectively. EQM incurred interest at weighted average annual interest rates of approximately
2.4%
and
2.2%
for the
three and nine
months ended
September 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.
RMP
$850
Million Facility.
RM Operating LLC
(formerly known as
R
ice Midstream OpCo LLC) (Rice Midstream OpCo), a wholly owned subsidiary of RMP, had an
$850
million credit facility. 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 dividends 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.
As of December 31, 2017, Rice Midstream OpCo had
$286 million
of borrowings and
$1 million
of letters of credit outstanding under the RMP
$850
Million Facility
. For the periods from July 1, 2018 through July 23, 2018 and from January 1, 2018 through July 23, 2018, the maximum amounts of RMP's outstanding borrowings under the RMP
$850
Million Facility
at any time were
$260 million
and
$375 million
, respectively, and the average daily outstanding balances under the RMP
$850
Million Facility
were approximately
$249 million
and
$300 million
, respectively. Interest was incurred on the RMP
$850
Million Facility
at weighted average annual interest rates of
4.1%
and
3.8%
for the periods from July 1, 2018 through July 23, 2018 and from January 1, 2018 through July 23, 2018, respectively.
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.
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 balances outstanding under the EQM
Term Loan Facility and
the RMP
$850
Million Facility,
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
September 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
September 30, 2018
and
December 31, 2017
, the estimated fair value of EQM's senior notes was approximately
$3,532 million
and
$1,006 million
, respectively, and the carrying value of EQM's senior notes was approximately
$3,455 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
September 30, 2018
and
December 31, 2017
, the estimated fair value of the Preferred Interest was approximately
$122 million
and
$133 million
, respectively, and the carrying value of the Preferred Interest was approximately
$116 million
and
$119 million
, respectively.
The following table summarizes the quarterly cash distributions declared by EQM and EQGP to their respective unitholders from January 1,
2017
through
September 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
|
|
1.09
|
|
|
201,809
|
|
|
94,286
|
|
|
0.306
|
|
|
92,552
|
|
September 30
(1)
|
|
1.115
|
|
|
207,735
|
|
|
97,746
|
|
|
0.315
|
|
|
95,275
|
|
|
|
(1)
|
On
October 23, 2018
, the Board of Directors of the EQM General Partner declared a cash distribution to EQM's unitholders for the
third quarter
of
2018
of
$1.115
per common unit. The cash distribution will be paid on
November 14, 2018
to unitholders of record at the close of business on
November 2, 2018
. Based on the EQM common units outstanding on
October 25, 2018
, cash distributions to EQGP will be approximately
$24.3 million
related to its limited partner interest,
$2.5 million
related to its general partner interest and
$71.0 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
third quarter
2018
distribution.
|
On
October 23, 2018
, the Board of Directors of the EQGP General Partner declared a cash distribution to EQGP's unitholders for the
third quarter
of
2018
of
$0.315
per common unit. The cash distribution will be paid on
November 23, 2018
to unitholders of record at the close of business on
November 2, 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 consolidated financial statements.
The following table presents amounts included in EQGP's consolidated balance sheets that were for the use or obligation of EQM.
|
|
|
|
|
|
|
|
|
Classification
|
September 30, 2018
|
|
December 31, 2017
|
|
(Thousands)
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
4,712
|
|
|
$
|
2,557
|
|
Accounts receivable
|
58,358
|
|
|
28,804
|
|
Accounts receivable – affiliate
|
167,481
|
|
|
103,304
|
|
Other current assets
|
9,080
|
|
|
12,662
|
|
Net property, plant and equipment
|
5,608,358
|
|
|
2,804,059
|
|
Investment in unconsolidated entity
|
1,300,430
|
|
|
460,546
|
|
Goodwill
|
1,384,872
|
|
|
—
|
|
Intangible assets, net
|
586,500
|
|
|
—
|
|
Other assets
|
146,400
|
|
|
136,895
|
|
Liabilities:
|
|
|
|
Accounts payable
|
$
|
134,026
|
|
|
$
|
47,040
|
|
Due to related party
|
39,709
|
|
|
31,673
|
|
Capital contribution payable to MVP Joint Venture
|
463,733
|
|
|
105,734
|
|
Accrued interest
|
46,165
|
|
|
10,926
|
|
Accrued liabilities
|
16,401
|
|
|
16,871
|
|
Credit facility borrowings of EQM and RMP
|
22,000
|
|
|
180,000
|
|
EQM senior notes
|
3,455,296
|
|
|
987,352
|
|
Regulatory and other long-term liabilities
|
31,010
|
|
|
20,273
|
|
EQGP HOLDINGS, LP AND SUBSIDIARIES