UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

 

EQT Midstream Partners, LP

 

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

As of March 31,June 30, 2016, there were 77,632,44980,581,758 Common Units and 1,443,015 General Partner Units outstanding.

 

 

Glossary of Commonly Used Terms, Abbreviations and Measurements

 

 

 

 

local distribution company or LDC – LDCs are companies involved in the delivery of natural gas to consumers within a specific geographic area.

 

 

Item 1.  Financial Statements

 

 

 

 

 

EQM is a growth-oriented Delaware limited partnership. EQT Midstream Services, LLC (EQM General Partner), a direct wholly owned subsidiary of EQT GP Holdings, LP (EQGP), is the general partner of EQM. References in these consolidated financial statements to EQT refer collectively to EQT Corporation and its consolidated subsidiaries.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements include all adjustments (consisting of only normal recurring adjustments, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQM as of March 31,June 30, 2016 and December 31, 2015, and the results of its operations for the three and six months ended June 30, 2016 and 2015 and its cash flows and partners' capital for the threesix months ended March 31,June 30, 2016 and 2015. Certain previously reported amounts have been reclassified to conform to the current year presentation. The balance sheet at December 31, 2015 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.

 

NWV Gathering was a business and the NWV Gathering Acquisition was a transaction between entities under common control; therefore, EQM recorded the assets and liabilities of NWV Gathering at their carrying amounts to EQT on the date of the transaction. The difference between EQT’s net carrying amount and the total consideration paid to EQT was recorded as a capital transaction with EQT, which resulted in a reduction in partners’ capital. EQM recast its consolidated financial statements to retrospectively reflect the NWV Gathering Acquisition as if the business was owned for all periods presented; however, the consolidated financial statements are not necessarily indicative of the results of operations that would have occurred if EQM had owned it during the periods reported.

 

Due to the seasonal nature of EQM’s utility customer contracts, the interim statements for the three and six months ended March 31,June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in EQM’s Annual Report on Form 10-K for the year ended December 31, 2015 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein.

 

 

 

On March 17, 2015, EQT contributed NWV Gathering to EQM Gathering. EQM paid total consideration of approximately $925.7 million to EQT, consisting of approximately $873.2 million in cash, 511,973 EQM common units and 178,816 EQM general partner units.

On March 30, 2015, EQM assumed from EQT 100% of the membership interests in MVP Holdco, the owner of the MVP Interest in the MVP Joint Venture, for approximately $54.2 million. The cash payment represented EQM's reimbursement to EQT for 100% of the capital contributions made by EQT to the MVP Joint Venture as of March 30, 2015. See Note F.

On April 15, 2015, pursuant to the NWV Gathering Acquisition contribution and sale agreement, EQM acquired the Preferred Interest in EES from EQT for approximately $124.3 million. EES generates revenue from services provided to a local distribution company. See Note F.

The following table summarizes EQM's common, subordinated and general partner units issued from January 1, 2015 through March 31,June 30, 2016.

 

In February 2016, EQM issued 19,796 common units under the 2014 EQM Value Driver Award (2014 EQM VDA) and 92,472 common units under the EQM Total Return Program, which were compensation programs for EQT employees performing work for EQM. The awards were granted in January 2014 and July 2012, respectively.

As of March 31,June 30, 2016, EQGP and its subsidiaries owned 21,811,643 EQM common units, representing a 27.6%26.6% limited partner interest, 1,443,015 EQM general partner units, representing a 1.8% general partner interest, and all of the incentive distribution rights in EQM. As of March 31,June 30, 2016, EQT owned 100% of the non-economic general partner interest and a 90.1% limited partner interest in EQGP.

Net income attributable to NWV Gathering for periods prior to March 17, 2015 was not allocated to the limited partners for purposes of calculating net income per limited partner unit. The weighted average phantom unit awards included in the calculation of basic weighted average limited partner units outstanding was 16,48017,308 and 13,47014,123 for the three months ended March 31,June 30, 2016 and 2015, respectively, and 16,847 and 13,757 for the six months ended June 30, 2016 and 2015, respectively. Potentially dilutive securities included in the calculation of diluted weighted average limited partner units outstanding totaled 82,190zero and 168,169154,576 for the three months ended March 31,June 30, 2016 and 2015, respectively, and 41,095 and 161,372 for the six months ended June 30, 2016 and 2015, respectively.

 

In the ordinary course of business, EQM has transactions with EQT and its affiliates including, but not limited to, transportation service and precedent agreements, storage agreements and gas gathering agreements. Pursuant to an omnibus agreement, EQT performs centralized corporate, general and administrative services for EQM. In exchange, EQM reimburses EQT for the expenses incurred in providing these services, including direct and indirect costs and expenses attributable to EQT's long-term incentive programs. Pursuant to an operation and management services agreement, EQT Gathering, LLC (EQT Gathering), an indirect wholly owned subsidiary of EQT, provides EQM’s pipelines and storage facilities with certain operational and management services.  EQM reimburses EQT Gathering for such services pursuant to the terms of the omnibus agreement. The expenses for which EQM reimburses EQT and its subsidiaries may not necessarily reflect the actual expenses that EQM would incur on a stand-alone basis and EQM is unable to estimate what those expenses would be on a stand-alone basis. See also Note B, Note C and Note F for further discussion of related party transactions.

 

The MVP Joint Venture plans to construct 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 March 31,June 30, 2016. The MVP Joint Venture has been determined to be a variable interest entity because the MVP Joint Venture has insufficient equity to finance 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, including, but not limited to, decisions about operating and construction budgets, project construction schedule, material contracts or precedent agreements, indebtedness, significant acquisitions or dispositions, material regulatory filings and strategic decisions require the approval of owners holding more than a 66 2/3% interest in the joint venture and no one member owns more than a 66 2/3% interest. EQM accounted for the MVP Interest as an equity method investment as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.

The value of the equity method investment recorded on the consolidated balance sheets was approximately $91.7$135.9 million and $77.0 million as of March 31,June 30, 2016 and December 31, 2015, respectively. On FebruaryJuly 15, 2016, MVP Holdco paid capital contributions of $27.1 million to the MVP Joint Venture issued a capital call notice to MVP Holdco for a total amount of $13.9 million, of which $9.4 million was paid on April 15, 2016 and the remaining $4.5 million is expected to be paid on May 16, 2016.Venture. The capital contribution payable has been reflected on the consolidated balance sheet as of March 31,June 30, 2016 with a corresponding increase to EQM's investment in the MVP Joint Venture.

On January 21, 2016, an affiliate of Consolidated Edison, Inc. (ConEd) acquired a 12.5% interest in the MVP Joint Venture, 8.5% of which was purchased from EQM. EQM received a cash payment of approximately $12.5 million which represented EQM's proportional capital contributions to the MVP Joint Venture through the date of the transaction. ConEd has the right to terminate its purchase of the interest in the MVP Joint Venture and be reimbursed for the purchase price and all capital contributions it makes to the MVP Joint Venture for a period ending no later than December 31, 2016.

As of March 31,June 30, 2016, 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. Upon the FERC’s initial release to begin construction of the MVP, EQM's guarantee will terminate and EQM will be obligated to issue a new guarantee in an amount equal to 33% of MVP Holdco’s remaining obligations to make capital contributions to the MVP Joint Venture in connection with the then remaining construction budget, less, subject to certain limits, any credit assurances issued by any affiliate of EQM under such affiliate's precedent agreement with the MVP Joint Venture.

As of March 31,June 30, 2016, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $183$227 million, which included the investment balance on the consolidated balance sheet as of March 31,June 30, 2016 and amounts which could have become due under the performance guarantee as of that date.

EES was determined to be a variable interest entity because it has insufficient equity to finance its activities. EQM is not the primary beneficiary because it does not have the power to direct the activities of EES that most significantly impact its economic performance. The Preferred Interest in EES was determined to be a cost method investment as EQM does not have the ability to exercise significant influence over operating and financial policies of EES.

During the three and six months ended June 30, 2016, EQM received cash distributions from EES of approximately $3$2.8 million during the three months ended March 31, 2016and $5.5 million, respectively, which were included in other income in the accompanying statements of consolidated operations. EQM expects to receive cash distributions of approximately $11 million during the year ended December 31, 2016. As of March 31,June 30, 2016 and December 31, 2015, the estimated fair value of EQM's Preferred Interest in EES was approximately $145$150 million and $140 million, respectively, and the carrying value of EQM's Preferred Interest in EES was approximately $124$124.3 million at both dates. The fair value of EQM's Preferred Interest in EES is a Level 3 fair value measurement. As of March 31,June 30, 2016, the carrying value represents EQM's maximum exposure to loss.

 

EQM has a $750 million credit facility that expires in February 2019. The credit facility is available to fund working capital requirements and capital expenditures, to purchase assets, to pay distributions, to repurchase units and for general partnership purposes.

The carrying value 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 values. The carrying value of credit facility borrowings approximates fair value as the interest rates are based on prevailing market rates; this is considered a Level 1 fair value. As of March 31,June 30, 2016 and December 31, 2015, the estimated fair value of EQM's long-term debt was approximately $433$481 million and $414 million, respectively, and the carrying value of EQM's long-term debt was approximately $494 million and $493 million, respectively. The fair value of EQM's long-term debt is a Level 2 fair value measurement. See Note F for the fair value of theEQM's Preferred Interest.Interest in EES.

 

As a result of its limited partnership structure, EQM is not subject to federal and state income taxes. For federal and state income tax purposes, all income, expenses, gains, losses and tax credits generated by EQM flow through to the unitholders; accordingly, EQM does not record a provision for income taxes.

As discussed in Note B, EQM completed the NWV Gathering Acquisition on March 17, 2015, which was a transaction between entities under common control. Prior to this transaction, the income from NWV Gathering was included in EQT’s consolidated federal tax return; therefore, the NWV Gathering operations were subject to income taxes. Accordingly, the income tax effects associated with the operations of NWV Gathering prior to the NWV Gathering Acquisition were reflected in EQM’s consolidated financial statements. In conjunction with the NWV Gathering Acquisition, approximately $84.4 million of net current and deferred income tax liabilities were eliminated through equity.

 

 

On AprilJuly 26, 2016, the Board of Directors of the EQM General Partner declared a cash distribution to EQM’s unitholders for the firstsecond quarter of 2016 of $0.745$0.78 per common unit. The cash distribution will be paid on May 13,August 12, 2016 to unitholders of record, including EQGP, at the close of business on May 6,August 5, 2016. Based on the 77,632,44980,581,758 EQM common units outstanding on April 27,July 28, 2016, cash distributions to EQGP related to its general partner interest and incentive distribution rights in EQM will be $1.4$1.6 million and $18.8$22.2 million, respectively. These distribution amounts to EQGP are subject to change if EQM issues additional common units on or prior to the record date for the firstsecond quarter 2016 distribution.

 

 

Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “could,” “would,” “will,” “may,” “forecast,” “approximate,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters.  Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the matters discussed in the section captioned “Outlook” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the expectations of plans, strategies, objectives, and growth and anticipated financial and operational performance of EQM, and its subsidiaries, including guidance regarding EQM’s gathering and transmission and storage revenue and volume growth; revenue projections; infrastructure programs (including the timing, cost, capacity and sources of funding with respect to gathering and transmission expansion projects); the timing, cost, capacity and expected interconnections with facilities and pipelines of the Ohio Valley Connector (OVC) and MVP projects; the ultimate terms, partners and structure of the MVP Joint Venture; natural gas production growth in EQM’s operating areas for EQT and third parties; asset acquisitions, including EQM’s ability to complete asset acquisitions from EQT or third parties; the amount and timing of distributions, including expected increases; the expected cash distributions from EES; projected capital contributions and operating and capital expenditures, including the amount of capital expenditures reimbursable by EQT; the impact of commodity prices on EQM's business; liquidity and financing requirements, including sources and availability;availability and the use of proceeds from common units sold under the ATM Program; EQM's reimbursement of EQT for its proportionate share of the funding for the Retirement Plan termination; the effects of government regulation and litigation; and tax position. The forward-looking statements included in this Quarterly Report on Form 10-Q involve risks and uncertainties that could cause actual results to differ materially from projected results.  Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  EQM has based these forward-looking statements on current expectations and assumptions about future events.  While EQM considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and are beyond EQM’s control. The risks and uncertainties that may affect the operations, performance and results of EQM’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” in EQM’s Annual Report on Form 10-K for the year ended December 31, 2015.2015, as updated by Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q.

 

Any forward-looking statement speaks only as of the date on which such statement is made and EQM does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember that such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about EQM. The agreements may contain representations and warranties by EQM, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.  Accordingly, these representations and warranties alone may not describe the actual state of affairs of EQM or its affiliates as of the date they were made or at any other time.

EQM declared a cash distribution to unitholders of $0.745$0.78 per unit on AprilJuly 26, 2016, which was 5% higher than the fourthfirst quarter 20152016 distribution of $0.71$0.745 per unit and 22% higher than the firstsecond quarter 2015 distribution of $0.61$0.64 per unit.

 

Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources. Other income and interest are managed on a consolidated basis. EQM has presented each segment’s operating income and various operational measures in the sections below.following sections. Management believes that the presentation of this information provides useful information to management and investors regarding the financial condition, results of operations and trends of segments. EQM has reconciled each segment’s operating income to EQM’s consolidated operating income and net income in Note D to the consolidated financial statements.

 

 

 

Gathering revenues increased by $17.9$17.8 million primarily as a result of higher affiliate volumes gathered for the three months ended March 31,June 30, 2016 compared to the three months ended March 31,June 30, 2015, driven by production development in the Marcellus Shale. EQM increased firm reservation fee revenues as a result of affiliates and third parties contracting for additional capacity under firm contracts. EQM increased firm gathering capacity by approximately 300 MMcf per day as a result of the NWV Gathering and Jupiter expansion projects completed in the fourth quarter of 2015. The decrease in usage fees under interruptible contracts was primarily due to these additional contracts for firm capacity.

Gathering revenues increased by $35.7 million primarily as a result of higher affiliate volumes gathered for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, driven by production development in the Marcellus Shale. EQM increased firm reservation fee revenues as a result of affiliates and third parties contracting for additional capacity under firm contracts. The decrease in usage fees under interruptible contracts was primarily due to affiliates contractingthese additional contracts for additional firm capacity.

Operating expenses increased by $3.3$6.7 million for the threesix months ended March 31,June 30, 2016 compared to the threesix months ended March 31,June 30, 2015. OperatingSelling, general and maintenanceadministrative expense increased primarily as a result of higher repairsallocations and maintenance expenses associated with increased throughput.personnel costs from EQT, including incentive compensation. The increase in depreciation and amortization expense resulted from additional assets placed in-service.in-service including those associated with the NWV Gathering and Jupiter expansion projects.

Operating revenues and operating expenses related to the AVCAllegheny Valley Connector (AVC) facilities do not have an impact on adjusted EBITDA or distributable cash flow as the excess of the AVC revenues over operating and maintenance and selling, general and administrative expenses is paid to EQT as the current monthly lease payment. All revenues related to the AVC facilities are from third parties.

 

Transmission and storage revenues increased by $7.9$9.6 million for the three months ended March 31,June 30, 2016 compared to the three months ended March 31,June 30, 2015, driven by production development in the Marcellus Shale by affiliate and third party producers

Transmission and storage revenues increased by $17.5 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, driven by production development in the Marcellus Shale by affiliate and third party producers which resulted in higher usage fees under firm and interruptible contracts and higher contracted firm capacity. Reduced firm capacity reservation throughput for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 reflected reduced volumes from third party producers and warmer weather during the the three months ended March 31,first quarter of 2016. This reduction did not have a significant impact on firm reservation fee revenues.

Operating expenses increased by $3.1$4.1 million for the threesix months ended March 31,June 30, 2016 compared to the threesix months ended March 31, 2015. The increase in depreciation and amortization expense wasJune 30, 2015 primarily as a result of higher depreciation onand amortization expense related to the increased investment in the AVC facilities.facilities and additional assets placed in-service.

 

Other income increased by $6.4$8.3 million for the three months ended March 31,June 30, 2016 compared to the three months ended March 31,June 30, 2015 primarily driven by increased AFUDC - equity of $4.1 million mainly attributable to increased spending on the OVC project, distributions received from EES of $2.8 million which began in January 2016 increased AFUDC - equity of $1.8 million mainly attributable to increased spending on the OVC project and higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP. Other income increased by $14.7 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 primarily driven by increased AFUDC - equity of $5.8 million mainly attributable to increased spending on the OVC project, distributions received from EES of $5.5 million and higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP.

EQM is not subject to U.S. federal and state income taxes. As previously noted, the NWV Gathering Acquisition, which closed on March 17, 2015, was a transaction between entities under common control for which the consolidated financial statements of EQM have beenwere retrospectively recast to reflect the combined entities.  Accordingly, the income tax effects associated with NWV Gathering's operations prior to the NWV Gathering Acquisition were reflected in the consolidated financial statements as NWV Gathering was previously part of EQT’s consolidated federal tax return. The decrease in income tax expense resulted from the timing of the NWV Gathering Acquisition.

 

See “Investing Activities” and “Capital Requirements” in the “Capital Resources and Liquidity” section below for a discussion of capital expenditures.

 

EQM defines adjusted EBITDA as EQM's net income plus interest expense, depreciation and amortization expense, income tax expense (if applicable) and non-cash long-term compensation expense less equity income, AFUDC - equity, capital lease payments and NWV Gathering adjusted EBITDA prior to the NWV Gathering Acquisition. EQM defines distributable cash flow as adjusted EBITDA less interest expense excluding capital lease interest, capitalized interest and AFUDC - debt, and ongoing maintenance capital expenditures net of expected reimbursements.  Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of EQM’s consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess:

 

EQM believes that adjusted EBITDA and distributable cash flow provide useful information to investors in assessing its financial condition and results of operations. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because adjusted EBITDA and distributable cash flow may be defined differently by other companies in its industry, EQM’s adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing the utility of the measures. Distributable cash flow should not be viewed as indicative of the actual amount of cash that EQM has available for distributions from operating surplus or that EQM plans to distribute.

 

The following table presents a reconciliation of the non-GAAP financial measures adjusted EBITDA and distributable cash flow with the most directly comparable EQM GAAP financial measures of net income and net cash provided by operating activities.activities as derived from EQM's Quarterly Reports on Form 10-Q for the quarters ended June 30, 2016 and March 31, 2016.