Item 1.  Financial Statements

EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES

EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES

EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

 

EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES

 

EQT Midstream Partners,MIDSTREAM PARTNERS, LP and SubsidiariesAND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

EQM is a growth-oriented Delaware limited partnership. EQT Midstream Services, LLC (EQM General Partner), is a direct wholly owned subsidiary of EQT GP Holdings, LP (EQGP), and is the general partner of EQM. References in these consolidated financial statements to EQT refer collectively to EQT Corporation and its consolidated subsidiaries, the owners of a 90.1% limited partner interest and 100% non-economic general partner interest in EQGP.

 

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 September 30, 2016March 31, 2017 and December 31, 2015,2016, and the results of its operations, cash flows and equity for the three and nine months ended September 30, 2016March 31, 2017 and 2015 and its cash flows and partners' capital for the nine months ended September 30, 2016 and 2015.2016. Certain previously reported amounts have been reclassified to conform to the current year presentation. The balance sheet at December 31, 20152016 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 businessAVC, Rager and the NWV Gathering Assets were businesses and the October 2016 Acquisition was a transaction between entities under common control; therefore, EQM recorded the assets and liabilities of NWV Gatheringthese entities 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.equity. EQM recast its consolidated financial statements to retrospectively reflect the NWV GatheringOctober 2016 Acquisition as if the business wasentities were 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 itthem during the periods reported.

Due to the seasonal nature of EQM’s utility customer contracts, the interim statements for the three and nine months ended September 30, 2016March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017.

 

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, 20152016 as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein.

 

 

The following table summarizes EQM's limited partner common subordinatedunits and general partner units issued from January 1, 20152016 through September 30,December 31, 2016. EQM did not issue any units during the first quarter of 2017.

 

As of September 30, 2016,March 31, 2017, EQGP and its subsidiaries owned 21,811,643 EQM common units, representing a 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 rightsIDRs in EQM. As of September 30, 2016,March 31, 2017, EQT owned 100% of the non-economic general partner interest and a 90.1% limited partner interest in EQGP.

 

In the ordinary course of business, EQM hasengages in transactions with EQT and its affiliates including, but not limited to, transportation service and precedent agreements, storage agreements and gas gathering agreements. Pursuant to anthe 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, Note F, Note G and Note K for further discussion of related party transactions.

The value of the equity method investment recorded on the consolidated balance sheets was approximately $160.3 million and $77.0 million as of September 30, 2016 and December 31, 2015, respectively. On October 17, 2016 MVP Holdco paid capital contributions of $13.1 million toIn February 2017, the MVP Joint Venture.Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for a total amount of $40.2 million, of which $22.1 million was paid on April 13, 2017 and the remaining $18.1 million is expected to be paid on May 12, 2017. The capital contribution payable has been reflected on the consolidated balance sheet as of September 30, 2016March 31, 2017 with a corresponding increase to EQM's investment in the MVP Joint Venture.

Equity income related to EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP is reported in other income in the statements of consolidated operations and was $2.7$4.3 million and $0.8$1.6 million for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively, and $6.1 million and $1.1 million for the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016,March 31, 2017, 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

As of September 30, 2016,March 31, 2017, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $251$328.3 million, which included the investment in unconsolidated entity balance on the consolidated balance sheet as of September 30, 2016March 31, 2017 and amounts which could have become due under the performance guarantee as of that date.

EQM had $91 million ofno borrowings outstanding on its $750 Million Facility as of September 30, 2016March 31, 2017 and had $299 million outstanding as of December 31, 2015. The maximum amount of EQM’s2016. There were no borrowings outstanding credit facility borrowings was $91 million and $404 million at any time during the three months ended September 30, 2016 and 2015, respectively, and $299 million and $404 million at any time during the nine months ended September 30, 2016 and 2015, respectively. The average daily balance of credit facility borrowings outstanding was approximately $34 million and $357 million forMarch 31, 2017. During the three months ended September 30,March 31, 2016, and 2015, respectively, and approximately $67 million and $241 million for the nine months ended September 30, 2016 and 2015, respectively. Interest was incurred onmaximum amount of EQM’s outstanding borrowings under the credit facility borrowingsat any time was $299 million and the average daily balance was approximately $134 million. Interest was incurred at a weighted average annual interest rate of approximately 2.0% and 1.9% for the three and nine months ended September 30, 2016, respectively, and approximately 1.7% for the three and nine months ended September 30, 2015.March 31, 2016.

 

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 theEQM's unitholders; accordingly, EQM does not record a provision for income taxes.

As discussed in Note B,A, EQM’s consolidated financial statements have been retrospectively recast to include the pre-acquisition results of AVC, Rager and the Gathering Assets, which were acquired by EQM completedeffective on October 1, 2016, because the NWV Gathering Acquisition on March 17, 2015, whichtransaction 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 thethese operations of NWV Gathering prior to the NWV Gathering Acquisition wereacquisition are reflected in EQM’sthe consolidated financial statements. In conjunction with the NWV Gathering Acquisition, approximately $84.4 millionstatements as they were previously part of net current and deferred incomeEQT’s consolidated federal tax liabilities were eliminated through equity.return.

 

On OctoberApril 25, 2016,2017, the Board of Directors of the EQM General Partner declared a cash distribution to EQM’s unitholders for the thirdfirst quarter of 20162017 of $0.815$0.89 per common unit. The cash distribution will be paid on November 14, 2016May 15, 2017 to unitholders of record including EQGP, at the close of business on November 4, 2016.May 5, 2017. Based on the 80,581,758 EQM common units outstanding on OctoberApril 27, 2016,2017, cash distributions to EQGP will be approximately $19.4 million related to its limited partner interest, $1.8 million related to its general partner interest and $30.7 million related to its IDRs in EQM. The distribution amounts to EQGP related to its general partner interest and incentive distribution rightsIDRs in EQM will be $1.6 million and $24.9 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 thirdfirst quarter 20162017 distribution.

EQT Midstream Partners, LP and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

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, 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 MVP project; 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; the amount and timing of distributions, including expected increases; the expected cash distributions from EES; the amounts and timing of projected capital contributions and operating and capital expenditures, including the amount of capital expenditures reimbursable by EQT; the impact of commodity prices on EQM's business; liquidity and financing requirements, including sources and availability; 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, as updated by Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q.2016.

 

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.

 

For the three months ended September 30, 2016,March 31, 2017, EQM reported net income of $126.6$143.2 million compared to $94.1$136.7 million for the three months ended September 30, 2015.March 31, 2016. The increase primarily resulted from higher revenues from both gathering and transmission and storage, which were primarily driven mainly by third party and affiliate production development in the Marcellus Shale higher other income and lower interest expense. These items were partly offset by an increase in operating expenses, consistent with the growth of the business.

 

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