UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| (Mark One) |
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20162017
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | FOR THE TRANSITION PERIOD FROM TO |
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| | COMMISSION FILE NUMBER 001-35574 |
EQT Midstream Partners, LP
(Exact name of registrant as specified in its charter)
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| DELAWARE | | 37-1661577 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
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| 625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania | 15222 |
| (Address of principal executive offices) | (Zip code) |
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(412) 553-5700 (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large Accelerated Filer | x | | | Accelerated Filer | ¨ | |
| Non-Accelerated Filer | ¨ | | Emerging Growth Company ¨ |
Non-Accelerated Filer ¨ | (Do not check if a smaller reporting company) | | Smaller reporting companyReporting Company ¨ | ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of SeptemberJune 30, 2016,2017, there were 80,581,758 Common Units and 1,443,015 General Partner Units outstanding.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Index
Glossary of Commonly Used Terms, Abbreviations and Measurements
adjusted EBITDA – a supplemental non-GAAP (as defined below) financial measure defined by EQT Midstream Partners, LP and subsidiaries (collectively, EQM) as net income plus net interest expense, depreciation and amortization expense, income tax expense, (if applicable)Preferred Interest (as defined below) payments received post conversion and non-cash long-term compensation expense less equity income, AFUDC – equity (as defined below), pre-acquisition capital lease payments for Allegheny Valley Connector, LLC (AVC) and NWV Gathering adjusted EBITDA of assets prior to the NWV Gathering Acquisition.acquisition.
AFUDC (Allowance for Funds Used During Construction)Construction or AFUDC – carrying costs for the construction of certain long-lived regulated assets are capitalized and amortized over the related assets’ estimated useful lives. The capitalized amount for construction of regulated assets includes interest cost and a designated cost of equity for financing the construction of these regulated assets.
British thermal unit – a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
distributable cash flow – a supplemental non-GAAP financial measure defined by EQM as adjusted EBITDA less net interest expense excluding capital lease interest income on the Preferred Interest, capitalized interest and AFUDC -– debt, and ongoing maintenance capital expenditures net of expected reimbursements.
firm contracts – contracts for gathering, transmission storage or gatheringstorage services that generally obligate customers to pay a fixed monthly charge to reserve an agreed upon amount of pipeline or storage capacity regardless of the actual capacity used by a customer during each month.
gas – all references to “gas” refer to natural gas.
local distribution company or LDCOctober 2016 Acquisition – LDCs are companies involved in the delivery of natural gas to consumers within a specific geographic area.
MVP Interest Acquisition –On March 30, 2015,October 13, 2016, EQM assumedacquired from EQT Corporation and subsidiaries (collectively, EQT) 100% of the membershipoutstanding limited liability company interests of AVC and Rager Mountain Storage Company LLC (Rager) and certain gathering assets located in MVP Holdco, LLC (MVP Holdco), the owner of an interest (the MVP Interest) in Mountain Valley Pipeline, LLC (MVP Joint Venture), which at the time was an indirect wholly owned subsidiary of EQT.
NWV Gathering Acquisition – On March 17, 2015, EQT contributed the Northernsouthwestern Pennsylvania and northern West Virginia Marcellus gathering system (NWV Gathering) to EQM(the Gathering Opco, LLC (EQM Gathering), an indirect wholly owned subsidiaryAssets). The closing of EQM.the October 2016 Acquisition was effective as of October 1, 2016.
omnibus agreement – the agreement, as amended, entered into among EQM, its general partner and EQT in connection with EQM's initial public offering, pursuant to which EQT agreed to provide EQM with, and EQM agreed to reimburse EQT for, certain general and administrative services and a license to use the name “EQT” and related marks in connection with EQM’s business. The omnibus agreement also provides for certain indemnification obligations between EQM and EQT.
Preferred Interest Acquisition – On April 15, 2015, pursuant to the NWV Gathering Acquisition contribution and sale agreement, EQM acquired a preferred interest (the Preferred Interest)that EQM has in EQT Energy Supply, LLC (EES), which at the time was an indirect wholly owned subsidiary of EQT..
The $750 Million ATM Program – EQM's at-the-market (ATM) common unit offering program, pursuant to which a group of managers, acting as EQM's sales agents, may sell EQM common units having an aggregate offering price of up to $750 million.
throughput – the volume of natural gas transported or passing through a pipeline, plant, terminal or other facility during a particular period.
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| Abbreviations | Measurements |
FASBASU –Financial Accounting Standards BoardUpdate
| Btu = one British thermal unit |
FERCFASB – Federal Energy Regulatory CommissionFinancial Accounting Standards Board
| BBtu = billion British thermal units |
GAAP FERC– United States Generally Accepted Accounting PrinciplesFederal Energy Regulatory Commission
| Bcf = billion cubic feet |
IPOGAAP – Initial Public OfferingUnited States Generally Accepted Accounting Principles
| Dth = dekatherm or million British thermal units |
IRSIPO – Internal Revenue ServiceInitial Public Offering
| MMBtu = million British thermal units |
SECIRS – Securities and Exchange CommissionInternal Revenue Service
| Mcf = thousand cubic feet |
SEC – Securities and Exchange Commission | MMcf = million cubic feet |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Operations (Unaudited) (1)
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | (Thousands, except per unit amounts) | (Thousands, except per unit amounts) |
Operating revenues (2) | $ | 170,836 |
| | $ | 148,789 |
| | $ | 523,441 |
| | $ | 448,213 |
| $ | 198,966 |
| | $ | 178,042 |
| | $ | 402,392 |
| | $ | 363,828 |
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| Operating expenses: | |
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Operating and maintenance (3) | 17,669 |
| | 18,456 |
| | 50,121 |
| | 50,167 |
| 20,581 |
| | 16,353 |
| | 40,867 |
| | 33,489 |
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Selling, general and administrative (3) | 16,112 |
| | 14,205 |
| | 49,195 |
| | 43,585 |
| 15,893 |
| | 18,129 |
| | 33,373 |
| | 35,652 |
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| Depreciation and amortization | 15,704 |
| | 13,217 |
| | 46,293 |
| | 37,402 |
| 21,400 |
| | 14,531 |
| | 41,947 |
| | 28,538 |
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| Total operating expenses | 49,485 |
| | 45,878 |
| | 145,609 |
| | 131,154 |
| 57,874 |
| | 49,013 |
| | 116,187 |
| | 97,679 |
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| Operating income | 121,351 |
| | 102,911 |
| | 377,832 |
| | 317,059 |
| 141,092 |
| | 129,029 |
| | 286,205 |
| | 266,149 |
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Other income (4) | 12,879 |
| | 2,469 |
| | 29,874 |
| | 4,746 |
| 6,709 |
| | 10,409 |
| | 12,718 |
| | 18,011 |
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Interest expense (5) | 7,662 |
| | 11,264 |
| | 27,311 |
| | 34,361 |
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Net interest expense (5) | | 8,662 |
| | 4,094 |
| | 16,588 |
| | 8,646 |
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| Income before income taxes | 126,568 |
| | 94,116 |
| | 380,395 |
| | 287,444 |
| 139,139 |
| | 135,344 |
| | 282,335 |
| | 275,514 |
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| Income tax expense | — |
| | — |
| | — |
| | 6,703 |
| — |
| | 3,485 |
| | — |
| | 6,920 |
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| Net income | $ | 126,568 |
| | $ | 94,116 |
| | $ | 380,395 |
| | $ | 280,741 |
| $ | 139,139 |
| | $ | 131,859 |
| | $ | 282,335 |
| | $ | 268,594 |
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| Calculation of limited partners' interest in net income: | |
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| Net income | $ | 126,568 |
| | $ | 94,116 |
| | $ | 380,395 |
| | $ | 280,741 |
| $ | 139,139 |
| | $ | 131,859 |
| | $ | 282,335 |
| | $ | 268,594 |
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| Less pre-acquisition net income allocated to parent | — |
| | — |
| | — |
| | (11,106 | ) | — |
| | (7,097 | ) | | — |
| | (14,767 | ) |
| Less general partner interest in net income – general partner units | (2,227 | ) | | (1,860 | ) | | (6,786 | ) | | (5,370 | ) | (2,448 | ) | | (2,210 | ) | | (4,967 | ) | | (4,561 | ) |
| Less general partner interest in net income – incentive distribution rights | (24,912 | ) | | (12,655 | ) | | (65,961 | ) | | (30,783 | ) | |
| Less general partner interest in net income – incentive distribution rights (IDRs) | | (34,150 | ) | | (22,217 | ) | | (64,836 | ) | | (41,049 | ) |
| Limited partners' interest in net income | $ | 99,429 |
| | $ | 79,601 |
| | $ | 307,648 |
| | $ | 233,482 |
| $ | 102,541 |
| | $ | 100,335 |
| | $ | 212,532 |
| | $ | 208,217 |
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| Net income per limited partner unit – basic | $ | 1.23 |
| | $ | 1.12 |
| | $ | 3.89 |
| | $ | 3.44 |
| $ | 1.27 |
| | $ | 1.27 |
| | $ | 2.64 |
| | $ | 2.66 |
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| Net income per limited partner unit – diluted | $ | 1.23 |
| | $ | 1.12 |
| | $ | 3.89 |
| | $ | 3.44 |
| $ | 1.27 |
| | $ | 1.27 |
| | $ | 2.64 |
| | $ | 2.66 |
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| Weighted average limited partner units outstanding – basic | 80,599 |
| | 70,929 |
| | 78,998 |
| | 67,800 |
| 80,603 |
| | 78,865 |
| | 80,602 |
| | 78,312 |
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| Weighted average limited partner units outstanding – diluted | 80,599 |
| | 71,086 |
| | 79,025 |
| | 67,960 |
| 80,603 |
| | 78,865 |
| | 80,602 |
| | 78,353 |
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Cash distributions declared per unit (6) | $ | 0.815 |
| | $ | 0.675 |
| | $ | 2.34 |
| | $ | 1.925 |
| $ | 0.935 |
| | $ | 0.78 |
| | $ | 1.825 |
| | $ | 1.525 |
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| (1) | FinancialAs discussed in Note A, EQM’s consolidated financial statements for the ninethree and six months ended SeptemberJune 30, 2015 included2016 have been retrospectively recast to include the pre-acquisition results of NWVAVC, Rager and the Gathering forAssets, which were acquired by EQM effective on October 1, 2016, because the entire period presented as a result of the NWV Gathering Acquisition on March 17, 2015. See Note B.transaction was between entities under common control. |
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| (2) | Operating revenues included affiliate revenues from EQT of $130.4$148.2 million and $111.6$137.5 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $394.0$291.6 million and $325.9$272.9 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. See Note E. |
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| (3) | Operating and maintenance expense included charges from EQT of $8.1$9.3 million and $9.0$8.6 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $24.5$19.2 million and $25.6$16.7 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Selling, general and administrative expense included charges from EQT of $14.8$15.2 million and $12.1$16.8 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $45.1$31.6 million and $37.2$32.9 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. See Note E. |
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| (4) | For the three and ninesix months ended SeptemberJune 30, 2017, other income included equity income from Mountain Valley Pipeline, LLC (MVP Joint Venture) of $5.1 million and $9.4 million, respectively. For the three and six months ended June 30, 2016, other income included distributions received from EES of $2.8 million and $8.3$5.5 million, respectively, and equity income from the MVP Joint Venture of $2.7$1.9 million and $6.1 million, respectively. For the three and nine months ended September 30, 2015, other income included equity income from the MVP Joint Venture of $0.8 million and $1.1$3.4 million, respectively. See Note F. |
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| (5) | InterestFor the three and six months ended June 30, 2017, net interest expense included interest on a capital lease with an affiliate of $4.7$1.7 million and $5.6$3.4 million, forrespectively, of interest income on the three months ended September 30, 2016 and 2015, respectively, and $15.3 million and $17.4 million for the nine months ended September 30, 2016 and 2015, respectively.Preferred Interest in EES. |
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| (6) | Represents the cash distributions declared related to the period presented. See Note J. |
The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Cash Flows (Unaudited) (1) | | | | Nine Months Ended
September 30, | Six Months Ended
June 30, |
| | 2016 | | 2015 | 2017 | | 2016 |
| | (Thousands) | (Thousands) |
| Cash flows from operating activities: | |
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| Net income | $ | 380,395 |
| | $ | 280,741 |
| $ | 282,335 |
| | $ | 268,594 |
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| Adjustments to reconcile net income to net cash provided by operating activities: | |
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| Depreciation and amortization | 46,293 |
| | 37,402 |
| 41,947 |
| | 28,538 |
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| Deferred income taxes | — |
| | 2,998 |
| — |
| | 5,997 |
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| Equity income | (6,139 | ) | | (1,147 | ) | (9,388 | ) | | (3,439 | ) |
| AFUDC – equity | (15,126 | ) | | (3,599 | ) | (3,297 | ) | | (8,730 | ) |
| Non-cash long-term compensation expense | 195 |
| | 1,133 |
| 225 |
| | 195 |
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| Changes in other assets and liabilities: | |
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| Accounts receivable | 2,379 |
| | 3,306 |
| (599 | ) | | 1,639 |
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| Accounts payable | 8,610 |
| | 1,577 |
| 2,426 |
| | 5,543 |
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| Due to/from EQT affiliates | (39,084 | ) | | (3,450 | ) | 1,410 |
| | (27,087 | ) |
| Other assets and other liabilities | (7,170 | ) | | 902 |
| 5,246 |
| | 5,123 |
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| Net cash provided by operating activities | 370,353 |
| | 319,863 |
| 320,305 |
| | 276,373 |
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| Cash flows from investing activities: | |
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| Capital expenditures | (430,366 | ) | | (304,567 | ) | (149,413 | ) | | (308,769 | ) |
| MVP Interest Acquisition and capital contributions to the MVP Joint Venture | (76,297 | ) | | (84,381 | ) | |
| Capital contributions to the MVP Joint Venture | | (59,940 | ) | | (40,663 | ) |
| Sales of interests in the MVP Joint Venture | 12,533 |
| | 8,344 |
| — |
| | 12,533 |
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| Acquisitions – net assets from EQT | — |
| | (386,791 | ) | |
| Preferred Interest Acquisition | — |
| | (124,317 | ) | |
| Principal payments received on the Preferred Interest | | 2,054 |
| | — |
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| Net cash used in investing activities | (494,130 | ) | | (891,712 | ) | (207,299 | ) | | (336,899 | ) |
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| Cash flows from financing activities: | |
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| Proceeds from the issuance of EQM common units, net of offering costs | 217,102 |
| | 760,731 |
| — |
| | 217,102 |
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| Acquisitions – purchase price in excess of net assets from EQT | — |
| | (486,392 | ) | |
| Proceeds from credit facility borrowings | 430,000 |
| | 561,500 |
| 150,000 |
| | 260,000 |
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| Payments of credit facility borrowings | (638,000 | ) | | (211,500 | ) | |
| Payments on credit facility borrowings | | (110,000 | ) | | (559,000 | ) |
| Distributions paid to unitholders | (237,263 | ) | | (149,866 | ) | (202,060 | ) | | (150,668 | ) |
| Capital contributions | 5,884 |
| | 1,781 |
| 216 |
| | 5,884 |
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| Net distributions to EQT | — |
| | (23,866 | ) | |
| Capital lease principal payments | (4,760 | ) | | (5,472 | ) | |
| Net cash (used in) provided by financing activities | (227,037 | ) | | 446,916 |
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| Net contributions from EQT | | — |
| | 10,346 |
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| Net cash used in financing activities | | (161,844 | ) | | (216,336 | ) |
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| Net change in cash and cash equivalents | (350,814 | ) | | (124,933 | ) | (48,838 | ) | | (276,862 | ) |
| Cash and cash equivalents at beginning of period | 350,814 |
| | 126,175 |
| 60,368 |
| | 360,956 |
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| Cash and cash equivalents at end of period | $ | — |
| | $ | 1,242 |
| $ | 11,530 |
| | $ | 84,094 |
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| Cash paid during the period for: | |
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| Interest, net of amount capitalized | $ | 31,961 |
| | $ | 39,885 |
| $ | 20,996 |
| | $ | 8,503 |
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Non-cash activity during the period for: | |
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| Increase in capital lease asset/obligation | $ | 35,944 |
| | $ | 19,800 |
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| Increase in MVP Joint Venture investment/payable for capital contributions (see Note F) | 13,095 |
| | — |
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| Elimination of net current and deferred tax liabilities | — |
| | 84,446 |
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| Limited partner and general partner units issued for acquisitions | $ | — |
| | $ | 52,500 |
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| (1) | FinancialAs discussed in Note A, EQM’s consolidated financial statements for the ninesix months ended SeptemberJune 30, 2015 included2016 have been retrospectively recast to include the pre-acquisition results of NWVAVC, Rager and the Gathering forAssets, which were acquired by EQM effective on October 1, 2016, because the entire period presented as a result of the NWV Gathering Acquisition on March 17, 2015. See Note B.transaction was between entities under common control. |
The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
| | | | September 30, 2016 | | December 31, 2015 | June 30,
2017 | | December 31, 2016 |
| ASSETS | (Thousands, except number of units) | (Thousands, except number of units) |
| Current assets: | |
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| Cash and cash equivalents | $ | — |
| | $ | 350,814 |
| $ | 11,530 |
| | $ | 60,368 |
|
| Accounts receivable (net of allowance for doubtful accounts of $226 as of September 30, 2016 and $238 as of December 31, 2015) | 14,752 |
| | 17,131 |
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| Accounts receivable (net of allowance for doubtful accounts of $329 as of June 30, 2017 and $319 as of December 31, 2016) | | 21,261 |
| | 20,662 |
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| Accounts receivable – affiliate | 73,267 |
| | 77,925 |
| 85,433 |
| | 81,358 |
|
| Due from related party | 5,023 |
| | — |
| |
| Other current assets | 2,521 |
| | 1,680 |
| 6,601 |
| | 9,671 |
|
| Total current assets | 95,563 |
| | 447,550 |
| 124,825 |
| | 172,059 |
|
| | | | | | | |
| Property, plant and equipment | 2,732,689 |
| | 2,228,967 |
| 3,049,658 |
| | 2,894,858 |
|
| Less: accumulated depreciation | (303,241 | ) | | (258,974 | ) | (353,504 | ) | | (316,024 | ) |
| Net property, plant and equipment | 2,429,448 |
| | 1,969,993 |
| 2,696,154 |
| | 2,578,834 |
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| Investments in unconsolidated entities | 284,643 |
| | 201,342 |
| |
| Investment in unconsolidated entity | | 260,737 |
| | 184,562 |
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| Other assets | 19,838 |
| | 14,950 |
| 137,926 |
| | 140,385 |
|
| Total assets | $ | 2,829,492 |
| | $ | 2,633,835 |
| $ | 3,219,642 |
| | $ | 3,075,840 |
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| LIABILITIES AND PARTNERS’ CAPITAL | |
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| LIABILITIES AND EQUITY | | |
| | |
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| Current liabilities: | |
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| | |
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| Accounts payable | $ | 71,583 |
| | $ | 35,868 |
| $ | 42,755 |
| | $ | 35,830 |
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| Due to related party | — |
| | 33,413 |
| 23,754 |
| | 19,027 |
|
| Credit facility borrowings | 91,000 |
| | 299,000 |
| 40,000 |
| | — |
|
| Capital contribution payable to MVP Joint Venture | 13,095 |
| | — |
| 18,318 |
| | 11,471 |
|
| Accrued interest | 3,875 |
| | 8,753 |
| 10,057 |
| | 12,016 |
|
| Accrued liabilities | 16,588 |
| | 12,194 |
| 13,214 |
| | 8,648 |
|
| Total current liabilities | 196,141 |
| | 389,228 |
| 148,098 |
| | 86,992 |
|
| | | | | | | |
| Long-term debt | 493,978 |
| | 493,401 |
| 986,542 |
| | 985,732 |
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| Lease obligation | 201,745 |
| | 175,660 |
| |
| Other long-term liabilities | 8,910 |
| | 7,834 |
| 9,974 |
| | 9,562 |
|
| Total liabilities | 900,774 |
| | 1,066,123 |
| 1,144,614 |
| | 1,082,286 |
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| Partners’ capital: | |
| | |
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| Common units (80,581,758 and 77,520,181 units issued and outstanding at September 30, 2016 and December 31, 2015, respectively) | 1,948,458 |
| | 1,598,675 |
| |
| General partner interest (1,443,015 units issued and outstanding at September 30, 2016 and December 31, 2015) | (19,740 | ) | | (30,963 | ) | |
| Total partners’ capital | 1,928,718 |
| | 1,567,712 |
| |
| Total liabilities and partners’ capital | $ | 2,829,492 |
| | $ | 2,633,835 |
| |
| Equity: | | |
| | |
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| Common (80,581,758 units issued and outstanding at June 30, 2017 and December 31, 2016) | | 2,082,011 |
| | 2,008,510 |
|
| General partner (1,443,015 units issued and outstanding at June 30, 2017 and December 31, 2016) | | (6,983 | ) | | (14,956 | ) |
| Total equity | | 2,075,028 |
| | 1,993,554 |
|
| Total liabilities and equity | | $ | 3,219,642 |
| | $ | 3,075,840 |
|
The accompanying notes are an integral part of these consolidated financial statements.
EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Partners’ CapitalEquity (Unaudited) (1)
| | | | | | Partners’ Capital | | | Predecessor | | Limited Partners | | General | | |
| | Predecessor | | Limited Partners | | General | | | Equity | | Common | | Partner | | Total Equity |
| | Equity | | Common | | Subordinated | | Partner | | Total | |
| | (Thousands) | |
| Balance at January 1, 2015 | $ | 315,105 |
| | $ | 1,647,910 |
| | $ | (929,374 | ) | | $ | (27,497 | ) | | $ | 1,006,144 |
| |
| Net income | 11,106 |
| | 233,482 |
| | — |
| | 36,153 |
| | 280,741 |
| |
| Capital contributions | — |
| | 7,260 |
| | — |
| | 148 |
| | 7,408 |
| |
| Equity-based compensation plans | — |
| | 1,180 |
| | — |
| | 33 |
| | 1,213 |
| |
| Distributions to unitholders | — |
| | (113,527 | ) | | (10,057 | ) | | (26,282 | ) | | (149,866 | ) | |
Conversion of subordinated units to common units (2) | — |
| | (939,431 | ) | | 939,431 |
| | — |
| | — |
| |
| Net distributions to EQT | (23,866 | ) | | — |
| | — |
| | — |
| | (23,866 | ) | |
| Proceeds from issuance of common units, net of offering costs | — |
| | 758,812 |
| | — |
| | 1,919 |
| | 760,731 |
| |
| Elimination of net current and deferred tax liabilities | 84,446 |
| | — |
| | — |
| | — |
| | 84,446 |
| |
| NWV Gathering net assets from EQT | (386,791 | ) | | — |
| | — |
| | — |
| | (386,791 | ) | |
| Issuance of units | — |
| | 38,910 |
| | — |
| | 13,590 |
| | 52,500 |
| |
| Purchase price in excess of net assets from EQT | — |
| | (505,452 | ) | | — |
| | (33,440 | ) | | (538,892 | ) | |
| Balance at September 30, 2015 | $ | — |
| | $ | 1,129,144 |
| | $ | — |
| | $ | (35,376 | ) | | $ | 1,093,768 |
| |
| | | | | | | | | | | (Thousands) |
| Balance at January 1, 2016 | $ | — |
| | $ | 1,598,675 |
| | $ | — |
| | $ | (30,963 | ) | | $ | 1,567,712 |
| $ | 275,545 |
| | $ | 1,598,675 |
| | $ | (30,963 | ) | | $ | 1,843,257 |
|
| Net income | — |
| | 307,648 |
| | — |
| | 72,747 |
| | 380,395 |
| 14,767 |
| | 208,217 |
| | 45,610 |
| | 268,594 |
|
| Capital contributions | — |
| | 567 |
| | — |
| | 10 |
| | 577 |
| — |
| | 159 |
| | 3 |
| | 162 |
|
| Equity-based compensation plans | — |
| | 195 |
| | — |
| | — |
| | 195 |
| — |
| | 195 |
| | — |
| | 195 |
|
| Distributions to unitholders | — |
| | (175,729 | ) | | — |
| | (61,534 | ) | | (237,263 | ) | — |
| | (112,875 | ) | | (37,793 | ) | | (150,668 | ) |
| Net contributions from EQT | | 10,346 |
| | — |
| | — |
| | 10,346 |
|
| Proceeds from issuance of common units, net of offering costs | — |
| | 217,102 |
| | — |
| | — |
| | 217,102 |
| — |
| | 217,102 |
| | — |
| | 217,102 |
|
| Balance at September 30, 2016 | $ | — |
| | $ | 1,948,458 |
| | $ | — |
| | $ | (19,740 | ) | | $ | 1,928,718 |
| |
| Balance at June 30, 2016 | | $ | 300,658 |
| | $ | 1,911,473 |
| | $ | (23,143 | ) | | $ | 2,188,988 |
|
| | | | | | | | | |
| Balance at January 1, 2017 | | $ | — |
| | $ | 2,008,510 |
| | $ | (14,956 | ) | | $ | 1,993,554 |
|
| Net income | | — |
| | 212,532 |
| | 69,803 |
| | 282,335 |
|
| Capital contributions | | — |
| | 956 |
| | 18 |
| | 974 |
|
| Equity-based compensation plans | | — |
| | 225 |
| | — |
| | 225 |
|
| Distributions to unitholders | | — |
| | (140,212 | ) | | (61,848 | ) | | (202,060 | ) |
| Balance at June 30, 2017 | | $ | — |
| | $ | 2,082,011 |
| | $ | (6,983 | ) | | $ | 2,075,028 |
|
| |
| (1) | FinancialAs discussed in Note A, EQM’s consolidated financial statements for the ninesix months ended SeptemberJune 30, 2015 included2016 have been retrospectively recast to include the pre-acquisition results of NWVAVC, Rager and the Gathering forAssets, which were acquired by EQM effective on October 1, 2016, because the entire period presented as a result of the NWV Gathering Acquisition on March 17, 2015. See Note B.transaction was between entities under common control. |
| |
(2) | All subordinated units were converted to common units on a one-for-one basis on February 17, 2015. For purposes of calculating net income per common and subordinated unit, the conversion of the subordinated units is deemed to have occurred on January 1, 2015. |
The accompanying notes are an integral part of these consolidated financial statements.
EQT Midstream Partners,MIDSTREAM PARTNERS, LP and SubsidiariesAND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Organization
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.
Basis of Presentation
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 SeptemberJune 30, 20162017 and December 31, 2015,2016, the results of its operations for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 and its cash flows and partners' capitalequity for the ninesix months ended SeptemberJune 30, 20162017 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 ninesix months ended SeptemberJune 30, 20162017 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.
Recently Issued Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (ASU)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 to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 will supersede most of the existing revenue recognition requirements in GAAP when it becomes effective and is required to be adopted using one of two retrospective application methods. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers - Deferral of the Effective Datewhich approved a one year deferral of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application of these ASUs is permitted as of the original effective date for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.2017. EQM expects to adopt the ASUs using the modified retrospective method of adoption on January 1, 2018 and2018. During 2016, EQM completed an analysis of the impact of the standard on its broad contract types. As a result, EQM anticipates that this standard will not have a material impact on net income. EQM has made significant progress in performing a detailed review of the impact of the standard on each of its contracts, which it expects to complete in the third quarter of 2017. EQM is currently evaluating the impact thisof the standard will have on its financial statements and related disclosures.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation. The standard changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. EQM adopted this standard in the first quarter of 2016 which had no significant impact on reported results or disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The changes primarily affect the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This standard will eliminate the cost method of accounting for equity investments. The ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, with early adoption of certain provisions permitted. EQM is currently evaluating the impactwill adopt this standard in the first quarter of 2018 and does not expect that the adoption will have a material impact on its financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. 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. The primary effect of adopting the new standard will be to record assets and obligations for contracts currently recognized as operating leases. EQM is currently evaluatinghas completed a high level identification of agreements covered by this standard and will continue to evaluate the impact this standard will have on its financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. EQM is currently evaluating the impact this standard will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the presentation and classification of eight specific cash flow issues. The amendments in the ASU will be effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. EQM does not anticipate thatadopted this standard will have ain the second quarter of 2017 with no material impact on its financial statements and related disclosures.
| |
B. | AcquisitionsOctober 2016 Acquisition |
NWV Gathering Acquisition
On March 17, 2015, EQT contributed NWV Gathering toEffective October 1, 2016, 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.
MVP Interest Acquisition
On March 30, 2015, EQM assumedacquired from EQT 100% of the membershipoutstanding limited liability company interests of AVC and Rager as well as the Gathering Assets. The aggregate consideration paid by EQM to EQT of $275 million was funded by borrowings under the $750 Million Facility (as defined in MVP Holdco,Note G).
Prior to the ownerOctober 2016 Acquisition, EQM operated the AVC facilities as part of its transmission and storage system under a lease agreement with EQT. The lease was a capital lease under GAAP; therefore, revenues and expenses associated with the AVC facilities were included in EQM’s historical consolidated financial statements and the AVC facilities were depreciated over the lease term of 25 years. In conjunction with the October 2016 Acquisition, the lease agreement was terminated. As a result, EQM's recast of the MVP Interest inconsolidated financial statements included recasting depreciation expense recognized for the MVP Joint Venture,periods prior to the transaction to reflect the pipeline’s useful life of 40 years. The cumulative capital lease depreciation recorded for approximately $54.2 million. The cash payment represented EQM's reimbursementperiods prior to EQT for 100%the transaction was eliminated through equity at the time of the capital contributions madeacquisition and the consolidated financial statements now reflect the depreciation expense based on the 40 year useful life. This adjustment increased previously reported net income by EQT to$1.4 million and $3.4 million for the MVP Joint Venture as of Marchthree and six months ended June 30, 2015. See Note F.
Preferred Interest Acquisition
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.
2016, respectively.
| |
| C. | Partners' CapitalEquity and Net Income per Limited Partner Unit |
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 six months of 2017.
|
| | | | | | | | | | | |
| | Limited Partner Units | | General | | |
| | Common | | Subordinated | | Partner Units | | Total |
| Balance at January 1, 2015 | 43,347,452 |
| | 17,339,718 |
| | 1,238,514 |
| | 61,925,684 |
|
| Conversion of subordinated units to common units | 17,339,718 |
| | (17,339,718 | ) | | — |
| | — |
|
| 2014 EQM VDA issuance | 21,063 |
| | — |
| | 430 |
| | 21,493 |
|
| March 2015 equity offering | 9,487,500 |
| �� | — |
| | 25,255 |
| | 9,512,755 |
|
| NWV Gathering Acquisition consideration | 511,973 |
| | — |
| | 178,816 |
| | 690,789 |
|
| $750 million "At the Market" (ATM) Program | 1,162,475 |
| | — |
| | — |
| | 1,162,475 |
|
| November 2015 equity offering | 5,650,000 |
| | — |
| | — |
| | 5,650,000 |
|
| Balance at December 31, 2015 | 77,520,181 |
| | — |
| | 1,443,015 |
| | 78,963,196 |
|
| 2014 EQM VDA issuance | 19,796 |
| | — |
| | — |
| | 19,796 |
|
| EQM Total Return Program issuance | 92,472 |
| | — |
| | — |
| | 92,472 |
|
| $750 million ATM Program | 2,949,309 |
| | — |
| | — |
| | 2,949,309 |
|
| Balance at September 30, 2016 | 80,581,758 |
| | — |
| | 1,443,015 |
| | 82,024,773 |
|
|
| | | | | | | | |
| | Limited Partner Common Units | | General Partner Units | | Total |
| Balance at January 1, 2016 | 77,520,181 |
| | 1,443,015 |
| | 78,963,196 |
|
| 2014 EQM Value Driver Award Program issuance | 19,796 |
| | — |
| | 19,796 |
|
| EQM Total Return Program issuance | 92,472 |
| | — |
| | 92,472 |
|
| $750 Million ATM Program | 2,949,309 |
| | — |
| | 2,949,309 |
|
| Balance at December 31, 2016 | 80,581,758 |
| | 1,443,015 |
| | 82,024,773 |
|
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.
During the second quarter of 2016, EQM issued 2,949,309 common units at an average price per unit of $74.42 under the $750 million ATM Program. EQM received net proceeds of approximately $217.1 million after deducting commissions of approximately $2.2 million and other offering expenses of approximately $0.2 million. EQM used the net proceeds for general partnership purposes.
As of SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2016,2017, EQT owned 100% of the non-economic general partner interest and a 90.1% limited partner interest in EQGP.
Net Income per Limited Partner Unit
Unit. Net income attributable to NWVAVC, Rager and the Gathering Assets for periods prior to March 17, 2015October 1, 2016 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 17,48121,041 and 14,23317,308 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and 17,04620,506 and 13,90616,847 for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Potentially dilutive securities included in the calculation of diluted weighted average limited partner units outstanding totaled zero and 157,38641,095 for the three and six months ended SeptemberJune 30, 2016, and 2015, respectively, and 27,397 and 160,043 for the nine months ended September 30, 2016 and 2015, respectively.
| |
| D. | Financial Information by Business Segment |
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | (Thousands) | (Thousands) |
| Revenues from external customers (including affiliates): | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Gathering | $ | 93,406 |
| | $ | 78,883 |
| | $ | 281,003 |
| | $ | 230,806 |
| $ | 112,145 |
| | $ | 100,155 |
| | $ | 214,474 |
| | $ | 198,164 |
|
| Transmission and storage | 77,430 |
| | 69,906 |
| | 242,438 |
| | 217,407 |
| |
| Total | $ | 170,836 |
| | $ | 148,789 |
| | $ | 523,441 |
| | $ | 448,213 |
| |
| Transmission | | 86,821 |
| | 77,887 |
| | 187,918 |
| | 165,664 |
|
| Total operating revenues | | $ | 198,966 |
| | $ | 178,042 |
| | $ | 402,392 |
| | $ | 363,828 |
|
| | | | | | | | | | | | | | | |
| Operating income: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Gathering | $ | 69,497 |
| | $ | 57,863 |
| | $ | 209,410 |
| | $ | 168,804 |
| $ | 83,310 |
| | $ | 73,175 |
| | $ | 156,899 |
| | $ | 145,779 |
|
| Transmission and storage | 51,854 |
| | 45,048 |
| | 168,422 |
| | 148,255 |
| |
| Transmission | | 57,782 |
| | 55,854 |
| | 129,306 |
| | 120,370 |
|
| Total operating income | $ | 121,351 |
| | $ | 102,911 |
| | $ | 377,832 |
| | $ | 317,059 |
| $ | 141,092 |
| | $ | 129,029 |
| | $ | 286,205 |
| | $ | 266,149 |
|
| | | | | | | | | | | | | | | |
| Reconciliation of operating income to net income: | | | |
| | |
| | |
| | | |
| | |
| | |
|
| Other income | 12,879 |
| | 2,469 |
| | 29,874 |
| | 4,746 |
| 6,709 |
| | 10,409 |
| | 12,718 |
| | 18,011 |
|
| Interest expense | 7,662 |
| | 11,264 |
| | 27,311 |
| | 34,361 |
| |
| Net interest expense | | 8,662 |
| | 4,094 |
| | 16,588 |
| | 8,646 |
|
| Income tax expense | — |
| | — |
| | — |
| | 6,703 |
| — |
| | 3,485 |
| | — |
| | 6,920 |
|
| Net income | $ | 126,568 |
| | $ | 94,116 |
| | $ | 380,395 |
| | $ | 280,741 |
| $ | 139,139 |
| | $ | 131,859 |
| | $ | 282,335 |
| | $ | 268,594 |
|
| | | | September 30, 2016 | | December 31, 2015 | June 30, 2017 | | December 31, 2016 |
| | (Thousands) | (Thousands) |
| Segment assets: | |
| | |
| |
| | |
|
| Gathering | $ | 1,183,896 |
| | $ | 963,877 |
| $ | 1,382,076 |
| | $ | 1,292,713 |
|
| Transmission and storage | 1,351,757 |
| | 1,110,027 |
| |
| Transmission | | 1,441,607 |
| | 1,413,631 |
|
| Total operating segments | 2,535,653 |
| | 2,073,904 |
| 2,823,683 |
| | 2,706,344 |
|
| Headquarters, including cash | 293,839 |
| | 559,931 |
| 395,959 |
| | 369,496 |
|
| Total assets | $ | 2,829,492 |
| | $ | 2,633,835 |
| $ | 3,219,642 |
| | $ | 3,075,840 |
|
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | (Thousands) | (Thousands) |
| Depreciation and amortization: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Gathering | $ | 7,000 |
| | $ | 5,441 |
| | $ | 20,634 |
| | $ | 15,841 |
| $ | 9,555 |
| | $ | 7,594 |
| | $ | 18,415 |
| | $ | 14,857 |
|
| Transmission and storage | 8,704 |
| | 7,776 |
| | 25,659 |
| | 21,561 |
| |
| Transmission | | 11,845 |
| | 6,937 |
| | 23,532 |
| | 13,681 |
|
| Total | $ | 15,704 |
| | $ | 13,217 |
| | $ | 46,293 |
| | $ | 37,402 |
| $ | 21,400 |
| | $ | 14,531 |
| | $ | 41,947 |
| | $ | 28,538 |
|
| | | | | | | | | | | | | | | |
| Expenditures for segment assets: | | | | | | | | | | | | | | |
| Gathering | $ | 84,030 |
| | $ | 55,387 |
| | $ | 235,740 |
| | $ | 160,685 |
| $ | 53,708 |
| | $ | 86,278 |
| | $ | 102,546 |
| | $ | 159,365 |
|
| Transmission and storage | 66,615 |
| | 36,788 |
| | 221,731 |
| | 116,270 |
| |
| Transmission | | 29,978 |
| | 115,946 |
| | 51,367 |
| | 176,017 |
|
Total (1) | $ | 150,645 |
| | $ | 92,175 |
| | $ | 457,471 |
| | $ | 276,955 |
| $ | 83,686 |
| | $ | 202,224 |
| | $ | 153,913 |
| | $ | 335,382 |
|
| |
| (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 on the statements of consolidated cash flows until they are paid in a subsequent period. Accrued capital expenditures were approximately $45.4$31.2 million, $49.3$34.0 million and $18.3$26.7 million at SeptemberJune 30, 2017, March 31, 2017 and December 31, 2016, respectively. Accrued capital expenditures were approximately $50.7 million, $32.7 million and $24.1 million at June 30, 2016, June 30,March 31, 2016 and December 31, 2015, respectively. Accrued capital expenditures were approximately $23.5 million, $27.0 million and $51.1 million at September 30, 2015, June 30, 2015 and December 31, 2014, respectively. |
| |
| E. | Related Party Transactions |
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.
EQT terminated the EQT Corporation Retirement Plan for Employees (the Retirement Plan) effective December 31, 2014. On March 2, 2016, the IRS issued a favorable determination letter for the termination of the Retirement Plan. On June 28, 2016, EQT purchased annuities from and transferred the Retirement Plan assets and liabilities to American General Life Insurance Company. In the third quarter of 2016, EQM reimbursed EQT approximately $5.2 million for its proportionate share of such funding related to retirees of Equitrans, L.P. (Equitrans), an indirect wholly owned subsidiary of EQM and the owner of EQM's FERC-regulated transmission, storage and gathering system. The settlement charge is expected to be recoverable in FERC approved rates and thus was recorded as a regulatory asset that will be amortized for rate recovery purposes over a period of 16 years.
| |
| F. | InvestmentsInvestment in Unconsolidated EntitiesEntity |
MVP Joint Venture
Venture. 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 SeptemberJune 30, 2016.2017. The MVP Joint Venture has been determined to be a variable interest entity because the MVP Joint Ventureit 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. EQM accountedaccounts for the interest in the MVP InterestJoint Venture 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 $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 May 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 $18.3 million, of which $5.5 million was paid on July 13, 2017 and the remaining $12.8 million is expected to be paid on August 15, 2017. The capital contribution payable has been reflected on the consolidated balance sheet as of SeptemberJune 30, 20162017 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$5.1 million and $0.8$1.9 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $6.1$9.4 million and $1.1$3.4 million for the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively.
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 SeptemberJune 30, 2016,2017, 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
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 SeptemberJune 30, 2016,2017, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $251$352 million, which included the investment in unconsolidated entity balance on the consolidated balance sheet as of SeptemberJune 30, 20162017 and amounts which could have become due under the performance guarantee as of that date.
Preferred Interest
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 nine months ended September 30, 2016, EQM received cash distributions from EES of $2.8 million and $8.3 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 September 30, 2016 and December 31, 2015, the estimated fair value of EQM's Preferred Interest in EES was approximately $150 million and $140 million, respectively, and the carrying value of EQM's Preferred Interest in EES was $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 September 30, 2016, the carrying value represents EQM's maximum exposure to loss.
Concurrent with the October 2016 Acquisition, discussed in Note K, the operating agreement of EES was amended to include mandatory redemption of the Preferred Interest at the end of the preference period which is expected to be December 31, 2034. As a result of this amendment, EQM's investment in EES converted to a note receivable effective October 13, 2016. This conversion does not impact the carrying value of this instrument; however, future distributions from EES will be recorded partly as interest income and partly as a reduction in the note receivable.
| |
| G. | Credit Facility Borrowings |
$750 Million Facility.EQM has a $750 million credit facility that expires in February 2019 (the $750 Million Facility).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. EQM’s $750 Million Facility contains various provisions that, if not complied with, 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 under the $750 Million Facility 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 $750 Million 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). In July 2017, EQM entered into a commitment letter related to a proposed amendment and restatement of its unsecured credit facility (the EQM Revolver Amendment) which, among other matters, would extend the maturity date of the credit facility to five years from the closing of the EQM Revolver Amendment and increase the amount of the credit facility to $1 billion. EQM expects to close the EQM Revolver Amendment during the third quarter of 2017.
EQM had $91 million ofno borrowings outstanding on its $750 Million Facility as of SeptemberJune 30, 20162017 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 threesix months ended SeptemberJune 30, 2017. During the three and six months ended June 30, 2016, and 2015, respectively,the maximum amounts of EQM’s outstanding borrowings under the credit facility at any time were $128 million and $299 million, respectively, 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 wasbalances were approximately $34$33 million and $357$83 million, for the three months ended September 30, 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 on the credit facility borrowings at a weighted average annual interest rate of approximately 2.0% and 1.9% for the three and ninesix months ended SeptemberJune 30, 2016, respectively, and approximately 1.7% for the three and nine months ended September 30, 2015.2016.
On364-Day Facility. In October 26, 2016, EQM entered into a $500 million, 364-day, uncommitted revolving loan agreement with EQT (the 364-Day Facility). The 364-Day Facility will maturethat matures on October 25, 2017 and will automatically renew for successive 364-day periods unless EQT delivers a non-renewal notice at least 60 days prior to the then current maturity date. EQM may terminate the 364-Day Facility at any time by repaying in full the unpaid principal amount of all loans together with interest thereon. The 364-Day Facility is available for general partnership purposes and does not contain any covenants other than the obligation to pay accrued interestInterest accrues on outstanding borrowings. Interest will accrue on any outstanding borrowings at an interest rate equal to the rate then applicable to similar loans under the $750 Million Facility, or a successor revolving credit facility, less the sum of (i) the then applicable commitment fee under the $750 Million Facility and (ii) 10 basis points.
EQM had $40 million of borrowings outstanding on the 364-Day Facility as of June 30, 2017 and had no borrowings outstanding as of December 31, 2016. During the three and six months ended June 30, 2017, the maximum amount of EQM’s outstanding borrowings under the credit facility at any time was $100 million and the average daily balances were approximately $55 million and $40 million, respectively. For the three and six months ended June 30, 2017, interest was incurred at a weighted average annual interest rate of approximately 2.2% and 2.1%, respectively.
As of June 30, 2017, EQM was in compliance with all debt provisions and covenants.
| |
| H. | Fair Value Measurements |
The carrying valuevalues 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 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. As EQM's long-term debt is not actively traded, its fair value is a Level 2 fair value measurement estimated using a standard industry income approach model which utilizes a discount rate based on market rates for debt with similar remaining time to maturity and credit risk. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the estimated fair value of EQM's long-term debt was
approximately $493$1,020 million and $414$982 million, respectively, and the carrying value of EQM's long-term debt was approximately $494$987 million and $493$986 million, respectively. The fair value of EQM's long-term debtthe Preferred Interest is a Level 23 fair value measurement. See Note F formeasurement which is estimated using an income approach model utilizing a market-based discount rate. As of June 30, 2017 and December 31, 2016, the estimated fair value of EQM'sthe Preferred Interest in EES.was approximately $133 million and $132 million, respectively, and the carrying value of the Preferred Interest was approximately $121 million and $123 million, respectively.
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 OctoberJuly 25, 2016,2017, the Board of Directors of the EQM General Partner declared a cash distribution to EQM’s unitholders for the thirdsecond quarter of 20162017 of $0.815$0.935 per common unit. The cash distribution will be paid on NovemberAugust 14, 20162017 to unitholders of record including EQGP, at the close of business on NovemberAugust 4, 2016.2017. Based on the 80,581,758 EQM common units outstanding on OctoberJuly 27, 2016,2017, cash distributions to EQGP will be approximately $20.4 million related to its limited partner interest, $1.9 million related to its general partner interest and $34.2 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 thirdsecond quarter 20162017 distribution.
On October 13, 2016, EQM entered into a Purchase and Sale Agreement with EQT and certain of EQT's affiliates pursuant to which EQM acquired from EQT (i) 100% of the outstanding limited liability company interests of Allegheny Valley Connector, LLC (AVC) and Rager Mountain Storage Company LLC (Rager) and (ii) certain gathering assets located in southwestern Pennsylvania and West Virginia (the Gathering Assets) (collectively, the October 2016 Acquisition). The closing of the October 2016 Acquisition occurred on October 13, 2016 and was effective as of October 1, 2016. The aggregate consideration paid by EQM to EQT in connection with the October 2016 Acquisition was $275 million, which was funded with borrowings under the $750 Million Facility.
AVC, Rager and the Gathering Assets were businesses and the October 2016 Acquisition was a transaction between entities under common control. Therefore, EQM will record the acquired assets and liabilities at their carrying amounts to EQT on the effective date of the transaction, and the difference between EQT’s net carrying amount and the total consideration paid to EQT will be recorded as a capital transaction with EQT. EQM will recast its consolidated financial statements to reflect the October 2016 Acquisition as if the assets were owned for all periods presented beginning with its Annual Report on Form 10-K for the year ended December 31, 2016.
EQT Midstream Partners,MIDSTREAM PARTNERS, LP and SubsidiariesAND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
EQM's consolidated financial statements for all periods presentedhave been retrospectively recast to include the historicalpre-acquisition results of NWV Gathering, which was acquired on March 17, 2015, as NWV Gathering was a businessAVC, Rager and the transaction was between entities under common control.Gathering Assets. You should read the following discussion and analysis of financial condition and results of operations in conjunction with the consolidated financial statements, and the notes thereto, included elsewhere in this report.
CAUTIONARY STATEMENTS
Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, 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 storagerevenue 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, timing of regulatory approvals and expected interconnections with facilities and pipelinesanticipated in-service date of the MVP project; the ultimate terms, partnersexpansion projects in EQM's areas of operations and structure of the MVP Joint Venture; natural gas production growth in EQM’s operating areas for EQT and third parties;that would provide access to new markets; asset acquisitions, including EQM’s ability to complete asset acquisitions;acquisitions from EQT or third parties; the expected benefits to EQM of EQT's proposed acquisition of Rice Energy Inc. (Rice), including whether EQT will complete the proposed acquisition and, if so, whether it will sell Rice's remaining midstream assets to EQM; 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.
EXECUTIVE OVERVIEW
For the three months ended SeptemberJune 30, 2016,2017, EQM reported net income of $126.6$139.1 million compared to $94.1$131.9 million for the three months ended SeptemberJune 30, 2015.2016. 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 wereincome taxes, partly offset by an increase in operating expenses, consistent with the growth of the business.higher net interest expense and lower other income.
For the ninesix months ended SeptemberJune 30, 2016,2017, EQM reported net income of $380.4$282.3 million compared to $280.7$268.6 million for the ninesix months ended SeptemberJune 30, 2015.2016. The increase primarily resulted from higher revenues from both gathering and transmission and storagegathering, which were primarily driven mainly by third party and affiliate production development in the Marcellus Shale, higher other income and lower interest and income tax expense. These items weretaxes, partly offset by an increase in operating expenses, consistent with the growth of the business.higher net interest expense and lower other income.
EQM declared a cash distribution to its unitholders of $0.815$0.935 per unit on OctoberJuly 25, 2016,2017, which was 4%5% higher than the first quarter 2017 distribution of $0.89 per unit and 20% higher than the second quarter 2016 distribution of $0.78 per unit and 21% higher than the third quarter 2015 distribution of $0.675 per unit.
Business Segment Results of Operations
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.
GATHERING
GATHERING RESULTS OF OPERATIONS | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2016 | | 2015 | | % Change | | 2016 | | 2015 | | % Change | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| FINANCIAL DATA | (Thousands, other than per day amounts) | (Thousands, other than per day amounts) |
| Firm reservation fee revenues | $ | 80,735 |
| | $ | 64,091 |
| | 26.0 |
| | $ | 240,652 |
| | $ | 182,440 |
| | 31.9 |
| $ | 101,858 |
| | $ | 83,560 |
| | 21.9 |
| | $ | 196,129 |
| | $ | 165,567 |
| | 18.5 |
|
| Volumetric based fee revenues: | | | | | | | | | | | | | | | | | | | | | | |
Usage fees under firm contracts(1) | 10,024 |
| | 8,562 |
| | 17.1 |
| | 31,516 |
| | 25,176 |
| | 25.2 |
| 6,479 |
| | 11,039 |
| | (41.3 | ) | | 11,300 |
| | 21,491 |
| | (47.4 | ) |
| Usage fees under interruptible contracts | 2,647 |
| | 6,230 |
| | (57.5 | ) | | 8,835 |
| | 23,190 |
| | (61.9 | ) | 3,808 |
| | 5,556 |
| | (31.5 | ) | | 7,045 |
| | 11,106 |
| | (36.6 | ) |
| Total volumetric based fee revenues | 12,671 |
| | 14,792 |
| | (14.3 | ) | | 40,351 |
| | 48,366 |
| | (16.6 | ) | 10,287 |
| | 16,595 |
| | (38.0 | ) | | 18,345 |
| | 32,597 |
| | (43.7 | ) |
| Total operating revenues | 93,406 |
| | 78,883 |
| | 18.4 |
| | 281,003 |
| | 230,806 |
| | 21.7 |
| 112,145 |
| | 100,155 |
| | 12.0 |
| | 214,474 |
| | 198,164 |
| | 8.2 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
| Operating and maintenance | 9,180 |
| | 9,546 |
| | (3.8 | ) | | 26,259 |
| | 26,563 |
| | (1.1 | ) | 10,408 |
| | 9,123 |
| | 14.1 |
| | 20,863 |
| | 18,068 |
| | 15.5 |
|
| Selling, general and administrative | 7,729 |
| | 6,033 |
| | 28.1 |
| | 24,700 |
| | 19,598 |
| | 26.0 |
| 8,872 |
| | 10,263 |
| | (13.6 | ) | | 18,297 |
| | 19,460 |
| | (6.0 | ) |
| Depreciation and amortization | 7,000 |
| | 5,441 |
| | 28.7 |
| | 20,634 |
| | 15,841 |
| | 30.3 |
| 9,555 |
| | 7,594 |
| | 25.8 |
| | 18,415 |
| | 14,857 |
| | 23.9 |
|
| Total operating expenses | 23,909 |
| | 21,020 |
| | 13.7 |
| | 71,593 |
| | 62,002 |
| | 15.5 |
| 28,835 |
| | 26,980 |
| | 6.9 |
| | 57,575 |
| | 52,385 |
| | 9.9 |
|
| Operating income | $ | 69,497 |
| | $ | 57,863 |
| | 20.1 |
| | $ | 209,410 |
| | $ | 168,804 |
| | 24.1 |
| $ | 83,310 |
| | $ | 73,175 |
| | 13.9 |
| | $ | 156,899 |
| | $ | 145,779 |
| | 7.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| OPERATIONAL DATA | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
| Gathering volumes (BBtu per day) | | | | | | | | | | | | |
| Firm reservation | 1,523 |
| | 1,120 |
| | 36.0 |
| | 1,463 |
| | 1,059 |
| | 38.1 |
| |
| Gathered volumes (BBtu per day) | | | | | | | | | | | | |
| Firm capacity reservation | | 1,780 |
| | 1,535 |
| | 16.0 |
| | 1,754 |
| | 1,478 |
| | 18.7 |
|
Volumetric based services(2) | 342 |
| | 386 |
| | (11.4 | ) | | 359 |
| | 409 |
| | (12.2 | ) | 281 |
| | 462 |
| | (39.2 | ) | | 253 |
| | 469 |
| | (46.1 | ) |
| Total gathered volumes | 1,865 |
| | 1,506 |
| | 23.8 |
| | 1,822 |
| | 1,468 |
| | 24.1 |
| 2,061 |
| | 1,997 |
| | 3.2 |
| | 2,007 |
| | 1,947 |
| | 3.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | $ | 84,030 |
| | $ | 55,387 |
| | 51.7 |
| | $ | 235,740 |
| | $ | 160,685 |
| | 46.7 |
| $ | 53,708 |
| | $ | 86,278 |
| | (37.8 | ) | | $ | 102,546 |
| | $ | 159,365 |
| | (35.7 | ) |
| |
| (1) | Includes fees on volumes gathered in excess of firm contracted capacity. |
| |
| (2) | Includes volumes gathered under interruptible contracts and volumes gathered in excess of firm contracted capacity. |
Three Months Ended SeptemberJune 30, 20162017 Compared to Three Months Ended SeptemberJune 30, 20152016
Gathering revenues increased by $14.5$12.0 million primarily as a result of higher affiliate and third party volumes gathered for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 2015,2016 driven by third party and affiliate production development in the Marcellus Shale. EQM increased firm reservation fee revenues primarily as a result of affiliates and third parties contracting for additional firm gathering capacity on various affiliate wellhead gathering expansion projects and the Range Resources Corporation (Range Resources) Header Pipeline project. The decrease in usage fees under firm contracts which resultedwas due to lower affiliate volumes in increasedexcess of firm gathering capacity of approximatelycontracted
300 MMcf per day following the completion of the NWV Gathering and Jupiter expansion projects in the fourth quarter of 2015.capacity. The decrease in usage fees under interruptible contracts was primarily due to thesethe additional contracts for firm capacity.
Operating expenses increased by $2.9$1.9 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 2015. Selling, general2016. Operating and administrativemaintenance expense increased primarily as a result of higher repairs and maintenance expenses associated with increased throughput. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and personnel costs from EQT.corporate acquisition projects. The increase in depreciation and amortization expense resulted from additional assets placed in-service including those associated with the Range Resources Header Pipeline project and the NWV Gathering and Jupiter expansion projects.project.
NineSix Months Ended SeptemberJune 30, 20162017 Compared to NineSix Months Ended SeptemberJune 30, 20152016
Gathering revenues increased by $50.2$16.3 million primarily as a result of higher affiliate and third party volumes gathered for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 2015,2016 driven by third party and affiliate production development in the Marcellus Shale. EQM increased firm reservation fee revenues primarily as a result of affiliates and third parties contracting for additional firm gathering capacity on various affiliate wellhead gathering expansion projects and the Range Resources Header Pipeline project. The decrease in usage fees under firm contracts which resultedwas due to lower affiliate volumes in aexcess of firm contracted capacity. The decrease in usage fees under interruptible contracts.contracts was primarily due to the additional contracts for firm capacity.
Operating expenses increased by $9.6$5.2 million for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 2015. Selling, general2016. Operating and administrativemaintenance expense increased primarily as a result of higher personnel costs. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and personnelcorporate acquisition projects partly offset by increases in other miscellaneous administrative costs from EQT.of $1.3 million. The increase in depreciation and amortization expense resulted from additional assets placed in-service including those associated with the Range Resources Header Pipeline project and the NWV Gathering and Jupiter expansion projects.project.
TRANSMISSION AND STORAGE
Operating revenues and operating expenses related to the Allegheny Valley Connector (AVC) facilities did 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 were paid to EQT as the monthly lease payment. All revenues related to the AVC facilities are from third parties.
RESULTS OF OPERATIONS
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2016 | | 2015 | | % Change | | 2016 | | 2015 | | % Change | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| FINANCIAL DATA | (Thousands, other than per day amounts) | (Thousands, other than per day amounts) |
| Firm reservation fee revenues | $ | 59,610 |
| | $ | 57,238 |
| | 4.1 |
| | $ | 190,003 |
| | $ | 182,092 |
| | 4.3 |
| $ | 79,512 |
| | $ | 60,284 |
| | 31.9 |
| | $ | 171,786 |
| | $ | 130,393 |
| | 31.7 |
|
| Volumetric based fee revenues: | | | | | | | | | | | | | | | | | | | | | | |
Usage fees under firm contracts(1) | 14,600 |
| | 11,200 |
| | 30.4 |
| | 42,274 |
| | 30,217 |
| | 39.9 |
| 3,503 |
| | 14,245 |
| | (75.4 | ) | | 6,360 |
| | 27,674 |
| | (77.0 | ) |
| Usage fees under interruptible contracts | 3,220 |
| | 1,468 |
| | 119.3 |
| | 10,161 |
| | 5,098 |
| | 99.3 |
| 3,806 |
| | 3,358 |
| | 13.3 |
| | 9,772 |
| | 7,597 |
| | 28.6 |
|
| Total volumetric based fee revenues | 17,820 |
| | 12,668 |
| | 40.7 |
| | 52,435 |
| | 35,315 |
| | 48.5 |
| 7,309 |
| | 17,603 |
| | (58.5 | ) | | 16,132 |
| | 35,271 |
| | (54.3 | ) |
| Total operating revenues | 77,430 |
| | 69,906 |
| | 10.8 |
| | 242,438 |
| | 217,407 |
| | 11.5 |
| 86,821 |
| | 77,887 |
| | 11.5 |
| | 187,918 |
| | 165,664 |
| | 13.4 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
| Operating and maintenance | 8,489 |
| | 8,910 |
| | (4.7 | ) | | 23,862 |
| | 23,604 |
| | 1.1 |
| 10,173 |
| | 7,230 |
| | 40.7 |
| | 20,004 |
| | 15,421 |
| | 29.7 |
|
| Selling, general and administrative | 8,383 |
| | 8,172 |
| | 2.6 |
| | 24,495 |
| | 23,987 |
| | 2.1 |
| 7,021 |
| | 7,866 |
| | (10.7 | ) | | 15,076 |
| | 16,192 |
| | (6.9 | ) |
| Depreciation and amortization | 8,704 |
| | 7,776 |
| | 11.9 |
| | 25,659 |
| | 21,561 |
| | 19.0 |
| 11,845 |
| | 6,937 |
| | 70.8 |
| | 23,532 |
| | 13,681 |
| | 72.0 |
|
| Total operating expenses | 25,576 |
| | 24,858 |
| | 2.9 |
| | 74,016 |
| | 69,152 |
| | 7.0 |
| 29,039 |
| | 22,033 |
| | 31.8 |
| | 58,612 |
| | 45,294 |
| | 29.4 |
|
| Operating income | $ | 51,854 |
| | $ | 45,048 |
| | 15.1 |
| | $ | 168,422 |
| | $ | 148,255 |
| | 13.6 |
| $ | 57,782 |
| | $ | 55,854 |
| | 3.5 |
| | $ | 129,306 |
| | $ | 120,370 |
| | 7.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| OPERATIONAL DATA | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
| Transmission pipeline throughput (BBtu per day) | | | | | | | | | | | | | | | | | | | | | | |
| Firm capacity reservation | 1,440 |
| | 1,751 |
| | (17.8 | ) | | 1,515 |
| | 1,866 |
| | (18.8 | ) | 2,218 |
| | 1,486 |
| | 49.3 |
| | 2,171 |
| | 1,554 |
| | 39.7 |
|
Volumetric based services(2) | 610 |
| | 300 |
| | 103.3 |
| | 556 |
| | 257 |
| | 116.3 |
| 21 |
| | 570 |
| | (96.3 | ) | | 24 |
| | 528 |
| | (95.5 | ) |
| Total transmission pipeline throughput | 2,050 |
| | 2,051 |
| | — |
| | 2,071 |
| | 2,123 |
| | (2.4 | ) | 2,239 |
| | 2,056 |
| | 8.9 |
| | 2,195 |
| | 2,082 |
| | 5.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Average contracted firm transmission reservation commitments (BBtu per day) | 2,365 |
| | 2,390 |
| | (1.0 | ) | | 2,591 |
| | 2,567 |
| | 0.9 |
| 3,341 |
| | 2,401 |
| | 39.2 |
| | 3,542 |
| | 2,703 |
| | 31.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | $ | 66,615 |
| | $ | 36,788 |
| | 81.1 |
| | $ | 221,731 |
| | $ | 116,270 |
| | 90.7 |
| $ | 29,978 |
| | $ | 115,946 |
| | (74.1 | ) | | $ | 51,367 |
| | $ | 176,017 |
| | (70.8 | ) |
| |
| (1) | Includes commodity charges and fees on all volumes transported under firm contracts as well as transmission fees on volumes in excess of firm contracted capacity. |
| |
| (2) | Includes volumes transported under interruptible contracts and volumes transported in excess of firm contracted capacity. |
Three Months Ended SeptemberJune 30, 20162017 Compared to Three Months Ended SeptemberJune 30, 20152016
Transmission and storage revenues increased by $7.5$8.9 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 2015. This was driven by higher2016. Firm reservation fee revenues increased due to affiliates contracting for additional firm capacity on the Ohio Valley Connector (OVC). The firm capacity on the OVC resulted in lower affiliate usage fees under firm contracts as a result of an increase in affiliate volumes in excess of firm capacity associated withcontracts.
Operating expenses increased production development in the Marcellus Shale, partly offset by lower usage fees from third party producers which is reflected in reduced firm capacity reservation throughput$7.0 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 2015. This reduction did not have2016. The increases in operating and maintenance expense and depreciation and amortization expense were the result of the OVC project placed in-service in the fourth quarter of 2016. Operating and maintenance expense increased primarily due to property taxes on the OVC. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a significant impact on firm reservation fee revenues.result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and corporate acquisition projects.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Transmission and storage revenues increased by $22.3 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Firm reservation fee revenues increased due to affiliates and third parties contracting for additional firm capacity, primarily on the OVC, as a result ofwell as higher contractual rates on existing contracts in the current year. UsageThe firm capacity on the OVC resulted in lower affiliate usage fees under interruptible contracts for the three months ended September 30, 2016 increased as a result of higher affiliate and third party volumes transported on an interruptible basis.firm contracts.
Operating expenses increased by $0.7$13.3 million for the threesix months ended SeptemberJune 30, 20162017 compared to the threesix months ended SeptemberJune 30, 2015 as a result of higher depreciation2016. Operating and amortizationmaintenance expense primarily related to the increased investment in the AVC facilities.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Transmission and storage revenues increased by $25.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Higher usage fees under firm contracts were driven by an increase in affiliate volumes in excess of firm capacity associated with increased production development in the Marcellus Shale, partly offset by lower usage fees from third party producers which is reflected in reduced firm capacity reservation throughput for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These volumes also decreased as a result of warmer weather during the first quarter of 2016. This decrease in transported volumes did not have a significant impact on firm reservation fee revenues. Firm reservation fee revenues increased as a result of higher contractual rates on existing contracts in the current year. Usage fees under interruptible contracts for the nine months ended September 30, 2016 increased as a result of higher affiliate and third party volumes transported on an interruptible basis.
Operating expenses increased by $4.9 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily as a result of property taxes on the OVC and higher depreciationpersonnel costs. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and corporate acquisition projects. Depreciation and amortization expense related toincreased primarily as a result of the increased investmentOVC project placed in-service in the AVC facilities and additional assets placed in-service.fourth quarter of 2016.
Other Income Statement Items
Other income increaseddecreased by $10.4$3.7 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 20152016 primarily driven by increaseddecreased AFUDC - equity of $5.7$4.2 million mainly attributable to increased spending onassociated with the OVC project placed in-service in the fourth quarter of 2016 and distributions received from EES of $2.8 million for the three months ended June 30, 2016 which beganwere recorded as other income in January 2016, andpartly offset by higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP. Other income increaseddecreased by $25.1$5.3 million for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 20152016 primarily driven by increaseddistributions from EES of $5.5 million for the six months ended June 30, 2016 which were recorded as other income in 2016 and decreased AFUDC - equity of $11.5$5.4 million mainly attributable to increased spending onassociated with the OVC project distributions received from EESplaced in-service in the fourth quarter of $8.3 million and2016, partly offset by higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP.
InterestNet interest expense decreasedincreased by $3.6$4.6 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 2015,2016 primarily driven by higher capitalized$5.2 million of interest and AFUDC -incurred on EQM's long-term debt associated with increased spending on regulated projects of $1.6 million, decreased interest expense of $1.3 million on lower credit facility borrowingsissued in November 2016 and lower capital lease interest expense. Interest expense decreased by $7.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily driven by higher capitalized interest and AFUDC - debt of $3.2$0.8 million associated with increaseddecreased spending on regulated projects, lower capital leasepartly offset by $1.7 million of interest income recorded on distributions from EES in 2017. Net interest expense increased by $7.9 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily driven by $10.3 million of $2.1 millioninterest incurred on EQM's long-term debt issued in November 2016 and decreasedlower capitalized interest expense on lower credit facility borrowings. As a result of the OVC beginning service on October 1, 2016,and AFUDC - debt will substantially decrease in the fourth quarter of 2016.
Concurrent$0.9 million associated with the October 2016 Acquisition, discussed in Note K, the operating agreementdecreased spending on regulated projects, partly offset by $3.4 million of EES was amended to include mandatory redemption of the Preferred Interest at the end of the preference period which is expected to be December 31, 2034. As a result of this amendment, EQM's investment in EES converted to a note receivable effective October 13, 2016. This conversion does not impact the carrying value of this instrument, however, futureinterest income recorded on distributions from EES will be recorded partly as interest income and partly as a reduction in the note receivable. This change will decrease the amount of other income2017.
recognized in future periods and increase interest income. It will have no impact on expected cash flows during the preference period.
EQM is not subjectSee Note I 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 for discussion of EQM were 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.expense.
See “Investing Activities” and “Capital Requirements” in the “Capital Resources and Liquidity” section below for a discussion of capital expenditures.
Non-GAAP Financial Measures
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’s operating performance as compared to other publicly traded partnerships in the midstream energy industry without regard to historical cost basis or, in the case of adjusted EBITDA, financing methods;
the ability of EQM’s assets to generate sufficient cash flow to make distributions to EQM’s unitholders;
EQM’s ability to incur and service debt and fund capital expenditures; and
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
EQM believes that adjusted EBITDA and distributable cash flow provide useful information to investors in assessing its financial condition and results of operations. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income 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 EQMit plans to distribute.
Reconciliation of Non-GAAP Financial Measures
The following table presents a reconciliation of theEQM's non-GAAP financial measures of adjusted EBITDA and distributable cash flow with the most directly comparable EQM GAAP financial measures of net income and net cash provided by operating activities as derived from EQM's Quarterly Reports on Form 10-Q for the quarters ended September 30, 2016 and June 30, 2016.activities. | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | (Thousands) | (Thousands) |
| Net income | $ | 126,568 |
| | $ | 94,116 |
| | $ | 380,395 |
| | $ | 280,741 |
| $ | 139,139 |
| | $ | 131,859 |
| | $ | 282,335 |
| | $ | 268,594 |
|
| Add: | | | | | | | | | | | | | | |
| Interest expense | 7,662 |
| | 11,264 |
| | 27,311 |
| | 34,361 |
| |
| Net interest expense | | 8,662 |
| | 4,094 |
| | 16,588 |
| | 8,646 |
|
| Depreciation and amortization expense | 15,704 |
| | 13,217 |
| | 46,293 |
| | 37,402 |
| 21,400 |
| | 14,531 |
| | 41,947 |
| | 28,538 |
|
| Income tax expense | — |
| | — |
| | — |
| | 6,703 |
| — |
| | 3,485 |
| | — |
| | 6,920 |
|
| Preferred Interest payments received post conversion | | 2,746 |
| | — |
| | 5,492 |
| | — |
|
| Non-cash long-term compensation expense | — |
| | 328 |
| | 195 |
| | 1,133 |
| — |
| | — |
| | 225 |
| | 195 |
|
| Less: | | | | | | | | | | | | | | |
| Equity income | (2,700 | ) | | (753 | ) | | (6,139 | ) | | (1,147 | ) | (5,111 | ) | | (1,850 | ) | | (9,388 | ) | | (3,439 | ) |
| AFUDC – equity | (7,412 | ) | | (1,716 | ) | | (15,126 | ) | | (3,599 | ) | (1,598 | ) | | (5,793 | ) | | (3,297 | ) | | (8,730 | ) |
Capital lease payments for AVC (1) | (3,786 | ) | | (3,078 | ) | | (17,186 | ) | | (15,349 | ) | |
Adjusted EBITDA attributable to NWV Gathering prior to acquisition (2) | — |
| | — |
| | — |
| | (19,841 | ) | |
Pre-acquisition capital lease payments for AVC (1) | | — |
| | (4,036 | ) | | — |
| | (13,400 | ) |
Adjusted EBITDA attributable to the October 2016 Acquisition prior to acquisition (2) | | — |
| | (4,154 | ) | | — |
| | (7,617 | ) |
| Adjusted EBITDA | $ | 136,036 |
| | $ | 113,378 |
| | $ | 415,743 |
| | $ | 320,404 |
| $ | 165,238 |
| | $ | 138,136 |
| | $ | 333,902 |
| | $ | 279,707 |
|
| Less: | | | | | | | | | | | | | | |
| Interest expense excluding capital lease interest | (2,926 | ) | | (5,697 | ) | | (11,979 | ) | | (16,971 | ) | |
Capitalized interest and AFUDC - debt (3) | (3,171 | ) | | — |
| | (6,307 | ) | | — |
| |
Ongoing maintenance capital expenditures net of expected reimbursements (4) | (4,230 | ) | | (5,902 | ) | | (9,360 | ) | | (8,827 | ) | |
| Net interest expense excluding interest income on the Preferred Interest | | (10,374 | ) | | (4,094 | ) | | (20,026 | ) | | (8,645 | ) |
| Capitalized interest and AFUDC – debt | | (1,008 | ) | | (1,808 | ) | | (2,608 | ) | | (3,544 | ) |
Ongoing maintenance capital expenditures net of expected reimbursements (3) | | (3,462 | ) | | (3,161 | ) | | (6,070 | ) | | (5,130 | ) |
| Distributable cash flow | $ | 125,709 |
| | $ | 101,779 |
| | $ | 388,097 |
| | $ | 294,606 |
| $ | 150,394 |
| | $ | 129,073 |
| | $ | 305,198 |
| | $ | 262,388 |
|
| | | | | | | | | | | | | | | |
| Net cash provided by operating activities | $ | 101,673 |
| | $ | 80,761 |
| | $ | 370,353 |
| | $ | 319,863 |
| $ | 158,883 |
| | $ | 160,046 |
| | $ | 320,305 |
| | $ | 276,373 |
|
| Adjustments: | | | | | | | | | | | | | | |
Capital lease payments for AVC (1) | (3,786 | ) | | (3,078 | ) | | (17,186 | ) | | (15,349 | ) | |
| Capital lease interest expense | 4,736 |
| | 5,567 |
| | 15,332 |
| | 17,390 |
| |
Capitalized interest and AFUDC - debt (3) | (3,171 | ) | | — |
| | (6,307 | ) | | — |
| |
Ongoing maintenance capital expenditures, net of expected reimbursements (4) | (4,230 | ) | | (5,902 | ) | | (9,360 | ) | | (8,827 | ) | |
| Current tax expense (benefit) | — |
| | — |
| | — |
| | 3,705 |
| |
Adjusted EBITDA attributable to NWV Gathering prior to acquisition (2) | — |
| | — |
| | — |
| | (19,841 | ) | |
Pre-acquisition capital lease payments for AVC (1) | | — |
| | (4,036 | ) | | — |
| | (13,400 | ) |
| Capitalized interest and AFUDC – debt | | (1,008 | ) | | (1,808 | ) | | (2,608 | ) | | (3,544 | ) |
| Principal payments received on the Preferred Interest | | 1,034 |
| | — |
| | 2,054 |
| | — |
|
Ongoing maintenance capital expenditures net of expected reimbursements (3) | | (3,462 | ) | | (3,161 | ) | | (6,070 | ) | | (5,130 | ) |
| Current tax expense | | — |
| | 463 |
| | — |
| | 923 |
|
Adjusted EBITDA attributable to the October 2016 Acquisition prior to acquisition (2) | | — |
| | (4,154 | ) | | — |
| | (7,617 | ) |
| Other, including changes in working capital | 30,487 |
| | 24,431 |
| | 35,265 |
| | (2,335 | ) | (5,053 | ) | | (18,277 | ) | | (8,483 | ) | | 14,783 |
|
| Distributable cash flow | $ | 125,709 |
| | $ | 101,779 |
| | $ | 388,097 |
| | $ | 294,606 |
| $ | 150,394 |
| | $ | 129,073 |
| | $ | 305,198 |
| | $ | 262,388 |
|
| |
| (1) | Reflects capital lease payments due under the lease. These lease payments arewere generally made monthly on a one month lag.lag prior to the October 2016 Acquisition. |
| |
| (2) | Adjusted EBITDA attributable to NWV Gatheringthe October 2016 Acquisition prior to acquisition for the periods presented was excluded from EQM’s adjusted EBITDA calculations as these amounts were generated by NWVAVC, Rager and the Gathering Assets prior to EQM’s acquisition;acquisition by EQM; therefore, they werethe amounts could not amounts that could have been distributed to EQM’s unitholders. Adjusted EBITDA attributable to NWV Gatheringthe October 2016 Acquisition prior to acquisition for the ninethree and six months ended SeptemberJune 30, 20152016 was calculated as net income of $11.1$0.5 million and $0.7 million, respectively, plus depreciation and amortization expense of $2.0$0.8 million and $1.4 million, respectively, plus income tax expense of $6.7 million.$3.5 million and $6.9 million, respectively, less interest income of $0.1 million and $0.4 million, respectively, less AFUDC - equity of $0.5 million and $1.0 million, respectively. |
| |
(3) | As a result of the increased significance of capitalized interest and AFUDC - debt in 2016, this line item was added as an adjustment to the calculation of distributable cash flow for the three and nine months ended September 30, 2016. Had distributable cash flow been calculated on a consistent basis, it would have been $1.5 million and $3.1 million lower for the three and nine months ended September 30, 2015, respectively, than the numbers presented herein. |
Adjusted EBITDA attributable to AVC, excluding income tax expense and AFUDC - equity, was previously included in EQM's results as a result of the capital lease and was eliminated from adjusted EBITDA by subtracting the capital lease payment; therefore, there is no adjustment for AVC's adjusted EBITDA prior to acquisition other than the capital lease payments, income tax expense and AFUDC - equity. Net income for AVC including decreased depreciation expense related to the 40 year useful life of the pipeline was $6.6 million and $14.0 million for the three and six months ended June 30, 2016, respectively (see Note B to the consolidated financial statements).
| |
(4)(3) | Ongoing maintenance capital expenditures net of expected reimbursements excludes ongoing maintenance that EQM expects to be reimbursed or that was reimbursed by EQT under the terms of EQM's omnibus agreement of $0.4$1.0 million and $5.7$0.2 million for the threesix months ended SeptemberJune 30, 20162017 and 2015, respectively, and $0.6 million and $7.4 million for the nine months ended September 30, 2016, and 2015, respectively. Additionally, it excludes ongoing maintenance attributable to NWVAVC, Rager and the Gathering Assets prior to acquisition of $0.3$2.1 million and $5.0 million for the ninethree and six months ended SeptemberJune 30, 2015.2016, respectively. |
See "Executive Overview" above for a discussion of EQM's net income, the GAAP financial measure most directly comparable to adjusted EBITDA. EQM's adjusted EBITDA increased by $22.7$27.1 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 20152016 and $95.3$54.2 million for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 20152016 primarily as a result of higher operating income on increased revenues driven by production development in the Marcellus Shale and the NWV GatheringOctober 2016 Acquisition, which resulted in EBITDA subsequent to the transaction being reflected in adjusted EBITDA, and distributions from EES.including the elimination of the AVC lease payment.
Net cash provided by operating activities, the GAAP financial measure most directly comparable to distributable cash flow, increased by $50.5$43.9 million for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 20152016 as discussed in the “Capital Resources and Liquidity" section below.Liquidity." Distributable cash flow increased by $23.9$21.3 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 20152016 and $93.5$42.8 million for the ninesix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 20152016 mainly attributable to the increase in EQM's adjusted EBITDA.EBITDA partly offset by increased net interest expense.
Outlook
EQM’s principal business objective is to increase the quarterly cash distributions that it pays to its unitholders over time while ensuring the ongoing growth of its business. EQM believes that it is well positioned to achieve growth based on the combination of its relationship with EQT and its strategically located assets, which cover portions of the Marcellus, Upper Devonian and Utica Shales that lack substantial natural gas pipeline infrastructure. EQM believes it has a competitive advantage in pursuing economically attractive organic expansion projects in its areas of operations, which EQM believes will be a key driver of growth in the future. EQM is also currently pursuing organic growth projects that are expected to provide access to markets in the Midwest, Gulf Coast and Southeast regions. Additionally, EQM may acquire additional midstream assets from EQT or pursue asset acquisitions from third parties or, if EQT were to purchase assets or companies that contain midstream assets, EQT may make those assets available to EQM.parties. Should EQT choose to pursue midstream asset sales, it is under no contractual obligation to offer the assets to EQM.
EQM expects that the following expansion projects will allow it to capitalize on drilling activity by EQT and third party producers:
Ohio Valley ConnectorAffiliate Wellhead Gathering Expansion. The OVC, which began service on October 1, 2016, is a 37-mile pipeline that extends EQM's transmission and storage system from northern West Virginia to Clarington, Ohio, at which point it interconnects with the Rockies Express Pipeline and may interconnect with other pipelines and liquidity points. The OVC will provide approximately 850 BBtu per day of transmission capacity with an aggregate compression of approximately 38,000 horsepower at an estimated cost of $360 million, excluding AFUDC, of which $220 million is expected to be spent in 2016. EQT has entered into a 20-year transportation service agreement with EQM for a total of 650 BBtu per day of firm transmission capacity on the OVC.
Range Resources Header Pipeline Project. EQM is constructing a natural gas header pipeline for a subsidiary of Range Resources Corporation (Range Resources) in southwestern Pennsylvania to support Marcellus development. The pipeline is expected to cost approximately $250 million and is contracted to provide 600 MMcf per day of firm capacity backed by a ten-year firm capacity reservation commitment. EQM plans to complete the project in two phases. On October 1, 2016, phase one was placed into service providing 75 MMcf per day of firm capacity. Phase two is expected to be completed during the first half of 2017. EQM expects to invest approximately $180$200 million on the project in 2016.
Gathering Expansion Projects. EQM expects to invest a total of approximately $370 million, of which approximately $90 million is expected to be spent during 2016, related to expansion in the NWV Gathering development area. These expenditures are part of a fully subscribed expansion project expected to raise total firm gathering capacity in the
NWV Gathering development area to 640 MMcf per day by mid-year 2017. EQM also plans to invest approximately $20$230 million in the Jupiter development area to install a2017 on gathering pipeline that will extend the gathering system to include additionalexpansion projects supported by EQT Production development areas in Greene County, Pennsylvania. As describedthe Marcellus. EQM plans to install approximately 30 miles of gathering pipeline and 10,000 horsepower compression in Note K, EQM acquired certainits gathering assets located insystems across northern West Virginia and southwestern Pennsylvania and West Virginia from EQT as part of the October 2016 Acquisition. EQM expects to invest approximately $105 million over the next several years to complete planned expansion projects including the installation of approximately 20 miles of pipeline and four compressor units. EQM expects to spend approximately $5 million on this expansion project during the fourth quarter of 2016.
Equitrans and AVC Expansion Projects. EQM is evaluating several multi-year transmission capacity expansion projects to support production growth in the Marcellus and Utica Shales that could total an additional 1.5 Bcf per day of capacity by year-end 2018. The projects may include additional compression, pipeline looping and new header pipelines. EQM expects to spend approximately $20 million on these expansion projects during 2016. As described in Note K, EQM acquired AVC from EQT as part of the October 2016 Acquisition. EQM expects to invest approximately $50 million in AVC related growth projects during the remainder of 2016 and 2017, of which approximately $25 million is expected to be spent during the fourth quarter of 2016.2017.
Mountain Valley Pipeline. The MVP Joint Venture is a joint venture with affiliates of each of NextEra Energy, Inc., Consolidated Edison, Inc., WGL Holdings, Inc. and RGC Resources, Inc. EQM is the operator of the MVP and owned a 45.5% interest in the MVP Joint Venture as of October 27, 2016.June 30, 2017. The 42 inch diameter MVP has a targeted initial capacity of 2.0 Bcf per day and is estimated to span 300-miles300 miles extending from EQM's existing transmission and storage system in Wetzel County, West Virginia to Pittsylvania County, Virginia. As currently designed, the MVP is estimated to cost a total of $3.0 billion to $3.5 billion, excluding AFUDC, with EQM funding its proportionate share through capital contributions made to the joint venture. In 2016,2017, EQM expects to provide capital contributions of approximately $100$200 million to the MVP Joint Venture, primarily in support of material orders, environmental andmaterials, land, assessments and engineering design, work. Expenditures are expected to increase substantially asenvironmental work and construction commences, with the bulk of the expenditures expected to be made in 2017 and 2018.activities. The MVP Joint Venture has secured a total of 2.0 Bcf per day of 20-year firm capacity commitments at 20-year terms, including a 1.29 Bcf per day firm capacity commitment by EQT, and is currently in negotiation with additional shippers who have expressed interest in the MVP project. The MVP Joint Venture submitted the MVP certificate application to the FERC in October 2015, andOn June 23, 2017, the FERC issued the NoticeFinal
Environmental Impact Statement on June 28, 2016for the project and September 16, 2016, respectively. Based on the schedule provided in the NOS, the MVP Joint Venture anticipates receiving the FERC certificate in mid-2017.by the fourth quarter of 2017. The pipeline is targeted to be placed in-service during the fourth quarter of 2018.
Transmission Expansion. EQM plans to invest $60 million to $80 million on transmission expansion projects in 2017 including Equitrans expansion projects and modernization projects on the AVC facilities. The AVC modernization projects primarily consist of the replacement of approximately 20 miles of pipeline.
Supply Hub Expansion. These expansion projects are designed to increase deliverable capacity to EQM's Mobley hub, which is the origin of both the OVC and the MVP. These gathering and/or transmission projects include additional compression, pipeline looping and new header pipelines. In total, the projects are expected to add up to 1.5 Bcf per day of capacity to EQM's systems.
See further discussion of capital expenditures in the “Capital Requirements” section below.
Commodity PricesRice Transaction. On June 19, 2017, EQT announced that it had entered into a definitive agreement to acquire Rice. Completion of the transaction is subject to the approval of both EQT shareholders and Rice stockholders, as well as certain customary closing conditions. As part of the transaction, EQT will acquire the midstream assets currently held at Rice. EQT announced that it intends to sell these retained midstream assets to EQM through one or more drop-down transactions. In addition to the potential drop-down opportunities, EQM expects to benefit from increased organic growth opportunities due to the combination of the EQT and Rice acreage positions if the transaction is completed.
OVC Rate. On July 14, 2017, subject to the terms of an existing contract, Equitrans, L.P. filed with the FERC for a negotiated rate adjustment on the OVC. If approved, EQM expects to record approximately $1 million per quarter of higher revenues as a result of the new rate, as well as approximately $3 million of additional revenues related to the period October 1, 2016 through June 30, 2017 as the amendment is retroactive.
Commodity Prices. EQM’s business is dependent on the continued availability of natural gas production and reserves in its areas of operation. Low prices for natural gas, including those resulting from regional basis differentials, could adversely affect development of additional reserves and production that is accessible by EQM’s pipeline and storage assets. Appalachian Basin market prices for natural gas were depressed throughout 20152016 and the first ninesix months of 2016.2017. Lower regional natural gas prices could cause producers to determine in the future that drilling activities in areas outside of EQM’s current areas of operation are strategically more attractive to them. In response to the depressed commodity price environment, a number of large natural gas producers announced their intention to re-evaluate and/or reduce their drilling programs in certain areas, including the Appalachian Basin. EQT's 2016 capital expenditure forecast is significantly lower than EQT's 2015 capital expenditures. EQT, or third party customers on EQM's systems, may reduce capital spending in the future based on commodity prices or other factors. Unless EQM is successful in attracting and retaining unaffiliated third party customers, which accounted for 49%48% of transmission and storage revenues and 4%9% of gathering revenues for the ninesix months ended SeptemberJune 30, 2016,2017, its ability to maintain or increase the capacity subscribed and volumes transported under service arrangements on its transmission and storage system as well as the volumes gathered on its gathering systems will be dependent on receiving consistent or increasing commitments from EQT. While EQT has dedicated acreage to EQM and has entered into long-term firm transmission and gathering contracts on EQM's systems, EQT may determine in the future that drilling in EQM's areas of operations is not economical or that drilling in areas outside of EQM's current areas of operations is strategically more attractive to it, and itit. EQT is under no contractual obligation to continue to develop its acreage dedicated to EQM.
EQM believes the high percentage of its revenues derived from reservation charges under long-term, firm contracts will help to mitigate the risk of revenue fluctuations due to changes in near-term supply and demand conditions and commodity prices. For more information see “Risk Factors - Risks“Risks Inherent in Our Business - Any significant decrease in production of natural gas in
our areas of operation could adversely affect our business and operating results and reduce our distributable cash flow"available to make distributions" included in Item 1A, "Risk Factors" of EQM's Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Capital Resources and Liquidity
EQM’s principal liquidity requirements are to finance its operations, fund capital expenditures, and potential acquisitions and capital contributions to the MVP Joint Venture, make cash distributions and satisfy any indebtedness obligations. EQM’s ability to meet these liquidity requirements will depend on its ability to generate cash in the future as well as its ability to raise capital in banking, capital and other markets. EQM’s available sources of liquidity include cash generated from operations, borrowing under EQM's credit facilities, cash on hand, debt offerings and issuances of additional EQM partnership units. EQM expects to fund its remaining 2016 capital expenditures with cash on hand and available debt capacity.
Operating Activities
Net cash flows provided by operating activities totaled $370.4$320.3 million for the ninesix months ended SeptemberJune 30, 20162017 compared to $319.9$276.4 million for the ninesix months ended SeptemberJune 30, 2015.2016. The $50.5 million increase was primarily driven by higher operating income for which contributing factors are discussed in the “Executive Overview” and "Business Segment Results of Operations" sections herein distributions received from EES of $8.3 million and lower interest and income tax expense, partly offset by the timing of working capital payments between the two periods.
Investing Activities
Net cash flows used in investing activities totaled $494.1$207.3 million for the ninesix months ended SeptemberJune 30, 20162017 compared to $891.7$336.9 million for the ninesix months ended SeptemberJune 30, 2015.2016. The $397.6 million decrease was primarily attributable to the acquisition of the NWV Gathering net assets from EQT and the Preferred Interest Acquisition, both of which occurred during the nine months ended September 30, 2015. These decreases were partly offset by increaseddecreased capital expenditures as further described in the "Capital Requirements" section herein.herein partly offset by increased capital contributions to the MVP Joint Venture and sales of interests in the MVP Joint Venture in 2016.
Financing Activities
Net cash used in financing activities totaled $227.0$161.8 million for the ninesix months ended SeptemberJune 30, 20162017 compared to net cash provided by financing activities of $446.9$216.3 million for the ninesix months ended SeptemberJune 30, 2015. The primary financing uses of cash for2016. For the ninesix months ended SeptemberJune 30, 2016 were2017, the primary use of financing cash flows was distributions paid to unitholders and the primary source of financing cash flows was net credit facility borrowings. For the six months ended June 30, 2016, the primary uses of financing cash flows were net repayments of credit facility borrowings and distributions paid to unitholders. Theunitholders and the primary source of financing sources of cash for the period wereflows was proceeds from the sale of common units under the $750 millionMillion ATM Program. Financing cash inflows for the first nine months of 2015 were from the March 2015 equity offering and net credit facility borrowings; the primary financing cash payments were for the NWV Gathering Acquisition in excess of net assets acquired and distributions to unitholders.
Capital Requirements
The gathering, transmission and storage businesses are capital intensive, requiring significant investment to develop new facilities and to maintain and upgrade existing operations. The following table presents capital expenditures for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015.2016.
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| | (Thousands) | (Thousands) |
Expansion capital expenditures (1) | $ | 145,489 |
| | $ | 80,078 |
| | $ | 446,747 |
| | $ | 257,932 |
| $ | 80,224 |
| | $ | 196,820 |
| | $ | 146,869 |
| | $ | 324,770 |
|
| Maintenance capital expenditures: | | | | | | | | | | | | | | |
| Ongoing maintenance | 4,645 |
| | 11,562 |
| | 9,937 |
| | 16,572 |
| 3,462 |
| | 5,303 |
| | 7,044 |
| | 10,336 |
|
| Funded regulatory compliance | 511 |
| | 535 |
| | 787 |
| | 2,451 |
| — |
| | 101 |
| | — |
| | 276 |
|
| Total maintenance capital expenditures | 5,156 |
| | 12,097 |
| | 10,724 |
| | 19,023 |
| 3,462 |
| | 5,404 |
| | 7,044 |
| | 10,612 |
|
Total capital expenditures (2) | $ | 150,645 |
| | $ | 92,175 |
| | $ | 457,471 |
| | $ | 276,955 |
| $ | 83,686 |
| | $ | 202,224 |
| | $ | 153,913 |
| | $ | 335,382 |
|
| |
(1) | Expansion capital expenditures do not include capital contributions made to the MVP Joint Venture. Capital contributions to the MVP Joint Venture were $35.6of $40.2 million and $76.3$29.2 million for the three and nine months ended SeptemberJune 30, 2017 and 2016, respectively. In the first quarter of 2015, EQM paid approximately $54.2respectively, and $59.9 million and $40.7 million for its acquisition of EQT's ownership interest in the MVP Joint Venture as described in Note B.six months ended June 30, 2017 and 2016, respectively. |
| |
| (2) | 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 on the statements of consolidated cash flows until they are paid in a subsequent period. Accrued capital expenditures were approximately $45.4$31.2 million, $49.3$34.0 million and $18.3$26.7 million at September 30, 2016, June 30, 20162017, March 31, 2017 and December 31, 2015,2016, respectively. Accrued capital expenditures were approximately $23.5$50.7 million, $27.0$32.7 million and $51.1$24.1 million at September 30, 2015, June 30, 20152016, March 31, 2016 and December 31, 2014,2015, respectively. |
Expansion capital expenditures increaseddecreased by $65.4$116.6 million for the three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 20152016 and $177.9 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily as a result of the timing ofdecreased spending on projects. In the third quarter of 2016, expansion capital expenditures primarily related to the OVC project and the Range Resources Header Pipeline project. The final phase of the Range Resources Header Pipeline project andwas placed in-service during the NWV Gathering expansion. In the thirdsecond quarter of 2015, expansion capital expenditures primarily related2017 and now provides total firm gathering capacity of 600 MMcf per day. EQM estimates the total project cost to thebe approximately $250 million with approximately $40 million to be spent in 2017. The OVC the Jupiter and NWV Gathering expansions. EQM completed the Jupiter gathering expansionproject was placed into service in the fourth quarter of 2015.2016.
Expansion capital expenditures increased by $188.8 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 as a result
In 2016,2017, expansion capital expenditures and capital contributions to the MVP Joint Venture are expected to be approximately $660$500 million to $550 million and ongoing maintenance capital expenditures are expected to be approximately $25$30 million, net of reimbursements. EQM’s future capital investments may vary significantly from period to period based on the available investment opportunities and are expected to grow substantially in future periods for the Range Resources Header Pipeline project, the NWV Gathering expansion, the gathering and AVC expansion projects associated with the October 2016 Acquisition and capital contributions to the MVP Joint Venture. Maintenance related capital expenditures are also expected to vary quarter to quarter. EQM expects to fund future capital expenditures primarily through cash on hand, cash generated from operations, availability under its credit facility,facilities, debt offerings and issuances of additional EQM partnership units. EQM does not forecast capital expenditures associated with potential midstream projects not committed as of the filing of this Quarterly Report on Form 10-Q.
Credit Facility Borrowings
EQM has a $750 Million Facility that expires in February 2019 and had $91 million of borrowings outstanding as of September 30, 2016. The $750 Million 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. Subject to certain terms and conditions, the $750 Million Facility has an accordion feature that allows EQM to increase the available revolving borrowings under the facility by up to an additional $250 million. In addition, the $750 Million Facility includes a sublimit up to $75 million for same-day swing line advances and a sublimit up to $150 million for letters of credit. EQM has the right to request that one or more lenders make term loans to it under the $750 Million Facility subject to the satisfaction of certain conditions, which term loans will be secured by cash and qualifying investment grade securities. EQM’s obligations under the revolving portion of the $750 Million Facility are unsecured.
EQM’s $750 Million Facility contains various provisions that, if not complied with, could result in termination of the credit facility, require early payment of amounts outstanding or similar actions. The covenants and events of default under the $750 Million Facility relate to maintenance of 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 $750 Million Facility, EQM is required to maintain a consolidated leverage ratio of not more than 5.00 to 1.00 (or not more than 5.50 to 1.00 for certain measurement periods following the consummation of certain acquisitions). As of September 30, 2016, EQM was in compliance with all debt provisions and covenants.
On October 26, 2016, EQM entered into the 364-Day Facility (as defined in Note G) with EQT, which will mature on October 25, 2017. See Note G to the consolidated financial statements for further discussion of the uncommitted revolving loan agreement.
Security Ratings
The table below sets forth the credit ratings for debt instruments of EQM at SeptemberJune 30, 2016.2017.
|
| | | | |
| Rating Service | | Senior Notes | | Outlook |
| Moody’s Investors Service (Moody's) | | Ba1 | | Stable |
| Standard & Poor’s Ratings Services (S&P) | | BBB- | | Stable |
| Fitch Ratings (Fitch) | | BBB- | | Stable |
EQM’s credit ratings are subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating. EQM cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a credit rating agency if, in its judgment, circumstances so warrant. If any credit rating agency downgrades EQM’s ratings, EQM’s access to the capital markets may be limited, borrowing costs could increase, EQM may be required to provide additional credit assurances in support of commercial agreements such as joint venture agreements and construction contracts, the amount of which may be substantial, and the potential pool of investors and funding sources may decrease. In order to be considered investment grade, a company must be rated Baa3 or higher by Moody’s, BBB- or higher by S&P, or BBB- or higher by Fitch. Anything below these ratings, including EQM's current credit rating of Ba1 by Moody's, is considered non-investment grade.
$750 millionMillion ATM Program
As of OctoberJuly 27, 2016,2017, EQM had approximately $443 million in remaining capacity under the $750 millionMillion ATM Program.
Distributions
On October 25, 2016, the Board of Directors of the EQM General Partner declared a cash distribution to EQM’s unitholders for the third quarter of 2016 of $0.815 per common unit. The cash distribution will be paid on November 14, 2016 to unitholders of record, including EQGP, at the close of business on November 4, 2016. Based on the 80,581,758 EQM common units outstanding on October 27, 2016, cash distributions to EQGP related to its general partner interest and incentive distribution rights 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 priorSee Note J to the record dateconsolidated financial statements for the third quarter 2016 distribution.discussion of distributions.
Commitments and Contingencies
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against EQM. While the amounts claimed may be substantial, EQM is unable to predict with certainty the ultimate outcome of such claims and proceedings. EQM accrues legal and other direct costs related to loss contingencies when actually incurred. EQM has established reserves it believes to be appropriate for pending matters, and after consultation with counsel and giving appropriate consideration to available insurance, EQM believes that the ultimate outcome of any matter currently pending against it will not materially affect its business, financial condition, results of operations, liquidity or ability to make distributions.
Off-Balance Sheet Arrangements
As of September 30, 2016, EQM had issued a $91 million performance guarantee in favorSee Note F to the consolidated financial statements for further discussion 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.guarantee.
Critical Accounting Policies
EQM’s critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in EQM’s Annual Report on Form 10-K for the year ended December 31, 2015.2016. Any new
accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to EQM’s consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the period ended SeptemberJune 30, 2016.2017. The application of EQM’s critical accounting policies may require management to make
judgments and estimates about the amounts reflected in the consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Changes in interest rates affect the amount of interest EQM earns on cash, cash equivalents and short-term investments and the interest rates EQM pays on borrowings onunder its credit facilities. EQM's long-term borrowings are fixed rate and thus do not expose EQM to fluctuations in its results of operations or liquidity from changes in market interest rates. Changes in interest rates do affect the fair value of EQM's fixed rate debt. See Note G to the consolidated financial statements for further discussion of EQM's borrowings and Note H to the consolidated financial statements for a discussion of fair value measurements. EQM may from time to time hedge the interest on portions of its borrowings under the credit facilities in order to manage risks associated with floating interest rates.
Credit Risk
EQM is exposed to credit risk which is the risk that EQM may incur a loss if a counterparty fails to perform under a contract. EQM manages its exposure to credit risk associated with customers through credit analysis, credit approval, credit limits and monitoring procedures. For certain transactions, EQM may request letters of credit, cash collateral, prepayments or guarantees as forms of credit support. EQM’s FERC tariff requirestariffs require tariff customers that do not meet specified credit standards to provide three months of credit support; however, EQM is exposed to credit risk beyond this three month period when its tariff doestariffs do not require its customers to provide additional credit support. For some of EQM’s more recent long-term contracts associated with system expansions, it has entered into negotiated credit agreements that provide for enhanced forms of credit support if certain credit standards are not met. EQM has historically experienced only minimal credit losses in connection with its receivables. For the ninesix months ended SeptemberJune 30, 2016,2017, approximately 90%87% of revenues were from investment grade counterparties. EQM is exposed to the credit risk of EQT, its largest customer. In connection with EQM's IPO in 2012, EQT guaranteed all payment obligations, up to a maximum of $50 million, due and payable to Equitrans, L.P., EQM's wholly owned FERC-regulated subsidiary, by EQT Energy, LLC, one of Equitrans’Equitrans, L.P.’s largest customers and a wholly owned subsidiary of EQT. The EQT guaranty will terminate on November 30, 2023 unless terminated earlier by EQT upon 10 days written notice. At SeptemberJune 30, 2016,2017, EQT’s public senior debt had an investment grade credit rating.
Other Market Risks
EQM's $750 Million Facility is underwritten by a syndicate of financial institutions, each of which is obligated to fund its pro-rata portion of any borrowings by EQM. No one lender of the 18 financial institutions in the syndicate holds more than 10% of the facility. EQM’s large syndicate group and relatively low percentage of participation by each lender is expected to limit EQM’s exposure to problems or consolidation in the banking industry.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management of the EQM General Partner, including the EQM General Partner’s Principal Executive Officer and Principal Financial Officer, an evaluation of EQM’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) was conducted as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer of the EQM General Partner concluded that EQM’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the thirdsecond quarter of 20162017 that have materially affected, or are reasonably likely to materially affect, EQM’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against EQM. While the amounts claimed may be substantial, EQM is unable to predict with certainty the ultimate outcome of such claims and proceedings. EQM accrues legal and other direct costs related to loss contingencies when actually incurred. EQM has established reserves it believes to be appropriate for pending matters and, after consultation with counsel and giving appropriate consideration to available insurance, EQM believes that the ultimate outcome of any matter currently pending against it will not materially affect its business, financial condition, results of operations, liquidity or ability to make distributions.
Item 1A. Risk Factors
On April 8, 2016, the Pipeline and Hazardous Materials Safety Administration (PHMSA) published a notice of proposed rulemaking (NPRM) proposing new requirements applicable to natural gas transmission and gathering lines. As a result of the publication of the NPRM, EQM determined to replace in its entirety the second paragraph of the risk factor entitled “We may incur significant costs and liabilities as a result of pipeline integrity management program testing and related repairs” in Item 1A, “Risk Factors” of EQM’s Annual Report on Form 10-K for the year ended December 31, 2015, as follows:
Changes to pipeline safety laws and regulations that result in more stringent or costly safety standards could have a significant adverse effect on us and similarly situated midstream operators. For example, in August 2011, PHMSA published an advance notice of proposed rulemaking (2011 Notice) in which the agency was seeking public comment on a number of changes to regulations governing the safety of gas transmission pipelines and gathering lines, including, for example, revising the definitions of “high consequence areas” and “gathering lines” and strengthening integrity management requirements as they apply to existing regulated operators and to currently exempt operators should certain exemptions be removed. In April 2016, PHMSA published a notice of proposed rulemaking responding to several of the integrity management topics raised in the 2011 Notice and proposing new requirements to address safety issues for natural gas transmission and gathering lines that have arisen since the issuance of the 2011 Notice. The proposed rule, which is subject to a public comment period, would strengthen existing integrity management requirements, expand assessment and repair requirements to pipelines in areas with medium population densities and extend regulatory requirements to onshore gas gathering lines that are currently exempt. We are monitoring and evaluating the effect of these proposed requirements on our operations.
Except as set forth above, as of the date of this report, EQM'sInformation regarding risk factors have not changed materially from thoseis discussed in Item 1A, “Risk Factors” of EQM’s Annual Report on Form 10-K for the year ended December 31, 2015.
2016. There have been no material changes from the risk factors previously disclosed in EQM’s Annual Report on Form 10-K.
Item 5. Other Information
364-Day Facility
On October 26, 2016, EQM entered into the 364-Day Facility (as defined in Note G) with EQT, which will mature on October 25, 2017. The 364-Day Facility will automatically renew for successive 364-day periods unless EQT delivers a non-renewal notice at least 60 days prior to the then current maturity date. EQM may terminate the 364-Day Facility at any time by repaying in full the unpaid principal amount of all loans together with interest thereon. The 364-Day Facility is available for general partnership purposes and does not contain any covenants other than the obligation to pay accrued interest on outstanding borrowings. Interest will accrue on any outstanding borrowings at an interest rate equal to the rate then applicable to similar loans under EQM’s $750 Million Facility (as defined in Note G), less the sum of (i) the then applicable commitment fee under the $750 Million Facility and (ii) 10 basis points.
The foregoing description is not complete and is qualified in its entirety by reference to the full text of the 364-Day Facility, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and incorporated in this Item 5 by reference.
Relationships
The EQM General Partner is indirectly controlled by EQT through EQT’s control of EQGP. As of September 30, 2016, EQGP and its subsidiaries owned 21,811,643 EQM common units, representing a 26.6% limited partnership 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 September 30, 2016, EQT owned 100% of the non-economic general partner interest and a 90.1% limited partner interest in EQGP.
Item 6. Exhibits
|
| | |
2.1 |
| Purchase and Sale Agreement, dated as of October 13, 2016, by and among EQT Corporation, EQT Gathering Holdings, LLC, EQT Gathering, LLC, EQT Midstream Partners, LP, Equitrans Investments, LLC, Equitrans, L.P. and EQM Gathering Opco, LLC. EQT Midstream Partners, LP will furnish supplementally a copy of any omitted schedule and similar attachment to the SEC upon request. |
| 10.1 |
| 364-Day Uncommitted Revolving Loan Agreement, dated as of October 26, 2016, by and between EQT Corporation and EQT Midstream Partners, LP. |
10.2 |
| Amendment No. 31 to Jupiter Gas Gathering Agreement for the WG-100 Gas Gathering System, dated as of AugustApril 1, 2016,2017, by and among EQT Production Company and EQT Energy, LLC, on the one hand, and EQM Gathering Opco, LLC, (as assignee of EQT Gathering, LLC) on the other hand. Specific items in this exhibit have been redacted, as marked by three asterisks [***], because confidential treatment for those items has been requested from the SEC. The redacted material has been separately filed with the SEC. |
10.310.2 |
| TransitionAmendment No. 4 to Jupiter Gas Gathering Agreement, and General Release, dated as of September 9, 2016,June 1, 2017, by and betweenamong EQT CorporationProduction Company and Theresa Z. Bone.EQT Energy, LLC, on the one hand, and EQM Gathering Opco, LLC, on the other hand. |
| 31.1 |
| Rule 13(a)-14(a) Certification of Principal Executive Officer. |
| 31.2 |
| Rule 13(a)-14(a) Certification of Principal Financial Officer. |
| 32 |
| Section 1350 Certification of Principal Executive Officer and Principal Financial Officer. |
| 101 |
| Interactive Data File. |
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | EQT Midstream Partners, LP |
| | (Registrant) |
| | | |
| | By: | EQT Midstream Services, LLC, its General Partner |
| | | |
| | | |
| | | |
| | By: | /s/ Robert J. McNally |
| | | Robert J. McNally |
| | | Senior Vice President and Chief Financial Officer |
Date: OctoberJuly 27, 20162017
INDEX TO EXHIBITS
|
| | | | | |
| Exhibit No. | | Document Description | | Method of Filing |
2.1 |
| | Purchase and Sale Agreement, dated as of October 13, 2016, by and among EQT Corporation, EQT Gathering Holdings, LLC, EQT Gathering, LLC, EQT Midstream Partners, LP, Equitrans Investments, LLC, Equitrans, L.P. and EQM Gathering Opco, LLC. EQT Midstream Partners, LP will furnish supplementally a copy of any omitted schedule and similar attachment to the SEC upon request. | | Incorporated herein by reference to Exhibit 2.1 to Form 8-K (#001-35574) filed on October 13, 2016. |
| 10.1 |
| | 364-Day Uncommitted Revolving Loan Agreement, dated as of October 26, 2016, by and between EQT Corporation and EQT Midstream Partners, LP. | | Filed herewith as Exhibit 10.1.
|
10.2 |
| | Amendment No. 31 to Jupiter Gas Gathering Agreement for the WG-100 Gas Gathering System, dated as of AugustApril 1, 2016,2017, by and among EQT Production Company and EQT Energy, LLC, on the one hand, and EQM Gathering Opco, LLC, (as assignee of EQT Gathering, LLC) on the other hand. Specific items in this exhibit have been redacted, | | Filed herewith as markedExhibit 10.1. |
| 10.2 |
| | Amendment No. 4 to Jupiter Gas Gathering Agreement, dated as of June 1, 2017, by three asterisks [***], because confidential treatment for those items has been requested fromand among EQT Production Company and EQT Energy, LLC, on the SEC. The redacted material has been separately filed withone hand, and EQM Gathering Opco, LLC, on the SEC.other hand. | | Filed herewith as Exhibit 10.2. |
10.3 |
| | Transition Agreement and General Release, dated as of September 9, 2016, by and between EQT Corporation and Theresa Z. Bone. | | Filed herewith as Exhibit 10.3. |
| 31.1 |
| | Rule 13(a)-14(a) Certification of Principal Executive Officer. | | Filed herewith as Exhibit 31.1. |
| 31.2 |
| | Rule 13(a)-14(a) Certification of Principal Financial Officer. | | Filed herewith as Exhibit 31.2. |
| 32 |
| | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer. | | Furnished herewith as Exhibit 32. |
| 101 |
| | Interactive Data File. | | Filed herewith as Exhibit 101. |