UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
  
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20172018
or
 
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 FOR THE TRANSITION PERIOD FROM                TO               
  
 COMMISSION FILE NUMBER 001-35574
 
EQT Midstream Partners, LP
(Exact name of registrant as specified in its charter)
 
DELAWARE 37-1661577
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
 
625 Liberty Avenue, Suite 1700, Pittsburgh, Pennsylvania15222
(Address of principal executive offices)(Zip code)
(412) 553-5700

(Registrant’sRegistrant'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, a smaller reporting company, or an emerging growth company.  See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company”company" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   x
  
Accelerated Filer                  ¨
 
Emerging Growth Company       ¨
Non-Accelerated Filer     ¨
(Do not check if a
smaller reporting company)
 
Smaller Reporting 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, 2017,2018, there were 80,581,75886,480,648 Common Units and 1,443,015 General Partner Units outstanding.



EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
 
Index
 
 
 Page No.
  
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
   
   
   
 
   
   
   
   
    


2

Table of Contents


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 attributable to EQM plus net interest expense, depreciation, and amortization expense, income tax expense,of intangible assets, Preferred Interest (as defined below) payments, received post conversion and non-cash long-term compensation expense and transaction costs less equity income, AFUDC – equity (as defined below), pre-acquisition capital lease payments for Allegheny Valley Connector, LLC (AVC)defined) and adjusted EBITDA of assets prior to acquisition.
 
Allowance for Funds Used During Construction or AFUDC – carrying costs for the construction of certain long-lived regulated assets are capitalized and amortized over the related assets’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 interest income on the Preferred Interest, capitalized interest and AFUDC – debt, and ongoing maintenance capital expenditures net of expected reimbursements.reimbursements and transaction costs.
 
firm contracts – contracts for gathering, transmission or storage services that 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”"gas" refer to natural gas.

October 2016 AcquisitionOn October 13, 2016, EQM acquired from EQT Corporation and subsidiaries (collectively, EQT) 100% of the outstanding limited liability company interests of AVC and Rager Mountain Storage Company LLC (Rager) and certain gathering assets located in southwestern Pennsylvania and northern West Virginia (the Gathering Assets). The closing of 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 – the preferred interest that EQM has in EQT Energy Supply, LLC (EES).
 
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.

AbbreviationsMeasurements
ASU – Accounting Standards Update
Btu  = one British thermal unit
FASB  Financial Accounting Standards Board
BBtu = billion British thermal units
FERC – Federal Energy Regulatory Commission
Bcf   = billion cubic feet
GAAP – United States Generally Accepted Accounting Principles
Dth  =  dekatherm or million British thermal units
IPOIDRs Initial Public Offeringincentive distribution rights
MMBtu  = million British thermal units
IPO – Initial Public Offering
Mcf = thousand cubic feet
IRS – Internal Revenue Service
Mcf MMcf= thousandmillion cubic feet
SEC – Securities and Exchange Commission
MMcf  = million cubic feet

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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,
2017 2016 2017 20162018 2017 2018 2017
(Thousands, except per unit amounts)(Thousands, except per unit amounts)
Operating revenues (2)
$207,193
 $176,772
 $609,585
 $540,600
$269,761
 $196,815
 $556,323
 $396,887
Operating expenses: 
  
  
  
 
  
  
  
Operating and maintenance (3)
20,604
 18,198
 61,471
 51,687
24,587
 18,315
 44,047
 35,132
Selling, general and administrative (3)
18,839
 17,725
 52,212
 53,377
24,438
 15,812
 43,436
 33,212
Depreciation and amortization22,244
 14,639
 64,191
 43,177
Depreciation28,076
 21,400
 55,461
 41,947
Amortization of intangible assets10,387
 
 20,773
 
Total operating expenses61,687
 50,562
 177,874
 148,241
87,488
 55,527
 163,717
 110,291
Operating income145,506
 126,210
 431,711
 392,359
182,273
 141,288
 392,606
 286,596
Other income (4)
6,858
 13,479
 19,576
 31,490
Equity income (4)
10,938
 5,111
 19,749
 9,388
Other income944
 1,402
 1,842
 2,939
Net interest expense (5)
9,426
 2,802
 26,014
 11,448
20,683
 8,662
 31,399
 16,588
Income before income taxes142,938
 136,887
 425,273
 412,401
Income tax expense
 3,227
 
 10,147
Net income$142,938
 $133,660
 $425,273
 $402,254
173,472
 139,139
 382,798
 282,335
Net income attributable to noncontrolling interests853
 
 3,346
 
Net income attributable to EQM$172,619
 $139,139
 $379,452
 $282,335
              
Calculation of limited partners' interest in net income: 
  
  
  
Net income$142,938
 $133,660
 $425,273
 $402,254
Calculation of limited partner interest in net income: 
  
  
  
Net income attributable to EQM$172,619
 $139,139
 $379,452
 $282,335
Less pre-acquisition net income allocated to parent
 (7,094) 
 (21,861)(11,407) 
 (41,022) 
Less general partner interest in net income – general partner units(2,515) (2,224) (7,482) (6,785)(1,700) (2,448) (4,791) (4,967)
Less general partner interest in net income – incentive distribution rights (IDRs)(37,615) (24,912) (102,451) (65,961)
Limited partners' interest in net income$102,808
 $99,430
 $315,340
 $307,647
Less general partner interest in net income – IDRs(68,121) (34,150) (112,285) (64,836)
Limited partner interest in net income$91,391
 $102,541
 $221,354
 $212,532
              
Net income per limited partner unit – basic$1.28
 $1.23
 $3.91
 $3.89
Net income per limited partner unit – diluted$1.28
 $1.23
 $3.91
 $3.89
       
Weighted average limited partner units outstanding – basic80,603
 80,599
 80,603
 78,998
Weighted average limited partner units outstanding – diluted80,603
 80,599
 80,603
 79,025
Net income per limited partner unit – basic and diluted$1.09
 $1.27
 $2.69
 $2.64
Weighted average limited partner units outstanding – basic and diluted83,553
 80,603
 82,290
 80,602
              
Cash distributions declared per unit (6)
$0.98
 $0.815
 $2.805
 $2.34
$1.09
 $0.935
 $2.155
 $1.825
 

(1)As discussed in Note A, EQM’sthe consolidated financial statements for the three and nine months ended September 30, 2016of EQM have been retrospectively recast to include the pre-acquisition results of AVC, RagerRice Olympus Midstream LLC (ROM), Strike Force Midstream Holdings LLC (Strike Force) and the Gathering Assets,Rice West Virginia Midstream LLC (Rice WV), which were acquired by EQM effective on OctoberMay 1, 2016,2018 (the May 2018 Acquisition), because thethis transaction was between entities under common control.
(2)Operating revenues included affiliate revenues from EQT Corporation and subsidiaries (collectively, EQT) of $154.2$180.4 million and $135.5$148.2 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $445.8$361.6 million and $408.3$291.6 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. See Note E.F.
(3)Operating and maintenance expense included charges from EQT of $10.7$11.3 million and $8.4$9.3 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $29.8$21.8 million and $25.1$19.2 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. Selling, general and administrative expense included charges from EQT of $18.1$19.0 million and $16.4$15.2 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $49.7$36.6 million and $49.3$31.6 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016, respectively. See Note E.
(4)For the three and nine months ended September 30, 2017, other income included equity income from Mountain Valley Pipeline, LLC (MVP Joint Venture) of $6.0 million and $15.4 million, respectively. For the three and nine months ended September 30, 2016, other income included distributions received from EES of $2.8 million and $8.3 million, respectively, and equity income from the MVP Joint Venture of $2.7 million and $6.1 million, respectively. See Note F.
(4)Represents equity income from Mountain Valley Pipeline, LLC (the MVP Joint Venture). See Note G.
(5)For the three and nine months ended September 30, 2017, netNet interest expense included $1.7 million and $5.1 million, respectively, of interest income on the Preferred Interest in EES.EES of $1.7 million and $1.7 million for the three months ended June 30, 2018 and 2017, respectively, and $3.3 million and $3.4 million for the six months ended June 30, 2018 and 2017, respectively.
(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.

4

Table of Contents


EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Cash Flows (Unaudited)(1) 
Nine Months Ended 
 September 30,
Six Months Ended 
 June 30,
2017 20162018 2017
(Thousands)(Thousands)
Cash flows from operating activities: 
  
 
  
Net income$425,273
 $402,254
$382,798
 $282,335
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and amortization64,191
 43,177
Deferred income taxes
 8,774
Depreciation55,461
 41,947
Amortization of intangible assets20,773
 
Equity income(15,413) (6,139)(19,749) (9,388)
AFUDC – equity(4,128) (16,733)(2,137) (3,297)
Non-cash long-term compensation expense225
 195
331
 225
Changes in other assets and liabilities: 
  
 
  
Accounts receivable(1,106) 2,552
718
 (599)
Accounts payable1,848
 11,588
8,019
 2,426
Due to/from EQT affiliates5,627
 (60,217)(11,210) 1,410
Other assets and other liabilities3,686
 (5,433)6,642
 5,246
Net cash provided by operating activities480,203
 380,018
441,646
 320,305
   
Cash flows from investing activities: 
  
 
  
Capital expenditures(224,591) (477,605)(302,876) (149,413)
Capital contributions to the MVP Joint Venture(103,448) (76,297)(182,805) (59,940)
Sales of interests in the MVP Joint Venture
 12,533
May 2018 Acquisition from EQT(1,193,160) 
Principal payments received on the Preferred Interest3,103
 
2,172
 2,054
Net cash used in investing activities(324,936) (541,369)(1,676,669) (207,299)
   
Cash flows from financing activities: 
  
 
  
Proceeds from the issuance of EQM common units, net of offering costs
 217,102
Proceeds from credit facility borrowings334,000
 430,000
2,000,500
 150,000
Payments on credit facility borrowings(229,000) (638,000)(2,180,500) (110,000)
Credit facility origination fees(2,257) 
Proceeds from issuance of long-term debt2,500,000
 
Debt discount and issuance costs(30,295) 
Distributions paid to unitholders(313,515) (237,263)(258,211) (202,060)
Distributions to noncontrolling interest(750) 
Acquisition of 25% of Strike Force Midstream LLC(175,000) 
Capital contributions216
 5,884
15,672
 216
Net contributions from EQT
 22,672
3,660
 
Net cash used in financing activities(210,556) (199,605)
Net cash provided by (used in) financing activities1,875,076
 (161,844)
      
Net change in cash and cash equivalents(55,289) (360,956)640,053
 (48,838)
Cash and cash equivalents at beginning of period60,368
 360,956
44,062
 60,368
Cash and cash equivalents at end of period$5,079
 $
$684,115
 $11,530
      
Cash paid during the period for: 
  
 
  
Interest, net of amount capitalized$31,091
 $15,437
$29,961
 $20,996
   
Non-cash activity during the period for:
 
  
(Decrease) increase in capital contribution receivable from EQT$(12,251) $758
(1)As discussed in Note A, EQM’sthe consolidated financial statements for the nine months ended September 30, 2016of EQM have been retrospectively recast to include the pre-acquisition results of AVC, Rager and the Gathering Assets, which were acquired by EQM effective on October 1, 2016,May 2018 Acquisition because thethis transaction was between entities under common control.


The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents


EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)(1)
 
June 30, 
 2018
 December 31, 
 2017
September 30, 
 2017
 December 31, 2016(Thousands, except number of units)
ASSETS(Thousands, except number of units) 
Current assets: 
  
 
  
Cash and cash equivalents$5,079
 $60,368
$684,115
 $44,062
Accounts receivable (net of allowance for doubtful accounts of $336 as of September 30, 2017 and $319 as of December 31, 2016)21,768
 20,662
Accounts receivable (net of allowance for doubtful accounts of $1,400 and $446 as of June 30, 2018 and December 31, 2017, respectively)47,587
 48,305
Accounts receivable – affiliate88,103
 81,358
119,097
 110,292
Other current assets8,222
 9,671
14,085
 12,754
Total current assets123,172
 172,059
864,884
 215,413
      
Property, plant and equipment3,120,662
 2,894,858
4,363,068
 4,077,282
Less: accumulated depreciation(375,153) (316,024)(440,924) (398,245)
Net property, plant and equipment2,745,509
 2,578,834
3,922,144
 3,679,037
      
Investment in unconsolidated entity339,978
 184,562
1,003,299
 460,546
Goodwill37,954
 37,954
Intangible assets, net596,887
 617,660
Other assets138,770
 140,385
137,257
 136,966
Total assets$3,347,429
 $3,075,840
$6,562,425
 $5,147,576
      
LIABILITIES AND EQUITY 
  
 
  
Current liabilities: 
  
 
  
Accounts payable$37,493
 $35,830
$84,969
 $80,637
Due to related party28,991
 19,027
41,519
 31,673
Capital contribution payable to MVP Joint Venture48,026
 11,471
445,933
 105,734
Accrued interest10,434
 12,016
12,309
 10,926
Accrued liabilities12,500
 8,648
25,144
 16,936
Total current liabilities137,444
 86,992
609,874
 245,906
      
Credit facility borrowings105,000
 

 180,000
Long-term debt986,947
 985,732
Other long-term liabilities9,877
 9,562
Senior notes3,453,975
 987,352
Regulatory and other long-term liabilities21,442
 20,273
Total liabilities1,239,268
 1,082,286
4,085,291
 1,433,531
      
Equity: 
  
 
  
Common (80,581,758 units issued and outstanding at September 30, 2017 and December 31, 2016)2,111,095
 2,008,510
General partner (1,443,015 units issued and outstanding at September 30, 2017 and December 31, 2016)(2,934) (14,956)
Predecessor equity
 1,391,615
Noncontrolling interest
 173,472
Common (86,480,648 and 80,581,758 units issued and outstanding at June 30, 2018 and December 31, 2017, respectively)2,448,531
 2,147,706
General partner (1,443,015 units issued and outstanding at June 30, 2018 and December 31, 2017)28,603
 1,252
Total equity2,108,161
 1,993,554
2,477,134
 3,714,045
Total liabilities and equity$3,347,429
 $3,075,840
$6,562,425
 $5,147,576
(1)As discussed in Note A, the consolidated financial statements of EQM have been retrospectively recast to include the pre-acquisition results of the May 2018 Acquisition because this transaction was between entities under common control.


The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents


EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Statements of Consolidated Equity (Unaudited)(1) 

Predecessor Limited Partners General  Predecessor Equity Noncontrolling Interest 
Limited Partners
Common
 
General
Partner
 Total Equity
Equity Common Partner Total Equity
(Thousands)
Balance at January 1, 2016$275,545
 $1,598,675
 $(30,963) $1,843,257
Net income21,861
 307,647
 72,746
 402,254
Capital contributions
 567
 10
 577
Equity-based compensation plans
 195
 
 195
Distributions to unitholders
 (175,729) (61,534) (237,263)
Net contributions from EQT22,672
 
 
 22,672
Proceeds from issuance of common units, net of offering costs
 217,102
 
 217,102
Balance at September 30, 2016$320,078
 $1,948,457
 $(19,741) $2,248,794
       (Thousands)
Balance at January 1, 2017$
 $2,008,510
 $(14,956) $1,993,554
$
 $
 $2,008,510
 $(14,956) $1,993,554
Net income
 315,340
 109,933
 425,273

 
 212,532
 69,803
 282,335
Capital contributions
 2,576
 48
 2,624

 
 956
 18
 974
Equity-based compensation plans
 225
 
 225

 
 225
 
 225
Distributions to unitholders
 (215,556) (97,959) (313,515)
Balance at September 30, 2017$
 $2,111,095
 $(2,934) $2,108,161
Distributions paid to unitholders
 
 (140,212) (61,848) (202,060)
Balance at June 30, 2017$
 $
 $2,082,011
 $(6,983) $2,075,028
         
Balance at January 1, 2018$1,391,615
 $173,472
 $2,147,706
 $1,252
 $3,714,045
Net income41,022
 3,346
 221,354
 117,076
 382,798
Capital contributions
 
 3,361
 60
 3,421
Equity-based compensation plans
 
 331
 
 331
Distributions paid to unitholders
 
 (168,426) (89,785) (258,211)
Net contributions from EQT3,660
 
 
 
 3,660
Distributions to noncontrolling interests
 (750) 
 
 (750)
Acquisition of 25% of Strike Force Midstream LLC
 (176,068) 1,068
 
 (175,000)
May 2018 Acquisition from EQT (2)
(1,436,297) 
 243,137
 
 (1,193,160)
Balance at June 30, 2018$
 $
 $2,448,531
 $28,603
 $2,477,134
(1)As discussed in Note A, EQM’sthe consolidated financial statements for the nine months ended September 30, 2016of EQM have been retrospectively recast to include the pre-acquisition results of AVC, Rager and the Gathering Assets, which were acquired by EQM effective on October 1, 2016,May 2018 Acquisition because thethis transaction was between entities under common control.
(2)Under common control accounting, any difference between consideration transferred and the net assets received at historical cost is recorded as an equity transaction. In addition, equity issued in a common control transaction is recorded at an amount equal to the carrying value of the net assets transferred, even if the equity issued has a readily determinable fair value. As a result, the EQM common units issued in the May 2018 Acquisition are valued at the excess of the net assets received by EQM over the cash consideration.



The accompanying notes are an integral part of these consolidated financial statements.

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EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

A.Financial Statements

Organization
and Basis of Presentation
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.

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, 20172018 and December 31, 2016,2017, the results of its operations for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017, and its cash flows and equity for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. Certain previously reported amounts have been reclassified to conform to the current year presentation. The balance sheet at December 31, 20162017 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.

AVC, Rager andEQM's consolidated financial statements have been retrospectively recast to include the Gathering Assets were businesses andpre-acquisition results of the October 2016May 2018 Acquisition because this transaction was a transaction between entities under common control; therefore,control. The recast is for the period the acquired businesses were under the common control of EQT, which began on November 13, 2017 as a result of EQT's merger with Rice Energy Inc. (Rice) (the Rice Merger). EQM recorded the assets and liabilities of these entitiesacquired in the May 2018 Acquisition at their carrying amounts to EQT on the effective 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 equity. EQM recast its consolidated financial statements to retrospectively reflect the October 2016 Acquisition as if the entities were owned for all periods presented; however, the consolidated financial statements are not necessarily indicative of the actual results of operations that would have occurred if EQM had owned themand the assets acquired in the May 2018 Acquisition been operated together during the periods reported.

pre-acquisition periods.
Due to the seasonal nature of EQM’sEQM's utility customer contracts, the interim statements for the three and ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
2018.
For further information, refer to the consolidated financial statements and related footnotes thereto included in EQM’s Annual Report on Form 10-K for the year ended December 31, 2016 as well as “Management's2017 and "Management's Discussion and Analysis of Financial Condition and Results of Operations” contained therein.

Operations," in each case as included in EQM's Current Report on Form 8-K as filed with the SEC on June 12, 2018.
Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date which approved a one year deferral of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. EQM expects to adopt the ASUsadopted this standard on January 1, 2018 using the modified retrospective method of adoption on January 1, 2018. During the third quarter of 2017, EQM substantially completed its detailed reviewadoption. Adoption of the impactASU did not require an adjustment to the opening balance of the standard on each of its contracts. Based on this review,equity. EQM does not expect the standard to have a significant impact on net income. EQM is currently evaluating the impact of the standardeffect on its internalresults of operations, liquidity or financial position. EQM implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and disclosures.to generate the disclosures required under the new standard in the first quarter of 2018. For the disclosures required by this ASU, see Note C.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The changesstandard primarily affect theaffects accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. This standard will eliminateinstruments, and eliminates 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 will adoptadopted this standard in the first quarter of 2018 and does not expect that the adoption will have a material impactwith no significant effect on its financial statements andor related disclosures.


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In February 2016, the FASB issued ASU No. 2016-02, Leases. The primary effect of adopting the new standard will berequires an entity to record assets and obligations for contracts currently recognized as operating leases. 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.approach. The ASU will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. EQM has completedperformed a high levelhigh-level identification of agreements covered by this standard, is currently evaluating processes and will continueinternal controls and is in the process of implementing a third-party supported lease accounting information system to evaluatefacilitate the impact this standard will have on itsaccounting and financial statements and related disclosures.reporting requirements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and

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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 impacteffect this standard will have on its financial statements and related disclosures.

In August 2016,January 2017, the FASB issued ASU No. 2016-15,2017-04, StatementSimplifying the Test of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash PaymentsGoodwill Impairment. This ASU addresses2017-04 simplifies the presentation and classificationquantitative goodwill impairment test requirements by eliminating the requirement to calculate the implied fair value of eight specific cash flow issues. The amendmentsgoodwill (Step 2 of the current goodwill impairment test). Instead, a company would record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value (measured in Step 1 of the ASUcurrent goodwill impairment test). Entities 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.apply the standard’s provisions prospectively. EQM adopted this standard in the secondfirst quarter of 20172018 with no material impactsignificant effect on its financial statements andor related disclosures.
B.Acquisitions and Merger
May 2018 Acquisition
On April 25, 2018, EQT, Rice Midstream Holdings LLC, a wholly owned subsidiary of EQT, EQM and EQM Gathering Holdings, LLC (EQM Gathering), a wholly owned subsidiary of EQM, entered into a Contribution and Sale Agreement pursuant to which EQM Gathering acquired from EQT all of EQT's interests in ROM, Strike Force and Rice WV in exchange for an aggregate of 5,889,282 EQM common units and aggregate cash consideration of $1.15 billion, plus working capital adjustments. ROM owns a natural gas gathering system that gathers gas from wells located primarily in Belmont County, Ohio. Strike Force owns a 75% limited liability company interest in Strike Force Midstream LLC (Strike Force Midstream). The May 2018 Acquisition closed on May 22, 2018 with an effective date of May 1, 2018.
As a result of the recast, EQM recognized approximately $38.0 million of goodwill. The goodwill value was based on a valuation performed by EQT as of November 13, 2017 with regard to the Rice Merger. EQT recorded goodwill as the excess of the estimated enterprise value of ROM, Strike Force and Rice WV over the sum of the fair value amounts allocated to the assets and liabilities of ROM, Strike Force and Rice WV. Goodwill was allocated to the value attributed to additional growth opportunities, synergies and operating leverage within the Gathering segment. Prior to the recast, EQM had no goodwill. The following table summarizes the allocation of the fair value of the assets and liabilities of ROM, Strike Force and Rice WV as of November 13, 2017 through pushdown accounting from EQT. The preliminary allocation to certain assets and/or liabilities may be adjusted by material amounts as EQT continues to finalize the fair value estimates.
  At November 13, 2017
  (Thousands)
Estimated fair value of ROM, Strike Force and Rice WV (1)
 $1,514,743
  
Estimated Fair Value of Assets Acquired and Liabilities Assumed: 
Current assets (2)
 66,586
Intangible assets (3)
 623,200
Property and equipment, net (4)
 846,823
Other non-current assets 71
Current liabilities (2)
 (59,891)
Total estimated fair value of assets acquired and liabilities assumed $1,476,789
Goodwill 37,954
(1)Includes the estimated fair value attributable to noncontrolling interest of $166 million.
(2)The fair value of current assets and current liabilities were assumed to approximate their carrying values.
(3)The identifiable intangible assets for customer relationships were estimated by applying a discounted cash flow approach which was adjusted for customer attrition assumptions and projected market conditions.
(4)The estimated fair value of long-lived property and equipment were determined utilizing estimated replacement cost adjusted for a usage or obsolescence factor.
As a result of the recast, EQM also recognized approximately $623.2 million in intangible assets. These intangible assets were valued by EQT based upon the estimated fair value of the customer contracts as of November 13, 2017. The customer contracts were assigned a useful life of 15 years and are amortized on a straight-line basis. Amortization expense for the three and six

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months ended June 30, 2018 was $10.4 million and $20.8 million, respectively. As of June 30, 2018 and December 31, 2017, accumulated amortization was $26.3 million and $5.5 million, respectively. There was no amortization expense recognized for the three and six months ended June 30, 2017. The estimated annual amortization expense over the next five years is $41.5 million.
Gulfport Transaction
On May 1, 2018, pursuant to the Purchase and Sale Agreement dated April 25, 2018, by and among EQM, EQM Gathering, Gulfport Energy Corporation (Gulfport) and an affiliate of Gulfport, EQM Gathering acquired the remaining 25% limited liability company interest in Strike Force Midstream not owned by Strike Force for $175 million (the Gulfport Transaction). As a result, EQM owned 100% of Strike Force Midstream effective as of May 1, 2018.
EQM-RMP Merger
On April 25, 2018, EQM entered into an Agreement and Plan of Merger (the Merger Agreement) with Rice Midstream Partners LP (RMP), Rice Midstream Management LLC, the general partner of RMP (the RMP General Partner), the EQM General Partner, EQM Acquisition Sub, LLC, a wholly owned subsidiary of EQM (Merger Sub), EQM GP Acquisition Sub, LLC, a wholly owned subsidiary of EQM (GP Merger Sub), and, solely for certain limited purposes set forth therein, EQT. Pursuant to the Merger Agreement, on July 23, 2018, Merger Sub and GP Merger Sub merged with and into RMP and the RMP General Partner, respectively, with RMP and the RMP General Partner surviving as wholly owned subsidiaries of EQM (the EQM-RMP Merger). Pursuant to the Merger Agreement, each RMP common unit issued and outstanding immediately prior to the effective time of the EQM-RMP Merger was converted into the right to receive 0.3319 EQM common units (the Merger Consideration), the issued and outstanding incentive distributions rights of RMP were canceled and each outstanding award of phantom units in respect of RMP common units fully vested and converted into the right to receive the Merger Consideration, less applicable tax withholding, in respect of each RMP common unit subject thereto. The aggregate Merger Consideration consisted of approximately 34 million EQM common units. As a result of the EQM-RMP Merger, RMP's common units are no longer publicly traded.
Also in connection with the completion of the EQM-RMP Merger, on July 23, 2018, EQM repaid the approximately $260 million of borrowings outstanding under the Credit Agreement, dated as of December 22, 2014, by and among RMP, as parent guarantor, Rice Midstream OpCo LLC, a wholly owned subsidiary of RMP, as borrower, Wells Fargo Bank, N.A., as administrative agent, and the lenders and other parties from time to time party thereto (the RMP Credit Agreement), and the RMP Credit Agreement was terminated.
C.
Revenue from Contracts with Customers
As discussed in Note A, EQM adopted ASU No. 2014-09, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method of adoption. EQM applied the ASU to all open contracts as of the date of initial application. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not materially change EQM's amount and timing of revenues.
EQM provides gathering, transmission and storage services in two manners: firm service and interruptible service. Firm service contracts are typically long term and include firm reservation fees, which are fixed, monthly charges for the guaranteed reservation of pipeline or storage capacity. Volumetric based fees under firm contracts include usage fees and charges for actual volumes transported, gathered or stored in excess of the firm contracted volume. Interruptible service contracts include volumetric based fees, which are charges for the volume of gas actually gathered, transported or stored and do not guarantee access to the pipeline or storage facility. These contracts can be short or long term. Firm and interruptible contracts are billed at the end of each calendar month, with payment typically due within 21 days.
Under a firm contract, EQM has a stand-ready obligation to provide the service over the life of the contract. The performance obligation for firm reservation fee revenue is satisfied over time as the pipeline capacity is made available to the customer. As such, EQM recognizes firm reservation fee revenue evenly over the contract period, using a time-elapsed output method to measure progress. The performance obligation for volumetric based fee revenues for usage fees under firm and interruptible contracts is generally satisfied upon EQM's monthly billing to the customer for actual volumes gathered, transported or stored during the month. The amount billed corresponds directly to the value of EQM's performance to date as the customer obtains value as each volume is gathered, transported or stored.
Certain of EQM's gas gathering agreements are structured with minimum volume commitments (MVC), which specify minimum quantities for which a customer will be charged regardless of actual quantities gathered under the contract. Revenue is recognized for MVCs when the performance obligation has been met, which is the earlier of when the gas is gathered or when it is remote that the producer will be able to meet its MVC.

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For the three and six months ended June 30, 2018 and 2017, all revenues recognized on EQM's statements of consolidated operations are from contracts with customers. As of June 30, 2018 and December 31, 2017, all receivables recorded on EQM's consolidated balance sheets represent performance obligations that have been satisfied and for which an unconditional right to consideration exists.
The table below provides disaggregated revenue information by EQM business segment for the three and six months ended June 30, 2018.
  Three Months Ended June 30, 2018
  Gathering Transmission Total
  (Thousands)
Firm reservation fee revenues $111,702
 $82,222
 $193,924
Volumetric based fee revenues:      
Usage fees under firm contracts (1)
 9,956
 4,828
 14,784
Usage fees under interruptible contracts (2)
 58,958
 2,095
 61,053
Total volumetric based fee revenues 68,914
 6,923
 75,837
Total operating revenues $180,616
 $89,145
 $269,761
       
  Six Months Ended June 30, 2018
  Gathering Transmission Total
  (Thousands)
Firm reservation fee revenues $221,635
 $179,997
 $401,632
Volumetric based fee revenues:      
Usage fees under firm contracts (1)
 22,064
 8,650
 30,714
Usage fees under interruptible contracts (2)
 116,545
 7,432
 123,977
Total volumetric based fee revenues 138,609
 16,082
 154,691
Total operating revenues $360,244
 $196,079
 $556,323
(1)Includes fees on volumes gathered and transported in excess of firm contracted capacity and also for transmission includes commodity charges and fees on all volumes transported under firm contracts.
(2)Includes volumes from contracts under which EQM has agreed to hold capacity available but for which it does not receive a capacity reservation fee.
Based on total projected contractual revenues and including contracts associated with expected future capacity from expansion projects that are not yet fully constructed but for which EQM has entered into firm contracts, EQM's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately 8 and 15 years, respectively, as of December 31, 2017.
The following table summarizes the transaction price allocated to EQM's remaining performance obligations under all contracts with firm reservation fees and MVCs as of June 30, 2018.
  2018 2019 2020 2021 2022 Thereafter Total
 (Thousands)
Gathering firm reservation fees $223,806
 $471,226
 $547,153
 $557,152
 $557,152
 $2,841,279
 $5,197,768
Gathering revenues supported by MVCs 
 65,700
 71,370
 71,175
 71,175
 136,875
 416,295
Transmission firm reservation fees 179,786
 347,061
 347,261
 341,769
 338,010
 2,602,572
 4,156,459
Total $403,592
 $883,987
 $965,784
 $970,096
 $966,337
 $5,580,726
 $9,770,522

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B.
October 2016 Acquisition

Effective October 1, 2016, EQM acquired from EQT 100% of the outstanding 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 $1 Billion Facility (as defined in Note G).

Prior to the October 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 consolidated financial statements included recasting depreciation expense recognized for the periods prior to the transaction to reflect the pipeline’s useful life of 40 years. The cumulative capital lease depreciation recorded for periods prior to the transaction was eliminated through equity at the time of the acquisition 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 $1.8 million and $5.2 million for the three and nine months ended September 30, 2016, respectively.

C.D.Equity and Net Income per Limited Partner Unit

The following table summarizes EQM's limited partner common units and general partner units issued from January 1, 20162018 through December 31, 2016. EQM did not issue any units during the nine months ended SeptemberJune 30, 2018. There were no issuances in 2017.
 Limited Partner Common Units General Partner Units Total
Balance at January 1, 201677,520,181
 1,443,015
 78,963,196
2014 EQM Value Driver Award Program issuance19,796
 
 19,796
EQM Total Return Program issuance92,472
 
 92,472
$750 Million ATM Program2,949,309
 
 2,949,309
Balance at December 31, 201680,581,758
 1,443,015
 82,024,773
 Limited Partner Common Units General Partner Units Total
Balance at January 1, 201880,581,758
 1,443,015
 82,024,773
Common units issued (1)
9,608
 
 9,608
May 2018 Acquisition consideration5,889,282
 
 5,889,282
Balance at June 30, 201886,480,648
 1,443,015
 87,923,663
(1)Units issued upon a resignation from the EQM General Partner's Board of Directors in February 2018.
As of SeptemberJune 30, 2017,2018, EQGP and its subsidiaries owned 21,811,643 EQM common units, representing a 26.6%24.8% limited partner interest, 1,443,015 EQM general partner units, representing a 1.8%1.6% general partner interest, and all of the IDRs in EQM. As of SeptemberJune 30, 2017,2018, EQT owned 5,889,282 EQM common units, representing a 6.7% limited partner interest in EQM, 100% of the non-economic general partner interest in EQGP and a 90.1%91.3% limited partner interest in EQGP.


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the EQM-RMP Merger, on July 23, 2018, an indirect wholly owned subsidiary of EQT received 9,544,530 EQM common units as Merger Consideration.
Net Income per Limited Partner Unit. Net income attributable to AVC, Rager and the Gathering AssetsMay 2018 Acquisition for the periods prior to OctoberMay 1, 20162018, was not allocated to the limited partners for purposes of calculating net income per limited partner unit.unit as these pre-acquisition amounts were not available to the unitholders. The weighted average phantom unit awards included in the calculation of basic weighted average limited partner units outstanding was 21,29817,369 and 17,48121,041 for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and 20,75720,467 and 17,04620,506 for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively. Potentially dilutive securities included in the calculation of diluted weighted average limited partner units outstanding totaled zero and 27,397 for the three and nine months ended September 30, 2016, respectively.

D.E.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,
2017 2016 2017 20162018 2017 2018 2017
(Thousands)(Thousands)
Revenues from external customers (including affiliates): 
  
  
  
 
  
  
  
Gathering$116,522
 $99,141
 $330,996
 $297,305
$180,616
 $112,145
 $360,244
 $214,474
Transmission90,671
 77,631
 278,589
 243,295
89,145
 84,670
 196,079
 182,413
Total operating revenues$207,193
 $176,772
 $609,585
 $540,600
$269,761
 $196,815
 $556,323
 $396,887
              
Operating income: 
  
  
  
 
  
  
  
Gathering$85,817
 $72,495
 $242,716
 $218,274
$121,631
 $83,425
 $252,513
 $157,129
Transmission59,689
 53,715
 188,995
 174,085
60,642
 57,863
 140,093
 129,467
Total operating income$145,506
 $126,210
 $431,711
 $392,359
$182,273
 $141,288
 $392,606
 $286,596
              
Reconciliation of operating income to net income:   
  
  
   
  
  
Equity income (1)
10,938
 5,111
 19,749
 9,388
Other income6,858
 13,479
 19,576
 31,490
944
 1,402
 1,842
 2,939
Net interest expense9,426
 2,802
 26,014
 11,448
20,683
 8,662
 31,399
 16,588
Income tax expense
 3,227
 
 10,147
Net income$142,938
 $133,660
 $425,273
 $402,254
$173,472

$139,139

$382,798

$282,335
(1)Equity income is included in the Transmission segment.

 September 30, 2017 December 31, 2016
 (Thousands)
Segment assets: 
  
Gathering$1,422,645
 $1,292,713
Transmission1,453,309
 1,413,631
Total operating segments2,875,954
 2,706,344
Headquarters, including cash471,475
 369,496
Total assets$3,347,429
 $3,075,840

 Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
 2017 2016 2017 2016
 (Thousands)
Depreciation and amortization: 
  
  
  
Gathering$9,983
 $7,663
 $28,398
 $22,520
Transmission12,261
 6,976
 35,793
 20,657
Total$22,244
 $14,639
 $64,191
 $43,177
        
Expenditures for segment assets:       
Gathering$48,182
 $88,390
 $150,728
 $247,755
Transmission22,312
 77,940
 73,679
 253,957
Total (1)
$70,494
 $166,330
 $224,407
 $501,712

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 June 30, 
 2018
 December 31, 
 2017
 (Thousands)
Segment assets: 
  
Gathering$3,250,242
 $3,020,491
Transmission (1)
2,505,947
 1,948,047
Total operating segments5,756,189
 4,968,538
Headquarters, including cash806,236
 179,038
Total assets$6,562,425
 $5,147,576
(1)
The equity investment in the MVP Joint Venture was included in the headquarters segment prior to June 30, 2018. As of June 30, 2018, the investment in the MVP Joint Venture was included in the Transmission segment and the amount at December 31, 2017 has been recast to confirm with this presentation.
 Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
 2018 2017 2018 2017
 (Thousands)
Depreciation: 
  
  
  
Gathering$15,646
 $9,555
 $30,590
 $18,415
Transmission12,430
 11,845
 24,871
 23,532
Total$28,076
 $21,400
 $55,461
 $41,947
        
Expenditures for segment assets:       
Gathering$139,099
 $53,708
 $252,297
 $102,546
Transmission27,962
 29,978
 46,891
 51,367
Total (1)
$167,061
 $83,686
 $299,188
 $153,913
(1)EQM accrues capital expenditures when work has been completed but the associated bills have not yet been paid. These accrued amounts are excluded from capital expenditures onin the statements of consolidated cash flows until they are paid in a subsequent period. Accrued capital expenditures were approximately $26.5$62.3 million, $31.2$60.3 million and $26.7$66.0 million at September 30, 2017, June 30, 20172018, March 31, 2018 and December 31, 2016,2017, respectively. Accrued capital expenditures were approximately $48.2$31.2 million, $50.7$34.0 million and $24.1$26.7 million at September 30, 2016, June 30, 20162017, March 31, 2017 and December 31, 2015,2016, respectively.

E.F.Related Party Transactions
In the ordinary course of business, EQM engages in transactions with EQT and its affiliates including, but not limited to, gas gathering agreements, transportation service and precedent agreements storage agreements and gas gatheringstorage agreements. Pursuant to thean omnibus agreement, EQT performs centralized corporate, general and administrative services for EQM.EQM and provides a license for the use of the name "EQT" and related marks in connection with EQM's business. In exchange, EQM reimburses EQT for the expenses incurred by EQT in providing these services, including directservices. The omnibus agreement also provides for certain indemnification obligations between EQM and indirect costs and expenses attributable to EQT's long-term incentive programs.EQT. Pursuant to an operation and management servicesa secondment agreement, EQT Gathering, LLC (EQT Gathering), an indirect wholly owned subsidiaryemployees of EQT provides EQM’s pipelines and storage facilitiesits affiliates may be seconded to EQM to provide operating and other services with certain operationalrespect to EQM's business under the direction, supervision and management services.control of EQM. EQM reimburses EQT Gatheringand its affiliates for suchthe services pursuant toprovided by the terms of the omnibus agreement.seconded employees. The expenses for which EQM reimburses EQT and its subsidiariesaffiliates may not necessarily reflect the actual expenses that EQM would incur on a stand-alone basis andbasis. EQM is unable to estimate what those expenses would be on a stand-alone basis.

F.G.Investment in Unconsolidated Entity

MVP Joint Venture. The MVP Joint Venture plans to constructis constructing the Mountain Valley Pipeline (MVP), an estimated 300-mile natural gas interstate pipeline spanning from northern West Virginia to southern Virginia. EQM is the operator of the MVP and owned a 45.5% interest in the MVP Joint Venture as of SeptemberJune 30, 2017.2018. The MVP Joint Venture has been determined to beis a variable interest entity because it has insufficient equity to finance its activities during the construction stage of the project. EQM is not the primary beneficiary because it does not have the power to direct the activities of the MVP Joint Venture that most significantly impact its economic performance. Certain business decisions require the approval of owners holding more than a 66 2/3% interest in the MVP Joint Venture and no one member owns more than a 66 2/3% interest. EQM accounts for the interest in theThe MVP Joint Venture asis an equity method investment for accounting purposes as EQM has the ability to exercise significant influence over operating and financial policies of the MVP Joint Venture.

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In August 2017,May 2018, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for $48.0$445.9 million, of which $27.2$193.4 million was paid in October 2017July 2018 and the remaining $20.8$252.5 million is expected to be paid in November 2017.the third quarter of 2018. The capital contribution payable has been reflected on the consolidated balance sheet as of SeptemberJune 30, 20172018 with a corresponding increase to EQM's investment in the MVP Joint Venture.

Equity income related tois primarily 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 $6.0 million and $2.7 million for the three months ended September 30, 2017 and 2016, respectively, and $15.4 million and $6.1 million for the nine months ended September 30, 2017 and 2016, respectively.

MVP.
As of SeptemberJune 30, 2017,2018, EQM had issued a $91 million performance guarantee in favor of the MVP Joint Venture to provide performance assurances for MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP. Upon the FERC’s initial release to begin construction of the MVP, EQM's guarantee will terminate. EQM will then be obligated to issue a new guarantee in an amount equal to 33% of MVP Holdco’s proportionate share of 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, 2017,2018, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $431$1,094 million, which consists of the investment in unconsolidated entity balance on the consolidated balance sheet as of SeptemberJune 30, 20172018 and amounts whichthat could have become due under EQM's performance guarantee as of that date.


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The following tables summarize the unaudited condensed financial statements for the investment in unconsolidated entity accounted for under the equity method of accounting.

MVP Joint Venture.
Condensed Consolidated Balance Sheets
September 30, 2017 December 31, 2016June 30, 
 2018
 December 31, 
 2017
(Thousands)(Thousands)
Current assets$186,840
 $53,959
$1,161,641
 $330,271
Noncurrent assets594,208
 361,820
1,334,266
 747,728
Total assets$781,048
 $415,779
$2,495,907
 $1,077,999
      
Current liabilities$33,802
 $10,149
$290,855
 $65,811
Equity747,246
 405,630
2,205,052
 1,012,188
Total liabilities and equity$781,048
 $415,779
$2,495,907
 $1,077,999
Condensed Statements of Consolidated Operations
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
2017 2016 2017 20162018 2017 2018 2017
(Thousands)(Thousands)
Net interest income$3,227
 $1,460
 $8,205
 $3,237
$7,732
 $2,730
 $13,915
 $4,977
AFUDC - equity10,055
 4,474
 25,710
 10,023
16,307
 8,503
 29,489
 15,656
Net income$13,282
 $5,934
 $33,915
 $13,260
$24,039
 $11,233
 $43,404
 $20,633
G.H.Debt
Credit Facility Borrowings

$1 Billion Facility. In July 2017, EQM amended and restated itshas a $1 billion credit facility to increase the borrowing capacity under the facility from $750 million to $1 billion and extend the term tothat expires in July 2022. The proceeds of the loans made under the $1 Billion Facility may be used by EQM foris available to fund working capital requirements and capital expenditures, dividends, unit repurchasesto purchase assets, to pay distributions and other lawful corporaterepurchase units and for general partnership purposes (including purchasing assets from EQT and its subsidiaries and other third parties). Subject to certain terms and conditions, the $1 Billion Facility has an accordion feature that allows EQM to increase the available borrowings under the facility by up to an additional $500 million. EQM’sEQM's $1 Billion Facility contains various provisions that, if not complied with,violated, could result in termination of the credit facility, require early payment of amounts outstanding or similar actions. The most significant covenants and events of default relate to maintenance of a permitted leverage ratio, limitations on transactions with affiliates, limitations on restricted payments, insolvency events, nonpayment of scheduled principal or interest payments, acceleration of and certain other defaults under other financial obligations and change of control provisions. Under the $1 Billion Facility, EQM is required to maintain a consolidated leverage ratio of not more than 5.00 to 1.00 (or not more than 5.50 to 1.00 for certain measurement periods following the consummation of certain acquisitions).

EQM had $105 millionno letters of borrowingscredit outstanding onunder its credit facility as of SeptemberJune 30, 20172018 and had no borrowings outstanding as of December 31, 2016.2017. During the three and ninesix months ended SeptemberJune 30, 2017,2018, the maximum amount of EQM's outstanding borrowings under theEQM's credit facility at any time was $177$338 million and the average daily balances were approximately $95 million and $32 million, respectively. Interest was incurred at a weighted average annual interest rate of approximately 2.7% for the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the maximum amounts of EQM’s outstanding borrowings under the credit facility at any time were $91 million and $299$420 million, respectively, and the average daily balances werebalance was approximately $34$122 million and $67$211 million, respectively. Interest wasEQM incurred interest at weighted average annual interest rates of approximately 2.0%3.4% and 1.9%3.2% for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. There were no borrowings outstanding at any time during the

14



three and six months ended June 30, 2017. During the third quarter, EQM intends to increase its borrowing capacity from $1 billion up to $2 billion.
364-Day Facility. EQM has a $500 million, 364-day, uncommitted revolving loan agreement with EQT that matures on October 24, 2018 and will automatically renew for successive 364-day periods unless EQT delivers a non-renewal notice at least 60 days prior to the then current maturity date. Interest accrues on outstanding borrowings at an interest rate equal to the rate then applicable to similar loans under the $1 Billion Facility, or a successor revolving credit facility, less the sum of (i) the then applicable commitment fee under the $1 Billion Facility and (ii) 10 basis points.

EQM had no borrowings outstanding on the 364-Day Facility as of SeptemberJune 30, 20172018 and December 31, 2016.2017. There were no borrowings outstanding at any time during the three and six months ended June 30, 2018. During the three and ninesix months ended SeptemberJune 30, 2017, the maximum amountsamount of EQM’sEQM's outstanding borrowings under the credit

12



facility at any time were $40 million andwas $100 million respectively, and the average daily balances were approximately $11$55 million and $30$40 million, respectively. For the three and nine months ended September 30, 2017,EQM incurred interest was incurred at weighted average annual interest rates of approximately 2.4%2.2% and 2.2%,2.1% for the three and six months ended June 30, 2017, respectively. EQM expects EQT to terminate the 364-Day Facility at or prior to the proposed separation of EQT's production and midstream businesses (the Separation). 

EQM Term Loan Facility. On April 25, 2018, EQM entered into a $2.5 billion unsecured multi-draw 364-day term loan facility with a syndicate of lenders. The EQM Term Loan Facility was used to fund the cash consideration for the May 2018 Acquisition, to repay borrowings under EQM's $1 Billion Facility and for other general partnership purposes. During the second quarter 2018, the balance outstanding under the EQM Term Loan Facility was repaid, and the EQM Term Loan Facility was terminated on June 25, 2018 in connection with EQM's issuance of the 2018 Senior Notes (defined below). As a result of the termination, EQM expensed $3 million of deferred issuance costs. From April 25, 2018 through June 25, 2018, the maximum amount of EQM's outstanding borrowings under the EQM Term Loan Facility at any time was $1,825 million and the average daily balance was approximately $1,231 million. EQM incurred interest at a weighted average annual interest rate of approximately 3.3% for the period from April 25, 2018 through June 25, 2018.
2018 Senior Notes. During the second quarter of 2018, EQM issued 4.75% senior notes due July 15, 2023 in the aggregate principal amount of $1.1 billion, 5.50% senior notes due July 15, 2028 in the aggregate principal amount of $850 million and 6.50% senior notes due July 15, 2048 in the aggregate principal amount of $550 million (collectively, the 2018 Senior Notes). EQM received net proceeds from the offering of approximately $2,465.8 million, inclusive of a discount of $11.8 million and estimated debt issuance costs of $22.4 million. The net proceeds were used to repay the balance outstanding under the EQM Term Loan Facility and the RMP Credit Agreement and the remainder is expected to be used for general partnership purposes. The 2018 Senior Notes were issued pursuant to new supplemental indentures to EQM's existing indenture dated August 1, 2014. The 2018 Senior Notes contain covenants that limit EQM's ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of the EQM's assets.
As of SeptemberJune 30, 2017,2018, EQM was in compliance with all debt provisions and covenants.

H.I.Fair Value Measurements

The carrying values of cash and cash equivalents, accounts receivable, amounts due to/from related parties and accounts payable approximate fair value due to the short maturity of the instruments; these are considered Level 1 fair values.value measurements. The carrying value of the credit facility borrowings approximates fair value as the interest rates are based on prevailing market rates; this is considered a Level 1 fair value.value measurement. As EQM's long-term debt issenior notes are not actively traded, itstheir fair value is avalues are considered Level 2 fair value measurementmeasurements and are estimated using a standard industry income approach model which utilizesthat applies a discount rate based on market rates for debt with similar remaining time to maturity and credit risk. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the estimated fair value of EQM's long-term debtsenior notes was approximately $1,018$3,454 million and $982$1,006 million, respectively, and the carrying value of EQM's long-term debtsenior notes was approximately $987$3,454 million and $986$987 million, respectively. The fair value of the Preferred Interest is a Level 3 fair value measurement whichand is estimated using an income approach model utilizingthat applies a market-based discount rate. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the estimated fair value of the Preferred Interest was approximately $133$125 million and $132$133 million, respectively, and the carrying value of the Preferred Interest was approximately $120$117 million and $123$119 million, respectively.

15

I.Income Taxes

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

As discussed in Note 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 effective on October 1, 2016, because the transaction was between entities under common control. Accordingly, the income tax effects associated with these operations prior to acquisition are reflected in the consolidated financial statements as they were previously part of EQT’s consolidated federal tax return.

J.Distributions
On OctoberJuly 24, 2017,2018, the Board of Directors of the EQM General Partner declared a cash distribution to EQM’sEQM's unitholders for the thirdsecond quarter of 20172018 of $0.98$1.09 per common unit. The cash distribution will be paid on NovemberAugust 14, 20172018 to unitholders of record at the close of business on NovemberAugust 3, 2017.2018. Based on the 80,581,758 EQM common units outstanding on OctoberJuly 26, 2017,2018, cash distributions to EQGP will be approximately $21.4$23.8 million related to its limited partner interest, $2.1$2.4 million related to its general partner interest and $37.6$68.1 million related to its IDRs in EQM. The distribution amounts to EQGP related to its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the thirdsecond quarter 20172018 distribution.


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EQT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2.  Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations

EQM's consolidated financial statements have been retrospectively recast to include the pre-acquisition results of AVC, Rager and the 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”"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”"Outlook" in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations," and the expectations of plans, strategies, objectives, and growth and anticipated financial and operational performance of EQM and its subsidiaries, including guidance regarding EQM’sEQM's gathering, and transmission and storage and water revenue and volume growth; the weighted average contract life of gathering, transmission and storage contracts; infrastructure programs (including the timing, cost, capacity and sources of funding with respect to gathering, transmission and transmissionwater expansion projects); the cost, capacity, timing of regulatory approvals and anticipated in-service date of the MVP project;and MVP Southgate; the ultimate terms, partners and structure of the MVP Joint Venture; expansion projects in EQM's operating areas of operations and in areas that would provide access to new markets; asset acquisitions, including EQM’sEQM's ability to complete asset acquisitions from EQT or third parties;acquisitions; the expected benefits to EQMimpact and outcome of pending and future litigation; the timing of the proposed separation of EQT's proposed acquisition of Rice Energy Inc. (Rice), including whether EQT willproduction and midstream businesses (the Separation) and the parties' ability to complete the proposed acquisition and, if so, whether it will sell Rice's remaining midstream assets to EQM;Separation; the amount and timing of distributions, including expected increases; 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;availability and EQM's plan to increase its borrowing capacity up to $2 billion; the effects of government regulation and litigation;regulation; 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’sEQM's control. The risks and uncertainties that may affect the operations, performance and results of EQM’sEQM's business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors”"Risk Factors" in EQM’sEQM's Annual Report on Form 10-K for the year ended December 31, 2016.
2017, as updated by Part II, Item 1A, "Risk Factors," of this Quarterly Report on Form 10-Q.
Any forward-looking statement speaks only as of the date on which such statement is made and EQM does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.
In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember that such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about EQM. The agreements may contain representations and warranties by EQM, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments. Accordingly, these representations and warranties alone may not describe the actual state of affairs of EQM or its affiliates as of the date they were made or at any other time.

EXECUTIVE OVERVIEW

For the three months ended SeptemberJune 30, 2017, EQM reported2018, net income of $142.9attributable to EQM was $172.6 million compared to $133.7$139.1 million for the three months ended SeptemberJune 30, 2016.2017. The increase resulted primarily from higher gathering and transmission revenues, which were driven mainly by the May 2018 Acquisition which supports affiliate and third party production development, and higher equity income, partly offset by higher operating expenses and higher net interest expense.
For the six months ended June 30, 2018, net income attributable to EQM was $379.5 million compared to $282.3 million for the six months ended June 30, 2017. The increase primarily resulted from higher revenues from both gathering and transmission revenues, which were driven mainly by affiliate and third party production development in the Marcellus Shale, and lower income taxes, partly offset by an increase in operating expenses, higher net interest expense and lower other income.

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For the nine months ended September 30, 2017, EQM reported net income of $425.3 million compared to $402.3 million for the nine months ended September 30, 2016. The increase primarily resulted from higher revenues from both transmission and gathering, which were driven mainly by the May 2018 Acquisition which supports affiliate and third party production development, in the Marcellus Shale, and lowerhigher equity income, taxes, partly offset by an increase in operating expenses and higher net interest expense and lower other income.expense.

EQM declared a cash distribution to its unitholders of $0.98$1.09 per unit on OctoberJuly 24, 2017,2018, which was 5%2% higher than the first quarter 2018 distribution of $1.065 per unit and 17% higher than the second quarter 2017 distribution of $0.935 per unit and 20% higher than the third quarter 2016 distribution of $0.815 per unit.

Business Segment Results
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’ssegment's operating income to EQM’sEQM's consolidated operating income and net income in Note DE to the consolidated financial statements.

GATHERING RESULTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
Three Months Ended September 30, Nine Months Ended September 30,
2018 (1)
 2017 % Change 
2018 (1)
 2017 % Change
2017 2016 % Change 2017 2016 % Change(Thousands, except per day amounts)
FINANCIAL DATA(Thousands, other than per day amounts)        
Firm reservation fee revenues$104,772
 $83,560
 25.4
 $300,901
 $249,127
 20.8
$111,702
 $101,858
 9.7 $221,635
 $196,129
 13.0
Volumetric based fee revenues:                   
Usage fees under firm contracts (1)
7,873
 10,024
 (21.5) 19,173
 31,515
 (39.2)
Usage fees under interruptible contracts3,877
 5,557
 (30.2) 10,922
 16,663
 (34.5)
Usage fees under firm contracts (2)
9,956
 6,479
 53.7 22,064
 11,300
 95.3
Usage fees under interruptible contracts(3)
58,958
 3,808
 1,448.3 116,545
 7,045
 1,554.3
Total volumetric based fee revenues11,750
 15,581
 (24.6) 30,095
 48,178
 (37.5)68,914
 10,287
 569.9 138,609
 18,345
 655.6
Total operating revenues116,522
 99,141
 17.5
 330,996
 297,305
 11.3
180,616
 112,145
 61.1 360,244
 214,474
 68.0
Operating expenses:                   
Operating and maintenance10,219
 9,672
 5.7
 31,082
 27,740
 12.0
15,777
 10,293
 53.3 27,686
 20,633
 34.2
Selling, general and administrative10,503
 9,311
 12.8
 28,800
 28,771
 0.1
17,175
 8,872
 93.6 28,682
 18,297
 56.8
Depreciation and amortization9,983
 7,663
 30.3
 28,398
 22,520
 26.1
Depreciation15,646
 9,555
 63.7 30,590
 18,415
 66.1
Amortization of intangible assets10,387
 
 100.0 20,773
 
 100.0
Total operating expenses30,705
 26,646
 15.2
 88,280
 79,031
 11.7
58,985
 28,720
 105.4 107,731
 57,345
 87.9
Operating income$85,817
 $72,495
 18.4
 $242,716
 $218,274
 11.2
$121,631
 $83,425
 45.8 $252,513
 $157,129
 60.7
                   
OPERATIONAL DATA 
  
  
  
  
  
 
  
    
  
  
Gathered volumes (BBtu per day)                   
Firm capacity reservation1,838
 1,563
 17.6
 1,783
 1,506
 18.4
2,007
 1,780
 12.8 1,986
 1,754
 13.2
Volumetric based services (2)
370
 451
 (18.0) 292
 463
 (36.9)
Volumetric based services (4)
2,494
 281
 787.5 2,514
 253
 893.7
Total gathered volumes2,208
 2,014
 9.6
 2,075
 1,969
 5.4
4,501
 2,061
 118.4 4,500
 2,007
 124.2
                   
Capital expenditures$48,182
 $88,390
 (45.5) $150,728
 $247,755
 (39.2)$139,099
 $53,708
 159.0 $252,297
 $102,546
 146.0
(1)Includes the pre-acquisition results of the May 2018 Acquisition, which was effective on May 1, 2018. The recast is for the period the acquired businesses were under the common control of EQT, which began on November 13, 2017 as a result of the Rice Merger.
(2)Includes fees on volumes gathered in excess of firm contracted capacity.

(2)(3)Includes volumes from contracts under which EQM has agreed to hold capacity available but for which it does not receive a capacity reservation fee.
(4)Includes volumes gathered under interruptible contracts and volumes gathered in excess of firm contracted capacity.

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

Gathering revenues increased by $17.4 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 driven by third party and affiliate production development in the Marcellus Shale. EQM increased firm reservation fee revenues primarily as a result of third parties and affiliates contracting for additional firm gathering capacity on the Range Resources Corporation (Range Resources) Header Pipeline project and various affiliate wellhead gathering expansion projects. The decrease in usage fees under firm contracts was due to lower affiliate volumes in excess of firm contracted capacity. The decrease in usage fees under interruptible contracts was primarily due to the additional contracts for firm capacity.

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Operating expensesThree Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Gathering revenues increased by $4.1$68.5 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 primarily driven by the May 2018 Acquisition and affiliate and third party production development in the Marcellus Shale. Firm reservation fee revenues increased primarily as a result of increased depreciationaffiliate and amortizationthird party contracted gathering capacity, including that on the Range Resources Corporation (Range Resources) header pipeline project, and higher rates on various affiliate wellhead expansion projects in the current period. Usage fees under firm contracts increased due to increased third party and affiliate volumes gathered in excess of firm contracted capacity. Usage fees under interruptible contracts increased as a result of the May 2018 Acquisition, which added revenues of $55.3 million for the three months ended June 30, 2018.
Operating expenses increased by $30.3 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Operating and maintenance expense increased as a result of $2.3 million due tothe May 2018 Acquisition as well as an increase in repairs and maintenance expense consistent with the growth of the business. Selling, general and administrative increased as a result of the May 2018 Acquisition and transaction costs associated with that acquisition and the EQM-RMP Merger. Depreciation expense increased primarily as a result of the May 2018 Acquisition and additional assets placed in-service, including those associated with the Range Resources Header Pipelineheader pipeline project and a Northern West Virginia Marcellusvarious wellhead gathering system (NWV Gathering) expansion project and higher personnel costs.projects. Amortization of intangible assets relates to the May 2018 Acquisition.

NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017

Gathering revenues increased by $33.7$145.8 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 20162017 primarily driven by the May 2018 Acquisition and affiliate and third party and affiliate production development in the Marcellus Shale. EQM increased firmFirm reservation fee revenues increased primarily as a result of affiliatesincreased affiliate and third parties contracting for additional firmparty contracted gathering capacity, including that on the Range Resources header pipeline project, and higher rates on various affiliate wellhead gathering expansion projects andin the Range Resources Header Pipeline project. The decrease in usagecurrent period. Usage fees under firm contracts wasincreased due to lowerincreased third party and affiliate volumes gathered in excess of firm contracted capacity. The decrease in usageUsage fees under interruptible contracts was primarily due toincreased as a result of the additional contractsMay 2018 Acquisition, which added revenues of $109.0 million for firm capacity.the six months ended June 30, 2018.

Operating expenses increased by $9.2$50.4 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 20162017. Operating and maintenance expense increased as a result of the May 2018 Acquisition as well as an increase in repairs and maintenance expense consistent with the growth of the business. Selling, general and administrative increased as a result of the May 2018 Acquisition and transaction costs associated with that acquisition and the EQM-RMP Merger. Depreciation expense increased primarily as a result of increased depreciationthe May 2018 Acquisition and amortization expense of $5.9 million due to additional assets placed in-service, including those associated with the Range Resources Header Pipelineheader pipeline project and a NWV Gatheringvarious wellhead gathering expansion project and higher personnel costs.projects. Amortization of intangible assets relates to the May 2018 Acquisition.

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TRANSMISSION RESULTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
Three Months Ended September 30, Nine Months Ended September 30,2018 2017 % Change 2018 2017 % Change
2017 2016 % Change 2017 2016 % Change(Thousands, except per day amounts)
FINANCIAL DATA(Thousands, other than per day amounts)           
Firm reservation fee revenues$84,438
 $59,610
 41.7
 $256,224
 $190,003
 34.9
$82,222
 $79,512
 3.4
 $179,997
 $171,786
 4.8
Volumetric based fee revenues:                      
Usage fees under firm contracts (1)
3,427
 14,600
 (76.5) 9,787
 42,274
 (76.8)4,828
 3,503
 37.8
 8,650
 6,360
 36.0
Usage fees under interruptible contracts2,806
 3,421
 (18.0) 12,578
 11,018
 14.2
2,095
 1,655
 26.6
 7,432
 4,267
 74.2
Total volumetric based fee revenues6,233
 18,021
 (65.4) 22,365
 53,292
 (58.0)6,923
 5,158
 34.2
 16,082
 10,627
 51.3
Total operating revenues90,671
 77,631
 16.8
 278,589
 243,295
 14.5
89,145
 84,670
 5.3
 196,079
 182,413
 7.5
Operating expenses:                      
Operating and maintenance10,385
 8,526
 21.8
 30,389
 23,947
 26.9
8,810
 8,022
 9.8
 16,361
 14,499
 12.8
Selling, general and administrative8,336
 8,414
 (0.9) 23,412
 24,606
 (4.9)7,263
 6,940
 4.7
 14,754
 14,915
 (1.1)
Depreciation and amortization12,261
 6,976
 75.8
 35,793
 20,657
 73.3
Depreciation12,430
 11,845
 4.9
 24,871
 23,532
 5.7
Total operating expenses30,982
 23,916
 29.5
 89,594
 69,210
 29.5
28,503
 26,807
 6.3
 55,986
 52,946
 5.7
Operating income$59,689
 $53,715
 11.1
 $188,995
 $174,085
 8.6
$60,642
 $57,863
 4.8
 $140,093
 $129,467
 8.2
           
Equity income$10,938
 $5,111
 114.0
 $19,749
 $9,388
 110.4
                      
OPERATIONAL DATA 
  
  
  
  
  
 
  
  
  
  
  
Transmission pipeline throughput (BBtu per day)                      
Firm capacity reservation2,517
 1,440
 74.8
 2,288
 1,515
 51.0
2,826
 2,218
 27.4
 2,821
 2,171
 29.9
Volumetric based services (2)
21
 610
 (96.6) 22
 556
 (96.0)41
 21
 95.2
 41
 24
 70.8
Total transmission pipeline throughput2,538
 2,050
 23.8
 2,310
 2,071
 11.5
2,867
 2,239
 28.0
 2,862
 2,195
 30.4
                      
Average contracted firm transmission reservation commitments (BBtu per day)3,474
 2,365
 46.9
 3,519
 2,591
 35.8
3,607
 3,341
 8.0
 3,873
 3,542
 9.3
                      
Capital expenditures$22,312
 $77,940
 (71.4) $73,679
 $253,957
 (71.0)$27,962
 $29,978
 (6.7) $46,891
 $51,367
 (8.7)
(1)Includes fees on volumes transported in excess of firm contracted capacity as well as commodity charges and fees on all volumes transported under firm contracts as well as transmission fees on volumes in excess of firm contracted capacity.contracts.

(2)Includes volumes transported under interruptible contracts and volumes transported in excess of firm contracted capacity.

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Transmission and storage revenues increased by $4.5 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Firm reservation fee revenues increased due to higher contractual rates on existing contracts with affiliates and third parties in the current period. Usage fees under firm contracts increased primarily due to increased commodity charges on higher firm contracted volumes. The increase in usage fees under interruptible contracts primarily relates to higher parking revenue, which does not have associated pipeline throughput.
Operating expenses increased by $1.7 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 consistent with the growth of the business.
The increase in equity income of $5.8 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily related to the increase in the MVP Joint Venture's AFUDC on the MVP.

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ThreeSix Months Ended SeptemberJune 30, 20172018 Compared to ThreeSix Months Ended SeptemberJune 30, 2016

2017
Transmission and storage revenues increased by $13.0$13.7 million for the threesix months ended SeptemberJune 30, 20172018 compared to the threesix months ended SeptemberJune 30, 2016.2017. Firm reservation fee revenues increased due to affiliates contracting for additional firm capacityhigher contractual rates on the Ohio Valley Connector (OVC). Approximately $3.4 million of the increase was related to a FERC-approved retroactive negotiated rate adjustment for the period October 1, 2016 through June 30, 2017. The firm capacity on the OVC resulted in lower affiliate usage fees under firm contracts.

Operating expenses increased by $7.1 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The increases in operatingexisting contracts with third parties and maintenance expense and depreciation and amortization expense were the result of the OVC project placed in-serviceaffiliates in the fourth quarter of 2016. Operating and maintenance expense increased primarily due to property taxes on the OVC.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Transmission and storage revenues increased by $35.3 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Firm reservation fee revenues increased due to affiliatescurrent period, and third parties contracting for additional firm capacity,capacity. Usage fees under firm contracts increased primarily on the OVC, as well as higher contractual rates on existing contractsdue to increased commodity charges. The increase in the current year. The firm capacity on the OVC resulted in lower affiliate usage fees under firm contracts.

interruptible contracts primarily relates to higher parking revenue, which does not have associated pipeline throughput.
Operating expenses increased by $20.4$3.0 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 2016. The increases in operating and maintenance expense and depreciation and amortization expense were2017 consistent with the resultgrowth of the OVC project placed in-service inbusiness.
Equity income increased $10.4 million for the fourth quarter of 2016. Operating and maintenance expense increasedsix months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to property taxes on the OVC and higher personnel costs.

Other Income Statement Items

Other income decreased by $6.6 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 primarily driven by decreased AFUDC - equity of $7.2 million associated with the OVC project placed in-serviceincrease in the fourth quarter of 2016 and distributions from EES of $2.8 million for the three months ended September 30, 2016 which were recorded as other income in 2016, partly offset by higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP.
Other Income Statement Items
Other income decreased by $11.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily driven by decreased AFUDC - equity of $12.6 million associated with the OVC project placed in-service in the fourth quarter of 2016 and distributions from EES of $8.3 million for the nine months ended September 30, 2016 which were recorded as other income in 2016, partly offset by higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP.

Net interest expense increased by $6.6$0.5 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and $1.1 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 as a result of lower AFUDC – equity, which was related to the timing of spending on regulated projects.
The increase in net interest expense of $12.0 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and $14.8 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily driven by $5.2due to increased interest of $7.6 million and $9.9 million, respectively, on higher borrowings on EQM's credit facilities, deferred issuance costs expensed in the second quarter of 2018 associated with the termination of the EQM Term Loan and interest incurred on EQM's long-term debt issued in November 2016 and lower capitalizedthe 2018 Senior Notes.
Net income attributable to noncontrolling interest and AFUDC - debt associated with decreased spending on regulated projects, partly offset by $1.7 million of interest income recorded on distributions from EES in 2017. Net interest expense increased by $14.6 million for the ninethree and six months ended SeptemberJune 30, 2017 compared to2018 was $0.9 million and $3.3 million, respectively. As discussed in Note A, on May 1, 2018, EQM acquired the nine months ended September 30, 2016 primarily driven by $15.5 millionremaining 25% limited liability company interest in Strike Force Midstream. As a result, EQM owned 100% of interest incurred on EQM's long-term debt issued in November 2016 and lower capitalized interest and AFUDC - debt associated with decreased spending on regulated projects, partly offset by $5.1 millionStrike Force Midstream effective as of interest income recorded on distributions from EES in 2017.

May 1, 2018.
See Note I to the consolidated financial statements for discussion of income tax expense.
See “Investing Activities”"Investing Activities" and “Capital Requirements”"Capital Requirements" in the “Capital"Capital Resources and Liquidity”Liquidity" section below for a discussion of capital expenditures.

17




Non-GAAP Financial Measures
Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of EQM’sEQM's consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess:

EQM’sEQM'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’sEQM's assets to generate sufficient cash flow to make distributions to EQM’sEQM's unitholders;
EQM’sEQM'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’sEQM'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 it plans to distribute.


1821



Reconciliation of Non-GAAP Financial Measures

The following table presents a reconciliation of EQM's non-GAAP financial measures of adjusted EBITDA and distributable cash flow with the most directly comparable EQM GAAP financial measures of net income attributable to EQM and net cash provided by operating activities.
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
2017 2016 2017 20162018 2017 2018 2017
(Thousands)(Thousands)
Net income$142,938
 $133,660
 $425,273
 $402,254
Net income attributable to EQM$172,619
 $139,139
 $379,452
 $282,335
Add:              
Net interest expense9,426
 2,802
 26,014
 11,448
20,683
 8,662
 31,399
 16,588
Depreciation and amortization expense22,244
 14,639
 64,191
 43,177
Income tax expense
 3,227
 
 10,147
Preferred Interest payments received post conversion2,746
 
 8,238
 
Depreciation28,076
 21,400
 55,461
 41,947
Amortization of intangible assets10,387
 
 20,773
 
Preferred Interest payments2,746
 2,746
 5,492
 5,492
Non-cash long-term compensation expense
 
 225
 195

 
 331
 225
Transaction costs (1)
3,424
 
 3,424
 
Less:              
Equity income(6,025) (2,700) (15,413) (6,139)(10,938) (5,111) (19,749) (9,388)
AFUDC – equity(831) (8,003) (4,128) (16,733)(1,072) (1,598) (2,137) (3,297)
Pre-acquisition capital lease payments for AVC (1)

 (3,786) 
 (17,186)
Adjusted EBITDA attributable to the October 2016 Acquisition prior to acquisition (2)

 (3,803) 
 (11,420)
Adjusted EBITDA attributable to the May 2018 Acquisition (2)
(16,417) 
 (60,507) 
Adjusted EBITDA$170,498
 $136,036
 $504,400
 $415,743
$209,508
 $165,238
 $413,939
 $333,902
Less:              
Net interest expense excluding interest income on the Preferred Interest(11,123) (2,803) (31,149) (11,448)(22,336) (10,374) (34,836) (20,026)
Capitalized interest and AFUDC – debt(867) (3,294) (3,475) (6,838)(1,940) (1,008) (2,757) (2,608)
Ongoing maintenance capital expenditures net of expected reimbursements (3)
(8,110) (4,230) (14,180) (9,360)(7,115) (3,462) (10,980) (6,070)
Transaction costs(3,424) 
 (3,424) 
Distributable cash flow$150,398
 $125,709
 $455,596
 $388,097
$174,693
 $150,394
 $361,942
 $305,198
              
Net cash provided by operating activities$159,898
 $103,645
 $480,203
 $380,018
$220,225
 $158,883
 $441,646
 $320,305
Adjustments:              
Pre-acquisition capital lease payments for AVC (1)

 (3,786) 
 (17,186)
Capitalized interest and AFUDC – debt(867) (3,294) (3,475) (6,838)(1,940) (1,008) (2,757) (2,608)
Principal payments received on the Preferred Interest1,049
 
 3,103
 
1,093
 1,034
 2,172
 2,054
Ongoing maintenance capital expenditures net of expected reimbursements (3)
(8,110) (4,230) (14,180) (9,360)(7,115) (3,462) (10,980) (6,070)
Current tax expense
 450
 
 1,373
Adjusted EBITDA attributable to the October 2016 Acquisition prior to acquisition (2)

 (3,803) 
 (11,420)
Adjusted EBITDA attributable to the May 2018 Acquisition (2)
(16,417) 
 (60,507) 
Other, including changes in working capital(1,572) 36,727
 (10,055) 51,510
(21,153) (5,053) (7,632) (8,483)
Distributable cash flow$150,398
 $125,709
 $455,596
 $388,097
$174,693
 $150,394
 $361,942
 $305,198
(1)Reflects capital lease payments due underThere were no transaction costs for the lease. These lease payments were generally made monthly on a one month lag prior to the October 2016 Acquisition.three and six months ended June 30, 2017.

(2)Adjusted EBITDA attributable to the October 2016May 2018 Acquisition for the period prior to acquisition for the periods presentedMay 1, 2018 was excluded from EQM’sEQM's adjusted EBITDA calculations as these amounts were generated by AVC, Rager and the Gathering AssetsMay 2018 Acquisition prior to acquisition by EQM; therefore, the amounts could not have been distributed to EQM’sEQM's unitholders. Adjusted EBITDA attributable to the October 2016May 2018 Acquisition prior to acquisition for the three and ninesix months ended SeptemberJune 30, 20162018 was calculated as net income of $0.6$11.4 million and $1.3$41.0 million, respectively, plus depreciation and amortization expense of $0.7$1.6 million and $2.1$5.8 million, respectively, plus income tax expenseamortization of $3.2intangible assets of $3.5 million and $10.1$13.8 million, respectively, less interest income of less than $0.1 million and $0.5 million, respectively, less AFUDC - equity of $0.6 million and $1.6$0.1 million, respectively.


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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 $20.6 million for the three and nine months ended September 30, 2016, respectively (see Note B to the consolidated financial statements).

(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 $1.7$0.6 million and $0.4 millionzero for the three months ended September 30, 2017 and 2016, respectively, and $2.6 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively. Additionally, it excludes ongoing maintenance attributable to AVC, Rager and the Gathering Assets prior to acquisition of $1.4 million and $6.5 million for the three and nine months ended September 30, 2016, respectively.

22



ended June 30, 2018 and 2017, respectively, and $3.4 million and $1.0 million for the six months ended June 30, 2018 and 2017, respectively.
See “Executive Overview”"Executive Overview" above for a discussion of EQM's net income attributable to EQM, the GAAP financial measure most directly comparable to adjusted EBITDA. EQM's adjusted EBITDA increased by $34.5$44.3 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and $88.7$80.0 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 20162017 primarily as a result of higher operating income on increased revenues driven by production development in the Marcellus Shale and the October 2016 Acquisition, which resulted in EBITDA subsequent to the transaction being reflected in adjusted EBITDA, including the elimination of the AVC lease payment.

Shale.
Net cash provided by operating activities, the GAAP financial measure most directly comparable to distributable cash flow, increased by $100.2$121.3 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 20162017 as discussed in “Capital"Capital Resources and Liquidity." Distributable cash flow increased by $24.7$24.3 million for the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 20162017 and $67.5$56.7 million for the ninesix months ended SeptemberJune 30, 20172018 compared to the ninesix months ended SeptemberJune 30, 20162017 mainly attributable to the increase in EQM's adjusted EBITDA, partly offset by increased net interest expense and ongoing maintenance capital expenditures.

Outlook

On February 21, 2018, EQT announced a plan to separate its upstream and midstream businesses, creating a standalone publicly traded corporation (SpinCo) that will focus on midstream operations. Following the Separation, SpinCo will own the midstream interests held by EQT, including the interests in EQM and EQGP. See Note B to the consolidated financial statements for a discussion of the EQM-RMP Merger, which was completed on July 23, 2018.
EQM’sEQM'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, Utica and 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 Gulf Coast and Southeast regions. Additionally, EQM may acquire additional midstream assets from EQT or pursue asset acquisitions from third 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:

Affiliate Wellhead Gathering Expansion. EQM expects to invest $160 million to $180 million in 2017 on gathering expansion projects supported by EQT Production development in the Marcellus Shale, down from the second quarter 2017 estimate as a result of timing of projects. EQM expects to install approximately 30 miles of gathering pipeline and 10,000 horsepower compression in its gathering systems across northern West Virginia and southwestern Pennsylvania during 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 SeptemberJune 30, 2017. 2018. The 42 inch diameter MVP has a targeted capacity of 2.0 Bcf per day and is estimated to span 300 miles extending from EQM's existing transmission and storage system in Wetzel County, West Virginia to Pittsylvania County, Virginia.Virginia, providing access to the growing Southeast demand markets. As currently designed, the total cost for the MVP is estimated to cost a total of $3.0be $3.5 billion to $3.5$3.7 billion, excluding AFUDC, with EQM funding its proportionate share through capital contributions made to the joint venture. MVP Joint Venture. In 2017,2018, EQM expects to provide capital contributions of approximately $180 million$1.0 billion to $200 million$1.2 billion to the MVP Joint Venture, primarily in support of materials, land, engineering design, environmental work and construction activities.Venture. The MVP Joint Venture has secured a total of 2.0 Bcf per day of firm capacity commitments at 20-year terms, including aan initial 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. On

20



In October 13, 2017, the FERC issued the Certificate of Public Convenience and Necessity for the MVP project. In the first quarter of 2018, the MVP Joint Venture received limited notice to proceed with certain construction activities from the FERC and commenced construction.The pipelineMVP Joint Venture is targeted to be placed in-service during the first quarter of 2019.

In April 2018, the MVP Joint Venture announced the MVP Southgate project, a proposed 70-mile interstate pipeline that will extend from the MVP at Pittsylvania County, Virginia to new delivery points in Rockingham and Alamance Counties, North Carolina. The MVP Southgate project is anchored by a firm capacity commitment from PSNC Energy. The preliminary MVP Southgate project cost estimate is $350 million to $500 million, which is expected to be spent in 2019 and 2020. EQM is expected to have between 33% and 48% ownership in the MVP Southgate project and will operate the pipeline. Subject to approval by the FERC, the MVP Southgate has a targeted in-service date of the fourth quarter of 2018.2020.
Affiliate Wellhead Gathering Expansion. EQM plans to invest approximately $750 million during 2018 in gathering expansion projects, primarily wellhead and header projects in Pennsylvania, West Virginia and Ohio, including

23



commencing preliminary construction activities on the Hammerhead project, a 1.2 Bcf per day gathering header pipeline connecting natural gas produced in Pennsylvania and West Virginia to the MVP.
Transmission Expansion. EQM plans to invest $80approximately $100 million to $90 million onduring 2018 in other transmission expansion projects, in 2017 includingprimarily the Equitrans expansion projects and modernization projectsExpansion project, which is designed to provide north-to-south capacity on the AVC facilities. The AVC modernization projects primarily consist ofmainline Equitrans system for deliveries to the replacement of approximately 20 miles of pipeline.MVP.

Supply Hub ExpansionWater Projects.. These expansion projects are designed In 2018, EQM plans 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.invest approximately $25 million on water infrastructure projects.

See further discussion of capital expenditures in the “Capital Requirements”"Capital Requirements" section below.

Rice 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 other customary closing conditions. The special meetings of EQT shareholders and Rice stockholders are each scheduled to be held for these purposes on November 9, 2017. 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.

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. 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. 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 46% of transmission and storage revenues and 11% of gathering revenues for the nine months ended September 30, 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. 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 “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 cash 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, 2016.

Capital Resources and Liquidity

EQM’sEQM's principal liquidity requirements are to finance its operations, fund capital expenditures, potential acquisitions and capital contributions to the MVP Joint Venture, make cash distributions and satisfy any indebtedness obligations. EQM’sEQM'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’sEQM'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.


21



Operating Activities

Net cash flows provided by operating activities totaled $480.2was $441.6 million for the ninesix months ended SeptemberJune 30, 20172018 compared to $380.0$320.3 million for the ninesix months ended SeptemberJune 30, 2016.2017. The increase was primarily driven by the timing of working capital payments between the two periods and higher operating income for which contributing factors are discussed in the “Executive Overview”"Executive Overview" and “Business"Business Segment Results of Operations”Operations" sections herein.

Investing Activities
Net cash flows used in investing activities totaled $324.9was $1,676.7 million for the ninesix months ended SeptemberJune 30, 20172018 compared to $541.4$207.3 million for the ninesix months ended SeptemberJune 30, 2016.2017. The decreaseincrease was primarily attributable to decreased capital expenditures as further describedthe net assets acquired from EQT in the “Capital Requirements” section herein partly offset byMay 2018 Acquisition, increased capital contributions to the MVP Joint Venture in 2017 and salesconsistent with the start of interests inconstruction on the MVP Joint Ventureand increased capital expenditures as further described in 2016.

"Capital Requirements."
Financing Activities

Net cash provided by financing activities was $1,875.1 million for the six months ended June 30, 2018 compared to net cash used in financing activities totaled $210.6of $161.8 million for the ninesix months ended SeptemberJune 30, 2017 compared to $199.6 million for2017. For the ninesix months ended SeptemberJune 30, 2016.2018, the primary source of financing cash flows was net proceeds from the 2018 Senior Notes offering, while the primary uses of financing cash flows were distributions paid to unitholders, net repayments on EQM's credit facilities and the Gulfport Transaction. For the ninesix months ended SeptemberJune 30, 2017, the primary use of financing cash flows was distributions paid to unitholders and the primary source of financing cash flows was net borrowings on EQM's credit facilities. For the nine months ended September 30, 2016, the primary uses of financing cash flows were distributions paid to unitholders and net repayments of credit facility borrowings and the primary source of financing cash flows was proceeds from the sale of common units under the $750 Million ATM Program.

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.
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
2017 2016 2017 20162018 2017 2018 2017
(Thousands)(Thousands)
Expansion capital expenditures (1)
$60,679
 $159,755
 $207,548
 $484,525
$159,968
 $80,224
 $284,787
 $146,869
Maintenance capital expenditures:       
Ongoing maintenance9,760
 6,064
 16,804
 16,400
7,093
 3,462
 14,401
 7,044
Funded regulatory compliance55
 511
 55
 787
Total maintenance capital expenditures9,815
 6,575
 16,859
 17,187
Total capital expenditures (2)
$70,494
 $166,330
 $224,407
 $501,712
$167,061
 $83,686
 $299,188
 $153,913
(1)
Expansion capital expenditures do not include capital contributions made to the MVP Joint Venture of $43.5$65.8 million and $35.6$40.2 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $103.4$182.8 million and $76.3$59.9 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, 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 onin the statements of consolidated cash flows until they are paid in a subsequent period. Accrued capital expenditures were approximately $26.5 million, $31.2 million and $26.7 million at September 30, 2017, June 30, 2017 and December 31, 2016, respectively. Accrued capital expenditures were approximately $48.2 million, $50.7 million and $24.1 million at September 30, 2016, June 30, 2016 and December 31, 2015, respectively.See Note E to the consolidated financial statements.

Expansion capital expenditures decreased by $99.1 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 and $277.0 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily as a result of decreased spending on the OVC project and the Range Resources Header Pipeline project. The final phase of the Range Resources Header Pipeline project was placed in-service during the second quarter of 2017 and now provides total firm gathering capacity of 600 MMcf per day. EQM estimates the total project cost to be approximately $240 million with approximately $40 million to be spent in 2017. The OVC project was placed into service in the fourth quarter of 2016.


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In 2017, expansionExpansion capital expenditures increased by $79.7 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and $137.9 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily as a result of increased spending on the Hammerhead project, various wellhead gathering expansion projects and the Equitrans Expansion project, partly offset by decreased spending on the Range Resources header pipeline project. The final phase of the Range Resources header pipeline project was placed in-service during the second quarter of 2017.
Ongoing maintenance increased by $3.6 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and $7.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily as a result of higher assets in service and timing of ongoing maintenance projects.
In 2018, capital contributions to the MVP Joint Venture are expected to be $460 million$1.0 billion to $510$1.2 billion, depending on the timing of the construction of the MVP, expansion capital expenditures are expected to be approximately $875 million and ongoing maintenance capital expenditures are expected to be $25 million to $30approximately $45 million, net of reimbursements. EQM’sAs a result of the closing of the EQM-RMP Merger on July 23, 2018, capital expenditures include expected capital expenditures of RMP. 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 periodsthe timing of construction for the capital contributions to the MVP Joint Venture.MVP. Maintenance related capital expenditures are also expected to vary quarter to quarter. EQM expects tomay fund future capital expenditures primarily through cash on hand, cash generated from operations, availability under its credit facilities, debt offerings and issuances of additional EQM partnership units. EQM does not forecast capital expenditures associated with potential projects not committed as of the filing of this Quarterly Report on Form 10-Q.

Credit Facility Borrowings

See Note GH to the consolidated financial statements for discussion of EQM’sEQM's credit facilities.

Security Ratings

The table below sets forth the credit ratings for debt instruments of EQM at SeptemberJune 30, 2017.2018.
Rating Service Senior Notes Outlook
Moody’sMoody's Investors Service (Moody's) Ba1 Stable
Standard & Poor’sPoor's Ratings Services (S&P) BBB- Stable
Fitch Ratings (Fitch) BBB- Stable

EQM’sEQM'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’sEQM's ratings, EQM’sEQM'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,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 Million ATM Program

As of OctoberJuly 26, 2017,2018, EQM had approximately $443 million in remaining capacity under the $750 Million ATM Program.

Distributions

See Note J to the consolidated financial statements for 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, andmatters; furthermore, 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.

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Off-Balance Sheet Arrangements

See Note FG to the consolidated financial statements for discussion of the MVP Joint Venture guarantee.

Critical Accounting Policies

EQM’sEQM's critical accounting policies are described in Item 7, “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" contained in EQM’s AnnualEQM's recast Current Report on Form 10-K8-K for the year ended December 31, 2016.2017 as filed with the SEC on June 12, 2018. Any new

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accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to EQM’sEQM's consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the period ended SeptemberJune 30, 2017.2018. The application of EQM’sEQM'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 under its credit facilities. EQM's long-term borrowingssenior notes 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 GH to the consolidated financial statements for further discussion of EQM's borrowings and Note HI 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’sEQM's FERC tariffs 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 monththree-month period when its tariffs do not require its customers to provide additional credit support. For some of EQM’sEQM'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, 2017,2018, approximately 87%77% 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, L.P.’s'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, 2017, EQT’s2018, EQT's public senior debt had an investment grade credit rating.
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. 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. 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 47% of transmission and storage revenues and 28% of gathering revenues for the six months ended June 30, 2018, 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 certain EQM systems, EQT may determine in the future that drilling in EQM's areas of operations does not provide an adequate return or that drilling in areas outside of EQM's current areas of operations is strategically more attractive to it. EQT is under no contractual obligation to continue to develop its acreage dedicated to EQM.

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For the year ended December 31, 2017, approximately 89% of EQM’s total revenues were derived from firm reservation fees. On a pro forma basis following the closing of the EQM-RMP Merger, approximately 60% of EQM’s total revenues would have been derived from firm reservation fees for the year ended December 31, 2017. This decrease is primarily driven by the fact that RMP’s gathering systems have not been supported by contracts with firm capacity reservation components. Rather, all of RMP’s gathering and compression revenues were generated under long-term contracts which provide for a fixed price per unit for volumes of natural gas actually gathered. As a result, following the EQM-RMP Merger, EQM has greater exposure to short and medium term declines in volumes of gas produced and gathered on its systems than it has historically. With respect to its firm contracts, EQM believes that short and medium term declines in volumes of gas produced, gathered, transported or stored on its systems will have a limited financial impact on EQM because the firm reservation fees associated with these contracts are paid regardless of volumes supplied to the system by customers. Longer term price declines could have an impact on customer creditworthiness and related ability to pay firm reservation fees under long-term contracts, which could impact EQM's results of operations, liquidity, financial position or ability to pay distributions to its unitholders. Additionally, long term declines in gas production in EQM's areas of operations would limit EQM's growth potential. 
Other Market Risks

EQM's $1 Billion 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 19 financial institutions in the syndicate holds more than 10% of the facility. EQM’sEQM's large syndicate group and relatively low percentage of participation by each lender is expected to limit EQM’sEQM's exposure to problemsdisruption 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’sPartner's Principal Executive Officer and Principal Financial Officer, an evaluation of EQM’sEQM'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’sEQM'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

ThereManagement’s assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of the entities acquired in the May 2018 Acquisition, which were initially acquired by EQT from Rice on November 13, 2017. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for a period of up to one year following an acquisition while integrating the acquired company. EQM is in the process of integrating its internal controls over financial reporting with those of the entities acquired in the May 2018 Acquisition. As a result of these integration activities, certain controls will be evaluated and may be changed. Except as noted above, there were no changes in EQM's 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 20172018 that have materially affected, or are reasonably likely to materially affect, EQM’sEQM's internal control over financial reporting.

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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,matters; furthermore, 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.

Environmental Proceedings
Between September 2015 and February 2016, EQM, as the operator of the Allegheny Valley Connector (AVC) facilities, which at that time were owned by EQT, received eight NOVs from the Pennsylvania Department of Environmental Protection (PADEP). The NOVs alleged violations of the Pennsylvania Clean Streams Law in connection with inadvertent releases of sediment and bentonite to water that occurred while drilling for a pipeline replacement project in Cambria County, Pennsylvania. EQT and EQM immediately addressed the releases and fully cooperated with the PADEP.  In October 2016, EQM acquired the AVC facilities from EQT, including any future obligations related to these releases. EQM and the PADEP are currently negotiating the terms of a consent order and agreement and related civil penalty related to the NOVs. While EQM expects the PADEP’s claims to result in penalties that exceed $100,000, EQM expects that the resolution of this matter will not have a material impact on its financial condition, results of operations, liquidity or ability to make distributions.
Item 1A. Risk Factors

Information regarding risk factors is discussed in Item 1A, “Risk Factors” of EQM’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes from the risk factors previously disclosed in EQM’sEQM's Annual Report on Form 10-K.10-K for the year ended December 31, 2017 other than the risks described below.
Failure to successfully combine the businesses of EQM and RMP in the expected time frame may adversely affect the future results of the combined organization and our ability to achieve the intended benefits of the EQM-RMP Merger and the May 2018 Acquisition.
The success of the EQM-RMP Merger will depend, in part, on our ability to realize the anticipated benefits from combining the businesses of EQM and RMP. To realize these anticipated benefits, the businesses must be successfully combined. If the combined organization is not able to achieve these objectives, or is not able to achieve these objectives on a timely basis, the anticipated benefits of the EQM-RMP Merger may not be realized fully or at all. In addition, the actual integration may result in additional and unforeseen expenses, which could reduce the anticipated benefits of the EQM-RMP Merger. There can be no assurance that our combination with RMP or the May 2018 Acquisition will deliver the strategic, financial and operational benefits anticipated by us. Our business may be negatively impacted if we are unable to effectively manage our expanded operations.
The proposed separation of EQT's production and midstream businesses into two independent publicly-traded companies may result in disruptions to, and negatively impact our relationships with, our customers and other business partners.
On February 21, 2018, EQT announced plans to separate its production and midstream businesses into two independent publicly-traded companies. Uncertainty related to the Separation may lead customers and other parties with which we currently do business or may do business in the future to terminate or attempt to negotiate changes in existing business relationships, or consider entering into business relationships with parties other than us. These disruptions could have a material and adverse effect on our business, financial condition, results of operations and prospects. The effect of such disruptions could be exacerbated by any delays in the completion of the Separation.
Our significant indebtedness, and any future indebtedness, as well as the restrictions under our debt agreements could adversely affect our business, financial condition and operating flexibility, results of operations, liquidity and ability to make quarterly cash distributions to our unitholders.
Our debt agreements contain various covenants and restrictive provisions that limit our ability to, among other things:
incur or guarantee additional debt;
make distributions on or redeem or repurchase units;

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incur or permit liens on assets;
enter into certain types of transactions with affiliates;
enter into certain mergers or acquisitions; and
dispose of all or substantially all of our assets.
In July 2017, we amended and restated our credit facility to increase the borrowing capacity under the facility from $750 million to $1 billion and extend the maturity date to July 2022. Our $1 billion credit facility contains a covenant requiring us 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). Our ability to meet these covenants can be affected by events beyond our control and we cannot assure our unitholders that we will meet these covenants. In addition, our $1 billion credit facility contains events of default customary for such facilities, including the occurrence of a change of control (which will occur, among other things, if EQT or certain permitted transferees fail to control the EQM General Partner, we fail to own 100% of Equitrans, L.P., or the EQM General Partner fails to be our general partner). Furthermore, in June 2018, we issued senior unsecured notes in an aggregate principal amount of $2.5 billion across three new series, consisting of $1.1 billion in aggregate principal amount of our 4.75% senior notes due 2023, $850 million in aggregate principal amount of our 5.5% senior notes due 2028, and $550 million in aggregate principal amount of our 6.5% senior notes due 2048.
The provisions of our debt agreements may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our debt agreements could result in an event of default, which could enable our lenders to, subject to the terms and conditions of the applicable agreement, declare any outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investments. The $1 billion credit facility also has cross default provisions that apply to any other indebtedness we may have with an aggregate principal amount in excess of $25 million.
Our substantial indebtedness and the additional debt we may incur in the future for, among other things, working capital, capital expenditures, capital contributions to the MVP Joint Venture, acquisitions or operating activities may adversely affect our liquidity and therefore our ability to make cash distributions to our unitholders.
Among other things, our significant indebtedness may be viewed negatively by credit rating agencies, which could result in increased costs for us to access the capital markets. Any future downgrade of the debt issued by us or our subsidiaries could significantly increase our capital costs or adversely affect our ability to raise capital in the future.
The demand for the services provided by our water distribution business could decline as a result of several factors.
Our water services business includes fresh water distribution for use in our customers’ natural gas, NGLs and oil exploration and production activities. Water is an essential component of natural gas, NGLs and oil production during the drilling, and in particular, the hydraulic fracturing process. As a result, the demand for our fresh water distribution and produced water handling services is tied to the level of drilling and completion activity of our customers, including EQT, which is currently and anticipated to continue to be our primary customer for such services. More specifically, the demand for our water distribution and produced water handling services could be adversely affected by any reduction in or slowing of EQT’s or other customers’ well completions, any reduction in produced water attributable to completion activity, or the extent to which EQT or other customers complete wells with shorter lateral lengths, which would lessen the volume of fresh water required for completion activity. In addition, increased regulation of hydraulic fracturing could result in reductions or delays in natural gas, NGLs and oil production by our water services customers, which could reduce the number of wells for which we provide water services.
Additionally, we depend on EQT to source a portion of the fresh water we distribute. The availability of our and EQT’s water supply may be limited due to reasons including, but not limited to, prolonged drought or regulatory delays associated with infrastructure development. Restrictions on the ability to obtain water or changes in wastewater disposal requirements may incentivize water recycling efforts by oil and natural gas producers, which could decrease the demand for our fresh water distribution services.
The regulatory approval process for the construction of new midstream assets is challenging, and litigation could impact our or MVP’s ability to obtain authorizations necessary for projects.
Certain of our internal growth projects may require regulatory approval from federal, state and local authorities prior to construction, including any extensions from or additions to our transmission and storage system. The approval process for storage and transportation projects has become increasingly challenging, due in part to state and local concerns related to

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exploration and production and gathering activities in new production areas, including the Marcellus, Utica and Upper Devonian Shales, and negative public perception regarding the oil and gas industry. Such authorization may not be granted or, if granted, such authorization may include burdensome or expensive conditions.
In addition, any significant delays in the regulatory approval process for the MVP Project could increase costs and negatively impact the scheduled in-service date, which in turn could adversely affect the ability for MVP and its owners, including us, to achieve the expected investment return. For example, in February 2018, the Sierra Club filed a lawsuit in the Fourth Circuit Court of Appeals challenging the use of U.S. Army Corps of Engineers Nationwide Permit 12 in West Virginia for the MVP project. In May 2018, the Army Corps suspended its Nationwide Permit 12 verifications for four river crossings in West Virginia. Plaintiffs then sought a preliminary injunction staying the Army Corps’ approval to proceed under Nationwide Permit 12 for all stream crossings in West Virginia. In June 2018, the Fourth Circuit granted the motion and stayed the Army Corps’ verification that Nationwide Permit 12 applied. Accordingly, MVP has stopped construction of the portions of the MVP project affected by this ruling. Although the Army Corps reinstated its verifications for four of the West Virginia stream crossings in July 2018, the stay imposed by the Fourth Circuit is still in place. This and other similar litigation could adversely affect our business, financial condition, results of operations, liquidity and ability to make quarterly cash distributions to our unitholders.
Our natural gas gathering, transmission and storage services are subject to extensive regulation by federal, state and local regulatory authorities. Changes or additional regulatory measures adopted by such authorities could have a material adverse effect on our business, financial condition, results of operations, liquidity and ability to make distributions.
Our interstate natural gas transmission and storage operations are regulated by the FERC under the NGA, the NGPA and the Energy Policy Act of 2005. Certain portions of our gathering operations are also rate-regulated by the FERC in connection with our interstate transmission operations. Our FERC-regulated systems operate under tariffs approved by the FERC that establish rates, cost recovery mechanisms and terms and conditions of service to our customers. Generally, the FERC's authority extends to:
    rates and charges for our natural gas transmission and storage and FERC-regulated gathering services;
    certification and construction of new interstate transmission and storage facilities;
    abandonment of interstate transmission and storage services and facilities;
    maintenance of accounts and records;
    relationships between pipelines and certain affiliates;
    terms and conditions of services and service contracts with customers;
    depreciation and amortization policies;
    acquisitions and dispositions of interstate transmission and storage facilities; and
    initiation and discontinuation of interstate transmission and storage services.
Interstate pipelines may not charge rates or impose terms and conditions of service that, upon review by the FERC, are found to be unjust and unreasonable or unduly discriminatory. The recourse rate that may be charged by our interstate pipeline for its transmission and storage services is established through the FERC's ratemaking process. The maximum applicable recourse rate and terms and conditions for service are set forth in our FERC-approved tariffs.
Pursuant to the NGA, existing interstate transmission and storage rates and terms and conditions of service may be challenged by complaint and are subject to prospective change by the FERC. Additionally, rate increases and changes to terms and conditions of service proposed by a regulated interstate pipeline may be protested and such increases or changes can be delayed and may ultimately be rejected by the FERC. We currently hold authority from the FERC to charge and collect (i) "recourse rates," which are the maximum rates an interstate pipeline may charge for its services under its tariff, (ii) "discount rates," which are rates below the "recourse rates" and above a minimum level, provided they do not "unduly discriminate", (iii) "negotiated rates," which involve rates above or below the "recourse rates," provided that the affected customers are willing to agree to such rates and that the FERC has approved the negotiated rate agreement, and (iv) market-based rates for some of our storage services from which we derive a small portion of our revenues. As of December 31, 2017, approximately 89% of our system's contracted firm transmission capacity was committed under such "negotiated rate" contracts, rather than recourse, discount or market rate contracts. There can be no guarantee that we will be allowed to continue to operate under such rate structures for the remainder of those assets' operating lives. Any successful challenge against rates charged for our transmission

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and storage services could have a material adverse effect on our business, financial condition, results of operations, liquidity and ability to make quarterly cash distributions to our unitholders.
While the FERC does not generally regulate the rates and terms of service over facilities determined to be performing a natural gas gathering function, the FERC has traditionally regulated rates charged by interstate pipelines for gathering services performed on the pipeline's own gathering facilities when those gathering services are performed in connection with jurisdictional interstate transmission facilities. We maintain rates and terms of service in our tariff for unbundled gathering services performed on a portion of our gathering facilities that are connected to our transmission and storage system. Just as with rates and terms of service for transmission and storage services, our rates and terms of services for our FERC-regulated gathering services may be challenged by complaint and are subject to prospective change by the FERC. Rate increases and changes to terms and conditions of service which we propose for our FERC-regulated gathering services may be protested, and such increases or changes can be delayed and may ultimately be rejected by the FERC.
The FERC's jurisdiction extends to the certification and construction of interstate transmission and storage facilities, including, but not limited to, acquisitions, facility maintenance, expansions, and abandonment of facilities and services. While the FERC exercises jurisdiction over the rates and terms of service for our FERC-regulated gathering services, these gathering facilities are not subject to the FERC's certification and construction authority. Prior to commencing construction of new or existing interstate transmission and storage facilities, an interstate pipeline must obtain a certificate authorizing the construction, or file to amend its existing certificate, from the FERC. On April 19, 2018, the FERC issued a Notice of Inquiry seeking information regarding whether, and if so how, it should revise its approach under its currently effective policy statement on the certification of new natural gas transportation facilities. We cannot currently predict when the FERC will issue an order in the Notice of Inquiry proceeding or what action the FERC may take in any such order. If the FERC changes its existing certificate policy, it could impact our ability to construct interstate pipeline facilities. Further, typically, a significant expansion project requires review by a number of governmental agencies, including state and local agencies, whose cooperation is important in completing the regulatory process on schedule. Any agency's delay in the issuance of, or refusal to issue, authorizations or permits for one or more of these projects may mean that we will not be able to pursue these projects or that they will be constructed in a manner or with capital requirements that we did not anticipate. Such delays, refusals or resulting modifications to projects could materially and negatively impact the revenues and costs expected from these projects or cause us to abandon planned projects.
FERC regulations also extend to the terms and conditions set forth in agreements for transmission and storage services executed between interstate pipelines and their customers. These service agreements are required to conform, in all material respects, with the forms of service agreements set forth in the pipeline's FERC-approved tariff. Non-conforming agreements must be filed with, and accepted by, the FERC. In the event that the FERC finds that an agreement is materially non-conforming, in whole or in part, it could reject the agreement or require us to seek modification, or alternatively require us to modify our tariff so that the non-conforming provisions are generally available to all customers.
On March 15, 2018, the FERC issued an order prohibiting master limited partnership (MLP)-owned pipelines from including an allowance for investor income tax liability in their cost-of-service based rates. Under its prior policy, the FERC had permitted all interstate pipelines to include an income tax allowance in the cost-of-service used as the basis for calculating their regulated rates. On July 18, 2018, the FERC issued an order affirming the principal finding in the March order regarding income tax recovery and also clarifying the treatment of Accumulated Deferred Income Taxes (ADIT) in light of the prohibition on MLP income tax allowances. Also on July 18, 2018, the FERC issued Order No. 849, adopting regulations requiring that natural gas pipelines must make a one-time report, Form 501-G, due in the fourth quarter of 2018. For MLP-owned pipelines, the Form 501-G report must calculate an earned rate of return on equity that addresses any potential over-recovery of their cost of service arising from the prohibition of the income tax allowance and the ADIT clarification. The FERC will evaluate these Form 501-G filings on a case-by-case basis and may open a limited or a general rate case, open an investigation, or take no further action. This recent action by the FERC could adversely affect our business, financial condition, results of operations, liquidity and ability to make cash distributions to our unitholders.
The FERC may not continue to pursue its approach of pro-competitive policies as it considers matters such as interstate pipeline rates and rules and policies that may affect rights of access to natural gas transmission capacity and transmission and storage facilities.
Section 1(b) of the NGA exempts certain natural gas gathering facilities from regulation by the FERC under the NGA. We believe that our high pressure natural gas gathering pipelines meet the traditional tests the FERC has used to establish a pipeline's status as an exempt gatherer not subject to regulation as a natural gas company, although the FERC has not made a formal determination with respect to the jurisdictional status of those facilities. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is often the subject of litigation within the industry,

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so the classification and regulation of our high pressure gathering systems are subject to change based on future determinations by the FERC, the courts or the U.S. Congress.
Failure to comply with applicable provisions of the NGA, the NGPA, federal pipeline safety laws and certain other laws, as well as with the regulations, rules, orders, restrictions and conditions associated with these laws, could result in the imposition of administrative and criminal remedies and civil penalties. For example, the FERC is authorized to impose civil penalties of up to approximately $1.2 million per violation, per day for violations of the NGA, the NGPA or the rules, regulations, restrictions, conditions and orders promulgated under those statutes. This maximum penalty authority established by statute will continue to be adjusted periodically for inflation.
In addition, future federal, state or local legislation or regulations under which we will operate our natural gas gathering, transmission and storage businesses may have a material adverse effect on our business, financial condition, results of operations, liquidity and ability to make quarterly cash distributions to our unitholders.

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Item 6. Exhibits

 
Exhibit No. Document Description Method of Filing






 

 



  

  

  
101
 Interactive Data File. Filed herewith as Exhibit 101.

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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 26, 20172018


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