Exhibit 99.5
Item 1. Financial Statements
EQT MIDSTREAM PARTNERS, LP
Combined Statements of Operations (Unaudited)
|
| Three Months Ended |
| ||
|
| 2014 (1) |
| 2013 (1) |
|
|
|
|
|
|
|
|
| (Thousands, except per unit amounts) |
| ||
Operating revenues: |
|
|
|
|
|
Operating revenues – affiliate | $ | 57,967 | $ | 59,573 |
|
Operating revenues – third party |
| 35,444 |
| 9,979 |
|
Total operating revenues |
| 93,411 |
| 69,552 |
|
Operating expenses: |
|
|
|
|
|
Operating and maintenance (2) |
| 10,610 |
| 7,913 |
|
Selling, general and administrative (2) |
| 10,474 |
| 6,081 |
|
Depreciation and amortization |
| 8,371 |
| 6,265 |
|
Total operating expenses |
| 29,455 |
| 20,259 |
|
Operating income |
| 63,956 |
| 49,293 |
|
Other income, net |
| 269 |
| 297 |
|
Interest expense, net (3) |
| 5,655 |
| 204 |
|
Income before income taxes |
| 58,570 |
| 49,386 |
|
Income tax expense |
| 9,066 |
| 9,651 |
|
Net income | $ | 49,504 | $ | 39,735 |
|
|
|
|
|
|
|
Calculation of limited partner interest in net income: |
|
|
|
|
|
Net income | $ | 49,504 | $ | 39,735 |
|
Less pre-acquisition income allocated to parent |
| (14,649) |
| (15,656) |
|
Less general partner interest in net income |
| (1,723) |
| (505) |
|
Limited partner interest in net income | $ | 33,132 | $ | 23,574 |
|
|
|
|
|
|
|
Net income per limited partner unit — basic | $ | 0.69 | $ | 0.68 |
|
Net income per limited partner unit — diluted | $ | 0.69 | $ | 0.68 |
|
|
|
|
|
|
|
Weighted average limited partner units outstanding — basic |
| 47,819 |
| 34,679 |
|
Weighted average limited partner units outstanding — diluted |
| 47,938 |
| 34,768 |
|
|
|
|
|
|
|
Cash distributions declared per unit (4) | $ | 0.49 | $ | 0.37 |
|
|
|
(1) Financial statements for the three months ended March 31, 2014 and 2013 have been retrospectively recast to reflect the inclusion of Sunrise Pipeline, LLC (Sunrise) and the Jupiter gathering system (Jupiter). See Note B.
(2) Operating and maintenance expense includes charges from EQT Corporation (EQT) and subsidiaries of $5.2 million and $4.1 million for the three months ended March 31, 2014 and 2013, respectively. Selling, general and administrative expense includes charges from EQT Corporation and subsidiaries of $7.8 million and $5.4 million for the three months ended March 31, 2014 and 2013, respectively. See Note D.
(3) Interest expense for the three months ended March 31, 2014 includes $4.9 million related to interest on a capital lease with an affiliate. See Note G.
(4) Represents the cash distribution declared on April 22, 2014 which related to the first quarter of 2014 and the cash distribution declared on April 23, 2013 which related to the first quarter of 2013, respectively. See Note J for further discussion.
The accompanying notes are an integral part of these combined financial statements.
EQT MIDSTREAM PARTNERS, LP
Combined Statements of Cash Flows (Unaudited)
|
| Three Months Ended |
| ||
|
| 2014 (1) |
| 2013 (1) |
|
|
| (Thousands) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
Net income | $ | 49,504 | $ | 39,735 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 8,371 |
| 6,265 |
|
Deferred income taxes |
| 329 |
| 885 |
|
Other income |
| (269) |
| (297) |
|
Non-cash long-term compensation expense |
| 978 |
| 353 |
|
Non-cash adjustments |
| — |
| (250) |
|
Changes in other assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| (5,625) |
| (756) |
|
Accounts payable |
| 656 |
| (5,151) |
|
Due to/from EQT affiliates |
| (286) |
| 10,097 |
|
Other assets and liabilities |
| (7,499) |
| (3,587) |
|
Net cash provided by operating activities |
| 46,159 |
| 47,294 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
Capital expenditures |
| (30,092) |
| (22,349) |
|
Net cash used in investing activities |
| (30,092) |
| (22,349) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
Short-term loans |
| 110,000 |
| — |
|
Sunrise Merger payment |
| (110,000) |
| — |
|
Distributions paid to unitholders |
| (23,039) |
| (12,386) |
|
Credit facility origination fees |
| (2,020) |
| — |
|
Capital contributions |
| (118) |
| 2,382 |
|
Capital lease principal payments |
| (948) |
| — |
|
Partners’ investments and net change in parent advances |
| 15,743 |
| 2,004 |
|
Net cash used in financing activities |
| (10,382) |
| (8,000) |
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
| 5,685 |
| 16,945 |
|
Cash and cash equivalents at beginning of period |
| 18,363 |
| 50,041 |
|
Cash and cash equivalents at end of period | $ | 24,048 | $ | 66,986 |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
Interest paid | $ | 4,866 | $ | — |
|
|
|
|
|
|
|
Non-cash activity during the period: |
|
|
|
|
|
Capital lease asset/obligation | $ | 3,625 | $ | — |
|
|
|
(1) Financial statements for the three months ended March 31, 2014 and 2013 have been retrospectively recast to reflect the inclusion of Sunrise and Jupiter. See Note B.
The accompanying notes are an integral part of these combined financial statements.
EQT MIDSTREAM PARTNERS, LP
Combined Balance Sheets (Unaudited)
|
| March 31, |
| December 31, |
|
|
| 2014 (1) |
| 2013 (1) |
|
ASSETS |
| (Thousands, except number of |
| ||
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 24,048 | $ | 18,363 |
|
Accounts receivable (net of allowance for doubtful accounts of $736 as of March 31, 2014 and $152 as of December 31, 2013) |
| 14,088 |
| 8,463 |
|
Accounts receivable – affiliate |
| 20,296 |
| 23,620 |
|
Other current assets |
| 2,123 |
| 1,033 |
|
Total current assets |
| 60,555 |
| 51,479 |
|
Property, plant and equipment |
| 1,195,095 |
| 1,163,683 |
|
Less: accumulated depreciation |
| (176,286) |
| (168,740) |
|
Net property, plant and equipment |
| 1,018,809 |
| 994,943 |
|
Regulatory assets |
| 16,323 |
| 16,246 |
|
Other assets |
| 4,604 |
| 1,304 |
|
Total assets | $ | 1,100,291 | $ | 1,063,972 |
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS’ CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable | $ | 9,290 | $ | 8,634 |
|
Short-term loans |
| 110,000 |
| — |
|
Due to related party |
| 21,732 |
| 25,621 |
|
Sunrise merger consideration to EQT |
| — |
| 110,000 |
|
Lease obligation - current |
| 2,967 |
| 662 |
|
Accrued liabilities |
| 5,566 |
| 12,951 |
|
Total current liabilities |
| 149,555 |
| 157,868 |
|
Deferred income taxes, net |
| 39,920 |
| 39,840 |
|
Lease obligation |
| 134,105 |
| 133,733 |
|
Other long-term liabilities |
| 6,763 |
| 6,014 |
|
Total liabilities |
| 330,343 |
| 337,455 |
|
|
|
|
|
|
|
Partners’ capital: |
|
|
|
|
|
Predecessor equity |
| 112,721 |
| 82,329 |
|
Common units (30,468,902 units issued and outstanding at March 31, 2014 and December 31, 2013) |
| 826,693 |
| 818,431 |
|
Subordinated units (17,339,718 units issued and outstanding at March 31, 2014 and December 31, 2013) |
| (171,898) |
| (175,996) |
|
General partner interest (975,686 units issued and outstanding at March 31, 2014 and December 31, 2013) |
| 2,432 |
| 1,753 |
|
Total partners’ capital |
| 769,948 |
| 726,517 |
|
Total liabilities and partners’ capital | $ | 1,100,291 | $ | 1,063,972 |
|
(1) Financial statements as of March 31, 2014 and December 31, 2013 have been retrospectively recast to reflect the inclusion of Jupiter. See Note B.
The accompanying notes are an integral part of these combined financial statements.
EQT MIDSTREAM PARTNERS, LP
Combined Statements of Partners’ Capital (Unaudited)(1)
|
|
|
| Partners’ Capital |
|
|
| ||||
|
| Predecessor |
| Limited Partners |
| General |
|
|
| ||
|
| Equity |
| Common |
| Subordinated |
| Partner |
| Total |
|
|
| (Thousands) |
| ||||||||
Balance at January 1, 2013 | $ | 279,576 | $ | 313,304 | $ | 153,664 | $ | 8,108 | $ | 754,652 |
|
Net income |
| 15,656 |
| 11,154 |
| 12,420 |
| 505 |
| 39,735 |
|
Capital contribution |
| — |
| 541 |
| 541 |
| 23 |
| 1,105 |
|
Equity-based compensation plans |
| — |
| 353 |
| — |
| — |
| 353 |
|
Distributions to unitholders |
| — |
| (6,069) |
| (6,069) |
| (248) |
| (12,386) |
|
Partners’ investments and net change in parent advances |
| 2,004 |
| — |
| — |
| — |
| 2,004 |
|
Balance at March 31, 2013 | $ | 297,236 | $ | 319,283 | $ | 160,556 | $ | 8,388 | $ | 785,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2014 | $ | 82,329 | $ | 818,431 | $ | (175,996) | $ | 1,753 | $ | 726,517 |
|
Net income |
| 14,649 |
| 21,116 |
| 12,016 |
| 1,723 |
| 49,504 |
|
Capital contribution |
| — |
| 102 |
| 58 |
| 3 |
| 163 |
|
Equity-based compensation plans |
| — |
| 1,060 |
| — |
| — |
| 1,060 |
|
Distributions to unitholders |
| — |
| (14,016) |
| (7,976) |
| (1,047) |
| (23,039) |
|
Partners’ investments and net change in parent advances |
| 15,743 |
| — |
| — |
| — |
| 15,743 |
|
Balance at March 31, 2014 | $ | 112,721 | $ | 826,693 | $ | (171,898) | $ | 2,432 | $ | 769,948 |
|
(b) | Financial statements for the three months ended March 31, 2014 and 2013 have been retrospectively recast to reflect the inclusion of Sunrise and Jupiter. See Note B. |
The accompanying notes are an integral part of these combined financial statements.
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
A. Financial Statements
Organization
EQT Midstream Partners, LP (EQT Midstream Partners or the Partnership) is a growth-oriented Delaware limited partnership. EQT Midstream Services, LLC, a wholly owned subsidiary of EQT Corporation, is the Partnership’s general partner. References in these combined financial statements to EQT refer collectively to EQT Corporation and its consolidated subsidiaries.
Limited Partner and General Partner Units
The following table summarizes common, subordinated and general partner units issued from January 1, 2013 through March 31, 2014.
|
| Limited Partner Units |
| General |
|
|
| ||
|
| Common |
| Subordinated |
| Partner Units |
| Total |
|
Balance at January 1, 2013 |
| 17,339,718 |
| 17,339,718 |
| 707,744 |
| 35,387,180 |
|
July 2013 equity offering |
| 12,650,000 |
| — |
| — |
| 12,650,000 |
|
Sunrise Merger consideration |
| 479,184 |
| — |
| 267,942 |
| 747,126 |
|
Balance at December 31, 2013 |
| 30,468,902 |
| 17,339,718 |
| 975,686 |
| 48,784,306 |
|
Balance at March 31, 2014 |
| 30,468,902 |
| 17,339,718 |
| 975,686 |
| 48,784,306 |
|
As of March 31, 2014, EQT retained a 44.6% equity interest in the Partnership, which included 3,443,902 common units, 17,339,718 subordinated units and 975,686 general partner units. EQT also holds the incentive distribution rights.
On May 7, 2014, the Partnership completed an underwritten public offering of 12,362,500 common units. Net proceeds from the offering were used to finance the cash consideration paid to EQT in connection with the acquisition of Jupiter. Following the offering, EQT retained a 36.4% equity interest in the Partnership, which includes 3,959,952 common units, 17,339,718 subordinated units and 1,238,514 general partner units. The Partnership received net proceeds of approximately $902 million from the offering after deducting the underwriters’ discount and offering expenses.
Basis of Presentation
The accompanying unaudited combined financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (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 United States GAAP for complete financial statements. In the opinion of management, these unaudited combined financial statements include all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 8-K) necessary for a fair presentation of the financial position of the Partnership as of March 31, 2014 and December 31, 2013 and the results of its operations and cash flows for the three months ended March 31, 2014 and 2013. Certain previously reported amounts have been reclassified to conform to the current year presentation.
The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States GAAP for complete financial statements.
As discussed in Note B, the Sunrise Merger and Jupiter Acquisition were transactions between entities under common control; therefore, the Partnership recorded the assets and liabilities at their carrying amounts to EQT on the date of the merger or acquisition. For each transaction, the difference between EQT’s net carrying amount and the total consideration paid to EQT was recorded as a capital transaction with EQT, which resulted in a reduction in partners’ capital. The Partnership recast its combined financial statements to retrospectively reflect the Sunrise Merger and the Jupiter Acquisition; however, the combined financial statements are not necessarily indicative of the results of operations that would have occurred if the Partnership had owned the assets during the periods reported.
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
Due to the seasonal nature of the Partnership’s utility customer contracts, the interim statements for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
For further information, refer to the combined financial statements and footnotes for the year ended December 31, 2013 thereto included in this Current Report on Form 8-K as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein.
B. Sunrise Merger and Jupiter Acquisition
On July 15, 2013, the Partnership and Equitrans L.P. (Equitrans) entered into an Agreement and Plan of Merger with EQT and Sunrise, a wholly owned subsidiary of EQT and the owner of the Sunrise Pipeline. Effective July 22, 2013, Sunrise merged with and into Equitrans, with Equitrans continuing as the surviving company (Sunrise Merger). Upon closing, the Partnership paid EQT consideration of $540 million, consisting of a $507.5 million cash payment, 479,184 Partnership common units and 267,942 Partnership general partner units. Prior to the Sunrise Merger, Equitrans entered into a precedent agreement with a third party for firm transportation service on the Sunrise Pipeline over a twenty-year term (the Precedent Agreement). Pursuant to the Agreement and Plan of Merger, following the effectiveness of the transportation agreement contemplated by the Precedent Agreement in December 2013, the Partnership was obligated to pay additional consideration of $110 million. The Partnership made this additional payment to EQT in January 2014.
Prior to the Sunrise Merger, the Partnership operated the Sunrise Pipeline as part of its transmission and storage system under a lease agreement with EQT. The lease was a capital lease under GAAP; therefore, prior to the merger, revenues and expenses associated with Sunrise were included in the Partnership’s historical combined financial statements and the Sunrise Pipeline was depreciated over the lease term of 15 years. Effective as of the closing of the Sunrise Merger on July 22, 2013, the lease agreement was terminated. Because the Sunrise Merger was a transaction between entities under common control, the Partnership has recast its financial statements to retrospectively reflect the merger for the applicable periods. This included recasting depreciation expense recognized for the periods prior to the merger to reflect the pipeline’s useful life of 40 years. The decrease in depreciation expense and interest expense associated with the capital lease increased previously reported net income in the first quarter of 2013.
On April 30, 2014, the Partnership, its general partner, EQM Gathering Opco, LLC, a wholly owned subsidiary of the Partnership (EQM Gathering), and EQT Gathering, LLC (EQT Gathering), a wholly owned subsidiary of EQT entered into a contribution agreement (Contribution Agreement) pursuant to which EQT Gathering contributed to EQM Gathering certain assets constituting the Jupiter natural gas gathering system (Jupiter Acquisition).
On May 7, 2014, the Partnership completed the Jupiter Acquisition. The aggregate consideration paid by the Partnership to EQT in connection with the Jupiter Acquisition was approximately $1,180 million, consisting of a $1,121 million cash payment, 516,050 common units of the Partnership and 262,828 general partner units of the Partnership. The cash portion of the purchase price was funded with the net proceeds from an equity offering and borrowings under the Partnership’s credit facility.
The Jupiter Acquisition was a transaction between entities under common control. As a result, the Partnership recast its financial statements to retrospectively reflect the Jupiter Acquisition; however, the combined financial statements are not necessarily indicative of the results of operations that would have occurred had the Partnership owned the assets during the periods reported.
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
C. Financial Information by Business Segment
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.
The Partnership reports its operations in two segments, which reflect its lines of business. Transmission and storage includes the Partnership’s FERC-regulated interstate pipeline and storage business. Gathering includes Jupiter and the FERC-regulated low pressure gathering system. The operating segments are evaluated on their contribution to the Partnership’s results based on operating income.
All of the Partnership’s operating revenues, income from operations and assets are generated or located in the United States.
|
| Three Months Ended
|
| ||
|
| March 31, |
| ||
|
| 2014 |
| 2013 |
|
|
| (Thousands) |
| ||
Revenues from external customers: |
|
|
|
|
|
Transmission and storage | $ | 59,317 | $ | 41,065 |
|
Gathering |
| 34,094 |
| 28,487 |
|
Total | $ | 93,411 | $ | 69,552 |
|
Operating income: |
|
|
|
|
|
Transmission and storage | $ | 42,037 | $ | 30,461 |
|
Gathering |
| 21,919 |
| 18,832 |
|
Total operating income | $ | 63,956 | $ | 49,293 |
|
|
|
|
|
|
|
Reconciliation of operating income to net income: |
|
|
|
|
|
Other income, net |
| 269 |
| 297 |
|
Interest expense, net |
| 5,655 |
| 204 |
|
Income tax expense |
| 9,066 |
| 9,651 |
|
Net income | $ | 49,504 | $ | 39,735 |
|
|
| March 31, |
| December 31, |
|
|
|
|
|
|
|
|
| 2014 |
| 2013 |
|
|
|
|
|
|
|
|
| (Thousands) |
| ||
Segment assets: |
|
|
|
|
|
Transmission and storage | $ | 826,362 | $ | 807,287 |
|
Gathering |
| 246,394 |
| 238,322 |
|
Total operating segments |
| 1,072,756 |
| 1,045,609 |
|
Headquarters, including cash |
| 27,535 |
| 18,363 |
|
Total assets | $ | 1,100,291 | $ | 1,063,972 |
|
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
|
| Three Months Ended |
| ||
|
| 2014 |
| 2013 |
|
|
| (Thousands) |
| ||
Depreciation and amortization: |
|
|
|
|
|
Transmission and storage | $ | 6,159 | $ | 4,311 |
|
Gathering |
| 2,212 |
| 1,954 |
|
Total | $ | 8,371 | $ | 6,265 |
|
|
|
|
|
|
|
Expenditures for segment assets: |
|
|
|
|
|
Transmission and storage | $ | 14,001 | $ | 10,939 |
|
Gathering |
| 16,173 |
| 11,410 |
|
Total | $ | 30,174 | $ | 22,349 |
|
|
|
|
|
|
|
D. Related-Party Transactions
In the ordinary course of business, the Partnership has transactions with affiliated companies. The Partnership has various contracts with affiliates including, but not limited to, transportation service and precedent agreements, storage agreements and gas gathering agreements.
The Partnership has various agreements with EQT. Pursuant to an omnibus agreement, EQT performs centralized corporate, general and administrative services for the Partnership, such as legal, corporate recordkeeping, planning, budgeting, regulatory, accounting, billing, business development, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, investor relations, cash management and banking, payroll, internal audit, taxes and engineering. In exchange, the Partnership reimburses EQT for the expenses incurred in providing these services, except for any expenses associated with EQT’s long-term incentive programs. The omnibus agreement further requires that the Partnership reimburse EQT for the Partnership’s allocable portion of the premiums on any insurance policies covering the Partnership’s assets. EQT does not record any profit or margin for the administrative and operational services charged to the Partnership.
Pursuant to an operation and management services agreement, EQT Gathering, LLC (EQT Gathering) provides the Partnership’s pipelines and storage facilities with certain operational and management services. The Partnership reimburses EQT Gathering for such services pursuant to the terms of the omnibus agreement. The expenses for which the Partnership reimburses EQT and its subsidiaries may not necessarily reflect the actual expenses that the Partnership would incur on a stand-alone basis and the Partnership is unable to estimate what those expenses would be on a stand-alone basis.
E. Income Taxes
As a result of its limited partnership structure, the Partnership 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 the Partnership flow through to the unitholders; accordingly, the Partnership does not record a provision for income taxes. As discussed in Note B, the Partnership completed the Sunrise Merger on July 22, 2013 and the Jupiter Acquisition on May 7, 2014, both of which were transactions between entities under common control. Prior to these transactions, the income from Sunrise and Jupiter was included in EQT’s consolidated federal tax return; therefore, the Sunrise and Jupiter financial statements included U.S. federal and state income tax. The income tax effects associated with the operations of Sunrise and Jupiter prior to the Sunrise Merger and the Jupiter Acquisition are reflected in the Partnership’s combined financial statements for those periods.
F. Debt
In February 2014, the Partnership amended its credit facility to increase the borrowing capacity to $750 million. The amended credit facility will expire in February 2019. The credit facility is available to fund working capital
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
requirements and capital expenditures, to purchase assets, to pay distributions, to repurchase units and for general partnership purposes.
As of March 31, 2014, the Partnership had $110 million outstanding on the credit facility. There were no amounts outstanding on the credit facility as of December 31, 2013. The maximum amount of the Partnership’s outstanding short-term loans at any time during the three months ended March 31, 2014 was $110 million. The average daily balance of short-term loans outstanding was approximately $92.9 million for the three months ended March 31, 2014. The loans bear interest at a weighted average rate of 1.72%. The carrying value of short-term borrowings approximates fair value as the interest rates are based on prevailing market rates. On May 7, 2014, the Partnership borrowed $340 million under its credit facility for the Jupiter Acquisition. On May 14, 2014, the Partnership reduced its outstanding balance on the credit facility by $120 million.
G. Lease Obligations
On December 17, 2013, the Partnership entered into a lease with EQT for the Allegheny Valley Connector (AVC) facilities. Under the lease, the Partnership operates the facilities as part of its transmission and storage system under the rates, terms and conditions of its FERC-approved tariff. The AVC facilities are strategically located to connect Marcellus Shale supply and demand and include an approximately 200 mile pipeline that interconnects with the Partnership’s transmission and storage system. Additionally, the AVC facilities provide 450 BBtu per day of additional firm capacity to the Partnership’s system and are supported by 4 associated natural gas storage reservoirs with approximately 260 MMcf per day of peak withdrawal capability and 15 Bcf of working gas capacity. Of the total 15 Bcf of working gas capacity, the Partnership leases and operates 13 Bcf of working gas capacity. The lease payment due each month is the lesser of the following alternatives: (1) a revenue-based payment reflecting the revenues generated by the operation of the AVC facilities minus the actual costs of operating the AVC facilities and (2) a payment based on depreciation expense and pre-tax return on invested capital for the AVC facilities. As a result, the payments to be made under the AVC lease will be variable.
The AVC lease is a capital lease under GAAP. The gross capital lease assets and obligations recorded in 2013 were approximately $134.4 million. The Partnership expects modernization capital expenditures will be incurred by EQT to upgrade the AVC facilities. As the capital expenditures are incurred, the capital lease asset and obligations will increase. In the first quarter of 2014, the fair value of the leased property increased by approximately $3.6 million as a result of the modernization capital expenditures.
For the three months ended March 31, 2014, interest expense of $4.9 million and depreciation expense of $1.3 million were recorded related to the capital lease. At March 31, 2014, accumulated depreciation was $1.7 million, net capital lease assets were $136.3 million and capital lease obligations were $137.1 million.
H. Net Income per Limited Partner Unit
The Partnership’s net income is allocated to the general partner and limited partners, including subordinated unitholders, in accordance with their respective ownership percentages, and when applicable, giving effect to incentive distributions allocable to the general partner. The allocation of undistributed earnings, or net income in excess of distributions, to the incentive distribution rights is limited to available cash (as defined by the Partnership’s partnership agreement) for the period. Net income allocated to the general partner includes amounts attributed to incentive distributions, as applicable. The Partnership’s net income allocable to the limited partners is allocated between common and subordinated unitholders by applying the provisions of the Partnership’s partnership agreement that govern actual cash distributions as if all earnings for the period had been distributed. Any common units issued during the period are included on a weighted-average basis for the days in which they were outstanding. The phantom units granted to the independent directors of the Partnership’s general partner will be paid in common units on a director’s termination of service on the general partner’s Board of Directors. As there are no remaining service, performance or market conditions related to these awards, 10,861 phantom unit awards were included in the calculation of basic weighted average limited partner units outstanding for the three months ended March 31, 2014.
Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units, such as awards under the long-term incentive plan, were exercised, settled or converted into common units. When it is determined that potential common units resulting from an award subject to performance
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
or market conditions should be included in the diluted net income per limited partner unit calculation, the impact is reflected by applying the treasury stock method. Potentially dilutive securities, consisting of performance awards, included in the calculation of diluted net income per limited partner unit totaled 118,642 and 88,815 for the three months ended March 31, 2014 and 2013, respectively. The 2014 EQM Value Driver Awards granted in the first quarter of 2014 were not included in potentially dilutive securities because the performance condition was not yet met.
The following table presents the Partnership’s calculation of net income per limited partner unit for common and subordinated limited partner units. Net income attributable to Sunrise for periods prior to July 22, 2013 and to Jupiter for periods prior to May 7, 2014 was not allocated to the limited partners for purposes of calculating net income per limited partner unit.
|
| Three Months Ended |
| ||||
|
| 2014 |
| 2013 |
| ||
|
| (Thousands, except per unit |
| ||||
Net income | $ |
| 49,504 | $ |
| 39,735 |
|
Less: |
|
|
|
|
| ||
Pre-acquisition net income allocated to parent |
| (14,649) |
| (15,656) |
| ||
General partner interest in net income – 2% |
| (697) |
| (505) |
| ||
General partner interest in net income attributable to incentive distribution rights |
| (1,026) |
| — |
| ||
Limited partner interest in net income | $ |
| 33,132 | $ |
| 23,574 |
|
|
|
|
|
|
| ||
Net income allocable to common units | $ |
| 21,116 | $ |
| 11,154 |
|
Net income allocable to subordinated units |
| 12,016 |
| 12,420 |
| ||
Limited partner interest in net income | $ |
| 33,132 | $ |
| 23,574 |
|
|
|
|
|
|
| ||
Weighted average limited partner units outstanding – basic |
|
|
|
|
| ||
Common units |
| 30,479 |
| 17,339 |
| ||
Subordinated units |
| 17,340 |
| 17,340 |
| ||
Total |
| 47,819 |
| 34,679 |
| ||
|
|
|
|
|
| ||
Weighted average limited partner units outstanding – diluted |
|
|
|
|
| ||
Common units |
| 30,598 |
| 17,428 |
| ||
Subordinated units |
| 17,340 |
| 17,340 |
| ||
Total |
| 47,938 |
| 34,768 |
| ||
|
|
|
|
|
| ||
Net income per limited partner unit – basic |
|
|
|
|
| ||
Common units | $ |
| 0.69 | $ |
| 0.64 |
|
Subordinated units |
| 0.69 |
| 0.72 |
| ||
Total | $ |
| 0.69 | $ |
| 0.68 |
|
|
|
|
|
|
| ||
Net income per limited partner unit – diluted |
|
|
|
|
| ||
Common units | $ |
| 0.69 | $ |
| 0.64 |
|
Subordinated units |
| 0.69 |
| 0.72 |
| ||
Total | $ |
| 0.69 | $ |
| 0.68 |
|
EQT Midstream Partners, LP
Notes to Combined Financial Statements (Unaudited)
I. Subsidiary Guarantors
The Partnership filed a registration statement on Form S-3 with the SEC on July 1, 2013 to register, among other securities, debt securities. Certain subsidiaries of the Partnership are co-registrants with the Partnership (Subsidiary Guarantors), and the registration statement registered guarantees of debt securities by one or more of the Subsidiary Guarantors (other than EQT Midstream Finance Corporation, a 100% owned subsidiary of the Partnership whose sole purpose is to act as co-issuer of debt securities). The Subsidiary Guarantors are 100% owned by the Partnership and any guarantees by the Subsidiary Guarantors will be full and unconditional. Subsidiaries of the Partnership other than the Subsidiary Guarantors and EQT Midstream Finance Corporation are minor. The Partnership has no assets or operations independent of the Subsidiary Guarantors, and there are no significant restrictions upon the ability of the Subsidiary Guarantors to distribute funds to the Partnership by dividend or loan. In the event that more than one of the Subsidiary Guarantors provide guarantees of any debt securities issued by the Partnership, such guarantees will constitute joint and several obligations. None of the assets of the Partnership or the Subsidiary Guarantors represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act of 1933, as amended.
J. Subsequent Events
On April 22, 2014, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders for the first quarter of 2014 of $0.49 per common and subordinated unit, $0.5 million to the general partner related to its 2% general partner interest and $1.0 million to the general partner related to its incentive distribution rights. The cash distribution was paid on May 15, 2014 to unitholders of record at the close of business on May 6, 2014.
See Note B for discussion regarding the Jupiter Acquisition on May 7, 2014, Note A for discussion of the related May 2014 equity offering and Note F for the additional borrowings under the credit facility for the acquisition in May 2014.