PART I.  FINANCIAL INFORMATION 

Item 1.  Financial Statements

 

 

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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements include all adjustments (consisting of only normal recurring adjustments, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQM as of September 30, 2017March 31, 2018 and December 31, 2016,2017, and the results of its operations, for the three and nine months ended September 30, 2017 and 2016 and its cash flows and equity for the ninethree months ended September 30, 2017March 31, 2018 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.

 

For further information, refer to the consolidated financial statements and related footnotes theretoand "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in EQM’sEQM's Annual Report on Form 10-K for the year ended December 31, 2016 as well as “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained therein.2017.

Under a lease agreement with EQT. The lease wasfirm contract, EQM has a capital lease under GAAP; therefore, revenues and expenses associated withstand-ready obligation to provide the AVC facilities were included in EQM’s historical consolidated financial statements and the AVC facilities were depreciatedservice over the lease term of 25 years. In conjunction with the October 2016 Acquisition, the lease agreement was terminated. As a result, EQM's recastlife of the consolidated financial statements included recasting depreciation expense recognizedcontract. The performance obligation for firm reservation fee revenue is satisfied over time as the periods priorpipeline capacity is made available to the transactioncustomer. As such, EQM recognizes firm reservation fee revenue evenly over the contract period, using a time-elapsed output method to reflect the pipeline’s useful life of 40 years.measure progress. The cumulative capital lease depreciation recordedperformance obligation for periods priorvolumetric based fee revenues is generally satisfied upon EQM's monthly billing to the transaction was eliminated through equity atcustomer for actual volumes gathered, transported or stored during the timemonth. The amount billed corresponds directly to the value of EQM's performance to date as the acquisitioncustomer obtains value as each volume is gathered, transported or stored.

The table below provides disaggregated revenue information by $1.8 million and $5.2 millionEQM business segment for the three and nine months ended September 30, 2016, respectively.March 31, 2018.

The following table summarizes EQM's limited partner common units and general partner units issued from January 1, 20162018 through DecemberMarch 31, 2016. EQM did not issue any units during the nine months ended September 30,2018. There were no issuances in 2017.

As of September 30, 2017,March 31, 2018, EQGP and its subsidiaries owned 21,811,643 EQM common units, representing a 26.6% limited partner interest, 1,443,015 EQM general partner units, representing a 1.8% general partner interest, and all of the IDRs in EQM. As of September 30, 2017,March 31, 2018, EQT owned 100% of the non-economic general partner interest and a 90.1% limited partner interest in EQGP.

In the ordinary course of business, EQM 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.

In August 2017,February 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$65.8 million, of which $27.2 million was paid in October 2017 and the remaining $20.8 million is expected to be paid in November 2017.May 2018. The capital contribution payable has been reflected on the consolidated balance sheet as of September 30, 2017March 31, 2018 with a corresponding increase to EQM's investment in the MVP Joint Venture.

Equity income, which is primarily related to EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP, is reported in otherequity 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.operations.

As of September 30, 2017,March 31, 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.

EQM had $105 millionno letters of borrowingscredit outstanding onunder its credit facility as of September 30, 2017March 31, 2018 and had no borrowings outstanding as of December 31, 2016.2017. During the three and nine months ended September 30, 2017,March 31, 2018, the maximum amount of EQM's outstanding borrowings under the credit facility at any time was $177$420 million and the average daily balances werebalance was approximately $95 million and $32 million, respectively. Interest was$301 million. EQM incurred interest at a weighted average annual interest rate of approximately 2.7%3.0% 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’sMarch 31, 2018. There were no borrowings outstanding borrowings under the credit facility at any time were $91 million and $299 million, respectively, and the average daily balances were approximately $34 million and $67 million, respectively. Interest was incurred at weighted average annual interest rates of approximately 2.0% and 1.9% forduring the three and nine months ended September 30, 2016, respectively.March 31, 2017.

As of September 30, 2017,March 31, 2018, EQM was in compliance with all debt provisions and covenants.

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 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 and transmission expansion projects); the cost, capacity, timing of regulatory approvals and anticipated in-service date of the MVP project; 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; the expected benefits to EQMwhether any of EQT's proposedEQM's merger with RMP, EQM's acquisition of the Rice Energy Inc. (Rice), retained midstream assets from EQT and EQGP's acquisition of all of the outstanding RMP IDRs from EQT (collectively, the Midstream Streamlining Transactions) will be completed and the timing of each transaction or transactions; the risk that EQM or RMP may be unable to obtain governmental and regulatory approvals required for the proposed merger of EQM and RMP, or required governmental and regulatory approvals may delay the merger or result in the imposition of conditions that could cause the parties to abandon the merger; the risk that a condition to closing of the merger may not be satisfied, including whether EQT willapproval of the merger by RMP's unitholders; the possible diversion of management's time on issues related to the merger; the impact and outcome of pending and future litigation, including litigation, if any, relating to the merger; the timing of the proposed separation of EQT's production and midstream businesses 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; the effects of government regulation and litigation; and tax position. The forward-looking statements included in this Quarterly Report on Form 10-Q involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. EQM has based these forward-looking statements on current expectations and assumptions about future events. While EQM considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and are beyond EQM’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.

For the three months ended September 30, 2017,March 31, 2018, EQM reported net income of $142.9$177.2 million compared to $133.7$143.2 million for the three months ended September 30, 2016.March 31, 2017. The increase resulted 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 lowerhigher equity income, taxes, partly offset by an increase in operating expenses, higher net interest expense. Selling, general and administrative expense anddecreased as a result of lower other income.

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 D to the consolidated financial statements.

Gathering revenues increased by $17.4$23.6 million for the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017, driven by affiliate and third party and affiliate production development in the Marcellus Shale. EQM increased firmFirm reservation fee revenues increased primarily as a result of third parties and affiliates contracting for additional firm gathering capacity onthe completion of the Range Resources Corporation (Range Resources) Header Pipelineheader pipeline project and increased affiliate contracted gathering capacity and rates on various affiliate wellhead gathering expansion projects. The decreaseprojects in usagethe current period. Usage fees under firm contracts wasincreased due to lowerincreased affiliate volumes gathered in excess of firm contracted capacity. The decrease in usage fees under interruptible contracts was primarily due to the additional contracts for firm capacity.

Operating expenses increaseddecreased by $4.1$1.6 million for the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016 primarilyMarch 31, 2017. Selling, general and administrative expense decreased due to a shift in strategic focus, which continued the trend of lower allocated costs from EQT. Depreciation and amortization expense increased as a result of increased depreciation and amortization expense of $2.3 million due to additional assets placed in-service, including those associated with the Range Resources Header Pipelineheader pipeline project and a Northern West Virginia Marcellus gathering system (NWV Gathering) expansion project and higher personnel costs.

Transmission and storage revenues increased by $13.0$9.2 million for the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016.March 31, 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 $20.4 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increases in operating and maintenance expense and depreciation and amortization expense were the result of the OVC project placed in-service in the fourth quarter of 2016. Operating and maintenance expense increased primarily due to property taxes on the OVC and higher personnel costs.

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: