EQM MIDSTREAM PARTNERS, LP
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 Exchange Act
and Section 27A of the Securities Act. Statements that do not relate strictly to
historical or current facts are forward-looking and usually identified by the
use of words such as "anticipate," "estimate," "could," "would," "will," "may,"
"forecast," "approximate," "expect," "project," "intend," "plan," "believe" and
other words of similar meaning in connection with any discussion of future
operating or financial matters. Without limiting the generality of the
foregoing, forward-looking statements contained in this Quarterly Report on
Form 10-Q include the matters discussed in the section captioned "Outlook" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the expectations of plans, strategies, objectives, and growth
and anticipated financial and operational performance of EQM and its
subsidiaries, including:
• guidance regarding EQM's gathering, transmission and storage and water
service revenue and volume growth, including the anticipated effects
associated with the EQT Global GGA;
• projected revenue (including from firm reservation fees and deferred
revenues), expenses and contract liabilities, and the effects on projected
revenue and contract liabilities associated with the EQT Global GGA and
the MVP project;
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• 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 storage and water
expansion projects);
• the cost, capacity, timing of regulatory approvals, final design and
targeted in-service dates of current projects;
• the ultimate terms, partners and structure of the MVP Joint Venture and
ownership interests therein;
• expansion projects in EQM's operating areas and in areas that would
provide access to new markets;
• EQM's ability to provide produced water handling services and realize
expansion opportunities and related capital avoidance;
• EQM's ability to identify and complete acquisitions and other strategic
transactions, including the proposed EQM Merger and joint ventures,
effectively integrate transactions into EQM's operations, and achieve
synergies, system optionality and accretion associated with transactions,
including through increased scale;
• EQM's ability to access commercial opportunities and new customers for its
water services business, and the timing and final terms of any definitive
water services agreement or agreements between EQT and EQM (a Water
Services Agreement) entered into pursuant to the terms of the Water
Services Letter Agreement;
• any further credit rating impacts associated with the MVP project,
customer credit ratings changes, including EQT's, and defaults,
acquisitions and financings and any further changes in EQM's credit
ratings;
• the ability of EQM's contracts to survive a customer bankruptcy or
restructuring;
• the timing of the consummation of the EQM Merger;
• the ability to obtain the requisite approvals related to the EQM Merger
from Equitrans Midstream's shareholders or EQM's limited partners, as
applicable, to consummate the EQM Merger;
• the risk that a condition to closing of the EQM Merger may not be satisfied;
• expected transaction expenses related to the EQM Merger and related
transactions;
• the possible diversion of management time on issues related to the EQM Merger;
• the impact and outcome of threatened, pending and future litigation
relating to the EQM Merger;
• the timing and amount of future issuances or repurchases of securities,
including in connection with the EQM Merger;
• effects of conversion of EQM securities into Merger Consideration or
Equitrans Midstream Preferred Shares, as applicable, in connection with
the EQM Merger;
• effects of seasonality;
• expected cash flows and MVCs, including those associated with the EQT
Global GGA and any definitive agreement or agreements between EQT and EQM
related to the Water Services Letter Agreement, and the potential impacts
thereon of the timing and cost of the MVP project;
• capital commitments;
• projected capital contributions and capital and operating expenditures,
including the amount and timing of reimbursable capital expenditures,
capital budget and sources of funds for capital expenditures;
• distribution amounts, timing and rates;
• the effect and outcome of pending and future litigation and regulatory
proceedings;
• changes in commodity prices and the effect of commodity prices on EQM's
business;
• liquidity and financing requirements, including sources and availability;
• interest rates;
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• EQM's and its subsidiaries' respective abilities to service debt under,
and comply with the covenants contained in, their respective credit
agreements;
• expectations regarding production volumes in EQM's areas of operations;
• EQM's ability to achieve the anticipated benefits associated with the
execution of the EQT Global GGA, the Water Services Letter Agreement, the
EQM Merger Agreement and related agreements;
• the impact on EQM and its subsidiaries of the COVID-19 pandemic,
including, among other things, effects on demand for natural gas and EQM's
services, commodity prices and access to capital;
• the effects of government regulation; and
• tax status and 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 the current expectations and
assumptions of the management of the EQM General Partner about future
events. While EQM considers these expectations and assumptions to be reasonable,
they are inherently subject to significant business, economic, competitive,
regulatory and other risks and uncertainties, many of which are difficult to
predict and are beyond EQM's control. The risks and uncertainties that may
affect the operations, performance and results of EQM's businesses and
forward-looking statements include, but are not limited to, those set forth
under "Item 1A, Risk Factors" in EQM's Annual Report on Form 10-K for the year
ended
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EXECUTIVE OVERVIEW For the three months endedMarch 31, 2020 , net income attributable to EQM was$251.7 million compared to$251.9 million for the three months endedMarch 31, 2019 . The decrease resulted primarily from impairments to long-lived assets (as discussed in Note 3 to the consolidated financial statements), higher net interest expense associated with increased borrowings outstanding under the Amended$3 Billion Facility, the Amended 2019 Term Loan Agreement and the Eureka Credit Facility, higher other operating expenses and net income attributable to noncontrolling interest for the three months endedMarch 31, 2020 attributable to the third-party ownership interest in Eureka Midstream, partially offset by higher gathering revenues primarily associated with the operating entities acquired with the Bolt-on Acquisition, higher water revenues and higher equity income from EQM's investment in the MVP Joint Venture. OnApril 27, 2020 , the Board of Directors of the EQM General Partner declared a cash distribution to EQM's common unitholders of$0.3875 per unit, which was 67% lower than the fourth quarter 2019 distribution of$1.16 per unit. Following the announcement of the EQM Merger, the decrease in EQM's quarterly distribution reflects a financial and distribution policy that is designed to deliver highly predictable revenues and substantial cash flows after total capital expenditures and distributions. In addition, onApril 27, 2020 , the Board of Directors of the EQM General Partner declared a quarterly cash distribution on the Series A Preferred Units for the first quarter of 2020 of$1.0364 per Series A Preferred Unit. COVID-19 Update While the outbreak of COVID-19 had minimal impact on the operations of EQM and its subsidiaries during the three months endedMarch 31, 2020 , EQM is unable to predict, in light of the ongoing and dynamic nature of the circumstances, any additional impact the outbreak may have on its business, results of operations and financial condition. The extent of COVID-19's impact on EQM will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, duration of the outbreak and related economic effects and after effects (including on the natural gas industry), and actions taken to contain COVID-19 or its impact, among others. As a result of the outbreak, EQM's operations, including its field operations, may be disrupted or become less efficient and instability in financial and credit markets as a result of COVID-19 may adversely affect EQM's customers, as well as EQM. Further, EQM's suppliers and customers may be adversely affected, including if the outbreak results in an economic downturn or recession, negatively affects the price of, demand for and production of natural gas or prevents or curtails continued natural gas production by EQM's customers, which could reduce demand for EQM's services or heighten EQM's exposure to risk of nonpayment and/or nonperformance. While the natural gas forward strip price has increased sinceMarch 31, 2020 primarily reflecting expected declines in production of associated gas (partially due to measures implemented by federal, state and local governments to control the spread of COVID-19 and resulting declines in demand for oil and to a lesser extent natural gas and continued economic uncertainty, as well as the failure, inMarch 2020 , ofSaudi Arabia andRussia to agree to cut oil production, which contributed to a sharp drop in the price of oil and an imbalance between the supply of demand for oil), the natural gas forward strip price continued to trend downward during the first three months of 2020 and could be depressed for several years, including as a result of COVID-19, which could affect EQM's customers and, in turn, EQM. For further information regarding the potential impact of COVID-19, see "The outbreak of COVID-19 (or any future pandemic), and related declines in economic output and associated demand for natural gas, could harm the business, results of operations and financial condition of us." under Part II, "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q. The situation surrounding COVID-19 remains fluid, and EQM is actively managing its response in collaboration with relevant parties. As a midstream energy company, EQM is recognized as an essential business under various regulations related to the COVID-19 pandemic and have continued to operate as permitted under these regulations. EQM has proactively undertaken a number of companywide measures intended to promote the safety of field and non-field level employees and contractors (including establishing anInfectious Disease Response Team , instituting enhanced self-protection and office sanitation measures, eliminating non-essential business travel, implementing a mandatory work-from-home protocol, sharing EQM's infectious disease response plan with suppliers and contractors, and timely communicating updates to employees and other relevant parties).EQM's Infectious Disease Response Team continues to monitor and assist in implementing mitigation efforts in respect of potential areas of risk for EQM. Additionally, EQM has implemented business continuity plans. EQM has been able to maintain a consistent level of effectiveness through the measures taken. EQM believes that it is following best practices under COVID-19 guidance and intends to continue to refine its practices as additional guidance is released and assess potential impacts from COVID-19 to its financial position and operating results, as well as any regulatory and legislative activities relating to COVID-19 that could impact its business. 34
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Business Segment Results
Operating segments are revenue-producing components of an 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, equity income and
various operational measures in the following sections. Management believes that
the presentation of this information is useful to management and investors
regarding the financial condition, results of operations and trends of its
segments. EQM has reconciled each segment's operating income to EQM's
consolidated operating income and net income in Note 5 to the consolidated
financial statements.
GATHERING RESULTS OF OPERATIONS
Three Months Ended March 31,
2020 2019 % Change
(Thousands, except per day amounts)
FINANCIAL DATA
Firm reservation fee revenues(a)
157,968 132,922 18.8
Total operating revenues 310,047 261,881 18.4
Operating expenses:
Operating and maintenance 18,878 15,253 23.8
Selling, general and administrative 21,235 22,534 (5.8 )
Separation and other transaction costs 4,104 3,513 16.8
Depreciation 40,440 28,116 43.8
Amortization of intangible assets 14,581 10,387 40.4
Impairments of long-lived assets 55,581 - 100.0
Total operating expenses 154,819 79,803 94.0
Operating income $ 155,228 $ 182,078 (14.7 )
OPERATIONAL DATA
Gathered volumes (BBtu per day)
Firm capacity reservation(b) 3,282 2,572 27.6
Volumetric-based services 5,014 4,194 19.6
Total gathered volumes 8,296 6,766 22.6
Capital expenditures(c) $ 111,454 $ 207,717 (46.3 )
(a) For the three months ended
included approximately
(b) Includes volumes under agreements structured with MVCs.
(c) Includes approximately
noncontrolling interest in Eureka Midstream for the three months ended
(d) Capital expenditures for the three months ended
approximately $49.7 million related to non-operating assets acquired from
Equitrans Midstream in the Shared Assets Transaction that primarily support
EQM's gathering activities.
Three Months Ended
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Operating expenses increased by
Three Months Ended March 31,
2020 2019 % Change
(Thousands, except per day amounts)
FINANCIAL DATA
Firm reservation fee revenues $ 99,597 $ 99,224 0.4
Volumetric-based fee revenues 7,018 10,635 (34.0 )
Total operating revenues 106,615 109,859 (3.0 )
Operating expenses:
Operating and maintenance 9,441 4,084 131.2
Selling, general and administrative 5,182 8,492 (39.0 )
Depreciation 13,558 12,533 8.2
Total operating expenses 28,181 25,109 12.2
Operating income $ 78,434 $ 84,750 (7.5 )
Equity income $ 54,072 $ 31,063 74.1
OPERATIONAL DATA
Transmission pipeline throughput (BBtu per day)
Firm capacity reservation 3,000 2,959 1.4
Volumetric-based services 15 105 (85.7 )
Total transmission pipeline throughput 3,015 3,064 (1.6 )
Average contracted firm transmission reservation
commitments
(BBtu per day) 4,453 4,442 0.2
Capital expenditures (a) $ 10,798 $ 18,762 (42.4 )
(a) Transmission capital expenditures do not include capital contributions made
to the MVP Joint Venture for the MVP and MVP Southgate projects of
approximately $45.2 million and $144.8 million for the three months ended
March 31, 2020 and 2019, respectively.
Three Months Ended
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Operating expenses increased by
Three Months Ended March 31,
2020 2019 % Change
(Thousands)
FINANCIAL DATA
Firm reservation fee revenues(a)
23,675 15,158 56.2
Total operating revenues 36,451 18,042 102.0
Operating expenses:
Operating and maintenance 10,103 8,546 18.2
Selling, general and administrative 1,480 1,894 (21.9 )
Depreciation 7,116 6,416 10.9
Total operating expenses 18,699 16,856 10.9
Operating income $ 17,752 $ 1,186 1,396.8
OPERATIONAL DATA
Water services volumes (MMgal)
Firm capacity reservation(b) 210 90 133.3
Volumetric-based services 383 280 36.8
Total water volumes 593 370 60.3
Capital expenditures $ 3,476 $ 9,175 (62.1 )
(a) For the three months ended
included approximately
(b) Includes volumes under agreements structured with MVCs.
Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Water operating revenues increased by$18.4 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Firm reservation fee revenues increased by$9.9 million primarily as a result of increased revenues generated under agreements with MVCs including increased unbilled revenue associated with MVC's. Volumetric based fee revenues increased$8.5 million primarily due to a 37% increase in fresh water distribution volumes associated with increased customer activity and increased realized rates on a per gallon basis. A majority of the fresh water delivery fees EQM charges per gallon of water are tiered and thus are lower on a per gallon basis once certain volumetric thresholds are met. Water operating expenses increased by$1.8 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily as a result of higher operating and maintenance expense associated with the timing of costs related to activities on drilling pads and increased depreciation expense as a result of additional assets placed in-service. EQM's water services are directly associated with the timing of producers' well completion activities and fresh and produced water needs (which are partially driven by horizontal lateral lengths and the number of completion stages per well), which will vary from quarter to quarter. Therefore, the Water operating results for the three months endedMarch 31, 2020 are not necessarily indicative of the results for the year endingDecember 31, 2020 . Other Income Statement Items Other income 37
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For the three months endedMarch 31, 2020 , other income increased by$2.1 million compared to the three months endedMarch 31, 2019 primarily associated with a$4.2 million gain on derivative instruments partially offset by a$2.1 million decrease in AFUDC - equity. Net interest expense Net interest expense increased by$5.2 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to higher interest expense of$11.7 million associated with the Amended 2019 EQM Term Loan Agreement and$2.1 million on credit facility borrowings associated with increased outstanding debt and the issuance of letters of credit with respect to the MVP and MVP Southgate projects, partly offset by aggregate interest income of$4.9 million associated with the Intercompany Loan Agreement and the Rate Relief Note and increased capitalized interest and AFUDC - debt. See also Note 9 to the consolidated financial statements for a discussion of the$3 Billion Facility Amendment and the Term Loan Amendment. EQM expects higher net interest expense for the remainder of 2020 from borrowings under the Amended$3 Billion Facility and the Amended 2019 EQM Term Loan Agreement due to an increase in the Applicable Rate (as defined in the Amended$3 Billion Facility and the Amended 2019 EQM Term Loan Agreement) and recent downgrades of EQM's credit ratings. Net income attributable to noncontrolling interests Net income attributable to noncontrolling interest for the three months endedMarch 31, 2020 related to the third-party ownership interest in Eureka Midstream. See "Investing Activities" and "Capital Requirements" under "Capital Resources and Liquidity" for a discussion of capital expenditures. Non-GAAP Financial Measures Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of EQM's consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess: • EQM's operating performance as compared to other publicly traded partnerships in the midstream energy industry without regard to historical cost basis or, in the case of adjusted EBITDA, financing methods; • the ability of EQM's assets to generate sufficient cash flow to make distributions to EQM's unitholders;
• EQM's ability to incur and service debt and fund capital expenditures; and
• the viability of acquisitions and other capital expenditure projects and
the returns on investment of various investment opportunities.
EQM believes that adjusted EBITDA and distributable cash flow provide useful information to investors in assessing its financial condition and results of operations. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income, operating income and net cash provided by operating activities. Additionally, because adjusted EBITDA and distributable cash flow may be defined differently by other companies in its industry, EQM's adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing the utility of the measures. Distributable cash flow should not be viewed as indicative of the actual amount of cash that EQM has available for distributions or that it plans to distribute and is not intended to be a liquidity measure.
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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 and net cash provided by operating activities, respectively.
Three Months Ended
March 31,
2020 2019
(Thousands)
Net income $ 255,285 $ 251,931
Add:
Net interest expense 54,531 49,356
Depreciation 61,114 47,065
Amortization of intangible assets 14,581 10,387
Impairment of long-lived assets 55,581 -
Preferred Interest payments 2,764 2,746
Non-cash long-term compensation expense 285 255
Separation and other transaction costs 4,104 3,513
Less:
Equity income (54,072 ) (31,063 ) AFUDC - equity (236 ) (2,346 ) Unrealized gain on derivatives (4,170 ) - Adjusted EBITDA attributable to noncontrolling interest(a) (8,515 ) - Adjusted EBITDA$ 381,252 $ 331,844
Less:
Net interest expense excluding interest income on the Preferred Interest(b)
(55,024 ) (50,962 )
Capitalized interest and AFUDC - debt(b) (8,671 ) (4,687 )
Ongoing maintenance capital expenditures net of expected reimbursements(b)
(8,996 ) (9,398 )
Series A Preferred Unit distributions (25,501 ) -
Distributable cash flow $ 283,060 $ 266,797
Net cash provided by operating activities $ 285,136 $ 160,973 Adjustments:
Capitalized interest and AFUDC - debt(b) (8,671 ) (4,687 ) Principal payments received on the Preferred Interest 1,225 1,141
Ongoing maintenance capital expenditures net of expected reimbursements(b)
(8,996 ) (9,398 )
Adjusted EBITDA attributable to noncontrolling
interest(a) (8,515 ) -
Series A Preferred Unit distributions (25,501 ) -
Other, including changes in working capital 48,382 118,768
Distributable cash flow $ 283,060 $ 266,797 (a) Reflects adjusted EBITDA attributable to noncontrolling interest associated
with the third-party ownership interest in Eureka Midstream. Adjusted EBITDA
attributable to noncontrolling interest for the three months ended March 31,
2020 was calculated as net income of $3.6 million , plus depreciation of $2.7
million , plus amortization of intangible assets of $1.2 million and plus
interest expense of $1.0 million .
(b) Does not reflect amounts related to the noncontrolling interest share of
Eureka Midstream.
See "Executive Overview" above for a discussion of net income, the GAAP
financial measure most directly comparable to adjusted EBITDA. EQM's adjusted
EBITDA increased by
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Net cash provided by operating activities, the GAAP financial measure most directly comparable to distributable cash flow, increased by$124.2 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 as discussed in "Capital Resources and Liquidity." Distributable cash flow increased by$16.3 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 mainly attributable to the increase in EQM's adjusted EBITDA, partly offset by increased net interest expense and distributions on the Series A Preferred Units. Outlook EQM's assets overlay core acreage in theAppalachian Basin . The location of EQM's assets allows it to access major demand markets in theU.S. EQM is one of the largest natural gas gatherers in theU.S. , and its largest customer, EQT, is the largest natural gas producer in theU.S. based on produced volumes as ofMarch 31, 2020 . EQM maintains a stable cash flow profile, with approximately 58% of its revenue for the three months endedMarch 31, 2020 generated by firm reservation fees, including revenues from MVCs. Further, the percentage of EQM's revenues that are generated by firm reservation fees and MVCs is expected to increase in future years as a result of the EQT Global GGA, which includes an MVC effective onFebruary 26, 2020 of 3.0 Bcf per day that gradually steps up to 4.0 Bcf per day for several years following the in-service date of the MVP project. EQM's principal strategy is to achieve the scale and scope of a top-tier midstream company by leveraging its existing assets, executing on its growth projects and, where appropriate, seeking and executing on strategically-aligned acquisition and joint venture opportunities and other strategic transactions, while strengthening its balance sheet through (i) highly predictable cash flows backed by firm reservation fees, (ii) actions to delever its balance sheet, (iii) disciplined capital spending, (iv) operating cost control and (v) an appropriate distribution policy. As part of its approach to organic growth, EQM is focused on building and completing its key transmission and gathering growth projects outlined below, many of which are supported by contracts with firm capacity commitments. Additionally, EQM is targeting growth from volumetric gathering and transmission services opportunities and from its water services business. EQM believes that this approach will enable it to achieve its strategic goals. EQM expects that the following expansion projects will be its primary organic growth drivers: • Mountain Valley Pipeline. The MVP Joint Venture is a joint venture among EQM and affiliates of each of NextEra Energy, Inc.,Con Edison , AltaGas Ltd. and RGC Resources, Inc. that is constructing the MVP. As ofMarch 31, 2020 , EQM owned a 45.7% interest in the MVP project and will operate the MVP. The MVP is an estimated 300 mile, 42-inch diameter natural gas interstate pipeline with a targeted capacity of 2.0 Bcf per day that will span from EQM's existing transmission and storage system inWetzel County, West Virginia toPittsylvania County, Virginia , providing access to the growing Southeast demand markets. During the three months endedMarch 31, 2020 , EQM made capital contributions of approximately$45 million to the MVP Joint Venture for the MVP project. For the remainder of 2020, EQM expects to make capital contributions of approximately$550 million to$600 million to the MVP Joint Venture for purposes of the MVP. The MVP Joint Venture has secured a total of 2.0 Bcf per day of firm capacity commitments at 20-year terms and additional shippers have expressed interest in the MVP project. The MVP Joint Venture is evaluating an expansion opportunity that could add approximately 0.5 Bcf per day of capacity through the installation of incremental compression and is also evaluating other future pipeline extension projects.
In
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litigation and regulatory-related delays affecting the completion of the MVP set forth in Part II, "Item 1. Legal Proceedings". Based on the MVP Joint Venture's current budget for the project, EQM is expected to fund approximately$2.7 billion (inclusive of additional contributions required due to theCon Edison cap described below) of the overall project cost, including approximately$105 million to$120 million in excess of EQM's ownership interest. OnNovember 4, 2019 ,Con Edison exercised an option to cap its investment in the MVP project at approximately$530 million (excluding AFUDC).EQM and NextEra Energy, Inc. are obligated, and RGC Resources, Inc., another member of the MVP Joint Venture owning an interest in the MVP project, has opted, to fund the shortfall inCon Edison's capital contributions on a pro rata basis. As a result, based on the MVP Joint Venture's current budget for the project, EQM expects to fund an additional approximately$86 million (excluding AFUDC) in capital contributions to the MVP Joint Venture. Any funding by EQM and other members will correspondingly increase their respective interests in the MVP project and decreaseCon Edison's interest in the MVP project. As a result, EQM's equity ownership in the MVP project will progressively increase from 45.7% to approximately 47.0%. In light of litigation and regulatory proceedings affecting or which have affected the construction of the MVP, EQM expects that the MVP Joint Venture will declare byMay 31, 2020 events of force majeure under the precedent agreements (MVP Precedent Agreements) entered into with shippers (MVP Shippers) that have subscribed for capacity on the MVP. EQM expects that the MVP Joint Venture will take such action as an administrative matter in order to extend in accordance with the terms of the MVP Precedent Agreements various milestone dates in the agreements during the pendency of the force majeure events, including service commencement dates. Such action does not adversely affect the targeted in-service date for the project. • Wellhead Gathering Expansion and Hammerhead Projects. During the three months endedMarch 31, 2020 , EQM invested approximately$104 million in gathering expansion projects. For the remainder of 2020, EQM expects to invest approximately$300 million in gathering expansion projects (inclusive of expected capital expenditures related to the noncontrolling interest in Eureka Midstream). The expansion projects include infrastructure expansion of core development areas in the Marcellus and Utica Shales in southwesternPennsylvania , easternOhio and northernWest Virginia for EQT, Range Resources Corporation (Range Resources) and other producers, including the Hammerhead project. The Hammerhead project is a 1.6 Bcf per day gathering header pipeline that is primarily designed to connect natural gas produced inPennsylvania andWest Virginia to the MVP, is supported by a 20-year term, 1.2 Bcf per day, firm capacity commitment from EQT and is expected to cost approximately$555 million , of which approximately$490 million had been spent throughMarch 31, 2020 . For the remainder of 2020, EQM expects to invest approximately$30 million in the Hammerhead project. The Hammerhead project is expected to become operational in the second quarter of 2020 and will provide interruptible service until the MVP is placed in-service, at which time the firm capacity commitment will begin. •MVP Southgate Project . InApril 2018 , the MVP Joint Venture announced the MVP Southgate project, a proposed 75-mile interstate pipeline that will extend from the MVP atPittsylvania County, Virginia to new delivery points inRockingham andAlamance Counties,North Carolina . The MVP Southgate project is backed by a 300 MMcf per day firm capacity commitment from Dominion Energy North Carolina. As designed, the MVP Southgate project has expansion capabilities that could provide up to 900 MMcf per day of total capacity. The MVP Southgate project is estimated to cost a total of approximately$450 million to$500 million , which is expected to be spent primarily in 2021. EQM is expected to fund approximately$225 million of the overall project cost. During the three months endedMarch 31, 2020 , no capital contributions were made by EQM to the MVP Joint Venture for the MVP Southgate project. For 2020, EQM expects to make capital contributions of approximately$15 million to the MVP Joint Venture for the MVP Southgate project. EQM will operate the MVP Southgate pipeline and, as ofMarch 31, 2020 , owned a 47.2% interest in the MVP Southgate project. The MVP Joint Venture submitted the MVP Southgate certificate application to theFERC inNovember 2018 . The Final Environmental Impact Statement for the MVP Southgate project was issued onFebruary 14, 2020 . The schedule also identifiesMay 14, 2020 as the deadline for other agencies to act on other federal authorizations required for the project (theFERC , however, is not subject to this deadline). Subject to approval by theFERC and other regulatory agencies, the MVP Southgate project is expected to be placed in-service in 2021. • Transmission Expansion. During the three months endedMarch 31, 2020 , EQM invested approximately$9 million in transmission expansion projects. For the remainder of 2020, EQM expects to invest approximately$40 million to$50 million in transmission expansion projects, primarily attributable to the Allegheny Valley Connector (AVC), theEquitrans, L.P. Expansion project (EEP), which is designed to provide north-to-south capacity on the mainlineEquitrans, L.P. system, including for deliveries to the MVP, and power plant projects. A portion of the EEP commenced operations with interruptible service in the third quarter of 2019. The EEP provides capacity of 41
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approximately 600 MMcf per day and offers access to several markets through
interconnects with
invested approximately $3 million in the expansion of its fresh water
delivery infrastructure. For the remainder of 2020, EQM expects to invest
approximately $10 million to $15 million in the expansion of its fresh
water delivery infrastructure in Pennsylvania and Ohio .
See further discussion of capital expenditures in the "Capital Requirements"
section below.
On February 27, 2020 , Equitrans Midstream and EQM announced the EQT Global GGA
with EQT, which is a 15-year contract that includes, among other things, a 3.0
Bcf per day MVC (which gradually steps up to 4.0 Bcf per day for several years
following the in-service date of the MVP project) and the dedication of a
substantial majority of EQT's core acreage in Pennsylvania and West Virginia to
EQM. Under the EQT Global GGA, EQT received certain gathering fee relief over a
period of three years following the in-service date of the MVP (as further
described in Note 6 to the consolidated financial statements). The EQT Global
GGA replaced 14 previous gathering agreements between affiliates of each of EQT
and EQM. In addition, on February 27, 2020 , Equitrans Midstream and EQM
announced a definitive merger agreement between Equitrans Midstream, EQM and
certain of their affiliates related to the EQM Merger, pursuant to which, among
other things, Equitrans Midstream will acquire all of the issued and outstanding
EQM common units (other than EQM common units held by Equitrans Midstream and
its subsidiaries). Following the EQM Merger, which is subject to customary
closing conditions, including approvals of EQM's limited partners and Equitrans
Midstream's shareholders, EQM will be an indirect, wholly owned subsidiary of
Equitrans Midstream and will no longer be a publicly traded entity. The
Equitrans Midstream Special Meeting and the EQM Special Meeting are both
scheduled to be held on June 15, 2020 , and EQM expects the EQM Merger to close
in June 2020 . See Notes 1, 2, 4, 6 and 7 for additional information regarding
the EQT Global GGA, the EQM Merger and the transactions related thereto.
Under the EQT Global GGA, the performance obligation is to provide daily MVC
capacity and as such the total consideration is allocated proportionally to the
daily MVC over the life of the contract. In periods that the gathering MVC
revenue billed will exceed the allocated consideration, the excess will be
deferred to the contract liability and recognized in revenue when the
performance obligation has been satisfied. Assuming an in-service date of
year-end 2020 for the MVP, the deferral to the contract liability is expected to
increase by approximately $224 million for the remainder of 2020 and by
approximately $10 million and $38 million , respectively, during 2021 and 2022.
The daily MVC capacity and the gathering MVC fees payable by EQT (or its
affiliates) to EQM as set forth in the EQT Global GGA are conditioned upon the
in-service date of the MVP. There are ongoing legal and regulatory matters that
must be resolved favorably before the MVP project can be completed which could
have a material effect on the performance obligation and the allocation of the
total consideration over the life of the contract and the gathering MVC fees
payable by EQT under the contract.
For a discussion of EQM's commercial relationship with EQT and related
considerations, including risk factors, see EQM's Annual Report on Form 10-K for
the year ended December 31, 2019 , as updated by this and any subsequent
Quarterly Report on Form 10-Q.
Commodity Prices. EQM's business is dependent on continued natural gas
production and the availability and development of reserves in its areas of
operation. Low prices for natural gas and natural gas liquids have adversely
affected development of additional reserves and production that is accessible by
EQM's pipeline and storage assets, which also negatively affects EQM's water
services business. The Henry Hub natural gas price ranged from $1.68 per MMbtu
to $2.17 per MMbtu between January 1, 2020 and March 31, 2020 . While the natural
gas forward strip price has increased since March 31, 2020 primarily as a result
of expected declines of production of associated gas (partially due to measures
implemented by federal, state and local governments to control the spread of
COVID-19 and resulting declines in demand for oil and to a lesser extent natural
gas and continued economic uncertainty, as well as the failure, in March 2020 ,
of Saudi Arabia and Russia to agree to cut oil production, which contributed to
a sharp drop in the price of oil and an imbalance between the supply of demand
for oil) and only a modest negative impact on demand for natural gas resulting
from the COVID-19 pandemic, the natural gas forward strip price continued to
trend downward during the first three months of 2020. Further, market prices for
natural gas in the Appalachian Basin continue to be lower than Henry Hub natural
gas prices. Lower natural gas prices have caused producers to determine to
reduce their rig count, shut in a portion of their wells or otherwise take
actions to slow production growth and/or reduce production, which when effected
by EQM's producer customers reduces the demand for, and usage of, EQM's
services. While the near-term outlook for natural gas prices has improved
significantly since March 31, 2020 , a sustained period of depressed natural gas
production and prices could cause producers in EQM's areas of operation to take
further actions to reduce natural gas production and supply in the future and
may adversely affect such producer customers' respective business, financial
condition, results of operation, access to capital and/or liquidity.
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EQM's customers, including EQT, Range Resources and Gulfport Energy Corporation (Gulfport), have announced reductions in their capital spending forecasts for 2020 and may continue to lower capital spending in the future based on commodity prices, access to capital, investor expectations for positive free cash flow, or a desire to reduce or refinance leverage (including the perceived ability to do so), or other factors. OnJanuary 13, 2020 , EQT publicly announced a 2020 capital expenditure forecast of$1.25 billion to$1.35 billion , compared to 2019 capital expenditures of$1.85 billion to$1.95 billion , which represented an approximate 30% decrease in capital expenditures compared to EQT's projected 2019 capital expenditures. OnMarch 16, 2020 , EQT announced a further reduction in its 2020 capital expenditure forecast to$1.075 billion to$1.175 billion , or an approximate 13% reduction from EQT's initial 2020 capital expenditure forecast. Longer-term price declines and sustained periods of low natural gas and natural gas liquids prices could continue to have an adverse effect on creditworthiness of EQM's customers and related ability to pay firm reservation fees under long-term contracts and/or affect activity levels and, accordingly, volumetric-based fees, which could affect EQM's results of operations, liquidity or financial position. Each of S&P, Moody's and Fitch has taken negative ratings actions on a number of Appalachian exploration and production companies, including EQT, Range Resources and Gulfport, citing, among other things, lower natural gas price assumptions and current and future financing needs. Many of EQM's customers, including EQT, have entered into long-term firm reservation transmission and gathering contracts or contracts with MVCs on EQM's systems. However, approximately 42% of EQM's operating revenues for the first quarter of 2020 were volumetric-based fee revenues. For more information, see "Decreases in production of natural gas in our areas of operation have adversely affected, and future decreases could further adversely affect, our business and operating results and reduce our cash available to make distributions to our unitholders." included in Item "1A, Risk Factors - Risks Inherent in Our Business" of EQM's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Potential Future Impairments. During the first quarter of 2020, EQM recognized an impairment of long-lived assets of approximately$55.6 million , including$37.9 million related to certain Hornet-related gathering assets and$17.7 million related to certain Hornet-related intangible assets associated with the Eureka/Hornet reporting unit. See Note 3 to the consolidated financial statements for additional information. As of the filing of this Quarterly Report on Form 10-Q, EQM cannot predict the likelihood or magnitude of any future impairment. The accounting estimates related to impairments are susceptible to change, including estimating fair value which requires considerable judgment. For goodwill, management's estimate of a reporting unit's future financial results is sensitive to changes in assumptions, such as changes in stock prices, weighted-average cost of capital, terminal growth rates and industry multiples. For EQM's equity investments in the MVP Joint Venture, management must evaluate EQM's investments for other-than-temporary-declines in fair value under ASC 323. EQM believes the estimates and assumptions used in estimating its reporting units' and its equity investments' fair values are reasonable and appropriate; however, assumptions and estimates are inherently subject to significant business, economic, competitive, regulatory and other risks, that could materially affect the calculated fair values and the resulting conclusions regarding impairments of goodwill and equity investments, which could materially affect EQM's results of operations and financial position. Additionally, actual results could differ from these estimates. For the period endedMarch 31, 2020 , EQM performed a sensitivity analysis for the RMP PA Gas Gathering reporting unit and the merged EQM Opco reporting unit to quantify the effect of certain changes to assumptions used in the interim goodwill assessment. It was determined that a 1% increase to the weighted average cost of capital and a corresponding 1% decrease to the terminal cash flow growth rate would not have resulted in an impairment of goodwill as ofMarch 31, 2020 . EQM also continues to evaluate the ongoing legal and regulatory matters related to the MVP project that must be resolved favorably (and timely) before the project can be completed, as further described in Part II, "Item 1. Legal Proceedings" of this Quarterly Report on Form 10-Q. See also Note 3 to the consolidated financial statements and "Reviews of our goodwill and intangible and other long-lived assets have resulted in significant impairment charges and reviews of goodwill, intangible and other long-lived assets (including equity method investments) could result in future significant impairment charges." included in Part II, "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q. Capital Resources and Liquidity EQM's liquidity requirements are to finance its operations, fund capital expenditures, potential acquisitions and other strategic transactions and capital contributions to joint ventures, including the MVP Joint Venture, to pay cash distributions and to satisfy any indebtedness obligations. EQM's ability to meet these liquidity requirements depends on its ability to generate cash in the future as well as its ability to raise capital in banking, capital and other markets, which may be affected by prevailing economic conditions in the natural gas industry and other financial and business factors, including the current COVID-19 pandemic, some of which are beyond EQM's control. EQM's available sources of liquidity include cash generated from operations, borrowing under EQM's revolving credit facilities, incremental borrowings under the Amended 2019 EQM Term Loan Agreement, cash on hand, debt transactions and issuances of additional EQM partnership interests. Pursuant to the Tax Matters Agreement between Equitrans Midstream and EQT entered into in connection with the Separation, Equitrans Midstream is subject to certain restrictions related to certain corporate actions, including restrictions related to the issuance of EQM securities beyond certain thresholds. See "Our general partner may require us to forgo certain transactions in order to avoid the risk ofEquitrans 43
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Midstream incurring material tax-related liabilities or indemnification obligations under Equitrans Midstream's tax matters agreement with EQT." under "Risks Inherent in an Investment in Us" included in "Item 1A. Risk Factors" of EQM's Annual Report on Form 10-K. EQM is not forecasting any public equity issuance for currently anticipated organic growth projects. InFebruary 2020 , S&P and Fitch downgraded EQM's credit ratings from investment grade to non-investment grade. In addition, inApril 2020 , Moody's further downgraded EQM's credit rating from Ba2 (with a negative outlook) to Ba3 (with a negative outlook), and S&P further downgraded EQM's credit rating from BB (with a stable outlook) to BB- (with a negative outlook). The non-investment grade ratings from Moody's, S&P and Fitch have caused EQM to incur higher borrowing costs under its Amended$3 Billion Facility and the Amended 2019 EQM Term Loan Agreement and may make it more difficult to raise capital in banking, capital or other markets. As a result of theFebruary 2020 downgrades, EQM was also obligated to deliver additional credit support to the MVP Joint Venture, which included letters of credit in the amounts of approximately$220.2 million and$14.2 million with respect to the MVP and the MVP Southgate projects, respectively. Additionally, pursuant to the EQT Global GGA, if EQM does not maintain minimum credit ratings of at least Ba3 with respect to Moody's and BB- with respect to S&P and Fitch from two of the three credit rating agencies, EQM will be obligated to provide additional credit support in an amount equal to approximately$196 million to EQT in support of the potential payment obligation related to the EQT Cash Option (the Cash Option Letter of Credit). See "A further downgrade of our credit ratings, including in connection with the MVP project or changes in the credit ratings of EQT, which are determined by independent third parties, could impact our liquidity, access to capital, and costs of doing business." under "Risks Inherent in Our Business" included in "Item 1A. Risk Factors" of EQM's Annual Report on Form 10-K for the year-endedDecember 31, 2019 . Operating Activities Net cash flows provided by operating activities were$285.1 million for the three months endedMarch 31, 2020 compared to$161.0 million for the three months endedMarch 31, 2019 . The increase was primarily driven by an increase in Gathering revenues primarily associated with the entities acquired in the Bolt-on Acquisition, an increase in Water revenues and the timing of working capital payments. Investing Activities Net cash flows used in investing activities were$845.9 million for the three months endedMarch 31, 2020 compared to$350.4 million for the three months endedMarch 31, 2019 . The increase was attributable to the Intercompany Loan, partly offset by decreased capital contributions to the MVP Joint Venture consistent with a lower level of construction activities for the MVP project and decreased capital expenditures during 2020 as further described in "Capital Requirements." Financing Activities Net cash flows provided by financing activities were$559.2 million for the three months endedMarch 31, 2020 compared to$245.7 million for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , the primary source of financing cash flows was proceeds from borrowings on the Amended$3 Billion Facility, net of repayments, while the primary use of financing cash flows was distributions paid to unitholders (including distributions paid to Series A Preferred unitholders). For the three months endedMarch 31, 2019 , the primary source of financing cash flows was proceeds from borrowings on the Amended$3 Billion Facility, net of repayments, while the primary use of financing cash flows was distributions paid to unitholders. Capital Requirements The gathering, transmission and storage and water services businesses are capital intensive, requiring significant investment to develop new facilities and to maintain and upgrade existing operations. Three Months EndedMarch 31, 2020 2019 (Thousands)
Expansion capital expenditures (a)(b)(c)
10,177 9,428
Total capital expenditures (d) $ 125,728 $ 185,937 (a) Expansion capital expenditures do not include capital contributions made to
the MVP Joint Venture for the MVP and MVP Southgate projects of approximately
$45.2 million and $144.8 million for the three months ended March 31, 2020
and 2019, respectively.
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(b) Includes approximately
$1.2 million of maintenance capital expenditures related to the noncontrolling interest in Eureka Midstream for the three months endedMarch 31, 2020 .
(c) Expansion capital expenditures for the three months ended
not include approximately $49.7 million of non-operating assets acquired from
Equitrans Midstream in the Shared Assets Transaction that primarily support
EQM's gathering activities. See Note 2 to the consolidated financial
statements for further detail.
(d) EQM accrues capital expenditures when the capital work has been completed but
the associated bills have not been paid. Accrued capital expenditures are
excluded from the statements of consolidated cash flows until they are paid.
See Note 5 to the consolidated financial statements.
Expansion capital expenditures decreased by approximately $61.0 million for the
three months ended March 31, 2020 , as compared to the three months ended
March 31, 2019 , primarily due to decreased spending on the Hammerhead project
and various wellhead gathering expansion projects, partly offset by spending on
the Eureka Midstream gathering system in the first quarter of 2020 following the
Bolt-on Acquisition.
Maintenance capital expenditures increased by approximately $0.7 million for the
three months ended March 31, 2020 as compared to the three months ended March
31, 2019 , primarily as a result of additional assets in service, including the
assets acquired in the Bolt-on Acquisition.
For the remainder of 2020, capital contributions to the MVP Joint Venture are
expected to be approximately $565 million to $615 million (including
approximately $15 million related to the MVP Southgate project), and expansion
capital expenditures are expected to be $350 million to $365 million (including
approximately $30 million attributable to the noncontrolling interest in Eureka
Midstream), net of expected reimbursements. EQM's future capital investments may
vary significantly from period to period based on the available investment
opportunities and the timing of the construction of the MVP, MVP Southgate and
other projects. Maintenance capital expenditures are also expected to vary
quarter to quarter. EQM expects to fund future capital expenditures primarily
through cash on hand, cash generated from operations, borrowings under its and
its subsidiaries' credit facilities and additional debt transactions. EQM is not
forecasting any public equity issuance for currently anticipated organic growth
projects.
Credit Facility Borrowings
See Note 9 to the consolidated financial statements for discussion of the
Amended $3 Billion Facility, the Amended 2019 EQM Term Loan Agreement and the
Eureka Credit Facility.
Security Ratings
The table below sets forth the credit ratings for debt instruments of EQM at
March 31, 2020 .
Senior Notes
Rating Service Rating Outlook
Moody's Ba2 Negative
S&P BB Stable
Fitch BB Negative
On
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EQT. As ofApril 2, 2020 , EQT's public debt had credit ratings of BB- from S&P (with a negative outlook), Ba3 from Moody's (with a negative outlook) and BB from Fitch (with a negative outlook). As ofDecember 31, 2019 , EQT's credit ratings with each of S&P, Moody's and Fitch were considered investment grade. If any credit rating agency further downgrades EQM's ratings, EQM's access to the capital markets could become more challenging, borrowing costs will likely increase, EQM may be required to provide additional credit assurances, including the Cash Option Letter of Credit, and in support of commercial agreements such as joint venture agreements and, if applicable, construction contracts, and the potential pool of investors and funding sources may decrease. In order to be considered investment grade, a company must be rated Baa3 or higher by Moody's, BBB- or higher by S&P, or BBB- or higher by Fitch. Anything below these ratings, including all of EQM's credit ratings, are considered non-investment grade. Distributions See Note 11 to the consolidated financial statements for discussion of distributions. OnFebruary 27, 2020 , EQM announced its intention to reduce its quarterly distribution from$1.16 per unit to$0.3875 per unit, a decrease of approximately 67% per unit, in connection with the announcement of the EQM Merger, commencing with the first quarter 2020 distribution. The decrease in EQM's quarterly distribution reflects a financial and distribution policy that is designed to deliver highly predictable revenues and substantial cash flows after total capital expenditures and distributions. Commitments and Contingencies In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against EQM and its subsidiaries. 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 incurred. EQM establishes reserves whenever it believes it to be appropriate for pending matters. Furthermore, after consultation with counsel and considering available insurance, EQM believes that the ultimate outcome of any matter currently pending against it or any of its subsidiaries will not materially affect its business, financial condition, results of operations, liquidity or ability to make distributions. See also "The regulatory approval process for the construction of new midstream assets is challenging, and recent decisions by regulatory and judicial authorities in pending proceedings could impact our or the MVP Joint Venture's ability to obtain all approvals and authorizations necessary to complete certain projects on the projected time frame or at all or our ability to achieve the expected investment return on the projects." under "Item 1A, Risk Factors - Risks Inherent in Our Business" included in EQM's Annual Report on Form 10-K for the year endedDecember 31, 2019 and Part II, "Item 1. Legal Proceedings" for a discussion of litigation and regulatory proceedings, including related to the MVP project. See Note 16 to the annual consolidated financial statements included in EQM's Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion of EQM's commitments and contingencies. Critical Accounting Policies and Estimates EQM's critical accounting policies are described in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in EQM's Annual Report on Form 10-K for the year endedDecember 31, 2019 as filed with theSEC onFebruary 27, 2020 . Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to EQM's consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 . The application of EQM's critical accounting policies may require management to make judgments and estimates about the amounts reflected in the consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates. 46
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