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| EQM > SEC Filings for EQM > Form 10-K on 21-Feb-2013 | All Recent SEC Filings |
21-Feb-2013
Annual Report
EQT Midstream Partners, LP (the Partnership, EQT Midstream Partners or the Company), which closed its initial public offering (IPO) to become publicly traded on July 2, 2012, is a growth-oriented Delaware limited partnership formed in January 2012. Equitrans, L.P. (Equitrans) is a Pennsylvania limited partnership and the predecessor for accounting purposes (the Predecessor) of EQT Midstream Partners (the Successor). References in the following discussion to the "Company," when used for periods prior to the IPO, refer to Equitrans. References in the following discussion to the "Company," when used for periods beginning at or following the IPO, refer collectively to the Partnership and its consolidated subsidiaries. Immediately prior to the closing of the IPO, EQT Corporation contributed all of the partnership interests in Equitrans to the Partnership. Therefore, the historical financial statements contained in this report reflect the assets, liabilities and operations of Equitrans (excluding the results of operations of Big Sandy Pipeline, a FERC-regulated transmission pipeline sold to an unrelated party in
July 2011) for periods ending before July 2, 2012 and EQT Midstream Partners for periods beginning at or following July 2, 2012.
The following discussion analyzes, among other things, the financial condition and results of operations of the Predecessor and Successor. 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 in Item 8, "Financial Statements and Supplementary Data." References in the following discussion and analysis to ''EQT'' refer collectively to EQT Corporation and its consolidated subsidiaries.
Executive Overview
The Company is a growth-oriented limited partnership formed by EQT Corporation (NYSE: EQT) to own, operate, acquire and develop midstream assets in the Appalachian Basin. The Company provides substantially all of its natural gas transmission, storage and gathering services under contracts with fixed reservation and/or usage fees, with a significant portion of its revenues being generated pursuant to long-term firm contracts.
On July 2, 2012, the Company closed its IPO of 14,375,000 common units at a price of $21.00 per unit, which included the full exercise of the underwriters' over-allotment option, and represented 40.6% of the Company's outstanding equity. Immediately prior to the closing of the IPO, EQT contributed all of the partnership interests in Equitrans to the Partnership. EQT retained a 59.4% equity interest in the Company, including 2,964,718 common units, 17,339,718 subordinated units and a 2% general partner interest.
The Company reported net income of $55.3 million in 2012 compared with $32.6 million in 2011. The increase was primarily related to an increase in operating income of $16.1 million and a decrease in income tax expense of $7.7 million. Transmission and storage revenues increased by $27.1 million primarily due to increased firm transmission service and increased system throughput, which were driven by production development in the Marcellus play. Total operating expenses increased consistent with the overall growth of the transmission system. The decrease in income tax expense was due to the Company's limited partnership structure subsequent to the IPO, as the Company is no longer subject to U.S. federal and state income taxes.
Subsequent to the IPO in 2012, net income per limited partner unit was $0.91 and diluted net income per limited partner unit was $0.90. For the six months ended December 31, 2012, adjusted EBTIDA was $40.0 million and distributable cash flow was $26.4 million, which exceeded the $24.8 million of distributable cash flow necessary to meet the minimum quarterly distributions. The Company paid all unitholders a quarterly cash distribution of $0.35 per unit during the year ended December 31, 2012 and declared a cash distribution to unitholders of $0.35 on January 22, 2013. For a discussion of the non-GAAP financial measures adjusted EBITDA and distributable cash flow, please read the discussion below of "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Measures."
The Company reported net income of $32.6 million in 2011 compared with $19.2 million in 2010. The increase was primarily related to an increase in operating income of $16.7 million. Transmission and storage revenues increased by $19.3 million primarily due to the completion of a portion of the Equitrans 2010 Marcellus expansion project in the fourth quarter of 2010 and the addition of new receipt point interconnects with EQT's gathering system.
Consolidated Results of Operations
Years Ended December 31,
% %
2012 2011 change 2010 change
2012 - 2011 -
2011 2010
FINANCIAL DATA (Thousands, other than per unit and per day amounts)
Operating revenues:
Transmission and storage
revenues $ 120,797 $ 93,707 28.9 $ 74,393 26.0
Gathering revenues 16,113 15,906 1.3 17,207 (7.6)
Total operating revenues 136,910 109,613 24.9 91,600 19.7
Operating expenses:
Operating and maintenance 29,405 26,221 12.1 24,300 7.9
Selling, general and
administrative 16,575 17,302 (4.2) 18,477 (6.4)
Depreciation and amortization 20,239 11,470 76.5 10,886 5.4
Total operating expenses 66,219 54,993 20.4 53,663 2.5
Operating income 70,691 54,620 29.4 37,937 44.0
Other income, net 7,701 3,826 101.3 498 668.3
Interest expense, net 9,955 5,050 97.1 5,164 (2.2)
Income before income taxes 68,437 53,396 28.2 33,271 60.5
Income tax expense 13,131 20,807 (36.9) 14,030 48.3
Net income $ 55,306 $ 32,589 69.7 $ 19,241 69.4
Net income per limited
partner unit
Basic (1) $ 0.91 N/A N/A N/A N/A
Diluted (1) $ 0.90 N/A N/A N/A N/A
Adjusted EBITDA (1) $ 40,022 N/A N/A N/A N/A
Distributable cash flow (1) $ 26,441 N/A N/A N/A N/A
CAPITAL EXPENDITURE AND
OPERATING DATA
Transmission pipeline
throughput (BBtu per day) 606 397 52.6 204 94.6
Gathered volumes (BBtu per
day) 78 78 0.0 83 (6.0)
Capital expenditures:
Expansion capital
expenditures,
excluding Sunrise
Pipeline project $ 40,620 $ 23,522 72.7 $ 10,549 123.0
Sunrise Pipeline project
capital expenditures 95,494 85,459 11.7 12,228 598.9
Maintenance capital
expenditures:
Ongoing maintenance 13,815 20,185 (31.6) 10,005 101.7
Funded regulatory compliance
(2) 6,993 214 3,167.8 288 (25.7)
Reimbursable maintenance (2) 10,140 6,451 57.2 3,334 93.5
Total maintenance capital
expenditures 30,948 26,850 15.3 13,627 97.0
Total capital expenditures $ 167,062 $ 135,831 23.0 $ 36,404 273.1
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(1) Presented for the post-IPO period only. For a discussion of the non-GAAP financial measures adjusted EBITDA and distributable cash flow, please read the sections below titled "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Measures."
(2) For more information regarding funded regulatory compliance and reimbursable maintenance see the discussion in the sections below titled "Capital Requirements."
Business Segment Results
Operating segments are evaluated on their contribution to the Company's consolidated results based on operating income. Interest and other income are managed on a consolidated basis. The Company has presented each segment's operating income and various operational measures in the sections below. Management believes that presentation of this information provides useful information to management and investors regarding the financial condition, results of operations and trends of segments. In addition, management uses these measures for budget planning purposes. The Company has reconciled each segment's operating income to the Company's consolidated operating income and net income in Note 2 to the Consolidated Financial Statements.
Years Ended December 31,
% %
2012 2011 change 2010 change
2012 - 2011 -
2011 2010
SEGMENT FINANCIAL DATA - (Thousands, other than per day amounts)
TRANSMISSION AND STORAGE
Operating revenues:
Operating revenues -
affiliate $ 95,849 $ 76,449 25.4 $ 62,961 21.4
Operating revenues - third
party 24,948 17,258 44.6 11,432 51.0
Total operating revenues 120,797 93,707 28.9 74,393 26.0
Operating expenses:
Operating and maintenance 15,191 11,677 30.1 10,009 16.7
Selling, general and
administrative 11,539 12,274 (6.0) 13,892 (11.6)
Depreciation and amortization 17,400 8,850 96.6 8,212 7.8
Total operating expenses 44,130 32,801 34.5 32,113 2.1
Operating income $ 76,667 $ 60,906 25.9 $ 42,280 44.1
SEGMENT OPERATIONAL DATA
-TRANSMISSION AND STORAGE
Transmission pipeline
throughput (BBtu per day) 606 397 52.6 204 94.6
Capital expenditures $ 161,683 $ 131,902 22.6 $ 33,158 297.8
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SEGMENT FINANCIAL DATA - GATHERING Operating revenues: Operating revenues - affiliate $ 10,331 $ 10,107 2.2 $ 11,067 (8.7) Operating revenues - third party 5,782 5,799 (0.3) 6,140 (5.6) Total operating revenues 16,113 15,906 1.3 17,207 (7.6) Operating expenses: Operating and maintenance 14,214 14,544 (2.3) 14,291 1.8 Selling, general and administrative 5,036 5,028 0.2 4,585 9.7 Depreciation and amortization 2,839 2,620 8.4 2,674 (2.0) Total operating expenses 22,089 22,192 (0.5) 21,550 3.0 Operating loss $ (5,976) $ (6,286) (4.9) $ (4,343) 44.7 |
SEGMENT OPERATIONAL DATA
-GATHERING
Gathering volumes (BBtu per
day) 78 78 0.0 83 (6.0)
Capital expenditures $ 5,379 $ 3,929 36.9 $ 3,246 21.0
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Operating revenues and operating expenses related to the Sunrise Pipeline do not have an impact on distributable cash flow as the excess of the Sunrise Pipeline revenues over operating and maintenance and selling, general and administrative operating expenses is paid to EQT as the current monthly lease payment.
Total operating revenues were $136.9 million for the year ended December 31, 2012 compared to $109.6 million for the year ended December 31, 2011. The increase was primarily related to a $27.1 million increase in transmission and storage operating revenues. Gathering revenues were essentially flat year over year.
Transmission and storage revenues increased as a result of increased firm transmission service and increased system throughput. This includes $12.2 million of reservation fees and usage charges under firm contracts on the Sunrise Pipeline, $11.8 million of fees associated with transported volumes in excess of firm capacity and increased reservation fees and usage charges under other firm contracts, which includes contracts for the Blacksville Compressor Station. These increases primarily resulted from increased production development in the Marcellus play. The average daily transmission throughput increased by 209 BBtu per day during the year ended December 31, 2012 compared to the year ended December 31, 2011. For the year ended December 31, 2012, approximately 62% of the Company's total operating revenues were generated from firm capacity reservation charges. These increases were partly offset by a decrease in storage and parking services.
Operating expenses totaled $66.2 million for the year ended December 31, 2012 compared to $55.0 million for the year ended December 31, 2011. The increase in operating expenses was due to an $8.8 million increase in depreciation and amortization expense and a $3.2 million increase in operating and maintenance expense, which were slightly offset by a decrease in selling, general and administrative expense.
The increase in depreciation and amortization expense was primarily in transmission and storage as a result of Sunrise Pipeline capital lease depreciation expense of $7.1 million and increased investment in transmission infrastructure. The Sunrise Pipeline capital lease is depreciated over the 15 year life of the lease, resulting in increased depreciation expense compared to the 40 year expected life of the pipeline.
The increase in operating and maintenance expense resulted from a $3.5 million increase in transmission and storage expenses partly offset by a $0.3 million decline in gathering operating and maintenance expense. Transmission and storage expenses increased primarily as a result of increased amortization of pipeline safety costs of $1.4 million, additional operating costs of $0.9 million associated with operating the Sunrise Pipeline and non-income based taxes of $0.5 million. The decrease in gathering expense primarily resulted from lower purchased gas costs of $0.9 million which was partly offset by increased repairs and maintenance expenses of $0.7 million. Fuel usage and lost and unaccounted for volumes on the gathering system have historically exceeded the natural gas retained from the Company's gathering customers as compensation for its fuel usage and lost and unaccounted for volumes. Purchased gas costs were recorded for the difference. The decline in purchased gas costs during 2012 was primarily the result of lower prices, partly offset by increased lost and unaccounted for volumes due to higher system pressures.
In the transmission and storage segment, selling, general and administrative expenses decreased by $0.7 million primarily due to a $2.5 million reduction of a reserve on the collectability of long-term regulatory assets and a $0.6 million reduction to a legal reserve. The storage reserve was established for the recovery of base storage gas from excess customer retention provided in the Company's 2006 rate settlement. At December 31, 2012, the majority of the gas has been recovered and the related reserve was reduced. These expense reductions were partly offset by increased expenses associated with being a publicly traded partnership of $1.4 million and $1.0 million due to the additional costs attributable to the Sunrise Pipeline.
Other income primarily represents the equity portion of AFUDC which generally increases during periods of increased construction and decreases during periods of reduced construction. The increase in other income for the year ended December 31, 2012 when compared to the year ended December 31, 2011 primarily resulted from an increase in applicable construction expenditures in connection with the Sunrise Pipeline project, which was placed into service on July 28, 2012.
Income taxes for the year ended December 31, 2012 totaled $13.1 million compared to $20.8 million for the year ended December 31, 2011. The $7.7 million decrease is primarily attributable to income taxes not being recorded after the IPO and an increased benefit related to equity AFUDC. The Predecessor's financial statements include U.S. federal and state income tax expense. Due to the Company's limited partnership structure subsequent to the IPO, the Company is no longer subject to U.S. federal and state income taxes and therefore no income tax expense was recorded for the third and fourth quarters of 2012.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Total operating revenues were $109.6 million for the year ended December 31, 2011 compared to $91.6 million for the year ended December 31, 2010. The $18.0 million increase was due to a $19.3 million increase in transmission and storage operating revenues, partly offset by a $1.3 million decrease in gathering operating revenues.
The majority of the increase in transmission and storage operating revenues was attributable to an increase in firm transmission service reservation revenues associated with an average daily increase of 193 BBtu of firm transmission service provided during the year ended December 31, 2011 when compared to the year ended December 31, 2010. This increased firm transmission capacity sold was due to the completion of a portion of the Equitrans 2010 Marcellus expansion project in the fourth quarter of 2010 and the addition of new receipt point interconnects with EQT's gathering systems. The increased firm transmission capacity sold also resulted in higher usage fees based on increased throughput for the period, which also contributed to the increased revenues.
Gathering revenues decreased due to fewer volumes gathered for the year ended December 31, 2011 when compared to the year ended December 31, 2010. The decreased volumes were primarily due to the addition of new direct interconnects between EQT's gathering systems and the Company's transmission and storage system, resulting in decreased usage by EQT of the Company's gathering system for connection onto its transmission and storage system. Volumes also decreased as a result of the natural decline in natural gas production from mature wells and limited additional development of some of the shallow, low-pressure formations served by the Company's gathering system.
Operating expenses totaled $55.0 million for the year ended December 31, 2011 compared to $53.7 million for the year ended December 31, 2010. The increase in operating expenses was primarily due to a $1.9 million increase in operating and maintenance expense partly offset by a $1.2 million decrease in selling, general and administrative expense.
The increase in operating and maintenance expense for both transmission and storage and gathering was primarily due to the increased activity on the expanded system. These increased expenses included costs related to compliance, training and engineering. Selling, general and administrative expense decreased primarily as a result of completing the amortization of previously deferred costs for post-retirement benefits other than pensions in 2010.
Depreciation and amortization expense increased $0.6 million year over year due to the increased investment in transmission infrastructure, which included the Equitrans 2010 Marcellus expansion project and a large compressor station all in the transmission and storage segment.
The $3.3 million increase in other income for the year ended December 31, 2011 compared to the year ended December 31, 2010 was primarily the result of increased construction expenditures in connection with the Sunrise Pipeline project.
Income taxes for the year ended December 31, 2011 totaled $20.8 million compared to $14.0 million for the year ended December 31, 2010. The $6.8 million increase was primarily driven by an increase in pre-tax income offset by a lower effective tax rate in 2011 primarily as a result of an increased benefit related to equity AFUDC.
Non-GAAP Financial Measures
As used herein, the Company defines adjusted EBITDA as net income plus net interest expense, income tax expense (if applicable), depreciation and amortization expense, non-cash long-term compensation expense and other non-cash adjustments less other income and the Sunrise Pipeline lease payment. As used herein, the Company defines distributable cash flow as adjusted EBITDA less net cash paid for interest expense, maintenance capital expenditures and income taxes (if applicable). Distributable cash flow should not be viewed as indicative of the actual amount of cash that the Company has available for distributions or that the Company plans to distribute. Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of the Company's consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess:
† the Company'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 the Company's assets to generate sufficient cash flow to make distributions to the Company's unitholders;
† the Company'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.
The Company believes that adjusted EBITDA and distributable cash flow provide useful information to investors in assessing the Company's financial condition and results of operations. Adjusted EBITDA and distributable cash flow should not be considered alternatives to net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities. Additionally, because adjusted EBITDA and distributable cash flow may be defined differently by other companies in its industry, the Company's definition of adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Reconciliation of Non-GAAP Measures
The following tables present a reconciliation of adjusted EBITDA and distributable cash flow, which are non-GAAP financial measures, to the most comparable GAAP financial measures of net income and net cash provided by operating activities. The amounts presented reflect the results for the year ended December 31, 2012 as presented in this Annual Report on Form 10-K less the results for the six months ended June 30, 2012 as presented in the Company's Form 10-Q for the second quarter of 2012.
Six Months Ended
December 31, 2012
(Thousands)
Net income $ 32,171
Add:
Depreciation and amortization 14,031
Interest expense, net 7,202
Non-cash long-term compensation expense 535
Non-cash reserve adjustment (2,508 )
Less:
Other income (1,073 )
Sunrise Pipeline lease payment (10,336 )
Adjusted EBITDA $ 40,022
Less:
Cash interest, net (445 )
Ongoing maintenance capital expenditures(1) (9,753 )
Reimbursable maintenance capital expenditures(2) (7,627 )
Add:
Reimbursement of reimbursable maintenance capital expenditures(2) 4,244
Distributable cash flow $ 26,441
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Six Months Ended
December 31, 2012
(Thousands)
Net cash provided by operating activities $ 31,022
Adjustments:
Interest expense, net 7,202
Sunrise Pipeline lease payment (10,336 )
Other, including changes in working capital 12,134
Adjusted EBITDA $ 40,022
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(1) Ongoing maintenance capital expenditures are expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, the Company's operating capacity or operating income.
(2) EQT has reimbursement obligations to the Company for certain capital expenditures for plugging and abandonment of natural gas wells and bare steel pipe replacement. For further explanation of these reimbursable maintenance capital expenditures, see the "Capital Requirements" section below.
Outlook
The Company's principal business objective is to increase the quarterly cash distributions that it pays to its unitholders over time while ensuring the ongoing growth of its business. The Company believes that it is well-positioned to achieve growth based on the combination of its relationship with EQT and its strategically located assets, which cover portions of the Marcellus Shale that lack substantial natural gas pipeline infrastructure. As production increases in the Company's areas of operations, the Company believes it will have a . . .
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