Item 1. Financial Statements
EQUITRANS MIDSTREAM CORPORATION
Statements of Consolidated Comprehensive Income (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (Thousands, except per share amounts) |
Operating revenues | $ | 361,595 | | | $ | 318,469 | | | $ | 725,869 | | | $ | 694,806 | |
Operating expenses: | | | | | | | |
Operating and maintenance | 48,006 | | | 45,767 | | | 93,234 | | | 88,629 | |
Selling, general and administrative | 45,653 | | | 56,932 | | | 89,982 | | | 89,554 | |
| Transaction costs | 2,011 | | | — | | | 7,695 | | | — | |
Depreciation | 73,188 | | | 70,031 | | | 144,860 | | | 139,435 | |
Amortization of intangible assets | 16,205 | | | 16,205 | | | 32,410 | | | 32,410 | |
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Total operating expenses | 185,063 | | | 188,935 | | | 368,181 | | | 350,028 | |
Operating income | 176,532 | | | 129,534 | | | 357,688 | | | 344,778 | |
Equity income (a) | 18,814 | | | 23,686 | | | 91,819 | | | 23,808 | |
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Other income (expense), net | 3,602 | | | 19,809 | | | (374) | | | 11,707 | |
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Net interest expense | (120,129) | | | (103,644) | | | (239,025) | | | (208,601) | |
Income before income taxes | 78,819 | | | 69,385 | | | 210,108 | | | 171,692 | |
Income tax expense (benefit) | 7,105 | | | 465 | | | 26,505 | | | (3,319) | |
Net income | 71,714 | | | 68,920 | | | 183,603 | | | 175,011 | |
Net income attributable to noncontrolling interest | 1,325 | | | 1,675 | | | 4,215 | | | 6,084 | |
Net income attributable to Equitrans Midstream | 70,389 | | | 67,245 | | | 179,388 | | | 168,927 | |
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Preferred dividends | 20,516 | | | 14,628 | | | 35,144 | | | 29,256 | |
Net income attributable to Equitrans Midstream common shareholders | $ | 49,873 | | | $ | 52,617 | | | $ | 144,244 | | | $ | 139,671 | |
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Earnings per share of common stock attributable to Equitrans Midstream common shareholders - basic | $ | 0.11 | | | $ | 0.12 | | | $ | 0.33 | | | $ | 0.32 | |
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Earnings per share of common stock attributable to Equitrans Midstream common shareholders - diluted | $ | 0.11 | | | $ | 0.12 | | | $ | 0.33 | | | $ | 0.32 | |
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Weighted average common shares outstanding - basic | 434,606 | | | 433,961 | | | 434,551 | | | 433,834 | |
Weighted average common shares outstanding - diluted | 441,771 | | | 435,476 | | | 441,238 | | | 434,640 | |
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Statement of comprehensive income: | | | | | | | |
Net income | $ | 71,714 | | | $ | 68,920 | | | $ | 183,603 | | | $ | 175,011 | |
Other comprehensive income, net of tax: | | | | | | | |
Pension and other post-retirement benefits liability adjustment, net of tax expense of $6, $7, $12, and $14 | 20 | | | 22 | | | 40 | | | 44 | |
Other comprehensive income | 20 | | | 22 | | | 40 | | | 44 | |
Comprehensive income | 71,734 | | | 68,942 | | | 183,643 | | | 175,055 | |
Less: Comprehensive income attributable to noncontrolling interest | 1,325 | | | 1,675 | | | 4,215 | | | 6,084 | |
Less: Comprehensive income attributable to preferred dividends | 20,516 | | | 14,628 | | | 35,144 | | | 29,256 | |
Comprehensive income attributable to Equitrans Midstream common shareholders | $ | 49,893 | | | $ | 52,639 | | | $ | 144,284 | | | $ | 139,715 | |
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Dividends declared per common share | $ | 0.15 | | | $ | 0.15 | | | $ | 0.30 | | | $ | 0.30 | |
(a)Represents equity income from Mountain Valley Pipeline, LLC (the MVP Joint Venture). See Note 5.
The accompanying notes are an integral part of these consolidated financial statements.
EQUITRANS MIDSTREAM CORPORATION
Statements of Consolidated Cash Flows (Unaudited)
| | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2024 | | 2023 |
| | (Thousands) |
| Cash flows from operating activities: | | | |
| Net income | $ | 183,603 | | | $ | 175,011 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation | 144,860 | | | 139,435 | |
| Amortization of intangible assets | 32,410 | | | 32,410 | |
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| Deferred income tax expense (benefit) | 24,455 | | | (6,457) | |
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Equity income (a) | (91,819) | | | (23,808) | |
| Other expense (income), net | 778 | | | (11,323) | |
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| Non-cash long-term compensation expense | 11,466 | | | 26,166 | |
| Changes in other assets and liabilities: | | | |
| Accounts receivable | 28,283 | | | 42,120 | |
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| Accounts payable | (5,274) | | | (12,474) | |
| Accrued interest | 12,461 | | | (2,386) | |
| Deferred revenue | 118,020 | | | 157,783 | |
| Other assets and other liabilities | (22,681) | | | 6,797 | |
| Net cash provided by operating activities | 436,562 | | | 523,274 | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (172,036) | | | (171,940) | |
| Capital contributions to the MVP Joint Venture | (558,286) | | | (70,533) | |
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| Principal payments received on the Preferred Interest (defined in Note 7) | 3,080 | | | 2,878 | |
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| Net cash used in investing activities | (727,242) | | | (239,595) | |
| Cash flows from financing activities: | | | |
| Proceeds from revolving credit facility borrowings | 545,000 | | | 215,000 | |
| Payments on revolving credit facility borrowings | (790,000) | | | (180,000) | |
| Proceeds from the issuance of long-term debt | 600,000 | | | — | |
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| Debt discounts, debt issuance costs and credit facility arrangement fees | (10,206) | | | (60) | |
| Payment for retirement of long-term debt | — | | | (98,941) | |
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| Dividends paid to common shareholders | (130,099) | | | (129,941) | |
| Dividends paid to holders of Equitrans Midstream Preferred Shares | (29,256) | | | (29,256) | |
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| Distributions paid to noncontrolling interest | (10,960) | | | (20,000) | |
| Other items | (797) | | | (1,307) | |
| Net cash provided by (used in) financing activities | 173,682 | | | (244,505) | |
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| Net change in cash and cash equivalents | (116,998) | | | 39,174 | |
| Cash and cash equivalents at beginning of period | 258,877 | | | 67,898 | |
| Cash and cash equivalents at end of period | $ | 141,879 | | | $ | 107,072 | |
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| Cash paid during the period for: | | | |
| Interest, net of amount capitalized | $ | 222,726 | | | $ | 208,269 | |
| Income taxes, net | $ | 14,989 | | | $ | 550 | |
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(a)Represents equity income from the MVP Joint Venture. See Note 5.
The accompanying notes are an integral part of these consolidated financial statements.
EQUITRANS MIDSTREAM CORPORATION
Consolidated Balance Sheets (Unaudited)
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| June 30, 2024 | | December 31, 2023 |
| (Thousands) |
| ASSETS | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 141,879 | | | $ | 258,877 | |
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Accounts receivable (net of allowance for credit losses of $10,611 and $6,429 as of June 30, 2024 and December 31, 2023, respectively) | 237,752 | | | 258,264 | |
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| Other current assets | 71,339 | | | 78,356 | |
Total current assets | 450,970 | | | 595,497 | |
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| Property, plant and equipment | 9,920,776 | | | 9,745,298 | |
| Less: accumulated depreciation | (1,895,901) | | | (1,752,914) | |
| Net property, plant and equipment | 8,024,875 | | | 7,992,384 | |
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Investment in unconsolidated entity (a) | 2,375,313 | | | 1,832,282 | |
| Goodwill | 486,698 | | | 486,698 | |
| Net intangible assets | 489,724 | | | 522,133 | |
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| Other assets | 292,893 | | | 280,432 | |
| Total assets | $ | 12,120,473 | | | $ | 11,709,426 | |
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| LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 299,962 | | | $ | 299,731 | |
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| Accounts payable | 60,822 | | | 60,884 | |
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| Capital contributions payable to the MVP Joint Venture | 73,916 | | | 181,051 | |
| Accrued interest | 146,791 | | | 134,330 | |
| Accrued liabilities | 80,845 | | | 106,870 | |
| Total current liabilities | 662,336 | | | 782,866 | |
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| Long-term liabilities: | | | |
| Revolving credit facility borrowings | 985,000 | | | 1,230,000 | |
| Long-term debt | 6,643,220 | | | 6,046,709 | |
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| Contract liability | 1,414,183 | | | 1,296,039 | |
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| Deferred income taxes | 38,543 | | | 4,718 | |
| Regulatory and other long-term liabilities | 173,860 | | | 160,977 | |
| Total liabilities | 9,917,142 | | | 9,521,309 | |
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| Mezzanine equity: | | | |
Equitrans Midstream Preferred Shares, 30,018 shares issued and outstanding as of June 30, 2024 and December 31, 2023 | 687,730 | | | 681,842 | |
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| Shareholders' equity: | | | |
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Common stock, no par value, 435,013 and 433,505 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | 3,983,145 | | | 3,977,149 | |
| Retained deficit | (2,922,171) | | | (2,932,206) | |
| Accumulated other comprehensive loss | (1,232) | | | (1,272) | |
| Total common shareholders' equity | 1,059,742 | | | 1,043,671 | |
| Noncontrolling interest | 455,859 | | | 462,604 | |
| Total shareholders' equity | 1,515,601 | | | 1,506,275 | |
| Total liabilities, mezzanine equity and shareholders' equity | $ | 12,120,473 | | | $ | 11,709,426 | |
(a)Represents investment in the MVP Joint Venture. See Note 5.
The accompanying notes are an integral part of these consolidated financial statements.
EQUITRANS MIDSTREAM CORPORATION
Statements of Consolidated Shareholders' Equity and Mezzanine Equity (Unaudited)
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| | | | | | | | | | | | | | | Mezzanine |
| | | | | | | | | | | | | | | Equity |
| | | | | | | | | Accumulated | | | | | | Equitrans |
| | | Common Stock | | | | Other | | | | | | Midstream |
| | | | Shares | | No | | Retained | | Comprehensive | | Noncontrolling | | Total | | Preferred |
| | | | Outstanding | | Par Value | | Deficit | | Loss | | Interest | | Equity | | Shares |
| | | | (Thousands, except per share amounts) | | |
| Balance at January 1, 2023 | | | 432,781 | | | $ | 3,974,127 | | | $ | (3,053,590) | | | $ | (1,332) | | | $ | 479,399 | | | $ | 1,398,604 | | | $ | 681,842 | |
| Other comprehensive income (net of tax): | | | | | | | | | | | | | | | |
| Net income | | | — | | | — | | | 87,054 | | | — | | | 4,409 | | | 91,463 | | | 14,628 | |
Pension and other post-retirement benefits liability adjustment, net of tax expense of $7 | | | — | | | — | | | — | | | 22 | | | — | | | 22 | | | — | |
Dividends on common shares ($0.15 per share) | | | — | | | — | | | (65,121) | | | — | | | — | | | (65,121) | | | — | |
| Share-based compensation plans, net | | | 402 | | | 3,050 | | | — | | | — | | | — | | | 3,050 | | | — | |
| Distributions paid to noncontrolling interest in Eureka Midstream Holdings, LLC | | | — | | | — | | | — | | | — | | | (8,000) | | | (8,000) | | | — | |
Dividends paid to holders of Equitrans Midstream Preferred Shares ($0.4873 per share) | | | — | | | — | | | — | | | — | | | — | | | — | | | (14,628) | |
| Balance at March 31, 2023 | | | 433,183 | | | $ | 3,977,177 | | | $ | (3,031,657) | | | $ | (1,310) | | | $ | 475,808 | | | $ | 1,420,018 | | | $ | 681,842 | |
| Other comprehensive income (net of tax): | | | | | | | | | | | | | | | |
| Net income | | | — | | | — | | | 52,617 | | | — | | | 1,675 | | | 54,292 | | | 14,628 | |
Pension and other post-retirement benefits liability adjustment, net of tax expense of $7 | | | — | | | — | | | — | | | 22 | | | — | | | 22 | | | — | |
Dividends on common shares ($0.15 per share) | | | — | | | — | | | (68,227) | | | — | | | — | | | (68,227) | | | — | |
| Share-based compensation plans, net | | | 78 | | | 23,853 | | | — | | | — | | | — | | | 23,853 | | | — | |
| Distributions paid to noncontrolling interest in Eureka Midstream Holdings, LLC | | | — | | | — | | | — | | | — | | | (12,000) | | | (12,000) | | | — | |
Dividends paid to holders of Equitrans Midstream Preferred Shares ($0.4873 per share) | | | — | | | — | | | — | | | — | | | — | | | — | | | (14,628) | |
| Balance at June 30, 2023 | | | 433,261 | | | $ | 4,001,030 | | | $ | (3,047,267) | | | $ | (1,288) | | | $ | 465,483 | | | $ | 1,417,958 | | | $ | 681,842 | |
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| | | | | | | | | | | | | Mezzanine |
| | | | | | | | | | | | | Equity |
| | | | | | | Accumulated | | | | | | Equitrans |
| Common Stock | | | | Other | | | | | | Midstream |
| Shares | | No | | Retained | | Comprehensive | | Noncontrolling | | Total | | Preferred |
| Outstanding | | Par Value | | Deficit | | Loss | | Interest | | Equity | | Shares |
| (Thousands, except per share amounts) |
| Balance at January 1, 2024 | 433,505 | | | $ | 3,977,149 | | | $ | (2,932,206) | | | $ | (1,272) | | | $ | 462,604 | | | $ | 1,506,275 | | | $ | 681,842 | |
| Other comprehensive income (net of tax): | | | | | | | | | | | | | |
| Net income | — | | | — | | | 94,371 | | | — | | | 2,890 | | | 97,261 | | | 14,628 | |
Pension and other post-retirement benefits liability adjustment, net of tax expense of $6 | — | | | — | | | — | | | 20 | | | — | | | 20 | | | — | |
Dividends on common shares ($0.15 per share) | — | | | — | | | (66,656) | | | — | | | — | | | (66,656) | | | — | |
| Share-based compensation plans, net | 156 | | | 5,425 | | | — | | | — | | | — | | | 5,425 | | | — | |
| Distributions paid to noncontrolling interest in Eureka Midstream Holdings, LLC | — | | | — | | | — | | | — | | | (8,000) | | | (8,000) | | | — | |
Dividends paid to holders of Equitrans Midstream Preferred Shares ($0.4873 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (14,628) | |
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| Balance at March 31, 2024 | 433,661 | | | $ | 3,982,574 | | | $ | (2,904,491) | | | $ | (1,252) | | | $ | 457,494 | | | $ | 1,534,325 | | | $ | 681,842 | |
| Other comprehensive income (net of tax): | | | | | | | | | | | | | |
| Net income | — | | | — | | | 49,873 | | | — | | | 1,325 | | | 51,198 | | | 20,516 | |
Pension and other post-retirement benefits liability adjustment, net of tax expense of $6 | — | | | — | | | — | | | 20 | | | — | | | 20 | | | — | |
Dividends on common shares ($0.15 per share) | — | | | — | | | (67,553) | | | — | | | — | | | (67,553) | | | — | |
| Share-based compensation plans, net | 1,352 | | | 571 | | | — | | | — | | | — | | | 571 | | | — | |
| Distributions paid to noncontrolling interest in Eureka Midstream Holdings, LLC | — | | | — | | | — | | | — | | | (2,960) | | | (2,960) | | | — | |
Dividends paid to holders of Equitrans Midstream Preferred Shares ($0.4873 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (14,628) | |
| Balance at June 30, 2024 | 435,013 | | | $ | 3,983,145 | | | $ | (2,922,171) | | | $ | (1,232) | | | $ | 455,859 | | | $ | 1,515,601 | | | $ | 687,730 | |
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The accompanying notes are an integral part of these consolidated financial statements.
EQUITRANS MIDSTREAM CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Financial Statements
Nature of Business. The Company's operating subsidiaries provide midstream services to the Company's customers in Pennsylvania, West Virginia and Ohio through three primary assets: the gathering system, which includes predominantly dry gas gathering systems of high-pressure gathering lines; the transmission system, which includes FERC-regulated interstate pipelines and storage systems; and the water network, which primarily consists of water pipelines and other facilities that support well completion activities and produced water handling activities.
Basis of Presentation. References in these financial statements to Equitrans Midstream or the Company refer collectively to Equitrans Midstream Corporation and its consolidated subsidiaries for all periods presented, unless otherwise indicated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (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 Quarterly Report on Form 10-Q) necessary for a fair presentation of the financial position of the Company as of June 30, 2024, the results of its operations, and equity for the three and six months ended June 30, 2024 and 2023 and its cash flows for the six months ended June 30, 2024 and 2023. The consolidated balance sheet at December 31, 2023 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2023, which includes all disclosures required by GAAP.
Due to, among other things, the seasonal nature of the Company's utility customer contracts, as well as producers’ well completion activities and varying needs for fresh and produced water (which are primarily driven by horizontal lateral lengths and the number of completion stages per well), the interim statements for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
For further information, refer to the Company's consolidated financial statements and related notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, as well as Part I, "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein.
Recently Issued Accounting Standards.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which provides improvements to reportable segment disclosures and is intended to enhance the disclosures regarding significant segment expenses. The guidance is applicable to all public entities that are required to report segment information in accordance with Topic 280 and is to be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the potential impact of adopting this standard on its financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures, which provides improvements to income tax disclosures and is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The guidance is applicable to all public entities required to report income taxes in accordance with ASC 740 and should be applied prospectively, but retrospective application is permitted. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation, information on income taxes paid, and various other disclosure changes. The Company is currently evaluating the potential impact of adopting this standard on its financial statements and related disclosures.
2. Proposed EQT Transaction
Proposed EQT Transaction. On March 10, 2024, the Company, EQT Corporation (Parent), Humpty Merger Sub Inc., an indirect wholly owned subsidiary of Parent (Merger Sub), and Humpty Merger Sub LLC, an indirect wholly owned subsidiary of Parent (LLC Sub), entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which, among other things, Merger Sub will merge with and into the Company (the First Merger), with the Company surviving the First Merger as an indirect wholly owned subsidiary of Parent (the First Step Surviving Corporation) and, as the second step in a single integrated transaction, the First Step Surviving Corporation will merge with and into LLC Sub (the Second Merger and,
together with the First Merger, the Mergers), with LLC Sub surviving the Second Merger as an indirect wholly owned subsidiary of Parent (the transactions contemplated by the Merger Agreement, the EQT Transaction).
Under the terms of the Merger Agreement, and subject to the satisfaction or waiver of certain conditions therein, at the effective time of the First Merger (the Effective Time), (i) each share of common stock, no par value per share, of Equitrans Midstream Corporation (Equitrans Midstream common stock) issued and outstanding immediately prior to the Effective Time (excluding any excluded shares) will be converted automatically at the Effective Time into the right to receive 0.3504 (the Exchange Ratio) fully-paid and nonassessable shares of common stock of Parent, no par value per share (EQT Shares) and (ii) each Equitrans Midstream Corporation Series A Perpetual Convertible Preferred Share, no par value (Equitrans Midstream Preferred Share), issued and outstanding immediately prior to the Effective Time will be treated in accordance with Section 8 of the Company’s Second Amended and Restated Articles of Incorporation and the procedures set forth in Section 2.5 of the Merger Agreement.
The EQT Transaction is expected to close on July 22, 2024, taking into account, as of the filing of this Quarterly Report on Form 10-Q, the satisfaction in accordance with the terms and conditions of the Merger Agreement of various conditions to closing under the Merger Agreement, including, among others: (i) approval of the Merger Agreement and the Mergers by a majority of the votes cast by holders of Equitrans Midstream common stock and Equitrans Midstream Preferred Shares, with such Equitrans Midstream Preferred Shares treated as Equitrans Midstream common stock on an as-converted basis, voting together as a single class, (ii) approval of the issuance of EQT Shares in connection with the Mergers by a majority of votes cast at a special meeting of holders of EQT Shares, (iii) expiration or termination of (a) all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act) and (b) any commitment to, or agreement with, any governmental entity to delay the consummation of, or not to consummate the transactions contemplated by the Merger Agreement, and (iv) the MVP Joint Venture receiving authorization of the Federal Energy Regulatory Commission (FERC) to place the Mountain Valley Pipeline (MVP) in-service.
The Company recorded approximately $2.0 million and $7.7 million in expenses related to the EQT Transaction during the three and six months ended June 30, 2024, respectively, primarily related to advisor, legal and other transaction-related fees, which are included in transaction costs on the Company's statements of consolidated comprehensive income.
Equitrans Midstream Preferred Shares Redemption. On June 25, 2024, Parent delivered to the Company a written election exercising Parent’s right under the Merger Agreement to cause the Company to purchase and redeem, prior to the Effective Time, all issued and outstanding Equitrans Midstream Preferred Shares in accordance the Company’s Second Amended and Restated Articles of Incorporation. The Company has no obligation to purchase and redeem the Equitrans Midstream Preferred Shares in accordance with the Merger Agreement unless Parent has deposited with the paying agent for such redemption sufficient funds to effect such purchase and redemption, and the deposit of such funds and any instructions and authority to pay such funds to holders of the Equitrans Midstream Preferred Shares in the redemption has occurred at least one hour prior to the consummation of the proposed EQT Transaction. In the event the EQT Transaction will not be consummated, the redemption will not be effected. Subject to the foregoing, the Company expects the purchase and redemption to occur on July 22, 2024 prior to the consummation of the EQT Transaction (or such later date as may be contemplated by virtue of the timing of the consummation of the EQT Transaction).
The Equitrans Midstream Preferred Shares are presented as temporary equity in the mezzanine equity section of the Company’s consolidated balance sheets. As the Equitrans Midstream Preferred Shares were not redeemable or probable of becoming redeemable as of June 30, 2024, adjustment to the carrying amount is not necessary and would only be required if the Equitrans Midstream Preferred Shares are redeemed in accordance with the events described above.
3. Financial Information by Business Segment
The Company reports its operations in three segments that reflect its three lines of business of Gathering, Transmission and Water, which reflects the manner in which management evaluates the business for making operating decisions and assessing performance.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (Thousands) |
| Revenues from customers: | | | | | | | |
Gathering (a) | $ | 230,006 | | | $ | 210,194 | | | $ | 454,646 | | | $ | 420,946 | |
Transmission (a) | 104,584 | | | 92,540 | | | 221,478 | | | 231,446 | |
| Water | 27,005 | | | 15,735 | | | 49,745 | | | 42,414 | |
| Total operating revenues | $ | 361,595 | | | $ | 318,469 | | | $ | 725,869 | | | $ | 694,806 | |
| Operating income: | | | | | | | |
| Gathering | $ | 110,689 | | | $ | 81,020 | | | $ | 215,748 | | | $ | 185,314 | |
| Transmission | 59,514 | | | 48,451 | | | 136,596 | | | 147,373 | |
| Water | 8,686 | | | 530 | | | 13,674 | | | 12,903 | |
Headquarters (b) | (2,357) | | | (467) | | | (8,330) | | | (812) | |
| Total operating income | $ | 176,532 | | | $ | 129,534 | | | $ | 357,688 | | | $ | 344,778 | |
| | | | | | | |
| Reconciliation of operating income to net income: | | | | | | | |
Equity income (c) | $ | 18,814 | | | $ | 23,686 | | | $ | 91,819 | | | $ | 23,808 | |
| | | | | | | |
Other income (expense), net (d) | 3,602 | | | 19,809 | | | (374) | | | 11,707 | |
| | | | | | | |
Net interest expense | (120,129) | | | (103,644) | | | (239,025) | | | (208,601) | |
Income tax expense (benefit) | 7,105 | | | 465 | | | 26,505 | | | (3,319) | |
Net income | $ | 71,714 | | | $ | 68,920 | | | $ | 183,603 | | | $ | 175,011 | |
(a)For the six months ended June 30, 2023, volumetric-based fee revenues associated with Gathering and Transmission included one-time contract buyouts by a customer for approximately $5.0 million and $23.8 million, respectively.
(b)Includes transaction costs and other certain unallocated corporate expenses.
(c)Equity income is included in the Transmission segment.
(d)Includes unrealized gains (losses) on derivative instruments recorded in the Gathering segment.
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| | (Thousands) |
| Segment assets: | | | |
| Gathering | $ | 7,575,061 | | | $ | 7,612,820 | |
Transmission (a) | 3,918,128 | | | 3,369,718 | |
| Water | 236,853 | | | 217,225 | |
| Total operating segments | 11,730,042 | | | 11,199,763 | |
| Headquarters, including cash | 390,431 | | | 509,663 | |
| Total assets | $ | 12,120,473 | | | $ | 11,709,426 | |
(a)The equity method investment in the MVP Joint Venture is included in the Transmission segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (Thousands) |
| Depreciation: | | | | | | | |
| Gathering | $ | 50,850 | | | $ | 49,387 | | | $ | 101,002 | | | $ | 98,736 | |
| Transmission | 15,123 | | | 13,904 | | | 29,506 | | | 27,792 | |
| Water | 7,111 | | | 6,511 | | | 14,145 | | | 12,374 | |
| Headquarters | 104 | | | 229 | | | 207 | | | 533 | |
| Total | $ | 73,188 | | | $ | 70,031 | | | $ | 144,860 | | | $ | 139,435 | |
| Capital expenditures: | | | | | | | |
Gathering (a) | $ | 65,996 | | | $ | 71,893 | | | $ | 120,252 | | | $ | 131,606 | |
Transmission (b) | 16,431 | | | 14,375 | | | 34,135 | | | 23,564 | |
| Water | 4,987 | | | 11,148 | | | 15,034 | | | 22,224 | |
| | | | | | | |
Total (c) | $ | 87,414 | | | $ | 97,416 | | | $ | 169,421 | | | $ | 177,394 | |
(a)Includes capital expenditures related to the noncontrolling interest in Eureka Midstream Holdings, LLC (Eureka Midstream) of approximately $5.0 million and $10.0 million for the three and six months ended June 30, 2024, respectively, and $5.0 million and $8.2 million for the three and six months ended June 30, 2023, respectively.
(b)Transmission capital expenditures do not include aggregate capital contributions made to the MVP Joint Venture of approximately $135.4 million and $558.3 million for the three and six months ended June 30, 2024, respectively, and $36.0 million and $70.5 million for the three and six months ended June 30, 2023, respectively.
(c)The Company accrues capital expenditures when the work has been completed but the associated bills have not yet been paid. Accrued capital expenditures are excluded from the statements of consolidated cash flows until they are paid. The net impact of non-cash capital expenditures, including the effect of accrued capital expenditures, transfers to/from inventory as assets are completed/assigned to a project and capitalized share-based compensation costs, was $(0.3) million and $2.6 million for the three and six months ended June 30, 2024, respectively, and $(1.1) million and $(5.5) million for the three and six months ended June 30, 2023, respectively.
4. Revenue from Contracts with Customers
For the three and six months ended June 30, 2024 and 2023, substantially all revenues recognized on the Company's statements of consolidated comprehensive income were from contracts with customers. As of June 30, 2024 and December 31, 2023, all receivables recorded on the Company's consolidated balance sheets represented performance obligations that have been satisfied and for which an unconditional right to consideration exists.
Summary of disaggregated revenues. The tables below provide disaggregated revenue information by business segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2024 |
| | Gathering | | Transmission | | Water | | Total |
| | (Thousands) |
Firm reservation fee revenues (a) | | $ | 147,498 | | | $ | 86,688 | | | $ | 12,110 | | | $ | 246,296 | |
| Volumetric-based fee revenues | | 82,508 | | | 17,896 | | | 14,895 | | | 115,299 | |
| | | | | | | | |
| Total operating revenues | | $ | 230,006 | | | $ | 104,584 | | | $ | 27,005 | | | $ | 361,595 | |
| | | | | | | | |
| | Three Months Ended June 30, 2023 |
| | Gathering | | Transmission | | Water | | Total |
| | (Thousands) |
Firm reservation fee revenues (a) | | $ | 141,737 | | | $ | 82,247 | | | $ | 9,389 | | | $ | 233,373 | |
| Volumetric-based fee revenues | | 68,457 | | | 10,293 | | | 6,346 | | | 85,096 | |
| | | | | | | | |
| Total operating revenues | | $ | 210,194 | | | $ | 92,540 | | | $ | 15,735 | | | $ | 318,469 | |
| | | | | | | | |
| | Six Months Ended June 30, 2024 |
| | Gathering | | Transmission | | Water | | Total |
| | (Thousands) |
Firm reservation fee revenues (a) | | $ | 283,174 | | | $ | 187,011 | | | $ | 21,485 | | | $ | 491,670 | |
| Volumetric-based fee revenues | | 171,472 | | | 34,467 | | | 28,260 | | | 234,199 | |
| | | | | | | | |
| Total operating revenues | | $ | 454,646 | | | $ | 221,478 | | | $ | 49,745 | | | $ | 725,869 | |
| | | | | | | | |
| | Six Months Ended June 30, 2023 |
| | Gathering | | Transmission | | Water | | Total |
| | (Thousands) |
Firm reservation fee revenues (a) | | $ | 281,808 | | | $ | 183,969 | | | $ | 18,764 | | | $ | 484,541 | |
Volumetric-based fee revenues (b) | | 139,138 | | | 47,477 | | | 23,650 | | | 210,265 | |
| | | | | | | | |
| Total operating revenues | | $ | 420,946 | | | $ | 231,446 | | | $ | 42,414 | | | $ | 694,806 | |
(a) Firm reservation fee revenues associated with Gathering included MVC unbilled revenues of approximately $3.2 million and $9.1 million for the three and six months ended June 30, 2024, respectively, and $2.4 million and $5.7 million for the three and six months ended June 30, 2023, respectively.
(b) For the six months ended June 30, 2023, volumetric-based fee revenues associated with Gathering and Transmission included one-time contract buyouts by a customer for approximately $5.0 million and $23.8 million, respectively.
Contract assets. The Company's contract assets related to the Company's future MVC deficiency payments are generally expected to be collected within the next twelve months and are primarily included in other current assets in the Company's consolidated balance sheets until such time as the MVC deficiency payments are invoiced to the customer.
The following table presents changes in the Company's contract assets balance: | | | | | | | | | | | | | |
| | | |
| Six Months Ended June 30, | | |
| 2024 | | 2023 | | |
| (Thousands) | | |
| Balance as of beginning of period | $ | 11,123 | | | $ | 27,493 | | | |
Revenue recognized in excess of amounts invoiced (a) | 10,851 | | | 5,680 | | | |
Minimum volume commitments invoiced (b) | (7,833) | | | (23,558) | | | |
Amortization (c) | (379) | | | (329) | | | |
| Balance as of end of period | $ | 13,762 | | | $ | 9,286 | | | |
| | | | | |
(a)Includes revenues associated with MVCs that are included in revenues within the Gathering and Water segments.
(b)Unbilled revenues are transferred to accounts receivable once the Company has an unconditional right to consideration from the customer.
(c)Amortization of capitalized contract costs paid to customers over the expected life of the agreement.
Contract liabilities. The Company's contract liabilities consist of deferred revenue primarily associated with the EQT Global GGA. Contract liabilities are classified as current or non-current according to when such amounts are expected to be recognized.
The following table presents changes in the Company's contract liability balances:
| | | | | | | | | | | | | |
| | | |
| | | Six Months Ended June 30, |
| | | 2024 | | 2023 |
| | | (Thousands) |
| Balance as of beginning of period | | | $ | 1,301,100 | | | $ | 973,087 | |
Amounts recorded during the period (a) | | | 123,686 | | | 165,011 | |
Change in estimated variable consideration (b) | | | (1,833) | | | (3,392) | |
Amounts transferred during the period (c) | | | (3,833) | | | (3,835) | |
| | | | | |
| Balance as of end of period | | | $ | 1,419,120 | | | $ | 1,130,871 | |
| | | | | |
(a)Includes deferred billed revenue during the six months ended June 30, 2024 and 2023 primarily associated with the EQT Global GGA.
(b)For the six months ended June 30, 2024 and 2023, the change in estimated variable consideration represents the decrease in total deferred revenue due to changes in MVP in-service timing assumptions.
(c)Deferred revenues are recognized as revenue upon satisfaction of the Company's performance obligation to the customer.
Summary of remaining performance obligations. The following table summarizes the estimated transaction price allocated to the Company's remaining performance obligations under all contracts with firm reservation fees, MVCs and/or ARCs as of June 30, 2024 that the Company will invoice or transfer from contract liabilities and recognize in future periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2024(a) | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
| | (Thousands) |
Gathering firm reservation fees | | $ | 96,368 | | | $ | 183,454 | | | $ | 173,167 | | | $ | 166,356 | | | $ | 162,664 | | | $ | 1,651,185 | | | $ | 2,433,194 | |
Gathering revenues supported by MVCs | | 224,091 | | | 454,590 | | | 486,931 | | | 491,273 | | | 488,641 | | | 2,703,274 | | | 4,848,800 | |
Transmission firm reservation fees | | 201,758 | | | 404,480 | | | 402,319 | | | 399,878 | | | 397,197 | | | 2,774,442 | | | 4,580,074 | |
Water revenues supported by ARCs/MVCs | | 24,221 | | | 48,441 | | | 45,159 | | | 44,065 | | | 45,706 | | | 120,938 | | | 328,530 | |
Total | | $ | 546,438 | | | $ | 1,090,965 | | | $ | 1,107,576 | | | $ | 1,101,572 | | | $ | 1,094,208 | | | $ | 7,249,839 | | | $ | 12,190,598 | |
(a) July 1, 2024 through December 31, 2024.
Based on total projected contractual revenues, the Company's firm gathering contracts and firm transmission and storage contracts had weighted average remaining terms of approximately 13 years and 11 years, respectively, as of June 30, 2024.
5. Investment in Unconsolidated Entity
The MVP Joint Venture. The Company has an equity method investment in the MVP Joint Venture. The MVP Joint Venture constructed the MVP and is developing the MVP Southgate project, each discussed in more detail below. The Company maintains separate ownership interests in each of the MVP and the MVP Southgate project and is the operator of the MVP and expects to operate the MVP Southgate project.
Mountain Valley Pipeline. The MVP Joint Venture received authorization of the FERC on June 11, 2024 to place the MVP, a 303-mile natural gas interstate pipeline that spans from northern West Virginia to southern Virginia, in service and the MVP entered service and became available for interruptible or short-term firm transportation service on June 14, 2024. The Company owned a 49.0% interest in the MVP as of June 30, 2024.
MVP and MVP-related long-term firm capacity obligations commenced on July 1, 2024. Upon commencement of the MVP long-term firm capacity obligations on July 1, 2024, the MVP Joint Venture is no longer a variable interest entity of the Company because it has sufficient equity to finance its activities.
The MVP Joint Venture has continued to undertake certain restoration efforts in respect of the MVP since the in-service date and the Company is targeting a total project cost of approximately $7.9 billion (excluding allowance for funds used during
construction (AFUDC) and which does not reflect general contingency). Based on such total project cost estimate, the Company's equity ownership in the MVP is expected to progressively increase from approximately 49.0% to approximately 49.2%.
Pursuant to the EQT Global GGA and given MVP full in-service occurred in 2024, MVC step ups and gathering fee rates are to be set forth in an amendment to the EQT Global GGA. The step ups and rates would become effective as of July 1, 2024 in accordance with the terms of the EQT Global GGA. The amendment, which reflects the step ups and rates assumed by the Company for purposes of the EQT Global GGA, has been negotiated, but not yet executed, with EQT as of the filing of this Quarterly Report on Form 10-Q.
The Company has a negative basis difference between the carrying value of its equity method investment and its proportionate share of MVP's net assets, which are entirely attributable to fixed assets. The basis difference is accreted over the life of the fixed assets and reflected as income in equity income on the Company's statements of consolidated comprehensive income.
In June 2024, the MVP Joint Venture issued a capital call notice for the funding of the MVP project to MVP Holdco, LLC (MVP Holdco) for $73.9 million, which was paid in July 2024. The capital contributions payable and the corresponding increase to the investment balance are reflected on the consolidated balance sheet as of June 30, 2024.
Pursuant to the MVP Joint Venture's limited liability company agreement, MVP Holdco was obligated to provide performance assurances in respect of the MVP project through in-service, which could take the form of a guarantee from EQM (provided that EQM's debt is rated as investment grade in accordance with the requirements of the MVP Joint Venture's limited liability company agreement), a letter of credit or cash collateral, in favor of the MVP Joint Venture to provide assurance as to the funding of MVP Holdco's proportionate share of the construction budget for the MVP project through in-service. On June 28, 2024, following MVP in-service, the $104.7 million letter of credit with respect to the MVP project was terminated.
The Company's ownership interest in the MVP Joint Venture related to the MVP project is significant for the three and six months ended June 30, 2024 as defined by the SEC's Regulation S-X Rule 1-02(w). Accordingly, as required by Regulation S-X Rule 3-09, the following tables summarize the condensed financial statements of the MVP Joint Venture in relation to the MVP project.
Condensed Balance Sheets
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (Unaudited) | | |
| (Thousands) |
| Current assets | $ | 181,485 | | | $ | 349,417 | |
| Non-current assets | 9,430,433 | | | 8,480,539 | |
| Total assets | $ | 9,611,918 | | | $ | 8,829,956 | |
| | | |
| Current liabilities | $ | 218,689 | | | $ | 371,508 | |
| Non-current liabilities | 33 | | | — | |
| Total liabilities | 218,722 | | | 371,508 | |
| Equity | 9,393,196 | | | 8,458,448 | |
| Total liabilities and equity | $ | 9,611,918 | | | $ | 8,829,956 | |
Condensed Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| (Unaudited) |
| (Thousands) |
| Operating revenues | $ | 3,723 | | | $ | — | | | $ | 3,723 | | | $ | — | |
| Operating expenses | (10,822) | | | — | | | (10,856) | | | — | |
| AFUDC - equity | 27,171 | | | 34,822 | | | 129,750 | | | 34,822 | |
| AFUDC - debt | 11,644 | | | 14,923 | | | 55,604 | | | 14,923 | |
| Other interest | 1,900 | | | 305 | | | 5,170 | | | 562 | |
| Net income | $ | 33,616 | | | $ | 50,050 | | | $ | 183,391 | | | $ | 50,307 | |
MVP Southgate Project. In April 2018, the MVP Joint Venture announced the MVP Southgate project (MVP Southgate) as a contemplated interstate pipeline that was approved by the United States FERC and designed to extend approximately 75 miles from the MVP in Pittsylvania County, Virginia to new delivery points in Rockingham and Alamance Counties, North Carolina using 24-inch and 16-inch diameter pipe.
In late December 2023, following completion of its negotiations with each of Public Service Company of North Carolina, Inc. (PSNC) and Duke Energy Carolinas, LLC (Duke), the MVP Joint Venture entered into precedent agreements with each of PSNC and Duke. The precedent agreements contemplate an amended project (in lieu of the original project) and, among other things, describe certain conditions precedent to the parties' respective obligations regarding MVP Southgate. The amended project would extend approximately 31 miles from the terminus of the MVP in Pittsylvania County, Virginia to planned new delivery points in Rockingham County, North Carolina using 30-inch diameter pipe.
The Company is expected to operate the MVP Southgate pipeline and owned a 47.2% interest in the MVP Southgate project as of June 30, 2024. The targeted completion timing for the project is June 2028.
Pursuant to the MVP Joint Venture's limited liability company agreement, MVP Holdco is obligated to provide performance assurances in respect of MVP Southgate, which performance assurances may take the form of a guarantee from EQM (provided that EQM's debt is rated as investment grade in accordance with the requirements of the MVP Joint Venture's limited liability company agreement), a letter of credit or cash collateral. On April 6, 2023, EQM’s $14.2 million letter of credit with respect to the MVP Southgate project was terminated, following the determination to temporarily defer partners’ obligations to post performance assurances with respect to the MVP Southgate project, which may be reinstated upon further developments. Upon the FERC’s initial release to begin construction of the MVP Southgate project, the Company will be obligated to deliver an allowable form of performance assurance in an amount equal to 33% of MVP Holdco’s proportionate share of the remaining capital obligations under the applicable construction budget.
6. Share-based Compensation Plans
In December 2021, the Company granted a special, one-time, performance award program designed to reward all employees should the Company’s most complex and strategically significant project, the MVP project, be placed in-service, subject to continued service through the applicable payment date (the MVP PSU Program). The achievement of the MVP Joint Venture being authorized by the FERC to commence service on the MVP represented a performance condition as defined by ASC 718, Share-based Compensation. During the second quarter of 2024, the MVP Joint Venture was authorized by the FERC to commence service on the MVP. As such, the performance condition of the MVP PSU Program was achieved and the award vested and was paid in Company common stock on June 28, 2024. Certain shares of the MVP PSU Program remain outstanding and are subject to continued service through the first and second anniversaries of the in-service date.
In June 2023, the performance condition associated with the MVP PSU Program awards was deemed to be probable, and the Company recognized compensation cost of approximately $16.8 million that included the cumulative catch-up of approximately $14.1 million to reflect the requisite service period of each award that had been provided to date. As of June 30, 2024, there was approximately $1.7 million of unrecognized compensation cost related to non-vested MVP PSU Program awards that is expected to be recognized over a remaining weighted average vesting term of approximately 1.4 years.
7. Debt
Amended EQM Credit Facility. On February 15, 2024 (the Fifth Amendment Date), EQM entered into an amendment (the Fifth Amendment) to the Third Amended and Restated Credit Agreement, dated as of October 31, 2018 (as amended, supplemented or otherwise modified, the Amended EQM Credit Facility), among EQM, as borrower, Wells Fargo Bank, National Association, as the administrative agent, swing line lender and an L/C issuer, the lenders party thereto from time to time and any other persons party thereto from time to time. The Fifth Amendment, among other things, amended the financial covenant, such that the Consolidated Leverage Ratio (as defined in the Amended EQM Credit Facility) (i) as of March 31, 2024, could not exceed 6.00 to 1.00, (ii) as of June 30, 2024, could not exceed 6.25 to 1.00, (iii) as of September 30, 2024, cannot exceed 5.85 to 1.00 and (iv) as of the end of each fiscal quarter thereafter, cannot exceed 5.50 to 1.00. EQM has or, as applicable, will have aggregate commitments available under the Amended EQM Credit Facility of approximately $1.55 billion prior to April 30, 2025, and approximately $1.45 billion on and after April 30, 2025 and prior to April 30, 2026. For the avoidance of doubt, any reference to the Amended EQM Credit Facility as of any particular date shall mean the Amended EQM Credit Facility as in effect on such date.
As of June 30, 2024, EQM had $655 million of borrowings and approximately $1.0 million of letters of credit outstanding under the Amended EQM Credit Facility. As of December 31, 2023, EQM had $915 million of borrowings and approximately $105.8 million of letters of credit outstanding under the Amended EQM Credit Facility. Taking into account the maximum Consolidated Leverage Ratio applicable under the Amended EQM Credit Facility that, as of June 30, 2024, could not exceed 6.25 to 1.00, EQM had the ability to borrow approximately $0.5 billion under the Amended EQM Credit Facility as of June 30, 2024. The Company believes that its cash on hand, future cash generated from operations and future cash received from potential distributions from the MVP Joint Venture, including as a result of potential financing at the MVP Joint Venture, together with available borrowing capacity under its subsidiaries' credit facilities and its access to banking and capital markets, will provide adequate resources to fund its short-term and long-term capital, operating and financing needs.
During the three and six months ended June 30, 2024, the maximum outstanding borrowings at any time were approximately $655 million and $1,055 million, respectively, the average daily balances were approximately $545 million and $690 million, respectively, and the weighted average annual interest rate was approximately 8.3%. For the three and six months ended June 30, 2024, commitment fees of $1.2 million and $1.9 million, respectively, were paid to maintain credit availability under the Amended EQM Credit Facility. During the three and six months ended June 30, 2023, the maximum outstanding borrowings at any time were approximately $255 million and $315 million, respectively, the average daily balances were approximately $191 million and $225 million, respectively, and the weighted average annual interest rates were approximately 7.9% and 7.7%, respectively. For the three and six months ended June 30, 2023, commitment fees of $2.3 million and $4.4 million, respectively, were paid to maintain credit availability under the Amended EQM Credit Facility. As of June 30, 2024 and December 31, 2023, no term loans were outstanding under the Amended EQM Credit Facility.
The Amended EQM Facility contains negative covenants that, among other things, limit restricted payments, the incurrence of debt, dispositions, mergers and other fundamental changes, and transactions with affiliates, in each case and as applicable, subject to certain specified exceptions. In addition, the Amended EQM Credit Facility contains certain specified events of default such as insolvency, nonpayment of scheduled principal or interest obligations, change of control and cross-default related to the acceleration or default of certain other financial obligations.
Eureka Credit Facility. Eureka has a $400 million senior secured revolving credit facility with Sumitomo Mitsui Banking Corporation, as administrative agent, the lenders party thereto from time to time and any other persons party thereto from time to time (the 2021 Eureka Credit Facility) that matures in November 2025.
As of June 30, 2024, and December 31, 2023, Eureka had $330 million and $315 million, respectively, of borrowings outstanding under the 2021 Eureka Credit Facility. For the three and six months ended June 30, 2024, the maximum amount of outstanding borrowings under the 2021 Eureka Credit Facility at any time were approximately $330 million, the average daily balances were approximately $330 million and $326 million, respectively, and Eureka incurred interest at a weighted average annual interest rate of approximately 8.3%. For the three and six months ended June 30, 2024, commitment fees of $0.1 million and $0.2 million, respectively, were paid to maintain credit availability under the 2021 Eureka Credit Facility. For the three and six months ended June 30, 2023, the maximum amount of outstanding borrowings under the 2021 Eureka Credit Facility at any time were approximately $315 million, the average daily balances were approximately $309 million and $303 million, respectively, and Eureka incurred interest at weighted average annual interest rates of approximately 7.7% and 7.4%, respectively. For the three and six months ended June 30, 2023, commitment fees of $0.1 million and $0.2 million, respectively, were paid to maintain credit availability under the 2021 Eureka Credit Facility.
The 2021 Eureka Credit Facility contains negative covenants that, among other things, limit restricted payments, the incurrence of debt, dispositions, mergers and other fundamental changes, and transactions with affiliates, in each case and as applicable, subject to certain specified exceptions. In addition, the 2021 Eureka Credit Facility contains certain specified events of default
such as insolvency, nonpayment of scheduled principal or interest obligations, loss and failure to replace certain material contracts, change of control and cross-default related to the acceleration or default of certain other financial obligations.
2024 Senior Notes. On February 26, 2024, EQM completed a private offering of $600 million in aggregate principal amount of new 6.375% senior notes due 2029 (the 2024 Senior Notes) and received net proceeds from the offering of approximately $590.6 million inclusive of a discount of approximately $7.5 million and debt issuance costs of approximately $1.9 million. EQM used the net proceeds from the 2024 Senior Notes offering to repay certain outstanding indebtedness, including borrowings under the Amended EQM Credit Facility, and for general partnership purposes.
The 2024 Senior Notes were issued under and are governed by an indenture, dated February 26, 2024 (the 2024 Indenture), between EQM and U.S. Bank Trust Company, National Association, as trustee (the Trustee). The 2024 Indenture contains covenants that limit EQM’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale and leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all of EQM’s assets. The 2024 Senior Notes will mature on April 1, 2029 and interest on the 2024 Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2024.
The 2024 Senior Notes are unsecured and rank equally in right of payment with all of EQM’s existing and future senior indebtedness. The 2024 Senior Notes are senior in right of payment to any of EQM’s future indebtedness that are, by their terms, expressly subordinated in right of payment to the 2024 Senior Notes. The 2024 Senior Notes are effectively subordinated to EQM’s future secured indebtedness, if any, to the extent of the value of the assets securing such indebtedness, and structurally subordinated to all existing and future obligations, including trade payables, of EQM’s subsidiaries, other than any subsidiaries that may guarantee the Notes in the future.
EQM may, at its option, redeem some or all of the 2024 Senior Notes, in whole or in part, at any time prior to their maturity at the applicable redemption price as set forth in the Indenture.
Upon the occurrence of a Change of Control Triggering Event (as defined in the 2024 Indenture), EQM may be required to offer to purchase the 2024 Senior Notes at a purchase price equal to 101% of the aggregate principal amount of the 2024 Senior Notes repurchased, plus accrued and unpaid interest, if any, on the 2024 Senior Notes repurchased, to, but excluding, the date of settlement, subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of settlement.
The 2024 Indenture contains certain events of default (each an Event of Default), including the following: (1) default in the payment of interest on such 2024 Senior Notes when due that continues for 30 days; (2) default in the payment of principal of or premium, if any, on any such 2024 Senior Notes when due, whether at its stated maturity, upon redemption or otherwise; (3) failure by EQM or any subsidiary guarantor, if any, to comply for 90 days with the other agreements with respect to such 2024 Senior Notes contained in the 2024 Indenture after written notice by the Trustee or by the holders of at least 25% in principal amount of the outstanding 2024 Senior Notes; (4) certain events of bankruptcy, insolvency or reorganization of EQM or any subsidiary guarantor, if any, that is one of EQM’s Significant Subsidiaries (as defined in the 2024 Indenture); and (5) if such 2024 Senior Notes are guaranteed by a subsidiary guarantor that is one of EQM’s Significant Subsidiaries, (a) the guarantee of that subsidiary guarantor ceases to be in full force and effect, except as otherwise provided in the 2024 Indenture; (b) the guarantee of that subsidiary guarantor is declared null and void in a judicial proceeding; or (c) such subsidiary guarantor denies or disaffirms its obligations under the 2024 Indenture or its guarantee.
If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 2024 Senior Notes may declare the principal of and all accrued and unpaid interest on such 2024 Senior Notes to be immediately due and payable. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization occurs, the principal of and interest on the 2024 Senior Notes will become immediately due and payable without any action on the part of the Trustee or any holders of the 2024 Senior Notes.
2023 Senior Notes Redemption. On June 21, 2023 (the Redemption Date), EQM redeemed in full its remaining outstanding 4.75% Senior Notes due 2023 (the 2023 Notes) in the aggregate principal amount of $98.9 million, pursuant to the Indenture, dated as of August 1, 2014, by and between EQM, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A. (BNYMTC), as trustee, as supplemented by that certain Third Supplemental Indenture, dated as of June 25, 2018, by and between the EQM and BNYMTC, at a redemption price equal to 100% of the principal amount of the 2023 Notes, plus accrued and unpaid interest to, but not including, the Redemption Date. Upon the redemption by EQM of the 2023 Notes, the Third Supplemental Indenture was discharged and ceased to be of further effect except as to rights thereunder. EQM utilized cash on hand to effect payment of the redemption on the Redemption Date.
As of June 30, 2024, EQM and Eureka were in compliance with all debt provisions and covenants.
8. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis. The Company records derivative instruments at fair value on a gross basis in its consolidated balance sheets. The Company, EQT and certain affiliates of EQT have a Gas Gathering and Compression Agreement dated February 26, 2020 (as amended, the "EQT Global GGA") which provides, among other things, for potential cash bonus payments payable by EQT to the Company during the period that began on July 1, 2024 through the calendar quarter ending December 31, 2024 (the Henry Hub cash bonus payment provision). The potential cash bonus payments are conditioned upon the quarterly average of certain Henry Hub natural gas prices exceeding certain price thresholds. The Henry Hub cash bonus payment provision is accounted for as a derivative instrument and recorded at its estimated fair value using a Monte Carlo simulation model. Significant inputs used in the fair value measurement include NYMEX Henry Hub natural gas futures prices as of the date of valuation, probability-weighted assumptions regarding MVP project completion (prior to in-service), the actual MVP in-service date, risk-free interest rates based on U.S. Treasury rates, expected volatility of NYMEX Henry Hub natural gas futures prices and an estimated credit spread of EQT. The probability-weighted assumptions regarding MVP project completion utilizing internally developed methodologies (prior to in-service), and the expected volatility of NYMEX Henry Hub natural gas futures prices, used in the valuation methodology represent significant unobservable inputs causing the Henry Hub cash bonus payment provision to be designated as a Level 3 fair value measurement. An expected average volatility of approximately 55.0% was utilized in the valuation model, which is based on market-quoted volatilities of relevant NYMEX Henry Hub natural gas forward prices.
As of June 30, 2024 and December 31, 2023, the fair values of the Henry Hub cash bonus payment provision were $23.0 million and $24.5 million, respectively, which were recorded in other current assets on the Company's consolidated balance sheets. During the three and six months ended June 30, 2024, the Company recognized a gain of $3.2 million and a loss of $1.5 million, respectively, and during the three and six months ended June 30, 2023 the Company recognized gains of $19.4 million and $10.9 million, respectively, representing the change in estimated fair value of the derivative instrument during the respective periods and are recorded in other income (expense), net on the Company's statements of consolidated comprehensive income.
Other Financial Instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturity of the instruments. The carrying values of borrowings under the Amended EQM Credit Facility and the 2021 Eureka Credit Facility approximate fair value as the interest rates are based on prevailing market rates. As EQM's borrowings under its senior notes are not actively traded, their fair values are estimated using an income approach model that applies a discount rate based on prevailing market rates for debt with similar remaining time-to-maturity and credit risk; as such, their fair values are Level 2 fair value measurements. As of June 30, 2024 and December 31, 2023, the estimated fair values of EQM's senior notes were approximately $6,916.8 million and $6,334.3 million, respectively, and the carrying values of EQM's senior notes were approximately $6,943.2 million and $6,346.4 million, respectively. The fair value of the preferred interest that the Company has in EQT Energy Supply, LLC (EES), a subsidiary of EQT (the Preferred Interest) is a Level 3 fair value measurement and is estimated using an income approach model that applies a market-based discount rate. As of June 30, 2024, and December 31, 2023, the estimated fair values of the Preferred Interest were approximately $86.3 million and $90.7 million, respectively, and the carrying values of the Preferred Interest were approximately $85.4 million and $88.5 million, respectively.
9. Earnings Per Share
The Company excluded 30,059 and 30,111 (in thousands) of weighted average anti-dilutive securities related to the Equitrans Midstream Preferred Shares and stock-based compensation awards from the computation of diluted weighted average common shares outstanding for the three and six months ended June 30, 2024. The Company excluded 31,125 and 32,506 (in thousands) of weighted average anti-dilutive securities related to the Equitrans Midstream Preferred Shares and stock-based compensation awards from the computation of diluted weighted average common shares outstanding for the three and six months ended June 30, 2023.
The Company grants Equitrans Midstream phantom units to non-employee directors that will be paid in Equitrans Midstream common stock upon the director's termination of service from the Company's Board of Directors. As there are no remaining service, performance or market conditions related to these awards, 901 and 871 (in thousands) Equitrans Midstream phantom units were included in the computation of basic and diluted weighted average common shares outstanding for the three and six months ended June 30, 2024, respectively and 745 and 674 (in thousands) Equitrans Midstream phantom units were included in the computation of basic and diluted weighted average common shares outstanding for the three and six months ended June 30, 2023, respectively.
10. Income Taxes
The Company's effective tax rate was 9.0% for the three months ended June 30, 2024 compared to 0.7% for the three months ended June 30, 2023. The Company's effective tax rate was 12.6% for the six months ended June 30, 2024 compared to (1.9)% for the six months ended June 30, 2023. The Company calculates the provision for income taxes for interim periods by applying an estimate of the annual effective tax rate for the full fiscal year to "ordinary" income or loss (income (loss) before income taxes excluding unusual or infrequently occurring items) for the periods. The effective tax rate was higher for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 primarily due to the impact of changes in the valuation allowance that limit tax benefits for the Company's federal and state deferred tax assets and the impact of projected AFUDC - equity from the MVP project. The effective tax rate for the three and six months ended June 30, 2024 and for the three and six months ended June 30, 2023 was lower than the statutory rate primarily due to the impact of changes in valuation allowances that limit tax benefits for the Company’s federal and state deferred tax assets and the impact of projected AFUDC – equity from the MVP project.
For the six months ended June 30, 2024, the Company believes that it is more likely than not that a portion of the benefit from the deferred tax assets related to interest disallowance carryforward under Internal Revenue Code Section 163(j) will not be realized and accordingly, the Company maintains a valuation allowance. For the six months ended June 30, 2024, the Company recorded approximately $20.2 million in income tax benefit related to changes in valuation allowances because of increases in federal and state deferred tax liabilities that are expected to be realized against net operating losses and a portion of the interest disallowance carryforward. As of June 30, 2024 and December 31, 2023, the valuation allowances related to federal and state deferred tax assets were approximately $36.6 million and $56.8 million, respectively.
EQUITRANS MIDSTREAM CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations in conjunction with the consolidated financial statements, and the notes thereto, included elsewhere in this report.
Cautionary Statements
Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (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 “aim,” “anticipate,” “approximate,” “aspire,” “assume,” “believe,” “budget,” “cause,” “continue,” “could,” “depend,” “develop,” “design,” “estimate,” “expect,” “focused,” “forecast,” “goal,” “guidance,” “impact,” “implement,” “increase,” “intend,” “lead,” “maintain,” “may,” “might,” “objective,” “opportunity,” “outlook,” “plan,” “position,” “possible,” “potential,” “predict,” “project,” “pursue,” “reduce,” “remain,” “result,” “scheduled,” “seek,” “should,” “strategy,” “strive,” “target,” “view,” “will,” or “would” and other similar words. The absence of such words or expressions does not necessarily mean the statements are not forward-looking. Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the expectations of plans, strategies, objectives, and growth and anticipated financial and operational performance of Equitrans Midstream Corporation (together with its subsidiaries, Equitrans Midstream or the Company), including the following and/or statements with respect thereto, as applicable:
•statements regarding the proposed EQT Transaction, including the ability to consummate the Mergers in the expected time frame;
•anticipated or perceived benefits of the proposed EQT Transaction;
•the timing for, and ability to effect, the redemption of the Equitrans Midstream Preferred Shares (as defined herein), if any;
•the continuance of the FERC authorization in respect of the MVP as of the closing date of the First Merger without material limitations, modifications, or conditions,
•guidance and any changes in such guidance in respect of the Company’s gathering, transmission and storage and water services revenue and volume, including the anticipated effects associated with the EQT Global GGA;
•projected and assumed revenue (including from firm reservation fees) and volumes, gathering rates, deferred revenues, expenses and contract liabilities, and the effects on liquidity, leverage, projected revenue, deferred revenue and contract liabilities associated with the EQT Global GGA and the MVP project;
•the weighted average contract life of gathering, transmission and storage contracts;
•the ultimate total cost to be incurred for the development of the MVP, inclusive of completing restoration efforts;
•the realizability of the perceived benefits of the MVP project;
•view as to having finalized the scope of the MVP Southgate and the ability to permit, construct, complete and place in service the MVP Southgate;
•the targeted total project cost and timing for completing (and ability to complete) MVP Southgate, including the satisfaction, if any, of conditions precedent with respect to the relevant precedent agreements, timing for forecasted capital expenditures related thereto, and the realizability of the perceived benefits of the amended project, design, scope and provisions included in the relevant precedent agreements, and any potential extensions of the terms of the precedent agreements;
•the MVP Joint Venture's ability to execute any additional agreements for firm capacity for the MVP Southgate;
•the realizability of all or any portion of the Henry Hub cash bonus payment under the EQT Global GGA;
•the potential for future bipartisan support for, and the potential timing for, additional federal energy infrastructure permitting reform legislation to be enacted;
•the ultimate terms, partner relationships and structure of the MVP Joint Venture and ownership interests therein;
• the potential for the MVP, EQM's leverage, the EQT Transaction, customer credit ratings changes, defaults, acquisitions, dispositions and financings to impact EQM's credit ratings and the potential scope of any such impacts;
• the effect and outcome of contractual disputes, litigation and other proceedings, including regulatory investigations and proceedings;
• the potential effects of any consolidation of or effected by upstream gas producers, including acquisitions of midstream assets, whether in or outside of the Appalachian Basin;
• the effects of conversion, if at all, of the Equitrans Midstream Preferred Shares;
• the effects of seasonality;
• expected cash flows, cash flow profile (and support therefor from certain contract structures) and MVCs, including those associated with the EQT Global GGA, and the potential impacts thereon of total cost of the MVP project;
• the Company's ability to recoup replacement and related costs;
• statements regarding macroeconomic factors' effects on the Company's business, including future commodity prices, the impact of MVP in-service on commodity prices or natural gas volumes in the Appalachian Basin, and takeaway capacity constraints in the Appalachian Basin;
• beliefs regarding future decisions of customers in respect of production growth, curtailing natural gas production, timing of turning wells in line, rig and completion activity and related impacts on the Company's business, and the effect, if any, on such future decisions of MVP in-service, as well as the potential for increased volumes to flow to the Company's gathering and transmission system to supply the MVP following in-service;
• the Company's liquidity and financing position and requirements, including sources, availability and sufficiency;
• statements regarding future interest rates and/or reference rates and the potential impacts thereof;
• the ability of the Company's subsidiaries (some of which are not wholly owned) to service debt under, and comply with the covenants contained in, their respective credit agreements;
• the MVP Joint Venture's ability to raise project-level debt and timing thereof, and the anticipated proceeds that the Company expects to receive therefrom;
• the ability of the MVP Joint Venture to attain sufficient emission reduction credits pursuant to commercial arrangements to realize its objectives at the time it entered into such arrangements and any potential pursuit, other than through such commercial arrangements, or execution of emission mitigation in respect of the MVP;
• expectations regarding natural gas and water volumes in the Company's areas of operations;
• the Company's ability to achieve anticipated benefits associated with the execution of commercial agreements;
• the Company's ability to position itself for a lower carbon economy, achieve, and create value from, its environmental, social and governance (ESG) and sustainability initiatives, targets and aspirations (including targets and aspirations set forth in its climate policy) and respond, and impacts of responding, to increasing stakeholder scrutiny in these areas;
• the effectiveness of the Company's information technology and operational technology systems and practices to detect and defend against evolving cyberattacks on United States critical infrastructure;
• the effects and associated cost of compliance with existing or new government regulations including any quantification of potential impacts of regulatory matters related to climate change on the Company; and
• future tax rates, 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. The Company has based these forward-looking statements on management's current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory, judicial,
construction and other risks and uncertainties, many of which are difficult to predict and are beyond the Company's control, including, as it pertains to the EQT Global GGA and certain assumed MVC step ups and gathering fee rates thereunder, the risk that an amendment to the EQT Global GGA required to implement such step ups and rates will not be executed in the form negotiated with EQT and, as it pertains to the MVP project and its total cost and ongoing operation and ability to mitigate emissions, risks and uncertainties such as, as applicable, the physical restoration scope and conditions, including steep slopes, weather which could affect restoration and operation, including the amount and severity of pipeline slips, testing, continued crew availability during restoration efforts, ability to enter into unit-based contractor arrangements and certain environmental mitigation agreements and meet workforce draw down plans, productivity ultimately realized, contractor and subcontractor costs and timing of related invoices received or revised, including for completed work, assumptions related to, and the realizability of, bids provided and/or claims which could be made by or against contractors, including relating to materials or subcontractors, project opposition, the maintenance of any necessary authorizations and permits, the availability of upstream and downstream infrastructure relative to MVP, and the performance of a contractual counterparty in generating certain emission reduction credits to be purchased by the MVP Joint Venture and factors, such as that performance, which may affect future determinations of the MVP Joint Venture as to the potential pursuit of any other emission mitigation. The risks and uncertainties that may affect the operations, performance and results of the Company's business and forward-looking statements include, but are not limited to, those set forth under Part I, "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, as updated by subsequent Quarterly Reports on Form 10-Q, including this Quarterly Report on Form 10-Q, as applicable.
Any forward-looking statement speaks only as of the date on which such statement is made and the Company does not intend to correct or update any forward-looking statement, unless required by securities law, whether as a result of new information, future events or otherwise. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements. All such statements are expressly qualified by this cautionary statement.
Executive Overview
Net income attributable to Equitrans Midstream common shareholders was $49.9 million, $0.11 per diluted share, for the three months ended June 30, 2024 compared to $52.6 million, $0.12 per diluted share, for the three months ended June 30, 2023. The decrease resulted primarily from higher net interest expense, lower other income and higher income tax expense, partially offset by higher operating revenues.
Net income attributable to Equitrans Midstream common shareholders was $144.2 million, $0.33 per diluted share, for the six months ended June 30, 2024 compared to $139.7 million, $0.32 per diluted share, for the six months ended June 30, 2023. The increase resulted primarily from higher equity income and higher operating revenues, partially offset by higher net interest expense, higher income tax expense, lower other income and higher operating expenses.
Proposed Acquisition by EQT Corporation. On March 10, 2024, we entered into a definitive agreement to be acquired by EQT. The EQT Transaction is expected to close on July 22, 2024 taking into account, as of the filing of this Quarterly Report on Form 10-Q, the satisfaction in accordance with the terms and conditions of the Merger Agreement of various conditions to closing under the Merger Agreement, including, among others: (i) approval of the Merger Agreement and the Mergers by a majority of the votes cast by holders of Equitrans Midstream common stock and Equitrans Midstream Preferred Shares, with such Equitrans Midstream Preferred Shares treated as Equitrans Midstream common stock on an as-converted basis, voting together as a single class, (ii) approval of the issuance of EQT Shares in connection with the Mergers by a majority of votes cast at a special meeting of holders of EQT Shares, (iii) expiration or termination of (a) all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act) and (b) any commitment to, or agreement with, any governmental entity to delay the consummation of, or not to consummate the transactions contemplated by the Merger Agreement, and (iv) the MVP Joint Venture receiving authorization of the FERC to place the MVP in-service. The Company recorded approximately $2.0 million and $7.7 million in expenses related to the EQT Transaction during the three and six months ended June 30, 2024, respectively, primarily related to advisor, legal and other transaction-related fees.
On June 25, 2024, Parent delivered to the Company a written election exercising Parent’s right under the Merger Agreement to cause the Company to purchase and redeem, prior to the Effective Time, all issued and outstanding Equitrans Midstream Preferred Shares in accordance the Company’s Second Amended and Restated Articles of Incorporation. The Company has no obligation to purchase and redeem the Equitrans Midstream Preferred Shares in accordance with the Merger Agreement unless Parent has deposited with the paying agent for such redemption sufficient funds to effect such purchase and redemption, and the deposit of such funds and any instructions and authority to pay such funds to holders of the Equitrans Midstream Preferred Shares in the redemption has occurred at least one hour prior to the consummation of the proposed EQT Transaction. In the event the EQT Transaction will not be consummated, the redemption will not be effected. Subject to the foregoing, the Company expects the purchase and redemption to occur on July 22, 2024 prior to the consummation of the EQT Transaction (or such later date as may be contemplated by virtue of the timing of the consummation of the EQT Transaction).
Mountain Valley Pipeline and Related Long-Term Firm Capacity. After receiving FERC authorization on June 11, 2024, MVP entered service on June 14, 2024 and became available for interruptible or short-term firm transportation service. MVP and MVP-related long-term firm capacity obligations commenced on July 1, 2024.
The MVP Joint Venture has continued to undertake certain restoration efforts in respect of the MVP since the in-service date. However, project costs were adversely affected by certain factors, including primarily unexpectedly high bids received from contractors for certain restoration work, overall restoration productivity relative to expectations, and unexpected subcontractor costs invoiced for now-completed boring work. Given these costs, the overall declining scope of work as restoration efforts continue, and the Company’s views of other relevant factors, the Company is targeting a total project cost of approximately $7.9 billion (excluding AFUDC). While such targeted total project cost incorporates certain forecasted factors such as potential changes in restoration scope, it does not reflect general contingency for factors which also could affect the total project cost realized, such as weather, unexpected contractor costs and other factors outlined in the "Cautionary Statements" section of this Quarterly Report on Form 10-Q.
The MVP Joint Venture has secured a total of 2.0 Bcf per day of firm capacity commitments at 20-year terms. Additional shippers have expressed interest in the MVP project and 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. Through June 30, 2024, the Company had funded approximately $4.0 billion to the MVP Joint Venture for the MVP project. Based on the total project cost estimate of approximately $7.9 billion (excluding AFUDC), the Company’s equity ownership in the MVP project is expected to progressively increase from approximately 49.0% to approximately 49.2%.
Additionally, EQT's long-term firm capacity commitments for the Hammerhead pipeline commenced on July 1, 2024. Interruptible volumes from the Company's Hammerhead Gathering agreement with EQT continued up to the full commercial
in-service date of the Hammerhead pipeline of July 1, 2024, when EQT's firm commitments commenced. The 20-year term firm transportation agreements for 550 MMcf per day of capacity on the EEP project commenced on July 1, 2024.
Pursuant to the EQT Global GGA and given MVP full in-service occurred in 2024, MVC step ups and gathering fee rates are to be set forth in an amendment to the EQT Global GGA. The step ups and rates would become effective as of July 1, 2024 in accordance with the terms of the EQT Global GGA. The amendment, which reflects the step ups and rates assumed by the Company for purposes of the EQT Global GGA, has been negotiated, but not yet executed, with EQT as of the filing of this Quarterly Report on Form 10-Q.
Forward Looking Statements. Any discussion included in this management discussion and analysis regarding the Company’s expectations, and any other expectations, such as relating to the MVP, refers to the expectations of the Company and its management at the time of filing this Quarterly Report on Form 10-Q with respect to the Company as a stand-alone company. Following the expected closing of the EQT Transaction on July 22, 2024, these expectations may no longer reflect the plans or expectations of the Company (or its successor) as a wholly owned subsidiary of EQT.
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. Headquarters costs consist primarily of transaction costs and other certain unallocated corporate expenses, as applicable. Net interest expense, loss on extinguishment of debt, components of other income (expense), net and income tax expense (benefit) are managed on a consolidated basis. The Company has presented each segment's operating income, other income (expense), net, equity income and various operational measures, as applicable, 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 and uncertainties of its segments. The Company has reconciled each segment's operating income to the Company's consolidated operating income and net income in Note 3.
Gathering Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | %
Change | | 2024 | | 2023 | | %
Change |
| (Thousands, except per day amounts) |
| FINANCIAL DATA | | | | | | | |
Firm reservation fee revenues (a) | $ | 147,498 | | | $ | 141,737 | | | 4.1 | | | $ | 283,174 | | | $ | 281,808 | | | 0.5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Volumetric-based fee revenues (b) | 82,508 | | | 68,457 | | | 20.5 | | | 171,472 | | | 139,138 | | | 23.2 | |
| Total operating revenues | 230,006 | | | 210,194 | | | 9.4 | | | 454,646 | | | 420,946 | | | 8.0 | |
| Operating expenses: | | | | | | | | | | | |
| Operating and maintenance | 25,500 | | | 25,136 | | | 1.4 | | | 50,260 | | | 46,532 | | | 8.0 | |
| Selling, general and administrative | 26,762 | | | 38,446 | | | (30.4) | | | 55,226 | | | 57,954 | | | (4.7) | |
| | | | | | | | | | | |
| Depreciation | 50,850 | | | 49,387 | | | 3.0 | | | 101,002 | | | 98,736 | | | 2.3 | |
| Amortization of intangible assets | 16,205 | | | 16,205 | | | — | | | 32,410 | | | 32,410 | | | — | |
| | | | | | | | | | | |
| Total operating expenses | 119,317 | | | 129,174 | | | (7.6) | | | 238,898 | | | 235,632 | | | 1.4 | |
| Operating income | $ | 110,689 | | | $ | 81,020 | | | 36.6 | | | $ | 215,748 | | | $ | 185,314 | | | 16.4 | |
| | | | | | | | | | | |
Other income (expense), net (c) | $ | 3,203 | | | $ | 19,416 | | | (83.5) | | | $ | (1,469) | | | $ | 10,922 | | | (113.4) | |
| | | | | | | | | | | |
| OPERATIONAL DATA | | | | | | | | | | | |
| Gathered volumes (BBtu per day) | | | | | | | | | | | |
Firm capacity (d) | 4,681 | | | 5,273 | | | (11.2) | | | 4,729 | | | 5,283 | | | (10.5) | |
| Volumetric-based services | 2,387 | | | 2,147 | | | 11.2 | | | 2,495 | | | 2,118 | | | 17.8 | |
| Total gathered volumes | 7,068 | | | 7,420 | | | (4.7) | | | 7,224 | | | 7,401 | | | (2.4) | |
| | | | | | | | | | | |
Capital expenditures (e) | $ | 65,996 | | | $ | 71,893 | | | (8.2) | | | $ | 120,252 | | | $ | 131,606 | | | (8.6) | |
(a)For the three and six months ended June 30, 2024, firm reservation fee revenues included approximately $3.2 million and $9.1 million, respectively, of MVC unbilled revenues. For the three and six months ended June 30, 2023, firm reservation fee revenues included approximately $2.4 million and $5.7 million, respectively, of MVC unbilled revenues.
(b)For the six months ended June 30, 2023, volumetric-based fee revenues included a one-time contract buyout by a customer for approximately $5.0 million.
(c)Other income (expense), net includes the unrealized gains (losses) on derivative instruments associated with the Henry Hub cash bonus payment provision. See Note 8 for further information on the Henry Hub cash bonus payment provision.
(d)Includes volumes up to the contractual MVC under agreements structured with MVCs. Volumes in excess of the contractual MVC are reported under volumetric-based services.
(e)Includes approximately $5.0 million and $10.0 million of capital expenditures related to the noncontrolling interest in Eureka Midstream for the three and six months ended June 30, 2024, respectively, and includes approximately $5.0 million and $8.2 million of capital expenditures related to the noncontrolling interest in Eureka Midstream for the three and six months ended June 30, 2023, respectively.
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Gathering operating revenues increased by $19.8 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Volumetric-based fee revenues increased by $14.0 million primarily due to higher gathered volumes that previously were subject to MVC revenues. Firm reservation fee revenues increased by $5.8 million primarily due to new customer agreements and higher effective rates, partly offset by the aforementioned change in volumetric-based fee revenues caused by the expiration of MVCs under a certain customer contract.
Gathering operating expenses decreased by $9.9 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Selling, general and administrative expenses decreased by $11.7 million primarily due to personnel costs associated with the MVP PSU Program, including a cumulative catch-up, during the three months ended June 30, 2023, partially offset by an increased reserve for bad debt expense. Depreciation expense increased by $1.5 million as a result of additional assets placed in-service.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Gathering operating revenues increased by $33.7 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Volumetric-based fee revenues increased by $32.3 million primarily due to higher gathered volumes that previously were subject to MVC revenues and gathered volumes on Hammerhead of approximately $11.1 million. Firm reservation fee revenues increased by $1.4 million primarily due to new customer agreements and higher effective rates, partially offset by the aforementioned change in volumetric-based fee revenues caused by the expiration of MVCs under a certain customer contract.
Gathering operating expenses increased by $3.3 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Operating and maintenance expenses increased by $3.7 million primarily due to higher repairs and maintenance costs and higher personnel costs. Depreciation expense increased $2.3 million as a result of additional assets placed in-service. Selling, general and administrative expenses decreased by $2.7 million primarily due to personnel costs associated with the MVP PSU Program, including a cumulative catch-up, during the six months ended June 30, 2023, partially offset by higher legal fees, higher professional fees and an increased reserve for bad debt expense.
See "EQT Global GGA" in Part I, “Item 1. Business” in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 for discussion of the EQT Global GGA, and the transactions related thereto, including periodic gathering MVC fee step downs. Firm reservation fee revenues under the Company’s Hammerhead gathering agreement with EQT are expected to contribute to an increase in the Company’s firm reservation fee revenues following achievement of the Hammerhead pipeline full commercial in-service which was achieved in conjunction with full MVP in-service. However, the percentage of the Company's operating revenues that are generated by firm reservation fees may vary year to year depending on various factors, including customer volumes and the rates realizable under the Company’s contracts, including the EQT Global GGA. See also "Cautionary Statements," and "Commodity Price Risk" in Part I, "Item 3. Quantitative and Qualitative Disclosures About Market Risk" of this Quarterly Report on Form 10-Q for additional information on factors that could affect the Company's operating revenues, including the Company's perceived risk that producers could curtail production further in 2024.
Transmission Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2024 | | 2023 | | %
Change | | 2024 | | 2023 | | %
Change |
| (Thousands, except per day amounts) |
| FINANCIAL DATA | | | | | | | |
| Firm reservation fee revenues | $ | 86,688 | | | $ | 82,247 | | | 5.4 | | | $ | 187,011 | | | $ | 183,969 | | | 1.7 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Volumetric-based fee revenues (a) | 17,896 | | | 10,293 | | | 73.9 | | | 34,467 | | | 47,477 | | | (27.4) | |
| Total operating revenues | 104,584 | | | 92,540 | | | 13.0 | | | 221,478 | | | 231,446 | | | (4.3) | |
| Operating expenses: | | | | | | | | | | | |
| Operating and maintenance | 13,411 | | | 14,356 | | | (6.6) | | | 25,164 | | | 28,746 | | | (12.5) | |
| Selling, general and administrative | 16,536 | | | 15,829 | | | 4.5 | | | 30,212 | | | 27,535 | | | 9.7 | |
| Depreciation | 15,123 | | | 13,904 | | | 8.8 | | | 29,506 | | | 27,792 | | | 6.2 | |
| Total operating expenses | 45,070 | | | 44,089 | | | 2.2 | | | 84,882 | | | 84,073 | | | 1.0 | |
| Operating income | $ | 59,514 | | | $ | 48,451 | | | 22.8 | | | $ | 136,596 | | | $ | 147,373 | | | (7.3) | |
| | | | | | | | | | | |
| Equity income | $ | 18,814 | | | $ | 23,686 | | | (20.6) | | | $ | 91,819 | | | $ | 23,808 | | | 285.7 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| OPERATIONAL DATA | | | | | | | | | | | |
| Transmission pipeline throughput (BBtu per day) | | | | | | | | | | | |
Firm capacity (b) | 3,325 | | | 3,212 | | | 3.5 | | | 3,347 | | | 3,278 | | | 2.1 | |
| Interruptible capacity | 53 | | | 26 | | | 103.8 | | | 51 | | | 15 | | | 240.0 | |
| Total transmission pipeline throughput | 3,378 | | | 3,238 | | | 4.3 | | | 3,398 | | | 3,293 | | | 3.2 | |
| | | | | | | | | | | |
| Average contracted firm transmission reservation commitments (BBtu per day) | 3,839 | | | 3,542 | | | 8.4 | | | 3,998 | | | 3,890 | | | 2.8 | |
| | | | | | | | | | | |
Capital expenditures (c) | $ | 16,431 | | | $ | 14,375 | | | 14.3 | | | $ | 34,135 | | | $ | 23,564 | | | 44.9 | |
(a)For the six months ended June 30, 2023, volumetric-based fee revenues included a one-time contract buyout by a customer for approximately $23.8 million.
(b)Firm capacity includes volumes associated with firm capacity contracts including volumes in excess of firm capacity.
(c)Transmission capital expenditures do not include aggregate capital contributions made to the MVP Joint Venture of approximately $135.4 million and $558.3 million for the three and six months ended June 30, 2024, respectively, and approximately $36.0 million and $70.5 million for the three and six months ended June 30, 2023, respectively.
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Transmission operating revenues increased by $12.0 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Firm reservation fee revenues increased $4.4 million primarily due to new capacity contracts associated with the OVC expansion project that was placed in-service during the second quarter of 2024. Volumetric-based fee revenues increased $7.6 million primarily as a result of higher effective rates and increased throughput volumes.
Operating expenses increased by $1.0 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Depreciation expense increased $1.2 million as a result of additional assets placed in-service. Selling, general and administrative expense increased $0.7 million primarily due to an increased reserve for bad debt expense and higher professional fees, partially offset by personnel costs associated with the MVP PSU Program, including a cumulative catch-up, during the three months ended June 30, 2023. Operating and maintenance expense decreased $0.9 million due to expenses associated with the Rager Mountain natural gas storage field incident incurred in the second quarter of 2023 and lower personnel costs, partially offset by higher repairs and maintenance expense.
Equity income decreased by $4.9 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to the decrease in the MVP Joint Venture's AFUDC on the MVP project resulting from the achievement of MVP full in-service in June 2024.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Transmission operating revenues decreased by $10.0 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Firm reservation fee revenues increased $3.0 million primarily due to new capacity contracts associated with the OVC expansion project that was placed in-service during the second quarter of 2024. Volumetric-based fee revenues decreased $13.0 million primarily as a result of a one-time contract buyout by a customer of approximately $23.8 million incurred during the six months ended June 30, 2023, partially offset by higher effective rates and increased throughput volumes.
Operating expenses increased by $0.8 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Operating and maintenance expense decreased $3.6 million primarily due to expenses associated with the Rager Mountain natural gas storage field incident incurred during the six months ended June 30, 2023, partially offset by higher repairs and maintenance costs. Selling, general and administrative expenses increased by $2.7 million primarily due to higher legal fees and an increased reserve for bad debt expense, partially offset by personnel costs associated with the MVP PSU Program, including a cumulative catch-up, during the six months ended June 30, 2023.
Equity income increased $68.0 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, respectively, due to the increase in the MVP Joint Venture's AFUDC on the MVP project resulting from the growth construction activities in 2024 prior to the achievement of MVP full in-service. Given achievement of MVP full in-service in June 2024, the Company's equity income will be primarily derived from 20-year firm reservation contracts for the MVP project.
Water Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | %
Change | | 2024 | | 2023 | | %
Change |
| (Thousands, except MMgal amounts) |
| FINANCIAL DATA | | | | | | | |
| Firm reservation fee revenues | $ | 12,110 | | | $ | 9,389 | | | 29.0 | | | $ | 21,485 | | | $ | 18,764 | | | 14.5 | |
| Volumetric-based fee revenues | 14,895 | | | 6,346 | | | 134.7 | | | 28,260 | | | 23,650 | | | 19.5 | |
| Total operating revenues | 27,005 | | | 15,735 | | | 71.6 | | | 49,745 | | | 42,414 | | | 17.3 | |
| Operating expenses: | | | | | | | | | | | |
| Operating and maintenance | 9,059 | | | 6,254 | | | 44.9 | | | 17,752 | | | 13,299 | | | 33.5 | |
| Selling, general and administrative | 2,149 | | | 2,440 | | | (11.9) | | | 4,174 | | | 3,838 | | | 8.8 | |
| Depreciation | 7,111 | | | 6,511 | | | 9.2 | | | 14,145 | | | 12,374 | | | 14.3 | |
| | | | | | | | | | | |
| Total operating expenses | 18,319 | | | 15,205 | | | 20.5 | | | 36,071 | | | 29,511 | | | 22.2 | |
| Operating income | $ | 8,686 | | | $ | 530 | | | 1538.9 | | | $ | 13,674 | | | $ | 12,903 | | | 6.0 | |
| | | | | | | | | | | |
| OPERATIONAL DATA | | | | | | | | | | | |
| Water services volumes (MMgal) | | | | | | | | | | | |
Firm capacity (a) | 131 | | | 114 | | | 14.9 | | | 258 | | | 222 | | | 16.2 | |
| Volumetric-based services | 274 | | | 168 | | | 63.1 | | | 556 | | | 519 | | | 7.1 | |
| Total water volumes | 405 | | | 282 | | | 43.6 | | | 814 | | | 741 | | | 9.9 | |
| | | | | | | | | | | |
| Capital expenditures | $ | 4,987 | | | $ | 11,148 | | | (55.3) | | | $ | 15,034 | | | $ | 22,224 | | | (32.4) | |
(a) Includes volumes up to the contractual MVC under agreements structured with MVCs or ARCs, as applicable. Volumes in excess of the contractual MVC are reported under volumetric-based services.
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Water operating revenues increased by $11.3 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily as a result of increased volumetric-based fee revenues from higher volumes and higher firm reservation fee revenues due to a new MVC contract.
Water operating expenses increased by $3.1 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Operating and maintenance expense increased $2.8 million due to higher purchased water costs as a result of increased activity and mixed-use water storage expenses related to a storage facility placed in-service during 2023.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Water operating revenues increased by $7.3 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 as a result of increased volumetric-based fee revenues primarily from higher volumes and higher firm reservation fee revenues due to a new MVC contract.
Water operating expenses increased by $6.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Operating and maintenance expense increased $4.5 million due to higher mixed-use water storage expenses related to a storage facility placed in-service during 2023 and higher purchased water costs as a result of increased activity. Depreciation expense increased $1.8 million due to additional assets placed in-service.
The Company’s volumetric-based water services are directly associated with producers’ well completion activities and fresh and produced water needs (which are primarily driven by horizontal lateral lengths and the number of completion stages per well). Therefore, the Water volumetric operating results traditionally fluctuate from year-to-year in response to producers’ well completion activities.
Other Income Statement Items
Other Income (Expense), Net
Other income (expense), net decreased by $16.2 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The decrease was primarily attributable to a $3.2 million unrealized gain on derivative instruments during the three months ended June 30, 2024, as compared to a $19.4 million unrealized gain on derivative instruments during the three months ended June 30, 2023, primarily due to probability-weighted assumptions regarding MVP project completion (prior to in-service) associated with the Henry Hub cash bonus payment provision and changes in NYMEX Henry Hub natural gas futures prices.
Other income (expense), net decreased by $12.1 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease was primarily due to a $1.5 million unrealized loss on derivative instruments during the six months ended June 30, 2024, as compared to a $10.9 million unrealized gain on derivative instruments during the six months ended June 30, 2023, primarily attributable to probability-weighted assumptions regarding MVP project completion (prior to in-service) associated with the Henry Hub cash bonus payment provision and changes in NYMEX Henry Hub natural gas futures prices.
See also Note 8 for a discussion of factors affecting the estimated fair value of the derivative asset attributable to the Henry Hub cash bonus payment provision that is recognized in other income (expense), net on the Company's statements of consolidated comprehensive income.
Net Interest Expense
Net interest expense increased by $16.5 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to increased borrowings and interest rates under the revolving credit facilities and interest on the 2024 Senior Notes issued in February 2024, partially offset by the redemption of the 2023 Notes effected in June 2023.
Net interest expense increased by $30.4 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily due to increased borrowings and interest rates under the revolving credit facilities and interest on the 2024 Senior Notes issued in February 2024, partially offset by the redemption of the 2023 Notes effected in June 2023.
See Note 7 for a discussion of certain of the Company's outstanding debt.
Income Tax Expense (Benefit)
See Note 10 for an explanation of the changes in income tax expense for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest decreased by $0.4 million and $1.9 million for the three and six months ended June 30, 2024, respectively, compared to the three and six months ended June 30, 2023, primarily as a result of lower net income on Eureka Midstream.
Capital Expenditures
See "Investing Activities" and "Capital Requirements" under "Capital Resources and Liquidity" for a discussion of capital expenditures and capital contributions.
Capital Resources and Liquidity
The Company's liquidity requirements are to finance its operations, its capital expenditures, strategic transactions and capital contributions to joint ventures, including the MVP Joint Venture, to pay distributions, when declared and to satisfy any indebtedness obligations. Additionally, the Company or its affiliates may, at any time and from time to time, seek to retire or purchase outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as the Company may determine, and will depend on prevailing market conditions, the Company's other liquidity requirements, contractual restrictions and other factors and the amounts involved may be material. The Company's ability to meet these liquidity requirements depends on the Company's cash flow from operations, the continued ability of the Company to borrow under its subsidiaries' credit facilities and the ability to raise capital in banking and capital markets. We believe that our cash on hand, future cash generated from operations and future cash received from potential distributions from the MVP Joint Venture, including as a result of potential financing at the MVP Joint Venture, together with available borrowing capacity under our subsidiaries' credit facilities and our access to banking and capital markets, will provide adequate resources to fund our short-term and long-term capital, operating and financing needs. However, cash flow, available borrowing capacity and capital raising activities may be affected by prevailing economic conditions in the natural gas industry and other financial and business factors, including factors discussed in Part I, “Item 1A. Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (for example, see “If we, our subsidiaries or our joint ventures are unable to obtain needed capital or financing on satisfactory terms, our ability to execute our business strategy and pay dividends to our shareholders may be diminished. Additionally, financing transactions may increase our financial leverage or could cause dilution to our shareholders.”) and factors discussed in Part II, “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q, some of which are beyond the Company's control. The Company's available sources of liquidity include cash from operations, cash on hand, borrowings under its subsidiaries' revolving credit facilities and issuances of additional debt. Taking into account the maximum Consolidated Leverage Ratio applicable under the Amended EQM Credit Facility that, as of June 30, 2024, could not exceed 6.25 to 1.00, EQM had the ability to borrow approximately $0.5 billion under the Amended EQM Credit Facility as of June 30, 2024. See Note 7 to the consolidated financial statements for further information regarding the Amended EQM Credit Facility. See also "Our subsidiaries’ significant indebtedness, and any future indebtedness, as well as the restrictions under our subsidiaries’ debt agreements, could adversely affect our operating flexibility, business, financial condition, results of operations, liquidity and ability to pay dividends to our shareholders." included in Part I, "Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
See “Security Ratings” below for a discussion of EQM’s credit ratings during 2024. Based on EQM's credit rating levels, EQM was obligated to deliver credit support to the MVP Joint Venture in the form of a letter of credit for the MVP project. On June 28, 2024, the $104.7 million letter of credit with respect to the MVP project was terminated, following MVP project in-service. See "A further downgrade of EQM’s credit ratings could impact our liquidity, access to capital, and costs of doing business." included in Part I, "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The following table is a summary of the cash flows by activity for the six months ended June 30, 2024 and 2023, respectively.
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2024 | | 2023 | | |
| (Thousands) |
| Cash flows | | | | | |
| Net cash provided by operating activities | $ | 436,562 | | | $ | 523,274 | | | |
| Net cash used in investing activities | (727,242) | | | (239,595) | | | |
| Net cash provided by (used in) financing activities | 173,682 | | | (244,505) | | | |
| Net decrease in cash and cash equivalents | $ | (116,998) | | | $ | 39,174 | | | |
Operating Activities
Net cash flows provided by operating activities decreased approximately $86.7 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The decrease was primarily due to higher interest and tax payments and the timing of other working capital payments and receipts.
Investing Activities
Net cash flows used in investing activities increased by approximately $487.6 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The increase was primarily due to higher capital contributions to the MVP Joint Venture. See “Capital Requirements” below for a discussion of forecasted 2024 capital contributions to the MVP Joint Venture.
Financing Activities
Net cash flows provided by (used in) financing activities increased by $418.2 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. For the six months ended June 30, 2024, the primary sources of financing cash flows were proceeds from the issuance of the 2024 Senior Notes and borrowings under the revolving credit facilities, while the primary uses of financing cash flows were repayments on borrowings under the revolving credit facilities, payments of dividends to shareholders and distributions paid to noncontrolling interest. For the six months ended June 30, 2023, the primary uses of financing cash flows were the payments of dividends to shareholders, repayments on borrowings under the revolving credit facilities, the redemption of the 2023 Notes and distributions paid to noncontrolling interest, while the primary source of financing cash flows were borrowings under the revolving credit facilities.
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.
During the six months ended June 30, 2024, the Company invested approximately $120.3 million in gathering projects (inclusive of capital expenditures related to the noncontrolling interest in Eureka Midstream) primarily for projects related to infrastructure expansion and optimization in core development areas in the Marcellus and Utica Shales in southwestern Pennsylvania, southeastern Ohio and northern West Virginia for EQT, Range Resources Corporation and other producers. During the six months ended June 30, 2024, the Company invested approximately $34.1 million in transmission projects primarily for the Company's Ohio Valley Connector expansion project and approximately $15.0 million in its water infrastructure primarily to continue to construct the initial mixed-use water system buildout.
Given the Company's targeted total MVP project cost of approximately $7.9 billion (excluding AFUDC) as discussed under “Executive Overview – Mountain Valley Pipeline and Related Long-Term Firm Capacity” above, the Company expects to make total capital contributions to the MVP Joint Venture in 2024 of approximately $750 million. Capital contributions payable to the MVP Joint Venture are accrued upon the issuance of a capital call by the MVP Joint Venture. The Company's short-term and long-term capital investments may vary significantly from period to period based on the available investment opportunities, the timing of projects, and maintenance needs. The Company expects to fund short-term and long-term capital expenditures and capital contributions primarily through cash on hand, future cash generated from operations and future cash received from potential distributions from the MVP Joint Venture, including as a result of potential financing at the MVP Joint Venture, together with available borrowing capacity under its subsidiaries' credit facilities and its access to banking and capital markets.
Credit Facility Borrowings
See Note 7 for a discussion of the Amended EQM Credit Facility and the 2021 Eureka Credit Facility.
Security Ratings
The table below sets forth the credit ratings for EQM's debt instruments at June 30, 2024. | | | | | | | | | | | | | | | | | | | |
| | | EQM Senior Notes | | |
| Rating Service | | | | | Rating | | Outlook | | | | |
Moody's | | | | | Ba3 | | N/A | | | | |
S&P | | | | | BB- | | N/A | | | | |
Fitch | | | | | BB | | N/A | | | | |
In light of the proposed EQT Transaction, on March 11, 2024, Moody's placed EQM's credit rating on Review for Upgrade and on March 12, 2024, S&P placed EQM’s credit rating on Credit Watch Developing, which, on June 12, 2024, was revised to Watch Positive given anticipated MVP in-service and the pending EQT Transaction. On February 21, 2024, Fitch removed the Rating Watch Positive and assigned a Stable Outlook for EQM as a result of the then-proposed 2024 Senior Notes offering and subsequently, on March 13, 2024, in light of the proposed EQT Transaction, Fitch placed EQM's credit rating on Rating Watch Positive. EQM's credit ratings are subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. The Company cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a credit rating agency if, in its judgment, circumstances so warrant. If any credit rating agency downgrades or withdraws EQM's ratings, the Company's access to the capital markets could become more challenging, borrowing costs will likely increase, the Company may, depending on contractual provisions in effect at such time, be required to provide additional credit assurances (the amount of which may be substantial) and the potential pool of investors and funding sources may decrease. In order to be considered investment grade, a company must be rated Baa3 or higher by Moody's, BBB- or higher by S&P, or BBB- or higher by Fitch. All of EQM's credit ratings are considered non-investment grade.
Commitments and Contingencies
From time to time, various legal and regulatory claims and proceedings are pending or threatened against the Company and its subsidiaries. While the amounts claimed may be substantial, the Company is unable to predict with certainty the ultimate outcome of such claims and proceedings. The Company accrues legal and other direct costs related to loss contingencies when incurred. The Company establishes reserves whenever it believes it to be appropriate for pending matters. Furthermore, after consultation with counsel and considering the availability, if any, of insurance, the Company believes, although no assurance can be given, that the ultimate outcome of any matter currently pending against it or any of its consolidated subsidiaries as of the filing of this Quarterly Report on Form 10-Q will not materially adversely affect its business, financial condition, results of operations, liquidity or ability to pay dividends to its shareholders.
See Note 14 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion of the Company's commitments and contingencies.
Critical Accounting Estimates
The Company's critical accounting policies are described in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to the Company's consolidated financial statements in Part I, "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q. Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts in the Company's consolidated financial statements and accompanying notes. The Company's critical accounting policies are considered critical due to the significant judgments and estimates used in the preparation of the Company's consolidated financial statements and the material impact on the results of operations or financial condition. Actual results could differ from those judgments and estimates.