News Column

EQT MIDSTREAM PARTNERS, LP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 20, 2014

References in the following discussion and analysis to the "Partnership," when used for periods prior to the IPO, refer to Equitrans. References in the following discussion and analysis to the "Partnership," when used for periods beginning at or following the IPO, refer collectively to the Partnership and its consolidated subsidiaries. As discussed below, the Partnership's consolidated financial statements have been retrospectively recast for all periods presented to include the historical results of Sunrise, which was merged into the Partnership on July 22, 2013, as the transaction was a transfer between entities under common control. References in the following discussion and analysis to ''EQT'' refer collectively to EQT Corporation and its consolidated subsidiaries.

Executive Overview



On July 15, 2013, the Partnership and Equitrans entered into an Agreement and Plan of Merger with EQT and Sunrise, a wholly owned subsidiary of EQT and the owner of the Sunrise Pipeline. Effective July 22, 2013, Sunrise merged with and into Equitrans, with Equitrans continuing as the surviving company. Upon closing, the Partnership paid EQT consideration of $540 million, consisting of a $507.5 million cash payment, 479,184 Partnership common units and 267,942 Partnership general partner units. Prior to the Sunrise Merger, Equitrans entered into a precedent agreement with a third party for firm transportation service on the Sunrise Pipeline over a twenty-year term (the "Precedent Agreement"). Pursuant to the Agreement and Plan of Merger, the Partnership paid additional consideration of $110 million to EQT in January 2014 following the effectiveness of the transportation agreement contemplated by the Precedent Agreement.

Prior to the Sunrise Merger, the Partnership operated the Sunrise Pipeline as part of its transmission and storage system under a lease agreement with EQT. The lease was a capital lease under GAAP and, as a result, revenues and expenses associated with Sunrise were included in the Partnership 's financial statements. However, the monthly lease payment to EQT offset the impact of Sunrise operations on the Partnership's adjusted EBITDA and distributable cash flow. Effective as of the closing of the Sunrise Merger on July 22, 2013, the lease agreement was terminated. As the transaction was a transfer between entities under common control, the Partnership's historical consolidated financial statements have been retrospectively recast to reflect the results attributable to Sunrise for all periods presented.

On July 22, 2013, the Partnership completed an underwritten public offering of 12,650,000 common units. Net proceeds from the offering were used to finance the cash consideration paid to EQT in connection with the Sunrise Merger. Following the offering and Sunrise Merger, EQT retained a 44.6% equity interest in the Partnership, which includes 3,443,902 common units, 17,339,718 subordinated units and 975,686 general partner units. The Partnership received net proceeds of approximately $529 million from the offering after deducting the underwriters' discount and offering expenses of approximately $21 million.

On December 17, 2013, the Partnership entered into a capital lease with EQT for the AVC facilities. Under the lease, the Partnership operates the AVC facilities as part of its transmission and storage system under the rates, terms and conditions of its FERC-approved tariff. The AVC facilities are strategically located to connect Marcellus Shale supply and demand and include an approximately 200 mile pipeline that interconnects with the Partnership's transmission and storage system. The AVC facilities provide 450 BBtu per day of additional firm capacity to the Partnership's system and are supported by 4 associated natural gas storage reservoirs with approximately 260 MMcf per day of peak withdrawal capability and 15 Bcf of working gas capacity. Of the total 15 Bcf of working gas capacity, the Partnership leases and operates 13 Bcf of working gas capacity.

The Partnership reported net income of $109.8 million in 2013 compared with $63.1 million in 2012. The increase was primarily related to an increase in transmission and storage revenues of $53.1 million primarily due to increased firm transmission service and increased system throughput, which were driven by production development in the Marcellus Shale partly offset by a $9.9 million increase in operating expenses consistent with the overall growth of the transmission system.

In 2013, net income per limited partner unit was $2.47 and diluted net income per limited partner unit was $2.46. For the year ended December 31, 2013, adjusted EBITDA was $119.5 million and distributable cash flow was $101.4 million. The Partnership paid cash distributions of $1.55 per limited partner unit during the year ended December 31, 2013 and declared a cash distribution to unitholders of $0.46 on January 23, 2014. For a discussion of

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the non-GAAP financial measures adjusted EBITDA and distributable cash flow, please read the sections titled "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Measures."

The Partnership reported net income of $63.1 million in 2012 compared with $32.6 million in 2011. The increase was primarily related to an increase in operating income of $20.5 million, an increase in other income and lower expenses for interest and taxes. Transmission and storage revenues increased by $27.1 million primarily due to increased firm transmission service and increased system throughput, which were driven by production development in the Marcellus Shale. Total operating expenses increased $6.8 million, consistent with the overall growth of the transmission system.

Consolidated Results of Operations

Years Ended December 31, % % 2013 2012 change 2011 change 2013 - 2012 - 2012 2011 (Thousands, other than per unit) Operating revenues: Transmission and storage revenues $ 173,881$ 120,797 43.9 $ 93,707 28.9 Gathering revenues 12,010 16,113 (25.5) 15,906 1.3 Total operating revenues 185,891 136,910 35.8 109,613 24.9 Operating expenses: Operating and maintenance 28,954 29,405 (1.5) 26,221 12.1 Selling, general and administrative 21,497 16,614 29.4 17,302 (4.0) Depreciation and amortization 21,190 15,740 34.6 11,470 37.2 Total operating expenses 71,641 61,759 16.0 54,993 12.3 Operating income 114,250 75,151 52.0 54,620 37.6 Other income, net 1,242 8,228 (84.9) 3,826 115.1 Interest expense, net 1,672 2,944 (43.2) 5,050 (41.7) Income before income taxes 113,820 80,435 41.5 53,396 50.6 Income tax expense 4,053 17,313 (76.6) 20,807 (16.8) Net income $ 109,767$ 63,122 73.9 $ 32,589 93.7 Net income per limited partner unit Basic (1) $ 2.47$ 1.03 N/M(2) N/A N/A Diluted (1) $ 2.46$ 1.03 N/M(2) N/A N/A Adjusted EBITDA (1) $ 119,510$ 39,996 N/M(2) N/A N/A Distributable cash flow (1) $ 101,371$ 26,415 N/M(2) N/A N/A



(1) Presented for the post-IPO period only. For an explanation of the non-GAAP financial measures adjusted EBITDA and distributable cash flow and a reconciliation of these measures to their most directly comparable GAAP financial measures, please read the sections below titled "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Measures."

(2) Not meaningful data as the amounts presented are for the year ended December 31, 2013 compared to the post-IPO period of the six months ended December 31, 2012.

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Table of Contents Business Segment Results



Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources. Interest and other income are managed on a consolidated basis. The Partnership has presented each segment's operating income and various operational measures in the sections below. Management believes that presentation of this information provides useful information to management and investors regarding the financial condition, results of operations and trends of segments. The Partnership has reconciled each segment's operating income to the Partnership's consolidated operating income and net income in Note 3 to the Consolidated Financial Statements.

Years Ended December 31, % % 2013 2012 change 2011 change 2013 - 2012 - 2012 2011 SEGMENT FINANCIAL DATA - (Thousands, other than per day amounts) TRANSMISSION AND STORAGE Operating revenues: Operating revenues - affiliate $ 135,998$ 95,849 41.9 $ 76,449 25.4 Operating revenues - third party 37,883 24,948 51.8 17,258 44.6 Total operating revenues 173,881 120,797 43.9 93,707 28.9 Operating expenses: Operating and maintenance 15,041 15,191 (1.0) 11,677 30.1 Selling, general and administrative 15,567 11,578 34.5 12,274 (5.7) Depreciation and amortization 18,323 12,901 42.0 8,850 45.8 Total operating expenses 48,931 39,670 23.3 32,801 20.9 Operating income $ 124,950$ 81,127 54.0 $ 60,906 33.2 SEGMENT OPERATIONAL DATA -TRANSMISSION AND STORAGE Transmission pipeline throughput (BBtu per day) 1,146 606 89.1 397 52.6 Capital expenditures $ 77,989$ 188,143 (58.5) $ 131,902 42.6 SEGMENT FINANCIAL DATA - GATHERING Operating revenues: Operating revenues - affiliate $ 6,439$ 10,331 (37.7) $ 10,107 2.2 Operating revenues - third party 5,571 5,782 (3.6) 5,799 (0.3) Total operating revenues 12,010 16,113 (25.5) 15,906 1.3 Operating expenses: Operating and maintenance 13,913 14,214 (2.1) 14,544 (2.3) Selling, general and administrative 5,930 5,036 17.8 5,028 0.2 Depreciation and amortization 2,867 2,839 1.0 2,620 8.4 Total operating expenses 22,710 22,089 2.8 22,192 (0.5) Operating loss $ (10,700)$ (5,976) 79.1 $ (6,286) (4.9) SEGMENT OPERATIONAL DATA -GATHERING Gathering volumes (BBtu per day) 58 78 (25.6) 78 0.0 Capital expenditures $ 5,031$ 5,379 (6.5) $ 3,929 36.9 53



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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Total operating revenues were $185.9 million for the year ended December 31, 2013 compared to $136.9 million for the year ended December 31, 2012. The increase was a result of a $53.1 million increase in transmission and storage operating revenues partly offset by a decrease of $4.1 million in gathering revenues.

Transmission and storage revenues increased as a result of higher firm transmission contracted capacity and increased system throughput as compared to the prior year. This includes $44.8 million of revenue associated with increased reservation fees under firm contracts and $10.9 million of fees associated with firm usage charges and transported volumes in excess of firm capacity. These increases were primarily driven by activity related to the Sunrise Pipeline and the Blacksville compressor station, which were completed in July and September 2012, respectively, as well as the addition of the AVC facilities in December 2013. This increased activity is a result of increased production development in the Marcellus Shale. The average daily transmission throughput increased by 540 BBtu per day during the year ended December 31, 2013 compared to the year ended December 31, 2012. These increases were partly offset by a decrease in storage and parking revenues of $3.2 million.

The average daily volumes gathered decreased 20 BBtu, or 26%, compared to the prior year, which resulted in reduced gathering revenues. The decrease in gathered volumes was primarily the result of affiliates utilizing direct interconnects to the Partnership's transmission system.

Operating expenses totaled $71.6 million for the year ended December 31, 2013 compared to $61.8 million for the year ended December 31, 2012. The increase in operating expenses was due to a $5.4 million increase in depreciation and amortization expense and a $4.9 million increase in selling, general and administrative expense, which were slightly offset by a small decrease in operating and maintenance expense.

The increase in depreciation and amortization expense was in transmission and storage as a result of increased investment in transmission infrastructure, most notably a full year of depreciation in 2013 for both the Sunrise Pipeline and the Blacksville compressor station.

The increase in selling, general and administrative expense resulted from several items, including $2.4 million of lower reserve adjustments in 2013 compared to 2012 from: $1.8 million of lower adjustments for the collectability of a long-term regulatory asset and a $0.6 million reduction to a legal reserve in the prior year. Additionally, in 2013 personnel costs increased $1.3 million and the Partnership incurred $0.7 million of transaction costs in connection with the Sunrise Merger.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Total operating revenues were $136.9 million for the year ended December 31, 2012 compared to $109.6 million for the year ended December 31, 2011. The increase was primarily related to a $27.1 million increase in transmission and storage operating revenues. Gathering revenues were essentially flat year over year.

Transmission and storage revenues increased as a result of increased firm transmission service and increased system throughput. This includes $12.2 million of reservation fees and usage charges under firm contracts on the Sunrise Pipeline, $11.8 million of fees associated with transported volumes in excess of firm capacity and increased reservation fees and usage charges under other firm contracts, which includes contracts for the Blacksville Compressor station. These increases resulted from increased production development in the Marcellus Shale. The average daily transmission throughput increased by 209 BBtu per day during the year ended December 31, 2012 compared to the year ended December 31, 2011. These increases were partly offset by a decrease in storage and parking revenues.

Operating expenses totaled $61.8 million for the year ended December 31, 2012 compared to $55.0 million for the year ended December 31, 2011. The increase in operating expenses was due to a $4.3 million increase in depreciation and amortization expense and a $3.2 million increase in operating and maintenance expense, which were slightly offset by a $0.7 million decrease in selling, general and administrative expense.

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The increase in depreciation and amortization expense was primarily in transmission and storage as a result of increased investment in transmission infrastructure, including the Sunrise Pipeline and the Blacksville compressor station which were both placed in service in 2012.

The increase in operating and maintenance expense resulted from a $3.5 million increase in transmission and storage expenses partly offset by a small decline in gathering operating and maintenance expense. Transmission and storage expenses increased primarily as a result of increased amortization of pipeline safety costs of $1.4 million, additional operating costs of $0.9 million associated with operating the Sunrise Pipeline and non-income based taxes of $0.5 million. The decrease in gathering expense primarily resulted from lower purchased gas costs of $0.9 million which was partly offset by increased repairs and maintenance expenses of $0.7 million. Fuel usage and other requirements on the gathering system have historically exceeded the natural gas retained from the Partnership's gathering customers as compensation for its fuel usage and other requirements. Purchased gas costs were recorded for the difference. The decline in purchased gas costs during 2012 was primarily the result of lower prices, partly offset by increased volumes lost due to higher system pressures.

In the transmission and storage segment, selling, general and administrative expenses decreased by $0.7 million primarily due to a $2.5 million reduction of a reserve on the collectability of long-term regulatory assets and a $0.6 million reduction to a legal reserve. The regulatory reserve was established for the recovery of base storage gas. These expense reductions were partly offset by increased expenses associated with being a publicly traded partnership of $1.4 million and $1.0 million due to additional costs attributable to the Sunrise Pipeline.

Other Income Statement Items



Other income primarily represents the equity portion of AFUDC which generally increases during periods of increased construction and decreases during periods of reduced construction of regulated assets. The decrease of $7.0 million in other income for the year ended December 31, 2013 when compared to the year ended December 31, 2012 primarily resulted from a decrease in applicable construction expenditures on regulated projects as the Sunrise Pipeline and Blacksville compressor station projects were turned-in-line during 2012. The increase in other income for the year ended December 31, 2012 when compared to the year ended December 31, 2011 primarily resulted from an increase in applicable construction expenditures in connection with the Sunrise Pipeline project.

Interest expense for the year ended December 31, 2013 was $1.7 million compared to $2.9 million for the year ended December 31, 2012. For the year ended December 31, 2013, interest expense primarily consisted of commitment fees paid to maintain availability under the Partnership's credit facility and interest related to the AVC capital lease. For the year ended December 31, 2012, interest expense primarily related to intercompany debt which was repaid in June 2012. Interest expense for the year ended December 31, 2012 was $2.9 million compared to $5.1 million for the year ended December 31, 2011. The decrease primarily related to the repayment of intercompany debt in June 2012 prior to the IPO.

Income tax expense was $4.1 million, $17.3 million and $20.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. From and after the IPO, the Partnership is not subject to U.S. federal and state income taxes. Income earned prior to July 2, 2012 was subject to federal and state income tax. As previously noted, the Sunrise Merger on July 22, 2013 was a transfer between entities under common control for which the financial statements of the Partnership have been retrospectively recast to reflect the combined entities. Accordingly, the income tax effects associated with Sunrise's operations prior to the Sunrise Merger are reflected in the consolidated financial statements as Sunrise was previously part of EQT's consolidated federal tax return. The decreases in income tax expense resulted from these changes in tax status.

Non-GAAP Financial Measures



The Partnership defines adjusted EBITDA as net income plus net interest expense, depreciation and amortization expense, income tax expense (if applicable), non-cash long-term compensation expense and other non-cash adjustments (if applicable) less other income and capital lease payments prior to acquisition of the underlying assets. As used herein, the Partnership defines distributable cash flow as adjusted EBITDA less cash interest, ongoing maintenance capital expenditures and potentially reimbursable maintenance capital expenditures plus reimbursable maintenance capital expenditures to be reimbursed by EQT. Adjusted EBITDA and distributable cash

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flow are non-GAAP supplemental financial measures that management and external users of the Partnership's consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess:

the Partnership's operating performance as compared to other publicly traded partnerships in the midstream energy industry without regard to historical cost basis or, in the case of adjusted EBITDA, financing methods;

the ability of the Partnership's assets to generate sufficient cash flow to make distributions to the Partnership's unitholders;

the Partnership's ability to incur and service debt and fund capital expenditures; and

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

The Partnership believes that adjusted EBITDA and distributable cash flow provide useful information to investors in assessing the Partnership's financial condition and results of operations. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because adjusted EBITDA and distributable cash flow may be defined differently by other companies in its industry, the Partnership's definition of adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Distributable cash flow should not be viewed as indicative of the actual amount of cash that the Partnership has available for distributions from operating surplus or that the Partnership plans to distribute.

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Reconciliation of Non-GAAP Measures

The following table presents a reconciliation of adjusted EBITDA and distributable cash flow with net income and net cash provided by operating activities, the most directly comparable GAAP financial measures.

Years Ended December 31, 2013 2012 (1) (Thousands) Net income $ 109,767$ 40,360 Add: Interest expense, net 1,672 191 Depreciation and amortization 21,190 9,532 Income tax expense 4,053 3,822 Non-cash long-term compensation expense 981 535 Non-cash adjustments (680) (2,508)



Less:

Other income, net (1,242) (1,600) Capital lease payments prior to acquisition (16,231) (10,336) Adjusted EBITDA $ 119,510$ 39,996



Less:

Cash interest (939) (445) Ongoing maintenance capital expenditures(2) (13,192) (9,753) Potentially reimbursable P&A maintenance capital expenditures(3) (566) (1,585) Potentially reimbursable bare steel maintenance capital expenditures(3) (6,574) (6,042)



Add:

Reimbursable P&A maintenance capital expenditures(3) 566 1,585 Reimbursable bare steel maintenance capital expenditures(3) 2,566 2,659 Distributable cash flow $ 101,371$ 26,415



Net cash provided by operating activities $ 121,335$ 72,466 Adjustments: Interest expense, net

1,672 191 Current tax expense (benefit) 4,315 (36,010) Capital lease payments prior to acquisition (16,231) (10,336) Other, including changes in working capital 8,419 13,685 Adjusted EBITDA $ 119,510$ 39,996 (1) Presented for post-IPO period only.



(2) Ongoing maintenance capital expenditures are expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, the Partnership's operating capacity or operating income.

(3) EQT has reimbursement obligations to the Partnership for certain capital expenditures for plugging and abandonment (P&A) of natural gas wells and bare steel pipe replacement. For further explanation of these reimbursable maintenance capital expenditures, see the section below titled "Capital Requirements."

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Adjusted EBITDA was $119.5 million for the year ended December 31, 2013 compared to $40.0 million for the six months ended December 31, 2012. The increase was primarily a result of a full year of post-IPO operations and increased transmission and storage operating revenues related to production development in the Marcellus Shale. Distributable cash flow was $101.4 million for the year ended December 31, 2013 compared to $26.4 million for the six months ended December 31, 2012. The increase was mainly attributable to the increase in adjusted EBITDA for the full year, which was slightly offset by increased maintenance capital expenditures for the full year.

Outlook



The Partnership's principal business objective is to increase the quarterly cash distributions that it pays to its unitholders over time while ensuring the ongoing growth of its business. The Partnership believes that it is well-positioned to achieve growth based on the combination of its relationship with EQT and its strategically located assets, which cover portions of the Marcellus Shale that lack substantial natural gas pipeline infrastructure. As production increases in the Partnership's areas of operations, the Partnership believes it will have a competitive advantage in attracting volumes to its system through relatively low-cost capacity expansions. Additionally, the Partnership may acquire additional midstream assets from EQT, or pursue asset acquisitions from third parties. Should EQT choose to pursue midstream asset sales, it is under no contractual obligation to offer the assets to the Partnership.

In the near term, the Partnership expects that the following internal transmission and storage expansion projects also will allow it to capitalize on increased drilling activity by EQT and other third-party producers.

Jefferson Compressor Station Expansion Project. This project involves expanding the Jefferson compressor station to provide approximately 550 BBtu per day of incremental capacity on the Sunrise Pipeline system. When complete, the project is expected to more than double the existing throughput capacity on the Sunrise Pipeline of approximately 400 BBtu per day. The expansion, which is expected to cost approximately $30 million, is expected to be placed into service in the third quarter of 2014. Approximately $20 million is expected to be spent in 2014 related to this project.

Transmission Expansion (Antero Project). The Partnership entered into two separate agreements with Antero Resources for firm transportation services on the Partnership's transmission system. Under each agreement, the Partnership will ultimately provide 100 BBtu per day of firm transmission capacity on the transmission system for a combined total of 200 BBtu per day. As part of the agreements, the Partnership expects to spend approximately $55 million on two separate transmission expansion projects in northern West Virginia. The West-Side Expansion will add 100 BBtu per day of transmission capacity at an estimated cost of $26 million and is expected to be in full service by year-end 2014. The East-Side Expansion will add 100 BBtu per day of transmission capacity at an estimated cost of $29 million and is expected to be in full service by mid-year 2015. The agreements are primarily fixed-fee, demand based contracts with a 10-year term commencing on the applicable project's full 100 BBtu per day in-service date. The Partnership expects to spend approximately $30 million on the two projects in 2014, with the remaining $25 million to be spent in 2015.

Transmission and Gathering Expansion (Range Resources Project). The Partnership entered into definitive agreements with a subsidiary of Range Resources Corporation to provide gathering, compression, and transmission services in southwestern Pennsylvania. In 2014, the Partnership expects to invest approximately $30 million in gathering infrastructure and $25 million in a transmission expansion project in conjunction with the agreements. The transmission expansion will add approximately 100 BBtu per day of capacity to the Partnership's transmission system and is expected to be in service in the fourth quarter of 2014. The agreements include a fee-based 10-year minimum volume commitment for gathering and transmission services.

In 2014, the Partnership plans to spend approximately $135 - 140 million to increase transmission capacity by 750 BBtu per day. The Partnership's future expansion capital expenditures may vary significantly from period to period based on the available investment opportunities. Maintenance related capital expenditures are also expected to vary quarter to quarter. The Partnership expects to fund future capital expenditures primarily through cash on

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hand, cash generated from operations, availability under the Partnership's credit facility, debt offerings and the issuance of additional partnership units.

Capital Resources and Liquidity

The Partnership's principal liquidity requirements are to finance its operations, fund capital expenditures and acquisitions, make cash distributions and satisfy any indebtedness obligations. The Partnership's ability to meet these liquidity requirements will depend on its ability to generate cash in the future. From and after the IPO, the Partnership's available sources of liquidity include cash generated from operations, borrowing under the Partnership's credit facility, cash on hand, debt offerings and issuances of additional partnership units.

Prior to the IPO, the Partnership's primary sources of liquidity included cash generated from operations and cash contributions provided by EQT. The Partnership also participated in EQT's cash management program prior to the IPO, whereby EQT swept cash balances residing in the Partnership's bank accounts on a periodic basis. Prior to the IPO, capital expenditures were funded through amounts due to EQT. Subsequent to the IPO, affiliate payables and receivables are settled monthly and are classified as operating activities.

Operating Activities



Net cash provided by operating activities during 2013 was $121.3 million compared to $128.6 million for 2012. The slight decrease was driven by the 2012 cash receipt from EQT related to its use of Sunrise's depreciation deductions prior to the Sunrise Merger when Sunrise was included in the consolidated tax return of EQT. This was offset by increases in transmission and storage operating receipts due to increased firm transmission service and fees associated with transported volumes in excess of firm capacity related to production development in the Marcellus Shale.

Net cash provided by operating activities during 2012 was $128.6 million compared to $47.6 million for 2011. The increase was primarily a result of an increase in transmission and storage operating revenues due to increased firm transmission service and fees associated with transported volumes in excess of firm capacity related to production development in the Marcellus Shale. Additionally in 2012 there was a cash receipt from EQT related to its use of Sunrise's depreciation deductions prior to the Sunrise Merger when Sunrise was included in the consolidated tax return of EQT. These increases were partly offset by the distribution to EQT of approximately $12.2 million of trade and other accounts receivable prior to the initial public offering. Proceeds from the offering of $12.2 million were retained to replenish working capital and are reflected in the financing activities.

Investing Activities



Cash flows used in investing activities totaled $83.0 million for 2013 as compared to $193.5 million for 2012. The 2013 capital expenditures primarily related to the Low Pressure East expansion and Jefferson compressor station expansion projects. The 2012 capital expenditures primarily related to the Sunrise Pipeline and Blacksville Compressor station projects, which were completed in the third quarter of 2012.

Cash flows used in investing activities totaled $193.5 million for 2012 as compared to $135.8 million for 2011. The increase in capital expenditures was primarily attributable to the timing of expenditures associated with the Sunrise Pipeline and the Blacksville Compressor station projects.

See further discussion of capital expenditures in the "Capital Requirements" section below.

Financing Activities



Cash flows used in financing activities totaled $70.0 million for 2013 as compared to $115.0 million of cash flows provided by financing activities for the same period of 2012. In July 2013, the Partnership received net proceeds from its equity offering of approximately $529.4 million, after deducting the underwriters' discount and offering expenses. These funds were used to pay Sunrise Merger consideration to EQT of $507.5 million in July 2013, cash distributions to unitholders of $66.2 million and Sunrise pre-merger distributions to EQT of $31.4 million.

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Cash flows provided by financing activities totaled $115.0 million for 2012 as compared to $73.9 million for the same period of 2011. In 2012, the Partnership received net proceeds from the initial public offering of approximately $276.8 million, after deducting the underwriters' discount and offering expenses. Approximately $230.9 million of the proceeds were distributed to EQT, $12.0 million was retained by the Partnership to replenish amounts distributed by Equitrans to EQT prior to the IPO, $32.0 million was retained by the Partnership to pre-fund certain maintenance capital expenditures and $1.9 million was used by the Partnership to pay credit facility origination fees associated with its credit facility described below. During the fourth quarter of 2012, the Partnership made its first cash distribution to unitholders of approximately $12.4 million.

Prior to the IPO, the Partnership had financing cash inflows of $276.5 million for capital contributions from EQT and financing cash outflows of $10.2 million for distributions paid to EQT, $49.7 million related to reimbursements to EQT and $135.2 million to retire long-term intercompany debt to EQT. Prior to the IPO, certain advances from affiliates were viewed as financing transactions as the Partnership would have otherwise obtained demand notes or term loans from EQT Capital Corporation (EQT Capital) to fund these transactions. Subsequent to the IPO, these transactions reflect services rendered on behalf of the Partnership by EQT and its affiliates for operating expenses and are settled monthly. Therefore, these are classified as operating activities subsequent to the IPO.

Capital Requirements



The transmission, storage and gathering businesses can be capital intensive, requiring significant investment to maintain and upgrade existing operations. The below table presents capital expenditures forecasted for 2014 as well as actual amounts expended for 2013, 2012 and 2011.

2014 2013 2012 2011 Forecast Actual Actual Actual (Thousands)



Expansion capital expenditures $ 105,000$ 50,595$ 162,574$ 108,981 Maintenance capital expenditures: Ongoing maintenance

13,000 13,192 13,815 20,185 Funded regulatory compliance 12,000 12,093 6,993 214 Reimbursable P&A maintenance - 566 3,563 1,738



Reimbursable bare steel maintenance 7,000 6,574 6,577 4,713

Total maintenance capital expenditures 32,000 32,425 30,948 26,850

Total capital expenditures $ 137,000$ 83,020$ 193,522$ 135,831



The Partnership does not forecast capital expenditures associated with potential midstream projects not committed as of the filing of this Annual Report on Form 10-K.

Expansion capital expenditures totaled $50.6 million, $162.6 million and $109.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. In 2013, expansion capital expenditures primarily related to the Low Pressure East expansion and the Jefferson compressor station expansion projects. In 2012 and 2011, expansion capital expenditures were primarily related to the Sunrise Pipeline and Blacksville Compressor station projects which were placed into service in the third quarter of 2012.

Maintenance capital expenditures are expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, the Partnership's operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to connect new wells to maintain throughput, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

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Ongoing maintenance capital expenditures are all maintenance capital expenditures other than funded regulatory compliance and reimbursable maintenance capital expenditures described below. Ongoing maintenance capital expenditures were $13.2 million, $13.8 million and $20.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. In 2011, the Partnership completed a project designed to replace internal piping and measurement and install over pressure protection at one of the Partnership's main measuring and regulating stations.

Funded regulatory compliance capital expenditures are previously identified maintenance capital expenditures necessary to comply with certain regulatory and other legal requirements. Prior to the IPO, the Partnership identified two specific regulatory compliance initiatives which the Partnership expected to require it to expend approximately $32 million, largely over the two years following the IPO. The Partnership retained approximately $32 million from the net proceeds of the IPO to fund these expenditures. Note that the amounts included as funded regulatory compliance for periods prior to the IPO were included for comparative purposes and were not included in the Partnership's estimate of $32 million for the initiatives identified prior to the IPO. Funded regulatory compliance capital expenditures were $12.1 million, $7.0 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. A full year of expenditures related to the identified initiatives is included in 2013. The specific initiatives of this program are to install remote valve and pressure monitoring equipment on the Partnership's transmission and storage lines and to relocate certain valve operators above ground and apply corrosion protection. Since the IPO, funded regulatory compliance capital expenditures were $18.9 million.

Under the omnibus agreement, EQT has reimbursement obligations to the Partnership related to certain capital expenditures. For a period of ten years after the closing of the IPO, EQT has agreed to reimburse the Partnership for plugging and abandonment expenditures and other expenditures for certain identified wells of EQT and third parties. The reimbursement obligation of EQT with respect to wells owned by third parties is capped at $1.2 million per year. Additionally, EQT has agreed to reimburse the Partnership for bare steel replacement capital expenditures in the event that ongoing maintenance capital expenditures (other than capital expenditures associated with plugging and abandonment liabilities to be reimbursed by EQT) exceed $17.2 million (with respect to the Partnership's assets owned at the time of the IPO) in any year. If such ongoing maintenance capital expenditures and bare steel replacement capital expenditures exceed $17.2 million during a year, EQT will reimburse the Partnership for the lesser of (i) the amount of bare steel replacement capital expenditures during such year and (ii) the amount by which such ongoing capital expenditures and bare steel replacement capital expenditures exceeds $17.2 million. This bare steel replacement reimbursement obligation is capped at an aggregate amount of $31.5 million over the ten years following the IPO. The amounts included as reimbursable maintenance for periods prior to the IPO were included for comparative purposes; EQT has no reimbursement obligations for them under the omnibus agreement.

Reimbursable P&A maintenance capital expenditures were $0.6 million, $3.6 million and $1.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. The year over year fluctuations were due to the number of wells being plugged. Reimbursable bare steel maintenance capital expenditures were $6.6 million, $6.6 million and $4.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in 2013 and 2012 as compared to 2011 is primarily related to the timing of costs associated with this program. In 2013, the Partnership requested reimbursement of $0.6 million for reimbursable P&A maintenance capital expenditures. In 2013, ongoing maintenance capital expenditures totaled $13.2 million and bare steel replacement capital expenditures totaled $6.6 million, for a total of $19.8 million. As a result, the Partnership requested bare steel reimbursements of $2.6 million for 2013. In 2012, the Partnership requested reimbursement of $1.6 million for reimbursable P&A maintenance capital expenditures and $2.7 million for reimbursable bare steel maintenance capital expenditures.

Short-term Borrowings



In February 2014, the Partnership amended its credit facility to increase the borrowing capacity to $750 million. The amended credit facility will expire in February 2019. The credit facility is available to fund working capital requirements and capital expenditures, to purchase assets, to pay distributions and to repurchase units and for general partnership purposes. Subject to certain terms and conditions, the credit facility has an accordion feature that allows the Partnership to increase the available revolving borrowings under the facility by up to an additional $250 million. In addition, the credit facility includes a sublimit up to $75 million for same-day swing line advances and a

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sublimit up to $150 million for letters of credit. Further, the Partnership has the ability to request that one or more lenders make term loans to it under the credit facility subject to the satisfaction of certain conditions, which term loans will be secured by cash and qualifying investment grade securities. The Partnership's obligations under the revolving portion of the credit facility are unsecured. In January 2014, the Partnership borrowed $110 million on its credit facility to make the additional payment to EQT related to the Sunrise Merger. Based on the Partnership's current consolidated leverage ratio, the Partnership's maximum borrowing capacity on the credit facility is approximately $600 million.

The Partnership's credit facility contains various provisions that, if not complied with, could result in termination of the credit facility, require early payment of amounts outstanding or similar actions. The most significant covenants and events of default under the credit facility relate to maintenance of permitted leverage ratio, limitations on transactions with affiliates, insolvency events, nonpayment of scheduled principal or interest payments, acceleration of other financial obligations and change of control provisions. Under the credit facility, the Partnership is required to maintain a consolidated leverage ratio of not more than 5.00 to 1.00 (or, after the Partnership obtains an investment grade rating, not more than 5.50 to 1.00 for certain measurement periods following the consummation of certain acquisitions).

Distributions



On January 23, 2014, the Partnership announced that the Board of Directors of its general partner declared a cash distribution to the Partnership's unitholders of $0.46 per unit related to the fourth quarter of 2013. The cash distribution is payable on February 14, 2014 to unitholders of record at the close of business on February 4, 2014. In connection with this cash distribution, EQT received approximately $0.6 million related to its incentive distribution rights.

Schedule of Contractual Obligations

Total 2014 2015-2016 2017-2018 2019+ (Thousands)



Capital lease obligation (1) $ 413,512$ 16,650$ 33,364$ 40,691$ 322,807

(1) Represents the future projected payments associated with the AVC capital lease obligation (including interest) as of December 31, 2013.

Commitments and Contingencies



In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Partnership. While the amounts claimed may be substantial, the Partnership is unable to predict with certainty the ultimate outcome of such claims and proceedings. The Partnership accrues legal and other direct costs related to loss contingencies when actually incurred. The Partnership has established reserves it believes to be appropriate for pending matters, and after consultation with counsel and giving appropriate consideration to available insurance, the Partnership believes that the ultimate outcome of any matter currently pending against the Partnership will not materially affect its business, financial condition, results of operations, liquidity or ability to make distributions.

Off-Balance Sheet Arrangements

The Partnership does not have any off-balance sheet arrangements.

Critical Accounting Policies and Significant Estimates

The Partnership's significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. The discussion and analysis of the Consolidated Financial Statements and results of operations are based upon EQT Midstream Partners' Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities,

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revenues and expenses and the related disclosure of contingent assets and liabilities. The following critical accounting policies, which were reviewed by the Partnership's Audit Committee, relate to the Partnership's more significant judgments and estimates used in the preparation of its Consolidated Financial Statements. Actual results could differ from those estimates.

Regulatory Accounting: The Partnership's operations consist of interstate pipeline, intrastate gathering and storage operations subject to regulation by the FERC. Rate regulation provided by the FERC is designed to enable the Partnership to recover the costs of providing the regulated services plus an allowed return on invested capital. The application of ASC Topic 980 "Regulated Operations" allows the Partnership to defer expenses and income on its consolidated balance sheets as regulatory assets and liabilities when it is probable that those expenses and income will be allowed in the rate setting process in a period different from the period in which they would have been reflected in the statements of consolidated operations for a non-regulated company. The deferred regulatory assets and liabilities are then recognized in the statements of consolidated operations in the period in which the same amounts are reflected in rates. The amounts deferred in the consolidated balance sheets relate primarily to the accounting for income taxes, post-retirement benefit costs and base storage gas. The amounts established for accounting for income taxes were generated during the pre-IPO period when the Partnership was included as part of EQT's consolidated federal tax return. The Partnership believes that it will continue to be subject to rate regulation that will provide for the recovery of deferred costs.

The Partnership believes that the accounting estimates related to regulatory accounting are "critical accounting policies" because the underlying assumptions regarding the recovery of deferred costs and revenues in future rates can change from period to period and changes in the recoverability of these amounts could potentially have a material impact on the results of operations and on working capital. Actual rate recovery amounts and periods may vary significantly from management's estimates and may impact the realization or recovery of regulatory assets and liabilities.

Property, Plant and Equipment: Property, plant and equipment are stated at amortized cost. Maintenance projects that do not increase the overall life of the related assets are expensed as incurred. Expenditures that extend the useful life of the underlying asset are capitalized.

Depreciation is recorded using composite rates on a straight-line basis. The overall rate of depreciation for the years ended December 31, 2013, 2012 and 2011 were approximately 2.1%, 2.0% and 1.9%, respectively. The Partnership estimates its pipelines have useful lives ranging from 37 years to 65 years and its compression equipment has useful lives of 45 years. Depreciation rates are re-evaluated each time the Partnership files with the FERC for a change in its transportation and storage rates.

Whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the Partnership reviews the long-lived assets for impairment by first comparing the carrying value of the assets to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. If the carrying value exceeds the sum of the assets' undiscounted cash flows, the Partnership estimates an impairment loss by taking the difference between the carrying value and fair value of the assets.

The Partnership believes that the accounting estimate related to asset impairment is a "critical accounting estimate" as it is susceptible to change from period to period because it requires management to make assumptions about cash flows over future years. These assumptions affect the amount of an impairment, which would have an impact on the results of operations and financial position. Management's assumptions about future cash flows require significant judgment because actual operating levels have fluctuated in the past and are expected to do so in the future.

Contingencies and Asset Retirement Obligations: The Partnership is involved in various regulatory and legal proceedings that arise in the ordinary course of business. A liability is recorded for contingencies based upon the Partnership's assessment that a loss is probable and that the amount of the loss can be reasonably estimated. The Partnership considers many factors in making these assessments, including history and specifics of each matter. Estimates are developed in consultation with legal counsel and are based upon an analysis of potential results.

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The Partnership operates and maintains its transmission and storage system and its gathering system and intends to do so as long as supply and demand for natural gas exists, which is expected for the foreseeable future. Therefore, the Partnership believes that it cannot reasonably estimate the asset retirement obligations for its system assets as these assets have indeterminate lives.

The Partnership believes that the accounting estimates related to contingencies and asset retirement obligations are "critical accounting estimates" because it must assess the probability of loss related to contingencies and the expected amount and timing of asset retirement obligations. In addition, the Partnership must determine the estimated present value of future liabilities. Future results of operations for any particular quarterly or annual period could be materially affected by changes in the assumptions.

Equity-Based Compensation: The Partnership has awarded equity-based compensation in connection with the Partnership compensation plans and programs. The program awards will be paid in units, and as such the Partnership treats these awarded units as equity awards. Awards that have a fixed estimate due to a market condition require the Partnership to obtain a valuation. Significant assumptions made in valuing the Partnership's awards include the market price of units at payout date, total unitholder return threshold to be achieved, volatility, risk-free rate, term, dividend yield and forfeiture rate.

The Partnership believes that the accounting estimates related to equity-based compensation are "critical accounting estimates" because of the assumptions affecting the ultimate payout of the awards and the market price and volatility of the Partnership's common units. Future results of operations for any particular quarterly or annual period could be materially affected by changes in the Partnership's assumptions.

Revenue Recognition: Revenues relating to the transmission, storage and gathering of natural gas are recognized in the period service is provided. Reservation revenues on firm contracted capacity are recognized over the contract period based on the contracted volume regardless of the amount of natural gas that is transported. Revenues associated with transported volumes under firm and interruptible services are recognized as physical deliveries of natural gas are made. Revenue is recognized for gathering activities when deliveries of natural gas are made.

The Partnership encounters risks associated with the collection of its accounts receivable. As such, the Partnership records a monthly provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate monthly provision, a historical rate of accounts receivable losses as a percentage of total revenue is utilized. This historical rate is applied to the current revenues on a monthly basis and is updated periodically based on events that may change the rate, such as a significant change to the natural gas industry or to the economy as a whole. Management reviews the adequacy of the allowance on a quarterly basis using the assumptions that apply at that time.

The Partnership believes that the accounting estimates related to revenue recognition and the allowance for doubtful accounts receivable are "critical accounting policies" because the underlying assumptions used for the allowance can change from period to period and the changes in the allowance could potentially have a material impact on the results of operations and on working capital. In addition, the actual mix of customers and their ability to pay may vary significantly from management's estimates and may impact the collectability of customer accounts.

Emerging Growth Company: The JOBS Act provides that an emerging growth company may delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Partnership has irrevocably elected to opt out of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.


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Source: Edgar Glimpses


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