Net Income per Limited Partner Unit and Cash Distributions

3 Months Ended

Mar. 31, 2020

Net Income per Limited Partner Unit and Cash Distributions

Equity

The following table summarizes changes in EQM's Series A Preferred Units, common units and Class B units, each representing limited partner interests in EQM, and general partner units during the year ended December 31, 2019. EQM did not issue any partnership interest during the first quarter of 2020.



	Limited Partner Interests
	Series A Preferred Units	Common Units		Class B Units	General Partner Units		Total
Balance at January 1, 2019	—	120,457,638		—	1,443,015		121,900,653
Unit cancellation	—	(8	)	—	—		(8	)
EQM IDR Transaction ^(a)	—	80,000,000		7,000,000	(1,443,015	)	85,556,985
Issuance of Series A Preferred Units	24,605,291	—		—	—		—
Balance at December 31, 2019	24,605,291	200,457,630		7,000,000	—		232,062,921
Balance at March 31, 2020 ^(b)	24,605,291	200,457,630		7,000,000	—		232,062,921


(a)	Refer to Note 1 for a discussion on the EQM IDR Transaction.


(b)	There were no changes to partnership interests outstanding during the first quarter of 2020.

As of March 31, 2020, Equitrans Gathering Holdings, LLC (Equitrans Gathering Holdings), EQM GP Corporation (EQM GP Corp) and Equitrans Midstream Holdings, LLC (EMH), each a wholly owned subsidiary of Equitrans Midstream, held 89,505,616, 89,536 and 27,650,303 EQM common units, respectively. Additionally, Equitrans Gathering Holdings, EQM GP Corp and EMH held 6,153,907, 6,155 and 839,938 Class B units, respectively. As of March 31, 2020, Equitrans Midstream, through such subsidiaries, owned 117,245,455 EQM common units and 7,000,000 Class B units (collectively representing a 59.9% limited partner interest in EQM, excluding the Series A Preferred Units) and the entire non-economic general partner interest in EQM, while the public owned a 40.1% limited partner interest in EQM (excluding the Series A Preferred Units).

Class B Units

As discussed above and in Note 1, in February 2019, EQM issued 7,000,000 Class B units representing a new class of limited partner interests in EQM as partial consideration for the EQM IDR Transaction. The Class B units are substantially similar in all respects to EQM's common units, except that the Class B units are not entitled to receive distributions of available cash until the applicable Class B unit conversion date (or, if earlier, a change of control). The Class B units are divided into three tranches, with the first tranche of 2,500,000 Class B units becoming convertible at the holder's option into EQM common units on April 1, 2021, the second tranche of 2,500,000 Class B units becoming convertible on April 1, 2022, and the third tranche of

2,000,000 Class B units becoming convertible on April 1, 2023 (each, a Class B unit conversion date). Additionally, the Class B units will become convertible at the holder’s option into EQM common units immediately before a change of control of EQM. After the applicable Class B unit conversion date (or, if earlier, a change of control), whether or not such Class B units have been converted into EQM common units, the Class B units will participate pro rata with the EQM common units in distributions of available cash.

The holders of Class B units vote together with the holders of EQM common units as a single class, except that Class B units owned by the general partner of EQM and its affiliates are excluded from voting if EQM common units owned by such parties are excluded from voting. Holders of Class B units are entitled to vote as a separate class on any matter that adversely affects the rights or preferences of the Class B units in relation to other classes of EQM partnership interests in any material respect or as required by law.

Series A Preferred Units

As discussed in Note 1, in March 2019, EQM entered into the Preferred Unit Purchase Agreement with certain investors to issue and sell in the EQM Private Placement an aggregate of 24,605,291 Series A Preferred Units for a cash purchase price of $48.77 per Series A Preferred Unit, resulting in total gross proceeds of approximately $1.2 billion. The net proceeds from the EQM Private Placement were used in part to fund the purchase price in the Bolt-on Acquisition and to pay certain fees and expenses related to the Bolt-on Acquisition, and the remainder was used for general partnership purposes. The EQM Private Placement closed concurrently with the closing of the Bolt-on Acquisition on April 10, 2019.

The Series A Preferred Units rank senior to all EQM common units and Class B units with respect to distribution rights and rights upon liquidation. The Series A Preferred Units vote on an as-converted basis with the EQM common units and Class B units and have certain other class voting rights with respect to any amendment to the EQM Partnership Agreement or its certificate of limited partnership that would be adverse (other than in a de minimis manner) to any of the rights, preferences or privileges of the Series A Preferred Units.

The holders of the Series A Preferred Units are entitled to receive cumulative quarterly distributions at a rate of $1.0364 per Series A Preferred Unit for the first twenty distribution periods following the EQM Private Placement, and thereafter the quarterly distributions on the Series A Preferred Units will be an amount per Series A Preferred Unit for such quarter equal to (i) the Series A Preferred Unit purchase price of $48.77 per such unit, multiplied by (ii) a percentage equal to the sum of (A) the greater of (x) the three-month LIBOR as of the second London banking day prior to the beginning of the applicable quarter and (y) 2.59%, and (B) 6.90%, multiplied by (iii) 25%. EQM will not be entitled to pay any distributions on any junior securities, including any EQM common units or Class B units, prior to paying the quarterly distributions payable to the holders of Series A Preferred Units, including any previously accrued and unpaid distributions. See Note 2.

Preferred Restructuring Agreement

As discussed in Note 1, on February 26, 2020, Equitrans Midstream and EQM entered into the Restructuring Agreement with the Investors, pursuant to which the parties thereto agreed that, concurrently with the closing of the EQM Merger: (i) EQM will redeem $600 million aggregate principal amount of the Investors' Series A Preferred Units issued and outstanding immediately prior to the effective time of the Restructuring Closing (defined herein) for cash at 101% of the Series A Preferred Unit Purchase Price plus any accrued and unpaid distribution amounts and partial period distribution amounts, and (ii) after giving effect to such redemption, each remaining issued and outstanding Series A Preferred Unit will be exchanged for 2.44 Equitrans Midstream Preferred Shares, in connection with the occurrence of the “Series A Change of Control” (as defined in the EQM Partnership Agreement) that will occur upon the closing of the EQM Merger. The Equitrans Midstream Preferred Shares to be issued will not be registered under the Securities Act of 1933, as amended (the Securities Act), in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

The Restructuring is expected to close substantially concurrent with the closing of the EQM Merger (the Restructuring Closing), subject to the delivery of certain closing deliverables and certain closing conditions, including, among others: (i) the continued accuracy of the representations and warranties contained in the Restructuring Agreement; (ii) the performance by each party of its respective obligations under the Restructuring Agreement; (iii) the absence of any suit, action or proceeding by any governmental authority restraining, precluding, enjoining or prohibiting the Restructuring; (iv) the closing of the EQM Merger either prior to or concurrently with the Restructuring Closing; and (v) the execution of certain agreements and delivery of certain documents related to the Restructuring, including the certificate of designations to be filed by Equitrans Midstream with the Pennsylvania Department of State at the Restructuring Closing (the Certificate of Designations) and a registration rights agreement to be entered into by and among Equitrans Midstream and the Investors (the Registration Rights Agreement).

Pursuant to the Restructuring Agreement, in connection with the Restructuring Closing, Equitrans Midstream will file a statement with respect to shares, attaching the Certificate of Designations, with the Pennsylvania Department of State to,

among other things, authorize and establish the designations, rights and preferences of the Equitrans Midstream Preferred Shares.

The Equitrans Midstream Preferred Shares will be a new class of security that will rank pari passu with any other outstanding class or series of preferred stock of Equitrans Midstream and senior to Equitrans Midstream common stock with respect to dividend rights and rights upon liquidation. The Equitrans Midstream Preferred Shares will vote on an as-converted basis with Equitrans Midstream common stock and will have certain other class voting rights with respect to any amendment to the Certificate of Designations or Equitrans Midstream’s Amended and Restated Articles of Incorporation that would be adverse (other than in a de minimis manner) to any of the rights, preferences or privileges of the Equitrans Midstream Preferred Shares.

The holders of the Equitrans Midstream Preferred Shares will receive cumulative quarterly dividends at a rate per annum of 9.75% for each quarter ending on or before March 31, 2024, and thereafter the quarterly dividends at a rate per annum equal to the sum of (i) three-month LIBOR as of the LIBOR Determination Date (as defined in the Certificate of Designations) in respect of the applicable quarter and (ii) 8.15%; provided that such rate per annum in respect of periods after March 31, 2024 will not be less than 10.50%. Equitrans Midstream will not be entitled to pay any dividends on any junior securities, including on Equitrans Midstream common stock, prior to paying the quarterly dividends payable to the Equitrans Midstream Preferred Shares, including any previously accrued and unpaid dividends.

Each holder of the Equitrans Midstream Preferred Shares may upon issuance elect to convert all or any portion of the Equitrans Midstream Preferred Shares owned by it into Equitrans Midstream common stock initially on a one-for-one basis, subject to certain anti-dilution adjustments and an adjustment for any dividends that have accrued but not been paid when due and partial period dividends (referred to as the “conversion rate”), at any time (but not more often than once per fiscal quarter) after April 10, 2021 (or earlier liquidation, dissolution or winding up of Equitrans Midstream), provided that any conversion involves an aggregate number of Equitrans Midstream Preferred Shares of at least $20 million (calculated based on the closing price of the Equitrans Midstream common stock on the trading day preceding notice of the conversion) or such lesser amount if such conversion relates to all of a holder’s remaining Equitrans Midstream Preferred Shares or if such conversion is approved by Equitrans Midstream's Board of Directors.

So long as the holders of the Equitrans Midstream Preferred Shares have not elected to convert all of their Equitrans Midstream Preferred Shares into Equitrans Midstream common stock, Equitrans Midstream may elect to convert all of the Equitrans Midstream Preferred Shares for Equitrans Midstream common stock, at the then-applicable conversion rate, at any time after April 10, 2021 if (i) the shares of Equitrans Midstream common stock are listed for, or admitted to, trading on a national securities exchange, (ii) the closing price per share of Equitrans Midstream common stock on the national securities exchange on which the shares of Equitrans Midstream common stock are listed for, or admitted to, trading exceeds $27.99 for the 20 consecutive trading days immediately preceding notice of the conversion, (iii) the average daily trading volume of the Equitrans Midstream common stock on the national securities exchange on which the shares of Equitrans Midstream common stock are listed for, or admitted to, trading exceeds 1,000,000 shares (subject to certain adjustments) of Equitrans Midstream common stock for the 20 consecutive trading days immediately preceding notice of the conversion, (iv) Equitrans Midstream has an effective registration statement on file with the SEC covering resales of the shares of Equitrans Midstream common stock to be received by such holders upon any such conversion and (v) Equitrans Midstream has paid all prior accumulated and unpaid dividends in cash in full to the holders.

Upon certain events involving a Change of Control (as defined in the Certificate of Designations) in which more than 90% of the consideration payable to Equitrans Midstream or the holders of the Equitrans Midstream common stock is payable in cash, the Equitrans Midstream Preferred Shares will automatically convert into Equitrans Midstream common stock at a conversion ratio equal to the greater of (i) the quotient of (a) the sum of (x) $19.99 (such per share price at which the Equitrans Midstream Preferred Shares will be issued, the Equitrans Midstream Preferred Share Issue Price plus (y) any accrued and unpaid dividends on such date, including any partial period dividends, with respect to the Equitrans Midstream Preferred Shares on such date, divided by (b) the Equitrans Midstream Preferred Share Issue Price and (ii) the quotient of (a) the sum of (x)(1) the Equitrans Midstream Preferred Share Issue Price multiplied by (2) 110% plus (y) any accrued and unpaid dividends on such date, including any partial period dividends with respect to the Equitrans Midstream Preferred Shares on such date, divided by (ii) the volume weighted average price of the shares of Equitrans Midstream common stock for the 30-day period ending immediately prior to the execution of definitive documentation relating to the Change of Control.

In connection with other Change of Control events that do not satisfy the 90% cash consideration threshold described above, in addition to certain other conditions, each holder of Equitrans Midstream Preferred Shares may elect to (i) convert all, but not less than all, of its Equitrans Midstream Preferred Shares into Equitrans Midstream common stock at the then applicable conversion rate, (ii) if Equitrans Midstream is not the surviving entity (or if Equitrans Midstream is the surviving entity, but the Equitrans Midstream common stock will cease to be listed), require Equitrans Midstream to use commercially reasonable efforts to cause the surviving entity in any such transaction to issue a substantially equivalent security that has rights,

preferences and privileges substantially equivalent to the Equitrans Midstream Preferred Shares (or if Equitrans Midstream is unable to cause such substantially equivalent securities to be issued, to exercise the option described in clause (i) or (iv) hereof or elect to convert such Equitrans Midstream Preferred Shares at a conversion ratio reflecting a multiple of invested capital), (iii) if Equitrans Midstream is the surviving entity, continue to hold the Equitrans Midstream Preferred Shares or (iv) require Equitrans Midstream to redeem the Equitrans Midstream Preferred Shares at a price per share equal to 101% of the Equitrans Midstream Preferred Share Issue Price, plus accrued and unpaid dividends, including any partial period dividends on the applicable Equitrans Midstream Preferred Shares on such date, which redemption price may be payable in cash, Equitrans Midstream common stock or a combination thereof at the election of Equitrans Midstream (and, if payable in Equitrans Midstream common stock, such Equitrans Midstream common stock will be issued at 95% of the volume-weighted average price of Equitrans Midstream common stock for the 20-day period ending on the fifth trading day immediately preceding the consummation of the Change of Control). Any holder of Equitrans Midstream Preferred Shares that requires Equitrans Midstream to redeem its Equitrans Midstream Preferred Shares pursuant to clause (iv) above will have the right to withdraw such election with respect to all, but not less than all, of its Equitrans Midstream Preferred Shares at any time prior to the fifth trading day immediately preceding the consummation of the Change of Control and instead elect to be treated in accordance with any of clauses (i), (ii) or (iii) above.

At any time on or after January 1, 2024, Equitrans Midstream will have the right, subject to applicable law, to redeem the Equitrans Midstream Preferred Shares, in whole or in part, by paying cash for each Equitrans Midstream Preferred Share to be redeemed in an amount equal to the greater of (a) the sum of (i) (1) the Equitrans Midstream Preferred Share Issue Price multiplied by (2) 110%, plus (ii) any accrued and unpaid dividends, including partial period dividends, with respect to the Equitrans Midstream Preferred Shares on such date and (b) the amount the holder of such Equitrans Midstream Preferred Share would receive if such holder had converted such Equitrans Midstream Preferred Share into shares of Equitrans Midstream common stock at the then-applicable conversion ratio and Equitrans Midstream liquidated immediately thereafter.

Pursuant to the terms of the Restructuring Agreement, in connection with the Restructuring Closing, Equitrans Midstream has agreed to enter into the Registration Rights Agreement pursuant to which, among other things, Equitrans Midstream will give the Investors certain rights to require Equitrans Midstream to file and maintain one or more registration statements with respect to the resale of the Equitrans Midstream Preferred Shares and the shares of Equitrans Midstream common stock that are issuable upon conversion of the Equitrans Midstream Preferred Shares, and to require Equitrans Midstream to initiate underwritten offerings for the Equitrans Midstream Preferred Shares and the shares of Equitrans Midstream common stock that are issuable upon conversion of the Equitrans Midstream Preferred Shares.

Net Income per Limited Partner Unit and Cash Distributions

The following table presents EQM's calculation of net income per limited partner unit for common and Class B limited partner units.



		Three Months Ended March 31,
		2020			2019
	(Thousands, except per unit data)
Net income attributable to EQM		$	251,678		$	251,931
Less: Series A Preferred Units interest in net income		(25,501		)	—
Limited partner interest in net income		$	226,177		$	251,931

Net income allocable to common units		$	226,177		$	251,931
Net income allocable to Class B units		$	—		$	—

Weighted average limited partner common units outstanding - basic		200,495			154,259
Weighted average limited partner common units outstanding - diluted		232,100			161,259

Net income per limited partner common unit - basic		$	1.13		$	1.63
Net income per limited partner common unit - diluted		$	1.08		$	1.56

The phantom units granted to the independent directors of the EQM General Partner will be paid in common units on a director’s termination of service on the Board of Directors of the EQM General Partner. As there are no remaining service, performance or market conditions related to these awards, 34,830 and 21,908 phantom unit awards were included in the calculation of basic and diluted weighted average limited partner units outstanding for the three months ended March 31, 2020 and 2019, respectively.

Distributions to common unitholders. On April 27, 2020, the Board of Directors of the EQM General Partner declared a cash distribution to EQM's unitholders for the first quarter of 2020 of $0.3875 per common unit. The cash distribution was paid on May 14, 2020 to common unitholders of record at the close of business on May 5, 2020. Cash distributions paid by EQM to Equitrans Midstream were approximately $45.4 million related to Equitrans Midstream's limited partner interest in EQM.

Distributions to Series A Preferred Unit holders. On April 27, 2020, the Board of Directors of the EQM General Partner declared a quarterly cash distribution on the Series A Preferred Units for the first quarter of 2020 of $1.0364 per Series A Preferred Unit. The cash distribution will be paid on May 14, 2020 to Series A Preferred unitholders of record at the close of business on May 5, 2020.

EQM Midstream Partners, LP 10-Q