Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

EQT Midstream Partners, LP (NYSE:EQM)

Q1 2013 Earnings Conference Call

April 25, 2013 11:30 ET

Executives

Nate Tetlow - Manager, Investor Relations

Dave Porges - President and Chief Executive Officer

Phil Conti - Senior Vice President and Chief Financial Officer

Randy Crawford - Executive Vice President

Pat Kane - Chief Investor Relations Officer

Analysts

John Edwards - Credit Suisse

Louis Shamie - Zimmer Partners

Christine Cho - Barclays

Operator

Good day, and welcome to the EQT Midstream First Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Nate Tetlow, Manager of Investor Relations. Mr. Tetlow, the floor is yours sir.

Nate Tetlow

Thank you. Good morning and welcome to the first quarter 2013 earnings call for EQT Midstream Partners LP.

With me today are Dave Porges, President and CEO; Phil Conti, Senior Vice President and CFO; Randy Crawford, Executive Vice President; and Pat Kane, Chief Investor Relations Officer. This call will be replayed for a 7-day period beginning at approximately 1:30 PM Eastern Time today. The phone number for the replay is 412-317-0088. The confirmation code is 10025400. The call will also be replayed for 7 days on our website at eqtmidstreampartners.com.

In just a moment, Phil will discuss the operational and financial results of the quarter. Following Phil’s remarks, we will open the call up for questions, but first, I would like to remind you that today’s call may contain forward-looking statements related to future events and expectations. Factors that could cause the partnership’s actual results to differ materially from these forward-looking statements are listed in today’s press release and under Risk Factors in the partnership’s Form 10-K for the year ended December 31, 2012 which is filed with the SEC and as updated by any subsequent Form 10-Q, which will be on file with the SEC and available on our website. Today’s call may also contain certain non-GAAP financial measures. Please refer to this morning’s press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure.

With that, I will turn it over to Phil. Phil?

Phil Conti

Thank you, Nate, and good morning everyone. In the first quarter, we continued to produce exceptional operational and financial results at EQT Midstream Partners. As you saw from the press release this morning, we reported first quarter 2013 adjusted EBITDA of $26.7 million and distributable cash flow of $24.4 million. Just to remind you, we believe it provides a more meaningful comparison when presenting financial results of EQM to do so on an adjusted basis excluding the impact of the Sunrise lease. Sunrise is owned by EQT, but is leased and operated by EQT Midstream Partners and is fully consolidated within the MLP financial statements. Because of the Sunrise cash lease payment equals to cash margin that the asset generates, Sunrise does not have a net positive or negative impact on the partnership’s distributable cash flow.

So, with that in mind, adjusted operating revenues for the quarter were $5.9 million higher than the same quarter last year. The increase was primarily due to growth in system throughput and higher contracted transmission capacity related to the Blacksville Compressor project, which was completed in September of 2012. There were a couple of items on the revenue side this quarter that I will point out and that should help you in modeling future quarters. First, the partnership benefited by approximately $2 million of revenue in the first quarter from interruptible throughput that we did not expect to recognize in the second quarter. Second, at the end of the first quarter, some storage related contracts expired and were not renewed. Revenue associated with those storage contracts amounted to about $0.5 million in the first quarter. Lastly, and we talked about this one before, some of our contracts with utility customers are designed around the winter heating season, and as a result with all else being equal, you should expect that operating revenues would be approximately $2 million higher in the first and fourth quarters as compared to revenues in the second and third quarters.

Moving on to the expense side, adjusted operating expenses decreased by about $0.7 million versus last year. Please do note that there is some seasonality with operating expenses and they do tend to be lower in the first quarter simply because maintenance related activity is typically much less in the coldest winter months. So, we caution about using the first quarter operating expenses as a run rate, we estimate the first quarter adjusted operating expenses for about $1 million lower than the forecasted average quarterly adjusted operating expenses for the remainder of 2013.

So, overall, we continued to perform well and benefit from our asset location in the heart of the Marcellus Shale. Today, we increased our full year guidance for adjusted EBITDA and distributable cash flow based on the growth we are experiencing on our system. We now forecast 2013 adjusted EBITDA of $90 million to $95 million and distributable cash flow of $71 million to $76 million. The increase in distributable cash flow forecast represents about 17% increase over the prior guidance.

Today we also initiated second quarter adjusted EBITDA guidance of $22 million to $24 million. Please keep in mind that our guidance for the second quarter and for the full year does not include potential acquisitions. We continue to expect a sizable dropdown from EQT in the third quarter of 2013. Previously we had discussed the possibility of a small drop down from EQT in the first half of 2013, but EQT has determined not to proceed with this dropdown and decided to focus on a large dropdown in the third quarter.

Earlier this week we announced the quarterly cash distribution of $0.37 per unit for the first quarter of 2013, that is a $0.02 increase from the fourth quarter 2012 distribution or 6% sequential growth. This distribution will be paid on May 15 to all unit holders of record at the close of business on May 6. Based on our updated guidance we anticipate quarterly distribution increases for the remainder of 2013, which puts us on track for a fourth quarter 2013 distribution per unit of at least 20% higher from the fourth quarter 2012 distribution of $0.35 per unit.

On the liquidity front we ended the quarter with $26 million of cash, zero debt outstanding and $315 million available under our credit facility. And with that, I will turn the call back to Nate Tetlow.

Nate Tetlow

Great, thanks. We are ready to open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question we have comes from John Edwards of Credit Suisse. Please go ahead.

John Edwards - Credit Suisse

Yeah. Good morning. So, just to be clear, so on the guidance it does not include the dropdowns you were talking about for third quarter or it does?

Phil Conti

It does not include.

John Edwards - Credit Suisse

Okay that’s what.

Phil Conti

Any dropdowns at all.

John Edwards - Credit Suisse

Alright so then – so I mean obviously these numbers came in a little bit above what most were expecting, so you are looking at that is mostly just to confirm what you are saying that some seasonal issues here since you don’t do as much maintenance in the first quarter?

Dave Porges

Well, it’s that as well as we kind of continued to see growth from the Marcellus Shale, so we are seeing growth on the system that’s a little bit better than what we expected when we gave you initial guidance.

John Edwards - Credit Suisse

Okay. Alright, thank you for that clarification that’s all I have. Thank you.

Operator

Next we have a question from Louis Shamie of Zimmer Partners.

Louis Shamie - Zimmer Partners

Good morning everyone and great quarter.

Dave Porges

Thank you.

Louis Shamie - Zimmer Partners

Just wanted to dive a little bit into the improvement in the revenue line for this quarter, first off on that $2 million of interruptible revenue that you don’t expect to recur in Q2, can you talk a little bit more about what drove that and what the prospects are of that possibly reappearing in other future quarters. And then also can you talk a little bit about where you stand on contracting out the Blacksville Compressor capacity?

Randy Crawford

Okay, Louis this is Randy. Let me address your first question in terms of the interruptible, at a high level the way FERC contracts work, most of the revenue was generated by firm capacity reservation rate and a much smaller amount of revenue generated under a usage fee where the gas actually flows. When volumes flow above the reserve level the full unit rates applied meaning that the reservation rate and plus the usage fee. In the case of the usage fee that represents as you know a small amount about 10% of the total rate, so up to the reserve capacity level, revenues were generated by volumes are relatively insignificant. But in the first quarter, because we are adding system capacity ahead of volume growth, we do generally have capacity available that goes unused. And certainly we try to maximize the use of that volume of that capacity. So, in the first quarter, EQT production exceeded its firm reserve capacity level and used some of this unused system capacity on interruptible basis in exchange for paying the same unit rate as if they had contracted for the capacity. So, this resulted in and is what you identified in significant incremental revenue to the partnership. We now expect that they will take additional firm reserve capacity on Equitrans, including Sunrise beginning May 1. So, as a result, we don’t expect to see the same level of interruptible revenues. Now, with regard to Blacksville…

Louis Shamie - Zimmer Partners

Well, just to pause there a second, Randy. So, what you are saying is you are not going to see that IT going forward, because it’s turning into firm not because the volumes are going away?

Randy Crawford

To some extent, that’s correct right. I mean, we obviously with the utility to contracts for firm on its design day, we have available capacity. So, some of the interruptible is opportunistic, but we do expect to firm up those volumes, a level those volumes are moving into the remainder of the year.

Louis Shamie - Zimmer Partners

That’s great, okay.

Randy Crawford

Now, with respect to your question on Blacksville, you know that we have firm agreements for 100 million a day, and we have no news really to report in addition to that, but we are talking to producers around the East side of the Equitrans system. And we are seeing some activity, but we don’t have anything to report in addition to what we have talked about previously.

Louis Shamie - Zimmer Partners

Okay. And what’s the total capacity on Blacksville?

Randy Crawford

The project created 200 million a day of capacity, of which 100 million is subscribed on a firm basis.

Louis Shamie - Zimmer Partners

And what’s the incremental revenue for the 100?

Phil Conti

About 5 million to 6 million a year.

Louis Shamie - Zimmer Partners

Okay, great. Thank you very much.

Randy Crawford

You’re welcome.

Operator

Next, we have a question from (indiscernible).

Unidentified Analyst

Yes, two questions. I just want to make sure I heard it right that given that the distribution was $0.35 related to the fourth quarter of last year, you are targeting 20% increase off of that to like $0.42 on Q4?

Randy Crawford

That’s what we said as an exit rate for 2013 right.

Unidentified Analyst

I see. And then why the change in drop down strategy from the smaller drop down sooner to the larger drop down later?

Phil Conti

That was an EQT decision. As we understand it the way they look that, there was the expenses and time were about the same for a small as for a large, and they decided to focus the attention on the larger acquisition, which was going to be more meaningful to both companies.

Randy Crawford

The small drop was never designed at the anything more than immaterial financially for either company. It was entirely a desire to test out the back office on the accounting side, the Conflicts Committee and stuff like that. And it winds up as Phil said in his comments that the fixed cost associated with those are just – it’s the same, no matter whether it’s a small deal or a big deal. And then so we wound up concluding that the thing that really governed it is we wanted to make sure that we didn’t do anything to divert our resources from making sure that we can get the large drop down as soon as we are allowed to.

Unidentified Analyst

And is that drop – the size of drop under consideration, is that still of the size that you believe would be able to be funded with that at the midstream level?

Randy Crawford

We have not assumed that, no. We’d assume that it would be of the size that would require equity issues.

Unidentified Analyst

Okay, thank you very much.

Operator

Next we have a question from Christine Cho of Barclays. Please go ahead.

Christine Cho - Barclays

Good morning. The increase in guidance, can you talk about what are the drivers behind this? Is it mostly because the volumes of E&P are better than expected or it was part of it because you initiated conservative guidance and you are more comfortable raising it with four months of the year behind you?

Randy Crawford

I think it’s really a lot to do with the increased volumes that we are seeing moving on our system.

Christine Cho - Barclays

Okay.

Randy Crawford

And we are more confident that we will be able to raise the guidance accordingly.

Christine Cho - Barclays

Okay, new guidance and the results so far would seem to suggest that your numbers are going to be quite better than what you guys expected at the time marketing the IPO, would it be fair to say that if this is the case what you are thinking about paying out in distributions should be higher than maybe what you are thinking at the time of the IPO. And I appreciate the color that you gave for a distribution guidance in 2013 but the run rate that you guys are kind of going at should I expect this rate in the medium term beyond 2015?

Phil Conti

We are not going further than an exit rate for 2013 at this point in time.

Christine Cho - Barclays

Okay and.

Dave Porges

Confident with the kind of numbers that we gave for longer term growth at the time of the IPO.

Christine Cho - Barclays

Which was mid-double digits?

Dave Porges

For a period of time, yeah.

Christine Cho - Barclays

Okay.

Dave Porges

Measure it in years.

Christine Cho - Barclays

Right. And then for – regarding the dropdown that’s’ going to coming later this year I know you guys can’t talk about size, but should I think that this is going to be 50-50 debt equity or will you skew it more towards equity given the appetite for your units despite your under-levered balance sheet?

Phil Conti

We are going to base it on market conditions at this time. We are not really going to say a lot more about that at this point in time.

Christine Cho - Barclays

Okay, great thanks.

Operator

Well, it appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn our conference back over to management for any closing remarks, gentlemen?

Nate Tetlow

That concludes the call. Thank you for listening.

Operator

And we thank you sir and to the rest of the management team for your time. The conference is now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: EQT Midstream Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts