EQT Midstream Partners LP (EQM) CEO Discusses Q2 2013 Results - Earnings Call Transcript

|
 |  About: EQT Midstream Partners, LP (EQM)
by: SA Transcripts

Operator

Good day, and welcome to the EQT Midstream Partners Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (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, Mike. Good morning and welcome to the second 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 seven-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 10025420. The call will also be replayed for seven days on our website at eqtmidstreampartners.com.

In just a moment, Randy will discuss the operational and financial results of the quarter. Following Randy’s remarks, we will open the call up for questions. But first, I’d 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 are on file with the SEC and are 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.

And with that, I’ll turn it over to Randy. Randy?

Randall L. Crawford

Thank you, Nate, and good morning everyone. In just a moment I’ll go through the results of the quarter, but first I’ll talk about the Sunrise transaction and follow-on equity offering that we closed early this week.

On July 22, we closed on the purchase of the Sunrise Pipeline, the first asset dropdown from EQT. We paid $540 million to the EQT with the potential to make another $110 million payment based on a third-party contract becoming effective. The additional payment relates to a 20-year precedent agreement that will become effective upon the close of EQT’s sale of its natural gas distribution business, which is subject to regulatory reviews that are expected to be complete by year-end 2013.

The 41.5 mile Sunrise Pipeline is a strategic addition to EQM as it links natural gas liquids processing with downstream transportations, providing the critical infrastructure solution to facilitate the development of both liquids-rich and dry Marcellus acreage in West Virginia and Western Pennsylvania.

Sunrise has existing capacity of 400 billion BTU per day, and through a $30 million compressor expansion, is expected to reach 950 billion BTU per day of total capacity in the third quarter of 2014. Both the existing capacity and the expansion capacity are fully subscribed under long-term firm agreements. The current run rate EBITDA of Sunrise is approximately $40 million and is expected to grow to approximately $55 million in 2014 and $80 million in 2015 as the firm fixed fee contract associated with the capacity expansion become effective. The transaction is immediately accretive to cash flows and is expected to be significantly accretive in years two and three as the compressor expansion comes online.

To finance the transaction we executed a follow-on equity offering that also closed earlier this week. Based on the level of demand we were able to upsize the transaction from the announced 10 million units to 11 million units. We decided to upsize the offering for a couple of reasons. First, we wanted to create more liquidity in the EQM unit, something that our investors have been warning. Second, by maintaining an unlevered balance sheet we have the dry powder necessary to maintain a high level of growth even if we face some rough patches in the capital market.

Including the full exercise of the underwriters’ over-allotment option, we ended up issuing a total of 12.65 million limited partners units to the public. As part of the Sunrise acquisition, another 0.5 million LP units and another 250,000 GP units were also issued to EQT. As we stand today, there are now 47.8 million LP units outstanding with EQT holding about 43% of those LP units.

In addition to adding 400 billion BTU per day of capacity from the Sunrise acquisition during the quarter, we also added an incremental 300 billion BTU per day of capacity to our legacy Equitrans asset through the completion of the Morris III interconnect with Texas Eastern Transmission Pipeline.

Our Equitrans transmission system, including Sunrise, now has a total capacity of 2.1 trillion Btu per day and with the completion of the Low Pressure East project later this year and the Sunrise compressor expansion next year. So total system capacity is projected to be 2.8 trillion Btu per day by the end of 2014. This is nearly 5 times the system capacity that we had just a few years ago and really highlights the strategic location of our assets and our ability to capitalize on the growing demand to connect Marcellus supply with outlets to demand market.

Now on to the second quarter results, as you saw in the press release this morning, we reported second quarter 2013 adjusted EBITDA of $23.4 million and distributable cash flow of $21.1 million. So just to remind you when presenting the financial results for the quarter, we do so, on an adjusted basis excluding the impacts of the Sunrise lease. Since we just bought Sunrise the second quarter is the last time we’ll have to do this, as the lease was terminated with the close of the acquisition.

So with that in mind adjusted operating revenues for the quarter were $5.9 million higher than the same quarter last year. The increase primarily due to the growth in system throughout and higher contracted transmission capacity primarily related to the Blacksville Compressor project, which was completed in September of 2012.

Now on the expense side, adjusted operating expenses increased by $2.1 million versus last year and included about $0.5 million of expenses related to the Sunrise acquisition. There is some seasonality with operating expenses as activity does tend to be correlated with weather. So we do expect operating expenses to come in higher in the third quarter relative to the first and even the second.

Today, we increased our full year guidance for adjusted EBITDA and distributable cash flow, to include the impact of the Sunrise acquisition. We’ll now forecast 2013 adjusted EBITDA of $113 million to $118 million and distributable cash flow of $95 million to $100 million. We also provided third quarter adjusted EBITDA guidance of $30 million to $33 million.

Now quick comment on ongoing maintenance CapEx and coverage ratio. We continue to forecast $17 million of ongoing maintenance CapEx for the full year. But year-to-date we have spend only $4.2 million, so clearly the maintenance CapEx is back-end loaded in the year. This is another seasonal influence and we expect the third quarter to see the highest level of on going maintenance CapEx compared to other quarters. This will likely result in a third quarter coverage ratio of around 1.0 times.

We now four quarters of history as a public company and over those 12 months our coverage has averaged 1.25 times. So what quarter-to-quarter you will see our coverage ratio fluctuate and sometimes fall near 1.0 times or reach nearly 2.0 times. We intend over the long-term to maintain coverage of at least 1.1 times. Early this month we announced a quarterly cash distribution of $0.40 per unit to the second quarter of 2013. This is a $0.03 increase from the first quarter distribution or 8% sequential growth.

The distribution will be paid on August 14, the unit holders of record at the close of business on August 5. Based on the accretion of the Sunrise acquisition and the underlying growth in our business we have a line of sight on $0.03 quarterly increases each quarter at least through the end of 2014. The $0.03 run rate translates into an expected fourth quarter 2013 distribution per unit that is 31% higher than the fourth quarter 2012 distribution. It also translates to an expected fourth quarter 2014 distribution per unit 26% higher than the expected fourth quarter 2013 distribution.

And finally, a comment on our liquidity position. After taking into account the net proceeds from the equity offering and the cash payment made for the Sunrise acquisition, the partnership has zero debt outstanding and approximately $46 million of cash. We also have $350 million available under our credit facility.

With that, I’ll turn it back to Nate.

Nate Tetlow

Thank you, Randy. This concludes the comments portion of the call. Mike, can you please open the call for questions.

Question-and-Answer Session

Operator

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

John D. Edwards – Credit Suisse Securities LLC

Yeah, good morning, everybody.

Randall L. Crawford

Good morning, John.

John D. Edwards – Credit Suisse Securities LLC

Just real quick. So the $0.03 sequential quarterly increases you’re expecting through the end of 2014, that contemplates no addition dropdowns. Is that correct?

Randall L. Crawford

That’s correct John.

John D. Edwards – Credit Suisse Securities LLC

Okay, great. All right. And then with your pipelines as I understood it, they're essentially full. I guess what's the thought process on capital spend on midstream going forward? I think this year you're budgeting around $200 million. Do you expect that to be a bit higher going forward?

Randall L. Crawford

John, I think the $200 million, I guess I am not sure, where from EQM, our expansion capital is not at that level, you might be…

John D. Edwards – Credit Suisse Securities LLC

I meant at EQT, I meant up at the parent level for midstream type projects.

David L. Porges

The CapEx there is, we are expecting $320 million this year.

John D. Edwards – Credit Suisse Securities LLC

$320 million, okay.

David L. Porges

Right.

John D. Edwards – Credit Suisse Securities LLC

Okay. And is that a reasonable trajectory going forward?

David L. Porges

It usually runs about 20% to 25% of the drilling capital, so it will go up as that goes up or down, as that goes down, but a reasonable.

John D. Edwards – Credit Suisse Securities LLC

About the same. Yes, okay. All right, and then I guess the only other question was with no debt on the balance sheet, when do you expect to use any leverage, I guess, maybe what the $110 million payment on the rest to Sunrise?

Randall L. Crawford

We’re certainly contemplated for that.

David L. Porges

Yeah, I think we’ve talked about this overtime, we want EQM to be an investment grade credits, so we’ll shoot for three or four times debt to EBITDA level overtime. So we expect to be using more debt as acquisitions happen in the future, but we’re not going to talk about how we’ll specifically finance any individual transaction right now. Just expected that usage to go up overtime toward that investment grade kind of a metric.

John D. Edwards – Credit Suisse Securities LLC

Okay, great. That's it. That's all I had. Thank you.

Operator

The next question we have comes from Derek Walker, Bank of America Merrill Lynch.

Derek Walker – Bank of America Merrill Lynch

Hey, good morning, guys.

Randall L. Crawford

Good morning, Derek.

Derek Walker – Bank of America Merrill Lynch

Just a quick one. You kind of addressed it a little bit in your formal remarks, but just can you give you us a little more color around the third-party agreement and sort of the risks there? You’re trying to get that closed. I think you alluded to this transaction has to close under some regulatory issues there, but can you just give a little more commentary around that?

0x01 graphic

Well, I think that’s, again, contingent on the sale of equitable gas company and the regulatory approvals and, I mean, EQT has said that we do expect – continue to expect approval by year-end. And so, that’s really the only contingency as the ultimate approval.

Philip P. Conti

And the long lead-time on those, it’s just the nature of the beast when it comes to local distribution companies.

Derek Walker – Bank of America Merrill Lynch

Got it.

Philip P. Conti

That was a transaction that was announced in kind of the middle of December of 2012, and EQT said at the time, if I recall, that was probably going to take about a year. And so we used to take a year and a half to get those things closed and that’s tended to come in to more like about a year. So everything at this point has really been consistent with that guidance and there’s been nothing that is inconsistent with that that’s come up since.

Derek Walker – Bank of America Merrill Lynch

Okay, great. And then just kind of a softball question, but as far as how you’re thinking about dropping down more assets and sort of the timing around that?

Randall L. Crawford

Well, I think we said in the past that’s going to be lumpy. We’re going to try to drop down assets and EQT will try to drop down assets and raise capital at least to the extent of the capital that it spends in its own midstream business, but it will be lumpy over time. EQT believes that those cash flows are more value in EQM, so it going to try to get them down there as quickly as it can.

0x01 graphic

Okay, great guys. That’s it for me.

Operator

It appears that we have no further questions at this time. We’ll go ahead and conclude our question-and-answer session. At this time I’d like to hand the conference back over to management for any closing remarks, gentlemen.

Nate Tetlow

Thank you for listening today, that concludes the call.

Operator

And we thank you sir and to the rest of the management team for your time. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, have a great day everyone.

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!