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EQT Midstream Partners, LP (NYSE:EQM)

Q3 2013 Earnings Conference Call

October 24, 2013 11:00 a.m. ET

Executives

David Porges – Chairman, President and Chief Executive Officer

Randall Crawford – Senior Vice President and President, Midstream, Distribution & Commercial

Philip Conti – Director, Senior Vice President and Chief Financial Office

Nate Tetlow – Investor Relations Manager

Patrick Kane – Chief Investor Relations Officer

Analysts

TJ Schultz – RBC Capital Markets

John Edwards – Credit Suisse

Ray Deacon – Brean Capital

Operator

Good day, and welcome to the EQT Midstream Partners Third Quarter Earnings Conference Call. 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 Nate Tetlow, Chief Investor Relations Officer. Please go ahead.

Nate Tetlow

Thank you. Good morning and welcome to the third 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 a moment, Randy will discuss the results of the quarter which will be followed by Q&A. 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.

Randall Crawford

Thank you, Nate, and good morning everyone. The third quarter was another strong operational financial quarter, as well as a very exciting one for EQM, in that we completed our first acquisition, the Sunrise Pipeline. On July 22, we closed on the purchase of the Sunrise Pipeline, the first asset dropdown from EQT. Sunrise is a FERC-regulated transmission and storage asset with a current throughput capacity of 400 billion Btu per day, all of which is subscribed under firm transportation contracts.

Our third quarter results include a full quarter of Sunrise and prior period financial statements have been recast to reflect the acquisition. As you saw from the press release this morning, we reported third quarter 2013 adjusted EBITDA of $33.1 million and distributable cash flow of $29.2 million. Operating revenues for the quarter were $11.4 million or 33% higher than the same period last year. The increase is due to higher contracted transmission capacity and increased system throughput, both of which are consistent with the growth in Marcellus production experienced by EQT and other producers. Operating expenses for the quarter were nearly flat compared to the same quarter last year.

Moving on to guidance. We expect full year adjusted EBITDA and distributable cash flow to come in near the high end of our previously provided guidance, or $118 million of adjusted EBITDA and $100 million of distributable cash flow. We are on track to add 150 billion Btu per day of transmission capacity in the fourth quarter for the completion of the low pressure East project and we have already began work on the Jefferson compressor expansion project that will add 550 billion Btu per day of transmission capacity in the third quarter next year.

The majority of the capacity associated with these projects has been sold under long term fixed fee based contracts. Both projects are a perfect example of EQM’s ability to leverage its existing Marcellus footprint to provide organic growth through competitively priced Pipeline and compression expansion.

Early this week, we announced a quarterly cash distribution of $0.43 per unit for the third quarter of 2013. This is a $0.03 increase from the previous quarter or 8% sequential growth. The distribution we paid on November 14 to all unit holders of record at the close of business on November 4. We continue to expect $0.03 quarterly increases each quarter at least through the end of 2014. This is without further drop downs from EQT.

AT the end of the quarter, we had zero debt outstanding and $31 million of cash. We also have $350 million available under our credit facility. We have now completed our fifth quarter as a public company and as you have seen, we have been able to produce cash flow and distribution growth. This is a credit to our team’s ability to capitalize on the strategic location of our assets, which lie in the heart of the Marcellus in southwestern Pennsylvania and northern West Virginia.

EQT and third party producers continue to experience tremendous production growth, which has resulted in increased demand to connect Marcellus supply with outlets to demand markets. As you look forward from here, while the upper trans system provides the footprint that would be nearly impossible to replicate, we must continue to evaluate projects to expand and extend our system to capitalize on the significant midstream opportunity that the Marcellus and Utica development are creating.

Our focus will continue to be on providing solutions to EQT. But it is also important for us to provide solutions to third party producers in the region. By including third parties, the economics are enhanced for all shippers and EQM. The Sunrise Pipeline project is an example of such a project. EQT anchored the project and reserved 600 billion BTU per day of capacity. As a result of EQT’s anchor commitment, we were able to achieve some economies of scale in Sunrise larger, which subsequently led to the sale an additional 350 billion BTU per day to third parties.

When looking at the third quarter revenues generated by EQT and third parties, revenues grew at roughly the same rate, about 30% year over year. While we are pleased with the success we have achieved to date in growing third party revenues, we are intent on continuing to build upon that success. We are currently evaluating several midstream projects for EQT and third parties and believe there is significant opportunity to continue to invest in organic projects over the next several years. The underlying strategy related to these opportunities is quite simple. They either leverage our existing assets or they extend and expand our asset footprint. We intend to provide additional details on specific projects in mid-December after the Board approves our 2014 capital and operating budget.

With that, I’ll turn it back over to Nate.

Nate Tetlow

Thanks, Randy. We’re now ready to open the call up for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from TJ Schultz of RBC Capital Markets. Please go ahead.

TJ Schultz – RBC Capital Markets

I guess just a couple of questions on the focus for organic growth CapEx at the EQM level. Obviously the midstream stand at -- the corp level is quite a bit higher and maybe there’s more of a focus to capture some of that organic spend at EQM. Can you help us think about what percentage of that spend you think EQM can handle which I do understand increases as the MLP gets larger or will higher organic spend at EQM be a separate function and more focused on some of these third party opportunities?

David Porges

The issue isn’t really a percentage of anything related to EQT. It’s all got to do with EQM’s ability to wear in progression construction funds without inhibiting its growth in distributable cash flow. We roughly assumed but just very rough almost for example purposes that probably 10% or so of your capital can be invested in that way. That obviously grows with the size of the company. But really it’s all about what can EQM wear? Every time there’s a project we’ll take a look at it and see, can EQM wear this on its own? Can it live through that period of construction timing when it’s got capital invested but that project isn’t generating cash flow. To the extent that the answer is you can wear it, then we’ll go with EQM level. But that’s regardless whether their spend at EQT level, higher spend, same spend or lower spend on EQT level.

TJ Schultz – RBC Capital Markets

As we think about that at the MLP level, does that have any implication on your target coverage level on distributions? Certainly you’ve been running quite a bit higher than the target of 1.1 times since the IPO. But as we think about some capital outlays at the MLP preceding immediate cash flow, is there more coverage you want to keep on the distribution going forward?

David Porges

No, I wouldn’t say that. I would say that the way it’s related in that it is probably easier to wear projects at the EQM level as its coverage prior to the project was higher, because the target all in would remain the same. The coverage target remains the same. But it could be when you look at those higher coverages, that would – it’s not unreasonable for you to infer that that’s the reason that we’re now talking about more projects at the EQM level that we could wear it to some extent.

TJ Schultz – RBC Capital Markets

Just lastly, shifting gears on maintenance CapEx. Third quarter I think you all said is typically the seasonally highest quarter for ongoing maintenance CapEx. You still appear to be running quite a bit below your full year guide to, I think it’s $15 million now. So maybe how we should be looking about that ongoing spend with the implication being that 4Q will be in the $7 million range versus $2 million to $3 million or $4 million the past few quarters.

Randall Crawford

Yeah. I think as we’ve said on previous calls, it can be rather lumpy between the third and the fourth quarter and we continue to be on track on that guidance. I think you’ll see the larger spend into the fourth quarter because a lot of the maintenance projects they’re still ongoing and will be completed into the fourth quarter. So, a little bit of lumpiness in terms of the timing of those projects. But you’ll see more maintenance capital in the fourth quarter. That will get us on track to our guidance that we’ve provided.

Operator

The next question comes from John Edwards of Credit Suisse. Please go ahead.

John Edwards – Credit Suisse

Congrats on another nice quarter. Just if I could follow up TJ’s question and you were talking about in effect wearing construction at the EQM level. I’m just curious given there’s no debt on the balance sheet, would that imply you could probably do more at the EQM level as opposed to up at the EQT level?

David Porges

We could, but that’s just one of the factors. The interest rate on debt of course that would also – that would mean that you’re investing capital and while there are projects in construction, you’re paying cash interest, but you’re not getting anything in return for it. So you have the same --- it’s all part and parcel of the same issue. But again from EQM’s perspective, EQM just needs to be prepared to accept whatever EQT is ready to drop. That’s one of the reasons we’re having to drive power out of the sky.

It doesn’t – and part of that being ready to accept it is what if it happens? What if there’s a period of a month or two or something where there’s some leaps in the capital markets? EQM wants to say we’re just going to as it were take a look and keep on ticking. We’re just going to keep moving and that’s just a speed bump. That’s really the purpose for having the dry powder so that EQM is always prepared for let’s say one more drop.

John Edwards – Credit Suisse

Now, what you build does this capitalize the interest for construction?

David Porges

I don’t know, no. Those banks I think – Phil used to work for one of those banks.

Philip Conti

Probably going to get paid monthly.

David Porges

You might capitalize it on the balance sheet, but every stop that the bank rejects.

John Edwards – Credit Suisse

Okay, so you’re still paying? Okay, I got you. Fair enough on that. Then I was just curious on in light of the fact that we keep hearing Marcellus production is running well above most observer forecasts. Are you looking for upward revisions to the capital spend outlook of the parent? And then I guess the other question is, how is any congestion generally in the northeast impacting plans for EQT and EQM?

David Porges

On the first part I don’t know that whatever EQT decides to do in spending really has an immediate effect on EQM because there is an inventory of projects. Again the bias would be for some of the projects if you can – if you think you can make it work to invest at the EQM level, that’s probably the most efficient thing to do. But I think Randy’s probably the best one to answer the congestion issue on the northeast part of the play.

Randall Crawford

John, from a midstream perspective the Marcellus is a tremendous opportunity. I think our assets are well positioned to take advantage of that opportunity. We have been to the last few years really focused on staying ahead, getting firm commitments in our fee-based businesses. So as I mentioned in my comments, certainly the rapid growth is a challenge, but I think EQT and EQM are well positioned to move this product going forward. As I said, we’re looking to expand and extend and always looking – our team does an excellent job at looking at providing liquidity markets, access to liquidity, connecting supply producers to markets. That’s one of the values of our EQM asset. I think that’s working quite well.

John Edwards – Credit Suisse

Operator

The next question comes from Ray Deacon of Brean Capital. Please go ahead.

Ray Deacon – Brean Capital

Randy, I was wondering, are you able to disclose how much of the capacity on the new compression and new firm transportation you’re creating would be subscribed to by EQT?

Randall Crawford

With respect to the capacity that was on the Sunrise, it’s approximately 600 million with EQT and the other 350 million with third parties.

Ray Deacon – Brean Capital

Got it. Okay, and the compression that on at the end of next year, does that benefit EQT or?

Randall Crawford

It’s a – but that was the total number that I gave you, inclusive of the compression. With the compression addition it’s actually – I think it’s about 50-50 actually between third party customers that is taking the additional compression capacity and EQT.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Nate Tetlow for any closing remarks, gentlemen.

Nate Tetlow

Thank you everyone for listening. That concludes the call.

Operator

The conference call has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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