EQT Midstream Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: EQT Midstream (EQM)

EQT Midstream Partners LP (NYSE:EQM)

Q4 2013 Earnings Conference Call

February 13, 2014 11:30 AM EST


Nate Tetlow – Manager-Investor Relations

Randall L. Crawford – Senior VP, President-Midstream & Commercial

David L. Porges – Chairman, President & Chief Executive Officer


Jerren A. Holder – Goldman Sachs & Co.

John D. Edwards – Credit Suisse Securities (NYSE:USA) LLC (Broker)


Good morning, everyone, and welcome to the Year-End 2013 Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note that today’s event is being recorded.

At this time, I would like to turn the conference call over to Mr. Nate Tetlow. Sir, you may begin.

Nate Tetlow

Thank you, Jamie. Good morning and welcome to the year-end 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 Chief Operating Officer, 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 10025566. 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 fourth quarter and the full-year, 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, filed with the SEC and as updated by any subsequent Form 10-Qs, which are also on file with the SEC and are available on our website, and also will be in the Partnership’s Form 10-K for the year-ended December 31, 2013, to be filed with the SEC.

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 the call over to Randy.

Randall L. Crawford

Thank you, Nate, and good morning, everyone. As you saw from the press release this morning, we reported fourth quarter 2013 adjusted EBITDA of $36.3 million and distributable cash flow of $26.7 million. For the year, adjusted EBITDA was $119.5 million and distributable cash flow were $101.4 million, both of which were ahead of our guidance.

Our strong operational and financial results continue to be driven by the tremendous growth in the Marcellus development around our assets. Before we get into the details on the quarter, I want to point out two things that will help when comparing results to last year.

First, our historical financial statements including 2012 have been recast to include the Sunrise Pipeline, which we acquired in July of 2013. This is something we will have to do after each drop from EQT. And second, in December we entered into a capital lease agreement with EQT to the Allegheny Valley Connector or AVC. EQT acquired AVC in December as part of the transfer of its utility business.

The AVC asset consists primarily of a 200 miles per regulated pipeline that interconnects with our FERC-regulated Equitrans transmission system and extends North, West, and East in the Central Pennsylvania. AVC adds to the drop inventory of our parent, but because it is a FERC-regulated EQMs Equitrans transfer pipeline will operate the system and make lease payment to EQT, because the lease is the capital lease the partnership will report the revenues and expenses of AVC in its financial statement.

However, the lease payment is designed, so that AVC will not have a positive – net positive or negative impact on the partnership’s distributable cash flow. If you recall, this is the same structure we used with the Sunrise Pipeline before we acquired Sunrise.

So in order to provide you with a more meaningful comparison when discussing financial results, we will do so on an adjusted basis to exclude the impact of AVC.

Adjusted operating revenues for the quarter were $49.5 million, or 18% higher than the same quarter 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. Adjusted operating expenses for the quarter were nearly flat compared to the same quarter last year after adjusting for $2.5 million non-cash favorable reserve reversal in the fourth quarter of 2012.

And moving on to guidance, we reiterate our full year 2014 adjusted EBITDA forecast of $170 million to $175 million and distributable cash flow forecast of $148 million to $153 million. For the first quarter, we expect adjusted EBITDA of $36 million to $39 million. We recently announced a cash distribution of $0.46 per unit for the fourth quarter of 2013.

The distribution is 7% higher than the previous quarter distribution and 31% higher than the fourth quarter 2012 distribution. The distribution will be paid on February 14 to all unitholders of record at the close of business on February 4. We continue to expect $0.03 quarterly increases each quarter at least through the end of 2014, and this is without further drops from EQT. As we look out beyond 2014, we believe our organic growth and acquisition opportunities will support annual distribution per unit growth of at least 15% for several years.

Moving on to our liquidity position. At year-end, we had no debt and $18 million cash. In January, we did utilize our revolving credit facility to make the $110 million cash payment to EQT for the deferred consideration portion of the Sunrise acquisition. The deferred consideration was related to transmission precedent agreement that became effective when EQT closed its utility sale.

Since our IPO a year and half ago, we have talked a lot about the strategic location of our assets, which run through the heart of the Marcellus and interconnects with five major interstate pipelines. As Marcellus development by EQT and other producers continues to accelerate, we will continue to leverage our existing asset position. We will do this by executing a strategy of expanding and extending our asset footprint.

In December we announced 10 year firm agreements with Antero Resources to provide transmission services to support their West Virginia Marcellus development. This is an example of expanding our system, we complete, we will complete two separate projects that include compression additions and pipeline looping, and we’ll ultimately add a total of 200 billion Btu per day of capacity all of which is subscribed by Antero.

The first 75 billion Btu per day will be in service on April 1, with the remaining capacity be completed and in service by mid year 2015. In January, we initiated an open season with FERC for the Ohio Valley Connector. This project is an example of extending our system, the project will connect the Western leg of Equitrans in West Virginia to both the Texas Eastern Pipeline and Rockies Express Pipeline in Clarington, Ohio.

The project will give Marcellus producers access to options to move gas back to pipeline serving Chicago and the Gulf Coast, or a points further West in Ohio. The project is estimated to be in service in the second quarter of 2016.

At this point the open season is ongoing and we won’t have a final project scope until we have a better idea of capacity needs from the producers. Depending on a few factors, including the ultimate cost and timing, the Ohio Valley Connector will either be financed by the partnership as an organic growth project or by EQT, which will add to their drop down inventory. We will provide an update on this decision and project scope later in the year.

Either way, the project is not expected to impact the 2014 capital budget as the majority of capital spend will be in 2015 and 2016. Okay in summary, we had an excellent 2013 and we look forward to continue our efforts to grow cash flows and distributions in 2014 and beyond.

And with that, I will turn it back to Nate.

Nate Tetlow

Great, thanks, Randy. Jamie, we’re now ready for the Q&A.

Question-and-Answer Session


And ladies and gentlemen at this time we’ll begin the question-and-answer session. (Operator Instructions) And our first question comes from Jerren Holder from Goldman Sachs.

Jerren A. Holder – Goldman Sachs & Co.

Hi, good morning. Thanks for taking my call.

David L. Porges

Good morning, Jerren.

Jerren A. Holder – Goldman Sachs & Co.

Just wanted to I guess touch back on, I guess the drop down strategy here, I know we had one last summer just in terms of general timing, should we be expecting one per year or how do you guys think about, timing of drop downs and what not?

David L. Porges

Sure. In EQT question, the way EQT talks about it is trying to get their Midstream EBITDA down into EQM, because I think that’s the best place for and gets discounted at the appropriate cost of capital et cetera. So there is a bias towards getting doing drop downs as quickly as possible. There are some things in that that dictate the pace and more specifically assets being ready to drop. But I would say at least one asset drop a year is how EQT thinks about it.

Jerren A. Holder – Goldman Sachs & Co.

Okay. And just in terms of coverage, I know you guys guided to the 1.1 to 1.5 times back in December when you gave your outlook for 2014, just in terms of that range, considering the potential to be at the upper end of that range, I know you guys reiterated the minimum or the $0.03 per quarter increases for 2014, but thinking about that and the potential for drop downs and coverage maybe even shooting over 1.5 times. How do you think about your distribution, I guess grow the outlook from that context?

David L. Porges

We’re comfortable with the guidance that we provided on that. And as far as the coverage looking like it might be at the high end, that is, frankly, one of the things that we’re weighing when we – at both the EQT and EQM levels when they make decisions on which of the projects that they’re considering should be constructed at the EQT level and then dropped, or at the EQM level, even though we certainly don’t have a plan to keep coverages extremely high over the course of time.

We do think over the long haul it might be in EQM the best interest to be able to take on some of these projects themselves. And that would require that they realistically they’re using a little bit of that coverage in the near-term and, of course, using this Ohio Valley Connector project as Randy discussed as an example. And then within a couple of years time, you get a lot more cash flow coming in from a project that was constructed at the EQM level.

So there is a couple of those moving pieces. But you’re right that we don’t expect that we’re going to have a, an extremely elevated coverage indefinitely. It will be a combination of increases in distributions and then the longer-term benefits of having more projects being constructed at the EQM level.

Jerren A. Holder – Goldman Sachs & Co.

Okay, I guess moving over to volumes obviously we see the very cold weather here. And obviously the strong demand in the Northeast in general. Have you guys seen those volumes going to pickup on your pipelines or is that more of a EQT production kind of push? How do you think about that?

David L. Porges

Well, obviously producers want to produce 365 days a year everyday and we continue to move all of their product. We are seeing obviously with our connections, with our local distribution market, more volumes that with colder weather somewhat seasonal and certainly that that is an aspect but a large portion of our cash flows are in the fixed demand charges in our large portion on the variable rate, but having said that we are obviously with the colder weather seeing an increased throughput and some positive interruptible type volumes.

Jerren A. Holder – Goldman Sachs & Co.

Okay thank you.


And we do have the additional question from John Edwards from Credit Suisse. Please go ahead with your question.

John D. Edwards – Credit Suisse Securities (USA) LLC (Broker)

Yes, could you just remind us what the 2014, CapEx budget plan is?

Philip P. Conti

Yes, it was $80 million to $85 million of which $55 million was for organic growth.

John D. Edwards – Credit Suisse Securities (USA) LLC (Broker)

Okay. And then as far as the expected size of drop down, you’re saying one for you, just kind of range of size you are expecting for this year?

Philip P. Conti

I don’t think we’ve given our range, I think EQT has said that EQT is going to spend $475 million on midstream project this year and EQT has said that that would sort of be a floor for the size of the drop they’d like to do on a given year. But we’re not going to give a range at this point in time its going to be specific to the next asset in the queue that’s ready to be dropped will dictate the size.

John D. Edwards – Credit Suisse Securities (USA) LLC (Broker)

Okay, thank you.


And gentlemen, at this time, I am showing no additional questions. I’d like to turn the conference call back over for any closing remarks.

Nate Tetlow

Thank you everyone for listening. That concludes the call.


And ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending today’s presentation. You may now disconnect your telephone lines.

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