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Midcoast Energy Partners LP (NYSE:MEP)

Q4 2013 Earnings Conference Call

February 12, 2014 9:00 AM ET

Executives

Sanjay Lad - Director, IR

Greg Harper - Principal Executive Officer

Terry McGill - President

Steve Neyland - VP, Finance

Darren Yaworsky - Treasurer

Analyst

Stephen Maresca - Morgan Stanley

Brian Zarahn - Barclays Capital

Gabe Moreen - BofA Merrill Lynch

Jerren Holder - Goldman Sachs

Sunil Sibal - Citigroup

Yves Siegel - Neuberger Berman

Operator

Good day, ladies and gentlemen, and welcome to the Midcoast Energy Partners’ Fourth Quarter 2013 Earnings and 2014 Guidance Conference Call. My name is Tihisha and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference to your host for today, Mr. Sanjay Lad, Director, Investor Relations. Please proceed.

Sanjay Lad

Great, thank you, Tihisha. Good morning, and welcome to the 2013 fourth quarter earnings and 2014 guidance conference call for Midcoast Energy Partners. This call is being webcast and a copy of the presentation slides, supplemental slides, condensed unaudited financial statements and news release associated with it, can be downloaded from the investors section of our website at midcoastpartners.com. A replay will be available later today, and a transcript will be posted to our website shortly thereafter. I will be available after the call for any follow-up questions you may have.

Our speakers today are; Greg Harper, Principal Executive Officer; Terry McGill, President; and Steve Neyland, Vice President, Finance. Available for the Q&A session, we also have Mark Maki, President, Enbridge Energy Partners; John Loiacono, Vice President Commercial Activities, Midcoast Energy Partners; Darren Yaworsky, Treasurer; and Noor Kaissi, Controller.

Our legal notice; this presentation will include forward-looking statements. The risks associated with forward-looking statements have been outlined in the earnings release and the Partnership's SEC filings, and we incorporate those by reference for this call. This presentation also contains certain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found in the investors section of our website.

Please turn to Slide 2. I will now turn the conference over to Greg Harper, Principal Executive Officer.

Greg Harper

Thank you, Sanjay. Good morning and welcome. I'm pleased to be with you on the call today and extremely excited about joining Enbridge and getting to lead Midcoast Energy Partners. With our recently completed initial public offering in the fourth quarter, we expect our opportunity for attractive capital investment to be enhanced, and we’re positioned to deliver visible and disciplined growth to our unitholders.

As it relates to our agenda for this morning, I'll provide an overview of the strategic rationale for Midcoast and our attractive value proposition. Then pass it along to Terry and Steve to discuss our business development and financial outlook.

Let's move on to Slide 3. Midcoast Energy Partners was established by Enbridge Energy Partners, or EEP, to enhance the strategic focus of their underlying business segments and create a pure play natural gas and NGL midstream business. With enhanced access to capital, and a team exclusively focused on gas pipelines and processing, we are positioned to more successfully grow the natural gas business. The agility to respond to market opportunities will be enhanced by our strategic focus, allowing us to better capitalize on current and prospective growth opportunities.

It is clear that we have a very motivated sponsor that is truly vested in Midcoast's success. Enbridge Partners has visible capital needs as they execute on their current organic growth program and look to advance their North American crude oil strategies. To meet their capital funding needs, Enbridge Energy Partners intends to utilize Midcoast as a dropdown vehicle to bolster their funding program.

This intention by our sponsor creates a visible dropdown opportunity set for Midcoast to acquire additional interests of the natural gas business, providing for a predictable, controlled, and accretive growth for our unitholders. We expect Enbridge Energy Partners to execute the first dropdown, post-IPO, to Midcoast Energy Partners in mid-2014, with a target size between $300 million to $500 million. Collectively, our enhanced access to capital, visible dropdown opportunities, and agility to respond to market opportunities underpin our growth outlook and attractive value proposition.

We can do a lot to successfully grow this business. Terry and the commercial team are currently pursuing a number of meaningful growth opportunities around our existing asset platform. And with Midcoast now up and running, we not only have the ability to pursue opportunities outside the existing asset footprint, but we intend to do so to enhance the scale and diversification of the existing business.

If you can turn to Slide 4, I'll now turn the call over to Terry, but will be back at the conclusion of the presentation to make a few closing remarks. Terry?

Terry McGill

Great, thanks, Greg. As Greg said, MEP is positioned to grow EBITDA through a combination of dropdowns and executing on our capital growth program. Enbridge Partners is executing on a multibillion-dollar organic growth program as it expands its crude oil transportation infrastructure in the United States. To fund its capital needs, our sponsor intends to drop 100% of their natural gas and NGL midstream business held by Midcoast Operating within five years. In addition to the recent organic growth projects placed into service, such as the Ajax gas processing plant and the Texas Express NGL System, we will look to secure and execute on our estimated $1.2 billion capital program through 2017, including the Beckville Processing Plant, which is currently under construction.

With the current environment of historically low natural gas and NGL prices, with the exception of propane, our distribution growth is poised to accelerate above our base case’s outlook as commodity prices recover. As such, we believe the current commodity price cycle invites an attractive entry point to the midstream business.

Taken together, visible and predictable dropdowns, our robust organic growth program, complemented by the ability to benefit from a recovery in commodity price positions allows us to drive visible EBITDA growth at Midcoast Operating and supports our targeted mid-teen distribution growth rate through 2017.

Please turn to Slide 5. The Midcoast gathering, processing, and transportation assets represent the foundation of Midcoast Partners, contributing approximately 90% of the business earnings. Our assets are located in key strategic producing basins in Texas and Oklahoma. We seek to provide customers with best-in-class service by leveraging our large geographic footprint. We provide integrated wellhead-to-market service from our systems to major energy hubs in the United States, Gulf Coast and the Mid-Continent region. Our focus on safety and operational excellence drives continuous improvement in our system reliability.

Now I would like to highlight the key assets and segments of our midstream business. Our Anadarko system is strategically located to capture liquids-rich natural gas volumes from the Granite Wash play, including the Hogshooter, Checkerboard, Cleveland, Skinner, Red Fork, Atoka, and Morrow formations. We expect development of the Granite Wash play to continue due to the prolific nature of the wells in addition to favorable current market prices for NGLs and crude oil, and the application of horizontal drilling and fracture technology.

To accommodate the expected growth of this region, we recently placed in service our 150 million cubic feet per day Ajax natural gas processing plant, which began service in late 2013. Additionally, the Ajax Gas Plant is connected to the Texas Express NGL system, providing much needed NGL takeaway capacity and improved access to the Mont Belvieu NGL market hub.

Our East Texas system has a large geographic footprint that allows Midcoast to access production from multiple, well-established producing formations, including the

Haynesville, Bossier, Cotton Valley, Woodbine, Travis Peak, James Lime, and the Rodessa formations, among other emerging shale plays.

With recent advancements in drilling technology and multi-stage fracturing, our East Texas system is positioned to capture growth from emerging formations in the region. To capitalize on this trend, Midcoast initiated construction of the 150 million cubic feet per day Beckville Processing Plant in late 2013. This new plant is expected to be in service in the first quarter of 2015 and positions Midcoast to attract new, rich gas development to our system.

Now, the North Texas system is located in the Fort Worth Basin, which primarily serves customers' production from the Barnett Shale play. Producers continue to develop new sources of production in this established producing region. Producers in the region continue to be attracted to liquids-rich gas and oil production in the area.

The Texas Express NGL pipeline and gathering project commenced operations during the fourth quarter of 2013, and has facilitated the ramp-up of our Ajax plant. Texas Express will provide 280,000 barrels per day of NGL takeaway capacity from the liquids-rich basins in the Mid-Continent, Texas, and the Rockies, through interconnected pipelines to the premier NGL market at Mont Belvieu, Texas. This NGL mainline is expandable to 400,000 barrels per day.

Now, the Logistics & Marketing segment directly supports the Gathering, Processing, & Transportation segment by allowing Midcoast to offer integrated, value-added services from the wellhead to premium markets, thereby providing producers enhanced economics. To better ensure continuous operation and reliable service to our customers, the Logistics & Marketing business has secured critical NGL takeaway and fractionation capacity at the Mont Belvieu market hub. Additionally, the significant Logistics & Marketing truck and rail fleet, and our TexPan rail facility, enables Midcoast to reach beyond our existing pipeline footprint to seek new business, access niche markets, and pursue potential step-out opportunities in new, emerging producing regions.

So let's move forward to Slide 6. Midcoast is actively pursuing additional accretive growth opportunities. Midcoast will compete aggressively to capture new rich gas opportunities, extend our geographic reach, and look to diversify our asset footprint. Potential opportunities also exist to optimize and enhance our systems to generate higher margins from our existing base business, such as compression projects; plant upgrades like refrigeration; and tiered gathering services. Our extensive asset footprint in the East Texas region is well positioned to capture expected NGL-rich production growth in the Cotton Valley trend and to potentially expand into nearby

developing plays such as the Eaglebine.

We expect development of the Granite Wash play to continue due to the prolific nature of the wells, favorable economics from the associated rich gas, and the established gathering, processing, stabilization, and NGL takeaway solutions our system can provide customers. While still in the early stages of development, production from the Cline Shale formation near the Anadarko system represents an attractive opportunity to leverage our existing infrastructure footprint and takeaway network. We are continuing to pursue the full integration of the Texas Express NGL gathering system in the Anadarko and the North Texas regions.

We're also continuing to thoughtfully grow the Logistics and Marketing segment with investments throughout the NGL value chain. Our Logistics & Marketing segment enables Midcoast to provide bundled value-added services to producers from the wellhead to the market liquidity points. Logistics & Marketing is actively seeking new business to enhance takeaway and other active production areas as well, where there's undeveloped infrastructure and inadequate takeaway.

The ability to utilize our sizable truck and rail fleet to provide services to producers in these emerging areas can give Midcoast a potential early-mover advantage when the opportunities arise to develop pipeline infrastructure. And the investment outlook for the logistic and marketing segment is consistent with the current business segment mix.

So please turn to Slide 7 now, and I'll turn it over to Steve to discuss our financial outlook.

Steve Neyland

Thank you, Terry. Overall volumes in our Gathering, Processing, and Transportation segment are forecasted to remain steady through 2014. Our process considers a number of fundamental inputs when deriving our volume forecast. This includes insight around producer drilling plans and the associated decline curves in the areas where we operate, as well as the review of commodity price fundamentals and the related hedges we have executed. These factors provide us with confidence in our volume outlook and gross margin of the Gathering, Processing, and Transportation area.

Volumes on our Anadarko system are expected to decrease by approximately 5% to 10% in 2014, primarily resulting from the loss of one major customer on the system. However, we expect wellhead volumes on our Anadarko system will ramp-up over the course of the year, as we expect development of Granite Wash play to continue due to the prolific nature of the wells and the favorable economics associated with the liquids-rich production in the formation.

With a backdrop of forecasted weak ethane fundamentals, we expect ethane rejection to continue to persist primarily at some of our assets on our Anadarko system at levels comparable to 2013. The gross margin impact of the expected volume reduction can be partially offset with processing efficiency gains related to the addition of the new 150 million cubic feet a day Ajax cryogenic processing plant, which entered service in late 2013. We expect volumes in East Texas to hold flat in 2014 due to increasing levels of rich gas development and continued moderate level of drilling activity for dry gas in the forecasted natural gas pricing environment. Our recent decline in volumes is due to reduced drilling in our dry gas operating areas, predominantly in East Texas, along with the recent trend of dry gas wells that have been drilled but not completed.

Softer gross margins in dry gas areas are expected to be offset by improved margins on richer gas. Midcoast expects to be well positioned to benefit from this trend with the construction of the state-of-the-art Beckville cryogenic gas plant in early 2015. Volumes in North Texas are expected to remain flat in 2014, with activity heavily focused on development of oil resources in the region. Commodity prices are relatively consistent with our S-1, with approximately $4 gas and $92 WTI. Midcoast Energy Partners is forecasted to generate 105 million to 125 million of adjusted EBITDA in 2014; and 75 million to 95 million of distributable cash flow.

Please note that the Adjusted EBITDA figures shown here include Midcoast Energy Partners' equity earnings from our investment in the Texas Express Joint Venture. We expect distribution coverage to be greater than 1.2 times. The ramp-up and associated cash flows from our recent accretive organic growth projects and visible dropdown opportunities positions the Partnership to grow distributable cash and translate into meaningful distribution growth. The support from our strong sponsor, Enbridge Energy Partners, is demonstrated through financial support, risk management support, and major project execution expertise. Our supplemental slide deck provides additional details that support our 2014 outlook.

Please proceed to Slide 8. The chart on the left shows Midcoast Operating's expected 2014 capital expenditures. These values are shown at 100%, and the amount will be proportionately shared between Enbridge Energy Partners' and Midcoast Energy Partners' relative ownership interest. Construction of the Beckville plant in East Texas is proceeding as scheduled, with 110 million of capital spend forecasted in 2014. Expected growth capital associated with well connects will be approximately 50 million. We also expect to spend approximately 140 million on expansion capital, which includes additional compression to support new volumes, potential pipeline extensions and step-out projects in and around our asset base, and our growth enhancements.

Core maintenance of 65 million is forecasted in 2014. Midcoast Energy Partners maintains a balanced capital structure that will afford us with access to capital markets at a competitive cost of capital. Although Midcoast Energy Partners does not currently have a credit rating, we target credit metrics that are consistent with investment grade midstream entities. Our debt-to-EBITDA at IPO was 1.2 times, and the Partnership is targeting a debt-to-EBITDA ratio of less than 3 times going forward.

In connection with the IPO, Midcoast Operating and Midcoast Energy Partners are co-borrowers, and we entered into a revolving credit agreement up to $850 million. At the end of the year, Midcoast Energy Partners had approximately 515 million of available liquidity. Additionally, Midcoast Operating's liquidity is enhanced through access to a $250 million working capital facility.

To further elaborate on Midcoast's well-secured credit position, in addition to our 850 million base credit facility, Midcoast has an option to expand the facility to 1 billion with lender approval. Also in conjunction with the IPO, Midcoast Operating has entered into a financial support agreement with Enbridge Energy Partners, in which EEP will provide letters of credit and guarantees not to exceed 700 million in aggregate. Given our strong liquidity position, we anticipate funding the first dropdown since our IPO with 100% debt financing. We expect this to occur in mid-2014.

Please turn to Slide 9. On January 29th, Midcoast Energy Partners declared its first cash distribution of $0.16644 per unit based on the close date of the IPO of November 13, 2013. The distribution represents a pro-rated amount of our targeted Minimum Quarterly Distribution of $0.3125 per unit, or $1.25 per unit on an annualized basis. At the Midcoast Operating level, we reported fourth quarter adjusted operating income of 4.4 million and adjusted EBITDA of 37.4 million. At the Midcoast Energy Partners level, we reported adjusted net income of 5.7 million for the fourth quarter.

Operational and financial results for the post-IPO period were negatively impacted by producer freeze-offs due to extreme weather conditions experienced in the Texas Panhandle region, and unplanned downtime at one of Midcoast Operating's facilities, and are not representative of expected run rate. In the Gathering, Processing, and Transportation business, the decrease in adjusted operating income at Midcoast Operating, compared to the fourth quarter of 2012, was predominantly due to a decrease in pricing spreads between our major NGL market hubs, in addition to lower natural gas and NGL volumes on the system. The decrease in adjusted operating income was partially offset by a lower operating and administrative expenses for the quarter.

Additionally, the Logistics and Marketing business reported a fourth-quarter decrease in adjusted operating income over prior year, primarily due to lower NGL storage margins. This was partially offset by lower demand fees paid to natural gas third-party pipelines. Adjusted results are provided to more clearly focus on our underlying business performance. The main items eliminated from adjusted results are unrealized non-cash mark-to-market net gains and losses and other items noted in our supplemental slides.

To recap, the earnings and cash flow outlook for 2014 is supported by the ramp-up of projects placed into service in late 2013 and an expected dropdown from our sponsor in mid-2014. In 2014, we'll be focused on growing the business, improving cost fundamentals, and tying in new gas production to our systems, in addition to developing and executing on our longer-term strategies.

For further details on our financial results for the quarter, I encourage you to review our supplemental slides that are posted on our website.

Please turn to Slide 10, and I will now turn it back over to Greg for his closing remarks.

Greg Harper

Thank you, Steve. Just a few points of emphasis in closing, we're excited about the outlook for Midcoast Energy Partners. And with our enhanced access to capital, we are positioned to more successfully grow the natural gas business and respond to market opportunities. Our sponsor is motivated for Midcoast to succeed, to meet their capital funding needs, and they intend to utilize Midcoast as a drop-down vehicle to bolster their funding program.

With the visible and controlled drop-down opportunity set for Midcoast, complemented by the attractive organic projects underway, the Partnership is poised to deliver mid-teens annual distribution growth to our unitholders. In closing, I want to reiterate how enthused I am about joining the Enbridge team and the opportunity to work with Terry, Mark, and Steve. Our future at Midcoast Energy is very bright, and we appreciate your investment.

Thank you. And we'll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Stephen Maresca from Morgan Stanley. Please proceed.

Stephen Maresca - Morgan Stanley

Thanks good morning everybody.

Greg Harper

Good morning Stephen.

Stephen Maresca - Morgan Stanley

Thanks for taking my question. I wanted to talk just first a little bit about the forecast in terms of total EBITDA. You had about 264 at the S-1, for 12 months ended September 30; and now it's about 250, midpoint, which is a 5% decline. But looking at the NGL volumes and gas, you're down 8% to 10%. So my question is, are you assuming a little bit higher prices in your forecast going forward? Or is there something we're missing? Because I would've thought EBITDA would be down a little bit more than that 5%.

Greg Harper

Steve?

Steve Neyland

Yes. Hello, Stephen. Yes. So, yes, you're -- make sure I understand your question. You're asserting that the…

Stephen Maresca - Morgan Stanley

Your EBITDA, from the S-1 to now, is down about 5%. And I think if you look from where your S-1 was in terms of NGL volume forecasts, and gas volume forecast, you're down about 10% and 8%, respectively, to where you're forecasting now for 2014. So I was wondering -- I would have thought EBITDA would be down a bit more than the 5%, considering those volumes are down 10% and 8%. So is there something we are missing? Are you assuming a little bit higher prices to offset that? That was my question.

Steve Neyland

Yes, thank you. Thank you for clarifying.

Stephen Maresca - Morgan Stanley

No problem.

Steve Neyland

The answer is, effectively, the gross margin in the areas we operate is different, and so the predominant area where you've seen the decrease in volumes is going to be around East Texas. And so the volume -- I think when you compare back to the S-1, that that has an element of it, so the gross margin in that area is typically lower than our other areas that we operate in. So that creates that difference that you're looking at, as well as modestly different assumptions in and around some of our operating costs.

Stephen Maresca - Morgan Stanley

Okay. But nothing different on the commodity assumptions between IPO and today?

Steve Neyland

Commodity -- yes, they are ever so slightly different, but basically in the same ballpark; a modest difference there.

Stephen Maresca - Morgan Stanley

Modest. Okay.

Steve Neyland

So, commodity prices is not driving it.

Stephen Maresca - Morgan Stanley

Is it modest difference to the upside, though? Like you're assuming a little bit higher commodity prices now than at the IPO?

Steve Neyland

I would call it almost the same, Stephen.

Stephen Maresca - Morgan Stanley

Okay, okay. Moving on -- you mentioned, Steve, that you lost a customer on the Anadarko system. Can you just discuss what transpired there?

Steve Neyland

Yes, so this is consistent with the communication we provided in our S-1. This was an expected customer loss around the Anadarko area. So those volumes are coming off. And as we work commercially, we're back-filling that volume loss with new production around the area. So that was an expected adjustment. And we would expect some additional amounts of those volumes to come off in Q1 as the producer fully leaves the system. And then we'd see a ramp-up occurring in and around that area with other production.

Stephen Maresca - Morgan Stanley

Okay. And the final one for me, sticking with volumes. A little more color, if you could. So, sequentially, you were down a little bit -- about 7%, 8% in natural gas. But you're forecasting what looks to be a rise from there -- about 5% or so from here through the 2014 number. So just discuss what's giving you confidence of the turnaround, given we've seen some sequential declines over the past two to three quarters. And what are you seeing that's not in the numbers that we're seeing that gives you that confidence that it turns around and rises from here? That's it for me.

Terry McGill

Alright. Thanks, Stephen. A couple things in different areas. One of them is, as we mentioned in the call a little bit, was the wells have been drilled but not completed. We see the slight increase in the gas prices, but we also see those completions starting to happen; thus, we'll see increased volumes in our East Texas area. We'll see a slower ramp-up. I think North Texas is probably very steady-Eddie. And as Mr. Neyland mentioned, we will see back-filling of volumes behind that customer that left in the Anadarko area.

I think the big thing is we've got several gas wells that are drilled but not completed, and we see the completion schedules and the frac crews moving in even as we speak.

Stephen Maresca - Morgan Stanley

Okay. Thanks a lot, guys. Really appreciate it.

Steve Neyland

Thank you.

Operator

Your next question comes from the line of Brian Zarahn from Barclays.

Brian Zarahn - Barclays Capital

Good morning.

Greg Harper

Hello Brian.

Steve Neyland

Hello Brian.

Brian Zarahn - Barclays Capital

Just wanted to say welcome to Greg, and best of luck in the new role.

Greg Harper

Thanks, Brian.

Brian Zarahn - Barclays Capital

Looking in the fourth quarter, can you talk a little bit about what you think the estimated impact was of the freeze-offs and the unplanned downtime?

Greg Harper

Yes. Steve?

Steve Neyland

Yes. Hello, Brian. Yes, we're -- the amounts were approximately in there somewhere between $3 million to $4 million of freeze-offs; and the unexpected downtime, predominantly around our Mid-Continent area. So that would be our ballpark for that.

Brian Zarahn - Barclays Capital

Combined, that's a $3 million to $4 million impact?

Steve Neyland

Yes.

Brian Zarahn - Barclays Capital

Okay. And then I guess following up on one of Terry's comments on propane prices potentially offering upside. Can you talk a little bit about -- is that already baked into your guidance range? And the puts and takes of the higher prices; but your hedged propane prices are lower than spot. Maybe talk a little bit about those dynamics.

Steve Neyland

Sure. Yes, and for those with the supplemental slides, page 7 and 8 of our supplemental slides are probably useful in referencing through that. So, we are -- as it relates to our propane position, we are open some amounts on propane. And we have effectively put in a price that's consistent with market and consistent with the S-1. If prices rise, we would participate in that upside. Also, too, as it relates to slide 8, when you look at the scaling of slide 8 and our commodity price sensitivity, you'll notice that there is effectively more upside than downside in the pricing. And that's driven by the fact that we are using puts in certain places to participate in that upside, protecting the downside. And some of those financial instruments are around propane.

Brian Zarahn - Barclays Capital

That's helpful. Turning to drop-downs, the upside of the range is a little higher than I expected. Can you talk about some of the assumptions within that range in terms of multiples; interest you expect to drop down?

Steve Neyland

The size of the dropdown, Brian, is higher than you would have expected? Is that --?

Brian Zarahn - Barclays Capital

Well, the $500 million, the high end of the range of what you would -- the interest you would drop down is bigger than I thought for this year.

Steve Neyland

Right.

Brian Zarahn - Barclays Capital

So can you talk about what range of interest you're looking to drop down?

Steve Neyland

Yes. So without giving too much more detail, what we've -- and consistent with our communications during the IPO process -- is we've looked at multiples being in the 8 to 10 range as far as drop-down. So, as far as the sizing of it, Enbridge Energy Partners will obviously be a participant in that discussion, as to what makes sense, and they have communicated a need for additional funding. And so we'll work through the specifics on the sizing through our Special Committee process between Boards when that happens. But we felt that we're comfortable that the range that we've provided here, that the drop-down will sit somewhere in that area. So, without giving you too much more -- I know not probably a lot of visibility as to why $500 million. So I'm going to leave a little bit of that to the side, as it needs to work its way through independent committee processes and so forth. I don't want to compromise that.

Brian Zarahn - Barclays Capital

And would that multiple be on a 2014 or 2015 EBITDA basis?

Steve Neyland

I think that will be one of the issues that will be worked through when we get to that point with the committee.

Brian Zarahn - Barclays Capital

Okay. Final one for me. You've reiterated your guidance in distribution growth. Would you expect growth to begin concurrent with the drop-down, or potentially a

different timeframe?

Steve Neyland

I think we're going to see the growth in our forecast -- it grows throughout the year. So as you come into the back half of the year, there's probably -- you're making more EBITDA than you are in the front half. And so there's an expected increase there. As Terry noted, the ramp-up of the volumes in and around our Anadarko area being one of those aspects.

Greg Harper

Steve, this is Greg. Hello, Brian. I'd say, number one, it's going to be the Board of Directors' call on that distribution growth and how they want to go about it. But with any IPO, you want to get your legs under you and see how things go, and I think that's what we'll look to see here, and get our first quarter or so under our belts. And then see how things are going before we make that recommendation to the Board.

Brian Zarahn - Barclays Capital

Thank you.

Operator

Your next question comes from the line of Gabe Moreen from Bank of America. Please proceed.

Gabe Moreen - BofA Merrill Lynch

Hi, good morning everyone. Question I guess so far in terms of what you're seeing in the first quarter in terms of some of the operational hiccups you experienced in the fourth quarter between freeze-offs or downtime. I was just wondering if you're seeing any of that in the first quarter, and to what extent it's baked into your guidance.

Terry McGill

We are seeing some of that. The weather has been -- not like you guys -- but the weather has been pretty nasty still up in the Panhandle. Predominantly, our Panhandle area -- it's very extremely rural when we get snow and ice up there. Basically, as the wells freeze off, the producers can't get back out to -- well, they don't have enough people, but they can't get them all back at once. So we see a slower ramp-up from a particular icing or a weather condition. So we have seen some coming into the January period. I'm sorry, what was the second part of the question?

Gabe Moreen - BofA Merrill Lynch

Sure, Terry. It was just basically whether that that hiccup was embedded in the guidance, the continued operational stuff -- weather and the like.

Terry McGill

Yes, Gabe you are absolutely right.

Gabe Moreen - BofA Merrill Lynch

It is. Okay, alright. I know that Logistics and Marketing is not a big part of the business overall, but I'm just curious that others have obviously seen some upside in the fourth quarter from some of the pricing dislocations in NGL, and cheaper-priced inventory versus selling at higher prices. I'm just wondering whether you've seen some opportunities here in the first quarter, given some of the NGL pricing dislocations we've seen in the markets and also in terms of realized pricing in your different basins, whether you've been able to realize some upside given the differentials between basins.

Terry McGill

We have seen some upside, yes. To the extent we're unhedged, we have open barrels. We have seen upside in the propane. Every truck we have has been running, subject to any ice storms over in Georgia or Alabama. So, rail cars, trucks, have all been fully loaded. We've been getting calls from Michigan to try to get propane up there, but we've got our hands full with just the Southeast. So we have seen some upside in the propane area and a little bit in the basins -- dislocations, if you will, between the basins.

Greg Harper

And, Terry and Gabe, that's more talking first quarter than fourth quarter.

Gabe Moreen - BofA Merrill Lynch

Yes, okay. Got it. And then last question for me for Steve, just in terms of it sounds like debt financing the entire first drop, even at the higher end of the potential range. Just thinking about your long-term cost of capital around -- on the debt side of things, and when you would think about terming out some of that revolver capacity into longer-term debt paper.

Steve Neyland

I think I'll turn that question over to Darren Yaworsky who is on the call, who is our Treasurer.

You want to touch on that, Darren?

Darren Yaworsky

Absolutely. Thanks, Steve. Gabe, I think we're working through that process now. The timing on it -- probably don't want to be too transparent, but I think it probably would make sense that we would look to term out some of our exposure in concert with the drop-down.

Gabe Moreen - BofA Merrill Lynch

Great. Thanks, Darren. Thanks, everyone.

Operator

Your next question comes from the line of Jerren Holder from Goldman Sachs. Please proceed.

Jerren Holder - Goldman Sachs

Most of my questions have been answered, but just wanted to touch on drop-downs and balance sheet management. So, when the first drop-down essentially happens? Is there essentially an EBITDA credit you guys will get, given that you're targeting a lower than 3 times debt to EBITDA ratio?

Terry McGill

You want Darren to take that?

Steve Neyland

Sure. Darren, you want to…

Darren Yaworsky

We're not envisioning any EBITDA credit. Just want to make sure that I'm understanding your question correctly. So, if you can put a little bit more meat on that bone, so that I make sure I'm answering your question properly.

Jerren Holder - Goldman Sachs

Right. So, essentially, you have a drop-down potentially in mid-2014. That will be $300 million to $500 million fully debt-financed. So essentially your debt to EBITDA metrics will go up from, say, the 1.2 times post-IPO to some range. I haven't done the math, but I'm assuming that that number is going to be above 3 times. And that 3 times -- below 3 times leverage number seems to be what you guys are targeting. So I'm just wondering whether that's going to be a temporary period where maybe your covenants are relaxed or something else.

Darren Yaworsky

Yes, that's what I figured where you were going, so I wanted to make sure that I was answering your question correctly. I think probably the first point, for clarification, the EBITDA that we use for our covenant testing is the consolidated EBITDA, including 100% of the EBITDA that's generated from Midcoast Operating. So we won't see any kind of material spike above 3 times. It will probably be around 3 times debt to EBITDA. And then I think your point on covenants -- it's probably important to point out that our covenant threshold, including an acquisition, is 5.5 times. So we have a tremendous amount of covenant runway that shouldn't cause any angst with our lenders.

Jerren Holder - Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Sunil Sibal from Citigroup. Please proceed.

Sunil Sibal - Citigroup

A couple of questions. On the project backlog that you guys talked about in one of the slides -- has there been any recent addition to that backlog, post the IPO projects that you had laid out?

Terry McGill

None that have been announced, no.

Sunil Sibal - Citigroup

Okay. And then when you look at your guidance on mid-teen distribution growth through 2017, I was just curious if you could provide what kind of commodity-based assumptions is baked into that distribution growth?

Steve Neyland

Yes, I think, yes I'll take that. The assumptions are somewhat improving. Gas prices and NGL prices, as you move throughout the period -- as Terry noted, we're at a low point of the cycle; and as we look forward in time, we do see gas prices getting better. Certainly it's something with a 4 handle as you move out over the next three or four years, but NGL prices seeing some improvement certainly from current levels.

Sunil Sibal - Citigroup

And ethane primarily trading at a premium to gas price, I guess?

Steve Neyland

As far as the gas-NGL spread that you're referring to, the processing spread? Yes, but we would still see it being positive.

Terry McGill

But there's not a hockey stick in the price forecast. It's very gradual. There's not an assumption that everything will jump in 2015. That's not buried in there.

Sunil Sibal - Citigroup

Okay, thanks. Very helpful.

Operator

Your next question comes from the line of Yves Siegel from Neuberger Berman. Please proceed.

Yves Siegel - Neuberger Berman

Thanks, good morning everybody and Greg, welcome on board.

Greg Harper

Hello. How are you doing?

Yves Siegel - Neuberger Berman

I'm all right, thanks. Sounds like you're doing well, too.

Greg Harper

Yes.

Yves Siegel - Neuberger Berman

So I just had to quick ones. One, when you think about third-party acquisitions, what kind of criteria are you using? What kind of assets are you thinking about?

Greg Harper

Yes, I'll take that one, Terry. You need to know, consistent with kind of where you've seen me before, and what Terry and I are talking about and the team is, we want acquisitions that truly, fundamentally help our footprint. And where we can add value to it and complement our existing asset base, I think it's going to be one of the very first criteria. And, again, we can add some value to those assets.

Second is if we step out, then I would like to step out into an area where maybe there is a new shale play that is proving up nicely; that will continue to attract capital for drilling. We want to make sure that we're going into gathering opportunities that have sustainability. So that's going to be key. And then, I'm a pipeline guy at heart, Yves, so I would hope that we'd be looking at some pipelines as well.

Yves Siegel - Neuberger Berman

Okay. And it sounds like you might have some opportunities there as well.

Greg Harper

Yes.

Yves Siegel - Neuberger Berman

And then finally -- and the second part of the question is on the hedging. I'm a little surprised that you have as much opportunity on the liquids as you do. What was the rationale for having as much open as you do right now?

Steve Neyland

Yes, I'll take that, Yves. This is Steve. Our process here is we look to hedge out the heaviers first and what's more liquid. So when you look at natural gas and the heavier components of the NGL stream, we have more liquidity, so we hedge those out first. And really if you were targeting a level such that we're protecting ourselves, and we typically are in the 60% to 70% zone as we move out. And we are, right now, at two-thirds hedged of our commodity positions. And so really propane, when we looked at the different commodity prices that are out there, that was the one that had the most upside relative to where it was from prices you could execute at from a hedge perspective. And so there was a decision to leave that open, and so that's the commodity that's most open in our mix.

Yves Siegel - Neuberger Berman

Are you still living within the thought process that you don't want to have more than 5% of a cash flow at risk?

Steve Neyland

Yes. So, under -- we still have our same cash flow at risk parameters. So, for Enbridge Energy Partners, that CFAR was 7.5%. For MOLP, it's 20%, but we're still living within the parameters of that same hedging guidelines that we've had. And with that, we've hedged out two-thirds of 2014, and then we'd have 50% of next year's put away.

Yves Siegel - Neuberger Berman

Got it. Thank you.

Operator

(Operator Instructions). All right. It looks like we have no more questions at this time. I would like to turn the call back over to Mr. Lad for any closing remarks.

Sanjay Lad

Great. Well, we thank you for joining our call this morning. I will be available after the call for any follow-up questions you may have. Thank you and have a great day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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