EQT Midstream Partners' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: EQT Midstream (EQM)

EQT Midstream Partners, LP (NYSE:EQM)

Q1 2014 Earnings Conference Call

April 24, 2014, 11:30 AM ET

Executives

Nate Tetlow - Manager, Investor Relations

David Porges - President and Chief Executive Officer

Philip Conti - Senior Vice President and Chief Financial Officer

Randall Crawford - Executive Vice President and Chief Operating Officer

Patrick Kane - Chief Investor Relations Officer

Analysts

Faisal Khan - Citigroup

Jeremy Tonet - JPMorgan

Michael Blum - Wells Fargo

Jerren Holder - Goldman Sachs

John Edwards - Credit Suisse

Timm Schneider - ISI Group

Christine Cho - Barclays

Becca Followill - U.S. Capital Advisors

Operator

Good morning, and welcome to the EQT Midstream first quarter 2014 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Nate Tetlow, Investor Relations Manager. Please go ahead, sir.

Nate Tetlow

Thank you. Good morning, and welcome to the first quarter 2014 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 COO; 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 and the confirmation code is 10037703. 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, and then we'll open the call to 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 news release and under Risk Factors in the Partnership's Form 10-K for the year-ended December 31, 2013, which is filed with the SEC and as updated by any subsequent Form 10-Q, which we filed with the SEC and also make available on our website.

Today's call may also contain certain non-GAAP financial measures. Please refer to this morning's news release for important disclosures regarding such measures, including reconciliations to most comparable GAAP financial measure.

With that, I'll turn the call over to Randy.

Randall Crawford

Thank you, Nate, and good morning, everyone. As you saw from the press release this morning, we reported first quarter 2014 adjusted EBITDA of $41.1 million and distributable cash flow of $38.9 million.

The first quarter results came in ahead of our guidance, primarily driven by two items, both of which were a result of the extreme cold weather this winter. One was higher than planned system throughput by local utilities, and the other was unplanned short-term loan and parking services around our storage assets.

Before we discuss the quarter, I want to point out two things that will help you, when looking at our results. First, as a reminder, EQM has a capital lease with EQT for the Allegheny Valley Connector or AVC. The partnership reports the revenues and expenses of AVC in its financial statement.

However, the lease payment is designed, so that AVC does not have a net positive or negative impact on the partnerships distributable cash flow. When discussing financial results, we do so on an adjusted basis to exclude the impact of AVC.

And second, the revenues from our contract with Equitable Gas Company, changed from being affiliate revenue to third-party revenue, when our parent EQT sold the gas company to Peoples Natural Gas last December.

So in order to provide an apples-to-apples comparison of year-over-year affiliate and third-party revenue, we have included a table in our press release that adjust 2013 revenues to reflect Equitable Gas revenues as third-party.

Adjusted operating revenues for the quarter were $53.6 million or 21% higher than the same quarter last year. The increase is primarily due to higher contracted transmission capacity. For the quarter, third-parties represented nearly half of the total adjusted operating revenue.

Adjusted operating expenses for the quarter were up about $3 million, which is consistent with the growth we have seen in the business. In terms of liquidity at the end of the quarter, we had net debt of $86 million. During the first quarter, we also increased our revolver size from $350 million to $750 million.

Moving to guidance, we are increasing our full year 2014 adjusted EBITDA forecast to $186 million to $188 million and distributable cash flow forecast to between $164 million and $166 million.

The increase in guidance is driven by our first quarter results being ahead of plan and higher projected throughput from both EQT and third-party producers. For the second quarter, we expect adjusted EBITDA of $44 million to $45 million.

Earlier this week, we announced a cash distribution of $0.49 per unit for the quarter of 2014. Distribution is 7% higher than the previous quarter distribution and 32% higher than the first quarter 2013 distribution.

We have now increased the distribution by $0.03 per unit each quarter for four consecutive quarters and we expect to maintain the $0.03 per unit increase each quarter at least through the end of 2015, and this is without further drops from EQT.

To be clear, this means that we expect the fourth quarter 2015 distribution to be $0.70 per unit. The guidance represents annual distribution per unit increases of 29% in 2014 and 22% in 2015.

Now, moving on to operational update. In February, we announced agreements with Range Resources to provide them with gathering, compression and transmission services.

We have had a lot of success in attracting third-party producers to our transmission system, but this marks our first significant agreement with a third-party producer for gathering and compression services.

The agreements include 10-year minimum volume commitment for gathering and transmission services. It also provide Range the opportunity to expand their capacity to 300 billion Btu per day and above.

As part of the agreement, we will be expanding the transmission system capacity by approximately a 100 billion Btu per day in southwestern Pennsylvania. This expansion is expected to be in service by November 1 of this year.

Now for an update on the Ohio Valley Connector project. In January, we initiated a non-binding open season for a FERC project that would extend our transmission system from West Virginia to Clarington, Ohio.

At Clarington, the pipeline would connect with both The Rockies Express Pipeline and the Texas Eastern Pipeline. We received strong interest in this project and are working towards securing binding present agreements from customers.

The current project scope is estimated to cost approximately $300 million, which includes construction of 35 miles of pipeline and necessary compressions, and as expected to ultimately provide 1.2 Bcf per day of transmission capacity.

The estimated in service date for this project is the second quarter of 2016. We will provide further details, as we make progress towards securing this project.

At the request of a number of producers, we also extended a non-binding open season upon our interest in a separate and distinct pipeline project that would move gas from Clarington to trading points and other pipelines through the west into Ohio.

We also had strong interest in this project, which we are calling the Ohio Express project. And we will continue to have discussions with a number of interested parties in the coming weeks.

Ohio Express project has the potential to expand more than 200 mile and based on 2 Bcf per day of capacity. We estimate this project could cost at least $1.5 billion and would likely be in service in the second quarter of 2017. As with the Ohio Valley Connector project to Clarington, we will provide further details as we work on securing the Ohio Express project.

We and EQT continue to analyze, whether these projects, if we do in fact move forward with them, will be built at the EQT level and add to the dropped inventory or will be built at the EQM level as organic growth projects.

There are a lot of factors to consider, when making the decision. And we intend on providing more information to our investors, when the projects are secure and a financing decision has been made.

In summary, we are off to a great start in 2014, with a first quarter that was above our plan and higher projected adjusted EBITDA and distribution cash flows for the year. We now have a line of site on $0.03 per unit distribution increases each quarter for at least the next seven quarters. And that's without another dropdown assumed. We are seeing robust growth from our affiliate and from third-parties on the system and we have a number of exciting growth projects that we are pursuing.

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

Nate Tetlow

Thanks, Randy. Laura, we're now ready to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Faisal Khan of Citigroup.

Faisal Khan - Citigroup

When you're thinking about all these projects that you guys have laid out here the $200 million for West Virginia to Clarington projects, now this Ohio Express project, which you talked about waiting to be financed collectively at the C-Corp and also at the MLP, how does this change sort of your thinking about potentially also spinning-off the general partnership from a company. This is a something I guess you did talked about in the past, but I'm not sure if this recent kind of resurgence in the backlog changes your sort of thinking and how you're looking at that?

Philip Conti

Faisal this is Phil Conti. As you know that decision is an EQT decision, and EQT on two conference calls ago, I think as you know, said they're going to study that decision during the course of 2014, and report back, perhaps as soon as late this year. And there will be a number of factors including the ones you talked about, but there will be a number of other factors that went into that decision. And that's really as much as EQT is saying about that at this point in time.

David Porges

I do want to comment upon the way the projects would be financed by those stakeholders. We actually did not mean to communicate that we're going to be financed jointly, that any of these projects would be financed jointly or would be at EQM or EQT, but merely that we are still looking at that issue.

And amongst the factors that we look at, that the ones you would imagine, but also one of the things that looms, I'd say, more so than a structural issues are those growth prospects at EQM, and if anything, we'll probably feel better about the prospects for more of these types of projects going forward.

So we will take that and other factors into account as we decide what's the best place to finance it with this notion of a joint financing, or certainly that would be an alternative, but then we didn't mean to communicate that, that's where we were leaning, and certainly not that that's what we have decided.

Faisal Khan - Citigroup

And just thinking about EQM's balance sheet, it's still fairly conservative, you have a lot of liquidity there, sort of how much running room do you guys have, now that your EBITDA is also higher and your guidance is higher? How much running room do you guys have to sort of absorb dropdowns or projects at EQM before you need to go out and raise equity?

Philip Conti

Well, it would be depended on the size of the drop. As far as running room, we think it's important for EQM to have an investment-grade rating, if we can achieve that, so that will govern our decisions on how we finance each individual acquisition, but we'll deal with those on one-by-one basis as dropdowns and acquisitions occur. Again, my point is, I sure want to maintain an investment-grade rating at EQM, if and when we get a rating.

Faisal Khan - Citigroup

How much liquidity do you guys have right now at the end of the -- that you will draw into facilities?

Philip Conti

I think we said, it was just under a $100 million drawn and we have a $750 million revolver in place now, Randy mentioned that in his comment.

Operator

The next question will come from Jeremy Tonet of JPMorgan.

Jeremy Tonet - JPMorgan

It seems like you have a nice portfolio ahead of you, kind of smaller bolt-on projects adding on extra capacity. It seemed to be very accretive projects. I was wondering if you could provide us any color or what type of multiples these projects might be completed at the Antero and Range projects?

Randall Crawford

Well, Jeremy, look, as we've guided before, we look at the mid-teens kind of returns on a projects that we're implementing at EQM. And so you can look back to the multiple then based on that.

Jeremy Tonet - JPMorgan

And just want to reconfirm, as far as the pace of dropdowns, is that something that's looking to be at least equal in size to how much EQT is spending in midstream in a given year or can you provide any updated thoughts there?

David Porges

Same guidance as we've provided probably only recently, and we recognize this is different from what we were saying at the time of the IPO. And that is that as we understand it, EQT's interest is in generating more proceeds now from drops than capital that they would be expending in the midstream business.

That in fact what's driving it now, isn't that anymore, even though that was a big factor at the time of the IPO, rather it's EQM's ability to absorb the project, which might mean capital markets and its own dry powder, if it were. And the ability for EQM and EQT to work out agreements amongst themselves that are true third-party agreements.

That is to say, there's not just tariffs involved, but all the terms and conditions that you would have associated with those true arm's-length contract, which of course was not the case when you're just affiliates working with one comp. So it is driven much more by EQM's ability to profitably absorb those projects and much less so by EQT's needs for cash.

Jeremy Tonet - JPMorgan

And then just last one for me. Just going back to coverage that you guys have, it seemed north of 1.5x in our numbers for this quarter. Very, very high coverage spend, I know you want to balance that with rate of growth and also ability to maybe absorb larger projects by retaining some of the surplus DCF and reduce equity needs for larger projects down the road. Just wondering if you could tell us some of your thoughts on balancing those different needs? And what type of target coverage you see over time? It seems like its still 1.1x is what you would think of on a normalized basis?

Philip Conti

Over time, but while we're in this heavy growth phase, I mean you said that we'd like to maintain a little bit dry powder, while we're in the growth phase to be able to absorb some of these projects while we're waiting for the cash flow to start coming in from them. So I think you said it quite well.

Operator

And next we have a question from Michael Blum from Wells Fargo.

Michael Blum - Wells Fargo

Just to go back on to the question of organic capital and how you would finance that, whether at C-corp or the MLP. Would you mind just walking through kind of your thought process in terms of how you would balance that or think about where you would do that? And then also I guess the second part of that would just be, is it fair to think that over time as the MLP gets larger, either via drop or organic that you could undertake more of the organic spending at the MLP level?

David Porges

That's really -- probably the most important factor is making sure that EQM is not trying to wear too much of the in-construction capital, the capital investments that require equity and debt financing, but that aren't actually throwing off cash flows yet. There's probably a certain percentage.

I think you can go back to the IPO, we threw out numbers like maybe 10% of your capital or something like that, it wasn't, it was just a swag, it wasn't really a very highly studied number. But some minority of the capital can be in projects that are under construction. And as we grow, as you pointed out, that turns into a larger and larger dollar amount. I don't think there's much doubt that over time EQM is going to do better if it's able to undertake more of its own organic projects.

Operator

And our next question is from Jerren Holder of Goldman Sachs.

Jerren Holder - Goldman Sachs

I'm just wondering if you guys could quantify the impact, I guess of the favorable weather. Obviously, you get most of your cash flows from firm capacity and what not, but just wondering what was the incremental contribution to volumes or EBITDA from that?

Philip Conti

I would say that, look most of the growth, as you mentioned is coming from the growth and capacity and the transmission volumes. In first quarter we were opportunistic to the tune of around a $1 million in our parking and loaning activities. And so it's a small level of that, but certainly that was a factor, but primarily driven by the increased amount of volumes that we're seeing with our producer community.

Jerren Holder - Goldman Sachs

And I guess, going back to organic projects, obviously you guys are seeing strong interest there and we continue to see strong demand for a takeaway capacity out of Marcellus. Are you guys seen interest in the third-parties to probably extend your system, probably further northeast into the Marcellus, help takeaway some of that bottleneck and connect it to some of the other takeaway options there?

David Porges

We're looking at all of those options. I certainly discussed the couple of those that are moving more west, that really create a strategic header system for us between the Utica and the Marcellus. But we would continue to talk to our customers about ways to get their gas to market and extend our footprint. So we're primarily focused in moving into, with the Ohio Valley Connector and the Ohio Express. But yes, we're looking at a variety of projects as well in addition to that.

Jerren Holder - Goldman Sachs

And I guess lastly, I guess on a longer term from a strategic perspective and just given once again the strong demand for takeaway capacity. Can we see potentially like a bigger pipeline maybe head into the Gulf Coast, call it, five, 10 years from now from you guys. Is that something, seeing that the demand is there, you guys will be willing to undertake?

David Porges

I don't know, as you are aware at the time of the IPO, when folks asked what we would do and wouldn't do, three of the things that we said we really weren't very focused on at all were processing, how to face an acquisition and long line pipes. So if you want to take it far enough into the future, I guess the long line pipe becomes a possibility to take it all the way there.

But a lot of that is of course going to be financial capability, so how much does pipes cost. And you can see first of all, I think from our perspective, let's work through this Ohio Express and see how that discussion all goes. Because frankly that would set a new standard for EQM as far as the size of project that we're undertaking.

And so yes, I think the projects at this point, and again you want to look out five, 10 years, anything else is possible, but if you try to think that where is EQM well-positioned, I'd say, the features that we want to have, if you could, is to be able to leverage-off of EQM's existing system, the Equitrans system et cetera. And of course as we build out more, you build off those new systems as well. And I think also possibly the ability to leverage-off of relationship with an affiliate producers, such that you got an anchor shipper on one of those pipes.

So from that perspective over time, buying Gulf of Mexico probably makes more sense than some of the ones to the northeast, because you think the northeast might get supply by the people in Northeastern PA, a little bit stranded. But I think a lot of the Gulf of Mexico projects are going to be the reversals. I mean the list that we've seen suggests that it would be very hard to compete, going down to the Gulf with the pipeline reversals. So also have to see how that plays out.

Operator

And the next question comes from John Edwards of Credit Suisse.

John Edwards - Credit Suisse

Just I think you're indicating the midstream spend at the EQT level is around $475 million or so. And I am just wondering or curious, I mean is that a pretty good number for the next few years do you think as far as organic spend on midstream?

Philip Conti

We go one year at a time, we're certainly not going to talk about what our capital spend in midstream is going to be next year. I mean it's a ballpark kind of a number, but it's a little bit lumpy. We're not going to say much more than that about beyond 2014. And you were asking really about EQT's level, right.

John Edwards - Credit Suisse

Yes, I was asking EQT, I'm just trying to get an idea of sort of longer-term, dial into what sort of the future dropdown inventory and how that would build up, that kind of thing?

David Porges

Part of the issue, when we struggle with that question though, just so you all can head some insight into the way we think about it is, to what extent would we deicide projects like that gets built at EQM. That's grows the same as it is if it were from a dropdown.

And arguably from EQM's perspective, maybe it would be at least as economical or even more economical. That kind of gets caught up with the overall discussion about where we're going to construct some of the projects. And then, we will not answer it just for what are the core organic needs and where would that be financed.

John Edwards - Credit Suisse

I mean the way I was thinking about it is in your investor presentation, there is the in-depth study where I think you indicated there is about $80 billion or so of need in the northeast for midstream over the next 20 years. And so the way I was trying to think about it was going forward, what share of that do you think either EQT, I mean really, EQM would end up with over say just the next five to 10 years. I mean, obviously, that's a long time out in the future. But how do you think about getting, your fair share of the available opportunities set, that's what I was heading at?

David Porges

That's one thing we're not going to get caught up in, what our share is. We're going to get caught up in where can we create the most value for the folks who own EQM equity. And at the EQT level, we're going to be focused on how we can create the most value there.

I do think there is a lot of growth potential, because of the kind of factors that led to the studies that you're talking about, the numbers that you're talking about. And it seems reasonable to believe that our other ways to create value is going to be constructing a fair amount of that. But we don't want to get caught up in protecting market share or something like that, because that just feels like a short way to not maximize the value proposition.

John Edwards - Credit Suisse

Let met ask a question in other way. I mean, you've talked in the past that there has been a ratio of midstream to investment in production at least to your apparent level?

David Porges

Yes, to meet EQT's needs.

John Edwards - Credit Suisse

Right. So that's been somewhere in the 20% range I think is what you said it. Is that still a reasonable way to think about it?

David Porges

Yes, it is.

Operator

And next we have a question from Timm Schneider of ISI Group.

Timm Schneider - ISI Group

I had a couple of questions on the pipeline project. Number one, on the Ohio Express, kind of what receipt points further west do you guys envision for that one?

Randall Crawford

Well, again, it will be depending on our customers and the producers. But we'll be looking along the route, right, those Tennessee's, Texas Gas, and our Panhandle, those type of interconnections. Not to say that we'll have them all, but certainly those are some of the liquidity points that will access again the Midwest markets as well as the Gulf Coast.

Timm Schneider - ISI Group

And how far along are you guys on that project in terms of just preliminary planning on pipeline route maybe some of the regulatory issues that will come up?

Randall Crawford

We've ran the open season and we've done quite a bit of work. And so we're moving forward to finalize that. But, yes, we've done a lot of work on the environmental studies in some of the routes.

Timm Schneider - ISI Group

When you think you'll have some more info on both the Ohio Valley and the Ohio Express 1?

Randall Crawford

Well, I don't want to give you a specific time, but I think as we work through this year, we'll certainly have first and foremost on the Ohio Valley Connector that we've first went out with and I think throughout this year. I mean, again, I've given you the timelines and when we'd expect those in service. So certainly with the FERC process, some decisions will have to be made this year.

Timm Schneider - ISI Group

And then lastly from me, if you can, can you give us a sense as to what tariffs will be in these projects? I'm just trying to sense as to how much it would cost a producer to get west?

Randall Crawford

Well, I've said, we looked at 220-plus mile type of project on the Ohio Express. I'm sorry, maybe I didn't hear your question.

Timm Schneider - ISI Group

I mean, if you could give us an indication on the tariff, yes?

Randall Crawford

Now, look with respect to the tariff rate, it will depend on a numerous factors. I don't mean to be offensive, but it would depend on the actual size of the pipe, the quantity and volume that we're moving. So it's really difficult. But we think we can be very competitive, but it will depend on the size of the project, I must say.

Operator

And the next question is from Christine Cho of Barclays.

Christine Cho - Barclays

I just wanted to get some clarification on something that was written in the press release. You guys say, you are forecasting $0.03 quarterly cash distribution per unit through at least 2015. I recognize you extended a year and the $0.03 is not different. But then without additional dropdowns from EQT, are you guys kind of implying that you're going to revisit this, if and when you do a dropdown?

David Porges

No. We're just setting a baseline, just to make sure you know what the assumption is around that guidance.

Christine Cho - Barclays

But would you reevaluate this one, if you drop something down or this is pretty fixed?

Philip Conti

We will always reevaluate each time. The only thing is that we don't have to revisit it.

Operator

And the next question is from Becca Followill of U.S. Capital Advisors.

Becca Followill - U.S. Capital Advisors

On the Ohio Express project, obviously that looks like it would be a direct competition to the REX reversal. Can you talk a little bit about what the competitive advantages exist or this pipeline is being driven by the REX or is it being oversubscribed or can you talk a little bit more about that?

Randall Crawford

It's being driven by some of the excellent results in the Utica dry gas by producers. And really, the fact that there is additional takeaway capacity that's needed over and above REX reversal.

David Porges

But again, as I think we're trying to get up, but we'll try to make, and maybe we should restate it, this is not a project that EQM or EQT for that matter, came up with on their own, and when we talked about it coming from producer demand, that wasn't code for EQT production. This was producers, who looked at the other project and said, hey, well, you're at it. We'd like you to do this.

And we then part of being a successful midstream company overtime, is to establish a reputation as being responsive what producer needs. And a number of producers asked us to look at this, so that's what we're doing. And I am hoping where we're really hard on the niches being very producer responsive.

Becca Followill - U.S. Capital Advisors

And that kind of goes to my next question is the basis, widening even more in certain areas, in Appalachia, during the winter seems to have created a real sense of urgency for producers now to sign up for some of these projects that they have been hesitant to do so. And this is a very big project for you guys. Can you talk to maybe the magnitude of other potential projects that you're looking for, is there another, a couple of billion projects, is it smaller stuff that's more alleviating through the bottlenecks. Can you just give us an idea of the magnitude?

Randall Crawford

Becca, look, the first step is to capitalize on the opportunity of what we've seen. As I said that that creates the header system between the Utica and Marcellus and then beyond that is the Ohio Express. Obviously, there is certainly a lot of need for infrastructure. We think we are positioned well to take advantage of that.

We've looked at projects, we think the Southeast market make sense. In others, you've seen announcements and catalyst around the need for additional supply there. So I think there is a significant amount of inventory of opportunity, difficult to put in a specific dollar on it what EQM will ultimately be successful there.

Operator

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

Nate Tetlow

Thank you everyone for listening today. That concludes the call.

Operator

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

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