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QEP Midstream Partners LP (NYSE:QEPM)

Q2 2014 Earnings Conference Call

August 7, 2014 11:00 AM ET

Executives

Gregory Bensen – Director, IR

Charles Stanley – Chairman, President and CEO

Richard Doleshek – EVP and CFO

Operator

Greetings and welcome to the QEP Midstream Partners Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference to your host today, Mr. Greg Bensen, Director of Investor Relations. Thank you, sir. You may begin.

Gregory Bensen

Good morning and thank you for joining us on the QEP Midstream Partners second quarter 2014 earnings conference call. With me today are officers of our General Partner, Chuck Stanley, Chairman, President and Chief Executive Officer; Richard Doleshek, Executive Vice President and Chief Financial Officer; and Perry Richards, Senior Vice President and General Manager. In a moment, Chuck will provide a brief review of our results for the quarter and outlook for the rest of 2014, followed by Richard who will summarize the financial results for the quarter. Following the prepared remarks, we’ll open up the call for questions.

Before we begin, I would like to remind participants that our comments today may include forward-looking statements. It should be noted that a variety of factors could cause the Partnership’s actual results to differ materially from the anticipated results expressed in these forward-looking statements. For a complete discussion of these risks, we encourage you to read the Partnership’s earnings release and SEC filings. Today’s call will also contain certain non-GAAP financial measures. Please refer to the earnings release we issued yesterday afternoon for important disclosures regarding such measures discussed on today’s call for reconciliation to comparable GAAP measures. You can obtain a copy of our earnings release on our website, qepm.com.

I’ll now turn the call over to, Chuck.

Charles Stanley

Thanks, Greg and welcome to QEP Midstream Partners second quarter call. Just as a reminder, we have four different areas of operations, associated assets and they are as follows; Green River gathering and processing systems in Western Wyoming, the Vermillion gathering system, primarily in Southwest Wyoming, the Three Rivers gathering system in Northeastern Utah and the Williston gathering system in North Dakota. There is maps of these systems along with additional details in our SEC filings on our website at www.qepm.com. Finally, as a reminder, QEP Field Services is the sole owner of our General Partner and owns 56% of the limited partner units in the partnership.

Earlier in the second quarter, we shared the exciting news about QEPM’s first acquisition. On May 7th, we entered into a definitive agreement with QEP to purchase a 40% interest in Green River Processing, LLC for $230 million. Green River Processing consists of QEP’s Blacks Fork and Emigrant Trail processing assets in Southwest Wyoming. The assets consist of four processing trains with up to 890 million cubic feet a day of raw gas inlet processing capacity’ 15,000 barrel per day NGL fractionator with associated truck and rail loading facilities; interconnects with six interstate natural gas pipelines and direct pipeline access to Mount Belvieu and Conway NGL market.

Total throughput volumes for Green River Processing were 201 million MMBtus in 2013 of which 65% was processed under fee-based processing agreements and 35% was processed under keep-whole processing agreements. The cryogenic plants in Green River Processing have a combined processing capacity of up to 560 million cubic feet a day, which was nearly fully utilized in 2013. The Green River Processing acquisition was closed on July 1st and was funded with $10 million of cash that we had on hand and $220 million borrowed from our $500 million revolving credit facility. For our base business delivery good distribution coverage during the time we’ve been public and is capable of covering continued distribution growth into the future, this acquisition of the premier gas processing facilities will strengthen our growth profile going forward and broaden our business mix.

Now let’s turn to second quarter results. Operating results for the quarter were in line with expectations. Gas gathering volumes increased 8% from the first quarter in line with the typical seasonality that we expect is QEP energy differs completion through the coldest months of the year at Pinedale and resumes activity in the spring. Condensates sales volumes decreased 16% from the prior quarter, also in line with typical seasonality. As the ground warms up in the spring, less condensates falls out of the gas stream and therefore, we recover fewer barrels. The price per barrel for condensate remained at $85.25 a barrel, pursuant to a fixed price purchase agreement that we have with QEP. There was no deficiency fee revenue in the second quarter compared to $2.9 million in the first quarter.

Turning to capital expenditures, Partnership invested $8.3 million in the first half, including $1 million of expansion capital related to projects in the Vermillion and the Williston systems. Maintenance capital expenditures are $7.3 million included $1 million investment related to a condensate pipeline repair project that was subsequently reimbursed by QEP. The remaining $6.3 million of net maintenance capital was due primarily to a large compressor replacement project in the Green River gathering systems. Overall, we expect maintenance capital for 2014 to be between $10 million and $12 million or around 13% of estimated EBITDA at the midpoint of guidance. Richard will cover some additional details on our guidance later on the call.

As for the balance of 2014, we expect to realize another year of consistent performance in these assets both operationally and financially. QEP Energy’s plans are ought to complete between 110 115 wells at Pinedale in 2014 and combining with that with just drilling activities our other areas of operations we expect 2014 gathered volumes and revenues to be slightly higher than 2013. Longer term, we expect a relatively strong natural gas prices can particularly in the premium price Rocky’s markets to continue to support stable to increase investment by our upstream customers across their systems.

Now let me provide a brief update on the separation of QEP Field Services from QEP Resources. In December of 2013, QEP announced its intention to separate its Midstream business, QEP Field Service including its GP and LP ownership interest in QEP Midstream from QEP Resources. In January, QEP further announced that its Board had instructed to prepare appropriate SEC filings for the definitive separation. The first Form-10 was filed with the SEC in late June. Simultaneous with the preparation of the SEC filings, QEP will entertain any value added proposals for ultimate transactions for separating the Midstream business ranging from an outrage sale of the business a straight spin off of the business to the QEP shareholders. QEP is currently in the second phase of a two phase process to determine the former separation. As a result of the separation, each business will be able to independently deploy resources to allocate capital according to their strategic initiatives and growth strategies.

Additionally, certain E&P and Midstream businesses each with experience and leadership teams will be better able to compete to capture future growth opportunities in their respective markets. Most importantly, we believe we will continue to be in a good position to execute our announced strategy to go distributions for our unit holders. As we’ve mentioned on our previous calls, the ongoing separation process hasn’t changed. Our strategy is how we manage the partnership. Our primary strategy involves for seeing drop down acquisition from our sponsor QEP Field Services. Our second strategy involves leveraging our relationship with QEP to pursue organic growth products in current new geographic areas and support QEP energy and third party E&P customers. Our third strategy is to pursue the acquisition of additional Midstream assets from unrelated third parties, both within our existing footprint and in new basins. And finally, we also intend to achieve some growth by simply increasing the throughput on our existing systems.

We believe we are in good position to deliver continued distribution growth, with the help of our strong corporate sponsor QEP Field Services, which has a significant inventory of Midstream assets that are available for drop down, a strong balance sheet that can help support the development of Greenfield projects and acquisitions; and existing collection of primary assets of some of the most economic oil and gas plays in the United States, in a stable cash flow generating business model and one that has multiple growth opportunities.

Finally, I wanted to give you a quick update on our thoughts around post-acquisition distribution growth. As we stated in our prior calls, we intend to be comfortably at the high end if not slightly above, the 10% to 20% distribution growth trajectory that we’ve shared with you previously.

I’ll now turn the call over to Richard.

Richard Doleshek

Thanks, Chuck. And before I get into the MLP financial results, I want to remind you again about the construct of the MLP’s earnings release. The earnings release includes results of the MLP for the first half of ‘14 and those results are labeled as the successor’s results. When we refer to financial results from periods before the IPO in the financial statements, we refer to those results as those of the predecessor. And results are not particularly comparable, because of processor contains assets that were not contributed to the MLP. Specifically, the processor includes all the MLP’s assets as well as QEP’s Uinta Basin and gathering assets and QEP’s 38% ownership in the Uinta Basin field services.

Recall, that due to the large capital requirement associated with the Uinta Basin and gathering assets in the coming years, we didn’t include those assets in the initial sort of assets in contributing to MLP. However, because of the nature of the business is somewhat of the assets that were initially contributed to, SEC required that we include those assets in the predecessor. More directly comparable metrics are found in the pro forma results table at the end of the earnings table, which includes selected financial and operating statistics for the second quarter and the first half of 2014 and 2013.

Okay with that as background, on July 22nd, we announced the MLP’s quarterly distribution to be limited partnership unit holders for the second quarter. The announced distribution was $0.28 per unit, a one penny or 4% increase from the $0.27 per unit or distribution declared in the first quarter. As you saw in the Partnership’s release yesterday, second quarter distributable cash flow is $15.9 million which included $3.1 million of net maintenance capital. Distribution to unit holders in the quarter was $15.3 million which was covered 1.04 times by distributable cash flow, which is a little thin. But if we exclude transaction cost incurred in the quarter associated with agreement of processing acquisition, DCF coverage of the distribution would have increased to about 1.1 times. Second quarter 2014 adjusted EBITDA was $18 million which is down $1.4 million from the first quarter of 2014, as an improvement in operating results was offset by lower deficiency revenue and higher G&A expense.

Base gathering and transportation revenues increased by $2.4 million or 9% in the first quarter, and condensates sales were down slightly both in line with typical seasonality. Deficiency revenues declined by $2.9 million in the first quarter, gas gathering volumes typically increased in the second quarter of the year as QEP Energy resumes planned out completion activity. And condensate sales are typically lower than second quarter as there is less “natural refrigeration” cause liquids to condense out in the gas stream. Gathering expense was $1 million lower and G&A expenses were $0.5 million higher than their respective levels in the first quarter of 2014, due to $1.1 million of cost associated with agreement of processing acquisition for outside professional services.

Turning to guidance, we expect distributable cash flow to be $72 million to $70 million in line with previous guidance. Adjusted EBITDA for 2014, is expected to be in the range of $85 million to $87 million, down from the $89 to $93 million previously. And maintenance capital expenditures is expected to be $10 million to $12 million, down to $11 million in the last quarter. Capital expenditure guidance were approximately $2 million was reduced from $10 million previously as the expansion of our gathering system in the Vermillion area Southwestern Wyoming which have been scheduled for the second half of 2014 has been deferred into 2015. Cash interest expenses is expected to be $4 million related to borrowings for agreement processing acquisition and for commitment fees on unused portion of the $500 million revolving credit facility.

As a reminder, we define maintenance capital expenditures as those that will enable us to maintain our operating income over the long-term. And in the finance expansion capital expenditures is those we expect that will increase our operating capacity or income over the long term. Finally, on liquidity front we end the quarter with $60.5 million of cash equivalents to balance sheet and had no debt outstanding under the revolving credit facility. However, on July 1st, we closed the acquisition of our 40% interest in Green River Processing which we funded with $10 million of cash and $220 million borrowed under the credit facility.

With that, we’ll open the line for Q&A.

Question-and-Answer Session

Operator

At this time, we will conduct a question-and-answer session. [Operator Instructions]. At this time, I would now like to turn the call back over to management for closing comments.

Charles Stanley

Well thank you all for calling in today for this second quarter results call for QEPM. We will be on the road attending investment conferences later in the summer and into the fall and we look forward to seeing you all in person.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. And have a great day.

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