EQT Midstream Partners' (EQM) CEO Dave Porges on Q4 2015 Results - Earnings Call Transcript

| About: EQT Midstream (EQM)

EQT Midstream Partners LP (NYSE:EQM)

Q4 2015 Earnings Conference Call

February 04, 2016 11:30 AM ET

Executives

Nate Tetlow - Manager, IR

Dave Porges - President and CEO

Phil Conti - SVP and CFO

Randy Crawford - EVP and COO

Pat Kane - Chief IR Officer

Analysts

TJ Schultz - RBC Capital Markets

Holly Stewart - Howard Weil

Kristina Kazarian - Deutsche Bank

Neal Basumullick - JPMorgan

Vavesh Ladoy - Credit Suisse

Timm Schneider - Evercore

Barrett Blaschke - MUFG Securities

Richard Lee - Knights of Columbus

Operator

Good day, everyone and welcome to the EQT Midstream Partners and EQT GP Holdings Year End Joint Earnings Conference Call. Today's call is being recorded. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I'd like to turn the conference over to Nate Tetlow. Please go ahead.

Nate Tetlow

Thank you, Lisa. Good morning and welcome to the year-end 2015 earnings calls for EQM and EQGP. 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 seven days, beginning at approximately 1:30 PM Eastern Time today. The phone number for the replay is 719-457-0820, and the confirmation code is 7837624. The call will also be replayed for seven days on our Web site, at eqtmidstreampartners.com. In a moment, Randy will discuss the operational and financial results of the fourth quarter and the full year, and then we'll open the call to your 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 press release and under Risk Factors in EQM's Form 10-K for the year ended December 31, 2014, and in EQGP's Form 10-Q for the quarter ended June 30, 2015, both of which are filed with the SEC and as updated by any subsequent Form 10-Q and in the partnership's Form 10-K’s for the year-ended December 31, 2015 which we expect to file with the SEC next week.

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 the most comparable GAAP financial measure. As a reminder, EQM has a capital lease with EQT for the Allegheny Valley Connector or AVC. The revenues and expenses of AVC are consolidated in our results, but the lease payment made to EQT ensures there is no impact to distributable cash flow. So when discussing financial results, we do so on an adjusted basis to exclude the impact of AVC.

I'll now turn the call over to Randy.

Randy Crawford

Thank you, Nate, and good morning everyone. This morning EQM reported full year adjusted EBITDA of $449 million and distributable cash flow of $407 million. In the fourth quarter, adjusted EBITDA was $129 million and distributable cash flow was $112 million. We exceeded our adjusted EBITDA guidance for the quarter and the year, primarily as a result of higher than expected transmission and gathering volumes. The main catalyst behind the volume increases was the early completion of planned incremental compression expansions in the Jupiter and Northern West Virginia gathering systems.

The earlier availability of the on budget compression projects allowed EQM to increase its monthly fixed pre-payments sooner than planned and provided network operating capability to move additional volumes. For the quarter, EQM adjusted operating revenues were $156 million, or 21% higher than the same quarter in 2014. As I mentioned, the increase was driven by higher contracted fixed fee capacity and increased throughput.

In the fourth quarter, 84% of the total revenues were generated by firm reservation fees, up from 58% in the fourth quarter of 2014. Adjusted operating expenses for the quarter were up about $4 million which is consistent with the growth of the business. At EQM, we recently announced cash distribution of $0.71 per unit for the fourth quarter of 2015 which represents an increase of $0.035 per unit over the third quarter and is $0.13 per unit or 22% higher than the year ago quarter.

At EQGP, we announced a quarterly distribution of $0.122 per unit which is 17% higher than the third quarter 2015 distributions. For 2016, we forecast a per unit distribution of $3.19 for EQM which is 21% higher than 2015 and for EQGP we forecast a distribution of $0.62 per unit which is 55% growth over 2015. For 2017 EQM is targeting 20% per unit distribution growth which results in EQGP distribution growth of at least 40%.

Now for an update on some of our organic growth projects starting with the Ohio Valley Connector, on December 30, 2015 we received the FERC certificate authorizing the construction of the pipeline. We began construction last month and anticipate placing the pipeline in service in the fourth quarter this year. To remind you OVC will extend our system from Northern West Virginia to Clarington Ohio. At Clarington OVC will interconnect the Rockies Express pipeline and other proposed pipelines, providing shippers access to new markets in the Mid-West and the Gulf Coast. The project is currently subscribed at 650,000 dekatherms per day.

And moving to the Mountain Valley pipeline, on October 23, 2015 we filed the formal application requesting FERC authorization. Since the filing we received the FERC request for additional data and we expect to have nearly all responses back to the FERC by the end of the month. In the first quarter we expect to receive the notice of schedule from FERC, which will provide their timeline for publishing the final Environmental Impact Study or EIS. In short everything is on track with MVP and we continue to target a late 2018 in-service date.

In other MVP news we recently announced the addition of Con Edison another demand market as a shipper on the Mountain Valley Pipeline. Under the terms of the Preston agreement Con Edison has agreed to a 250,000 dekatherms a day firm capacity commitment for a term of 20 years. The addition of Con Edison to the project further validates the need for MVP as it provides demand markets, supply diversity for their existing and growing market needs to access to low cost, reliable Marcellus and Utica resource.

In a separate agreement Con Edison joined Mountain Valley Pipeline as equity partner with a 12.5% ownership stake. With the inclusion of Con Edison, our joint venture ownership stake now stands at 45.5% and our expected investment is roughly 1.5 billion. In addition to their 20 year shipper’s commitment on MVP Con Edison is also contracted for 250,000 dekatherms per day of new firm capacity on our Equitrans Transmission System. The Equitrans capacity commitment is a testament to our strategy to build a diverse, operationally flexible pipeline network that will attract both supply and demand customers. The commitment will allow us to continue to invest in our systems to add market liquidity and optionality to our Marcellus and Utica hub which we believe offers both supply and demand customer's unique network features that cannot be easily replicated.

All said the quarter and annual results were very strong both operationally and financially. As we move forward we will continue to focus on the balance between distribution growth, coverage and leverage. We have clear visibility on growth for the coming years from our roughly $3 billion project backlog and we are well positioned to fund those investments. In 2015 we delivered 23% annual distribution growth while maintaining a coverage ratio of 1.67 times. In November we raised $400 million of equity to pre-fund 2016 growth CapEx. We have about $800,000 of liquidity between cash and our $715 million credit facility and we expect to retain at least $125 million through excess coverage in 2016. Currently EQM's net debt-to-EBTIDA ratio is approximately one providing us excellent flexibility to fund our future growth.

Before moving onto Q&A, I want to summarize what we'll be working on in 2016. We're going to execute on our planned growth projects which include OVC, phase 1 of the trunk-line for Range and gathering investments in Northern West Virginia and Jupiter. We expect to execute on the last asset dropdown from EQT. We will continue to focus on leveraging and expanding our pipeline network to positioning the asset to capture additional Marcellus and emerging Deep Utica opportunities. Lastly we will continue to work towards retaining regulatory approval of the Mountain Valley Pipeline that will connect with Marcellus and Utica's supply with new and growing demand market.

In closing we continue to execute on our strategy and look forward to continued value acceleration for our unit holders.

And with that I'll turn it back to Nate.

Nate Tetlow

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

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We'll take our first question from TJ Schultz with RBC Capital.

TJ Schultz

I guess first if you could expand on third-party growth potential or how those types of discussions are evolving as you move closer to expanding and extending your system with OVC and MVP, especially in the context of adding another demand or in an outlet to MVP, just how are the discussions with third-party customers evolving that may allow additional expansions on the header system?

Randy Crawford

Look as we've said before that we continue to see benefits and positive attributes when we talk to customers in the Mid Atlantic and Southeast and certainly the addition of Con Ed is a testament to the benefits of MVP. And really in my judgment it helps pave the way for both additional demand market, but also with supply customers, so certainly with the addition of Range Resources and then Terrell and other producers on our system. The fact that we are adding the market to reach back into our hub, certainly a positive from their perspective, so those discussions are ongoing and I think we will continue to add to that portfolio overtime. So the team is out there working diligently and I think the strategy is working quite effectively.

TJ Schultz

Okay. Thanks. So you're at 45.5% of MVP. Do you have a target ownership percentage you want to keep just given you still have time to negotiate with folks and don't have to spend the bulk of the CapEx until 2017 and 2018?

Randy Crawford

Well, I think we don’t necessarily have a target TJ as much as what we want to able to do is to -- if we took on our initial partnerships they really, they add additional value to the project. Right, if that makes sense from a strategic standpoint if that were to add additional demand markets and additional supply to the pipeline and focusing a lot on expansion then we certainly would consider that.

Dave Porges

But we certainly see the benefits in the capital needs in having both our equity stake where it is right now. But as Randy said the reason for each specific deal that wound up producing our equity ownership was actually that they made the project better. And I would say we're comfortable with where our equity is right now and we would be happy if this is where it stays forever. But on every project we are always going to be looking for opportunities that will strength the project itself. Right now it's just our equity, but strength project itself in the way that Con Ed and Roanoke, et cetera and WGL but those have all strengthened MVP as a project.

TJ Schultz

Great, makes sense, just last one for me. I think you mentioned the last drop down still in the plans for 2016. If you can just provide any more granularity on timing on that and what the cash flow is that's set to come down?

Randy Crawford

Yes, not really any update. We've been saying first half of 2016 and more likely in the second quarter of 2016. I think we have hinted that it is going to be quite a bit smaller than any of the previous drops, somewhere maybe in the $300 million range. I don't know that we've talked about an EBIDTA associated with that at that point in time.

Nate Tetlow

It is about 40 million to 45 million of EBITDA remaining at EQT that is eligible to be dropped, but they have identified the drop.

Operator

We'll take our next question from Holly Stewart with Howard Weil.

Holly Stewart

Good morning, gentlemen, just maybe a bigger picture question for Randy on the pipeline market in general and where things are today. Do you think we need this north of 20 Bcf a day of proposed projects that are coming online in ’17 and ’18 and, if not, what do you think stands at risk from a capacity standpoint?

Randy Crawford

Well, so Holly I would tell you that the question really comes around the ultimate pace of development. Certainly the Utica and Marcella are the best economic basins in North America if not the world. And depending on your forecasted growth it will depend on the need for all those particular projects. But quite frankly certainly with the demand market and the commitments on MVP certainly demonstrates the need for our particular projects. I am not sure that all of those projects that are out there in the scope will be built and maybe ultimately downsized prospectively. But again it’s really it’s depended on how quickly the development of the resource progresses. But I am optimistic overall that that will continue to grow and the demand is growing.

Dave Porges

I don’t think that we need all of the projects that still get listed in various analysts but I am not talking about U.S. in particular. But we still get various industry reports and the timeframe that they've got but I will tell you our impression is that the sponsors on a number of those projects don’t really intend to that their project is built or as Randy said it doesn’t get built in the timeframe that is listed on those tables or it doesn’t get built with the size. So our impression is that some of those things probably just need to get updated for what the actual sponsors really do intend. In our case though with the 2 big ones for us OVC and MVP we are serious about the volume, we are serious about the timing and everything that we have done and said since we announced those project I think is consistent with that seriousness.

Holly Stewart

And then can you just remind us on your lockup of EQT's ownership of EQGP and then how you think about the liquidity in that market?

Randy Crawford

The lockup has expired.

Holly Stewart

Okay.

Dave Porges

You mean the liquidity of EQGP shares?

Holly Stewart

Sure.

Dave Porges

Yes, obviously a concern and actually we are probably worried -- so we do think EQGP is very much undervalued and to some extent it is probably due to the so called let’s call it sticker shock of such a low current yield this market maybe people aren't factoring in to the extent that they used to or that they should even. The pretty clear growth prospects in the pretty near future. But it's also true that for a number of investors there's not a lot of liquidity. So, at some point we need to get more liquidity in those shares. But we actually don’t have a particular plan on how we're going to go about doing that. What we would like actually is for folks like you to really just talk up EQGP and that would help create more liquidity.

Operator

Our next question comes from Kristina Kazarian with Deutsche Bank.

Kristina Kazarian

Just a quick follow-up to TJ's question on OVC, so that one is at 65% at contracted capacity. Can you just remind me plans for the remaining portion? Are you guys expecting a large number of interruptible shippers? Or how should we be thinking about that because I know we're nearing the 4Q online time?

Dave Porges

Yes that -- really we have got this as you mentioned 650 million a day of firm commitments and I think at this point we've had a variety of different tap requests and such as we go forward. So, certainly the team is working on firming up those volumes but as it comes into service, I think we'll certainly endeavor to add additional throughput to that pipe and ultimately firm commitment. So, I think that's the approach. But even as we've mentioned in the past, with the 650 million a day commitment is a very solid return for that project.

Kristina Kazarian

And then can you just do a little clarification on funding needs just to walk for 2016 and what I specifically need from both a debt and equity perspective and how I'm thinking about moving up on that leverage range?

Nate Tetlow

We don't really talk about our capital markets plans in advance. In 2016 the capital plan though is pretty well funded. We did the equity offering late in 2015 to put most of the funding in 2016 to rest. That would not include a drop and we would -- that drop's going to be pretty small, $300 million, we'll look at the capital markets at that time and determine exactly how we'll fund that like we always have.

Kristina Kazarian

And that drop will include all the assets on that number, Nate, I think you gave early would be a seven times multiple, is that right?

Nate Tetlow

In that range seven, eight times yes.

Kristina Kazarian

Another quick clarification one, the press release did not mention DPU growth and I know in past sometimes we mention it, sometimes we don't, but I just wanted to make sure I wasn't missing anything relative to 2017 sorry I meant to say that, DPU growth in 2017?

Nate Tetlow

Yes, Randy mentioned it in his script that we're still targeting the 20% at EQM for 2017.

Kristina Kazarian

Perfect. Thanks. Sorry for missing it in the script. And then my last one for me is on the EQT call earlier I heard that we're thinking more of the lower range on the 5 to 10 well program possibly for 2016. Does that change…?

Nate Tetlow

No.

Kristina Kazarian

Does that effect…?

Nate Tetlow

No that is not -- no, we're saying the same thing that we were saying and if you are talking about the Utica?

Kristina Kazarian

Yes, I am.

Nate Tetlow

It's, we're in the spot, what we said all along and what we -- I know we didn't maybe explicitly reiterate it, but what we intended to do is to reiterate that as we looked at the results of the wells that -- the one well that actually was completed after Scotts Run, so it's really the second Utica well as well as the other ones that we are drilling, we will make those assessments about what the program is going forward after we have the results of all of that in and again the focus for us really is mainly on the cost side and what you heard of course that we're more confident that we're going to get into that range that we've talked about of capital cost per well. So, no, we do not intend certainly to communicate that we will in some way cut back our views of what we're going to be doing with the Utica in 2016.

Operator

Your next question is from Jeremy Tonet with JPMorgan.

Neal Basumullick

Hi, this is Neal on for Jeremy. So, I guess recently you've been growing volumes much more substantially than other Appalachian mystery peers, so what do you think is the big differentiator there? What you doing right?

Dave Porges

Yes I guess a lot of it is probably overall cost structure where we are as far as in a location. It does seem as if we've again entered an era, and we've gone through in my 35 years in the energy business seems like a long time when I say it that way, but there's times where it seems like it's a good idea to have wet gas and then there's times where it seems like a less good idea and right now we're again. I think we went through a period of time where people just assumed that was always better to have wet gas and we're now going through a period of time where if you don't have commitments, so you're doing everything from a blank sheet of paper, you're obviously better off with dry gas so it tends to play better to our asset position than it does for some others in the dry wet side given where we are in the cycle, probably the capital strength that we have had too and of course a lot of that really came from creating EQM and then the subsequent drops to EQM and then creating EQGP so that we were in a position to make decisions entirely based on economics and I think some of our peers haven't been able to do that, I think a lot of them actually do have some economic opportunities if they're right in the core of the Marcellus, they just in some cases have tougher situations from a capital perspective, but that's all I can come up with, I'm happy if somebody Bill or Randy if you got a view?

Randy Crawford

Yes and I'll just add to today's comment that and to put a plug in for our hub network I mean the commitment from Range and certainly EQT benefits from the liquidity and the optionality that our system does provide right and some of the unique features so I think that’s certainly the attributes with our Equitrans and systems in the markets that it does attach to. I think certainly is a reason why we would continue to grow volumes and maybe a greater pace than others.

Dave Porges

Actually that is a great point we do have integration between upstream and midstream and frankly sometimes that is a positive as it is now. Sometimes it's neutral and sometime it's negative. Right now it's positive.

Neal Basumullick

That's really helpful. I guess you mentioned financial strength, so on that you're one of really the few that access capital markets in the fourth quarter despite not really needing it, given the strong cash flow and balance sheet metrics. So I guess what was the decision process there? Was it more risk management or reverse inquiries?

Dave Porges

Yes. Our view with EQM all along has been that we have the growth opportunities, the organic growth opportunities. Notwithstanding concerns folks have about what the specific trajectory is going to be throughout the basin, but that we still have with the combination of gathering and header systems for third parties and long line pipes. So, we've got the organic growth opportunities. So, then we need to be aware of what the capital market availabilities are and we've long thought that the most reliable source of capital that’s always going to be there for you realistically is the investment grade debt market. And then the second but can kind of go in and out is equity. And with equity markets if you think you have needs for equity as we saw ourselves having in 2016 and the market was available you need to take advantage of that because it isn't always there. So, that’s just the nature of that market. So, we saw that the market was there at the time. We had specific needs in 2016 for our organic program and we decided that we just make ourselves as well as and probably investors feel a lot better to put those capital needs to bed before the year even started.

Operator

We will take our next question from Vavesh Ladoy with Credit Suisse.

Vavesh Ladoy

On Equitrans on the new 250 firm capacity sign with Con Edison, how should we think about the margins on these new volumes, especially given the current price environment?

Dave Porges

Well, again that’s right the demand market customer that’s moving upstream into Equitrans assets to supply hub. So, again I think that our targeted returns are in the five to seven times multiple and we continue to target those type of mid-teens returns.

Q - Vavesh Ladoy

And when do we see these volumes begin and also if you could quantify what other opportunities or excess capacity you have on Equitrans?

Dave Porges

Well, that I am not sure that’s not excess, that’s an investment that will tie MVP and Equitrans and allow them to reach back. So, the timing of those would be associated when MVP comes into service in late 2018.

Q - Vavesh Ladoy

Can I ask you the other excess capacity on Equitrans like how much more can you tie out there?

Dave Porges

Well, that really is dependent on where the volumes come in and our ability to leverage the system which we've done a quite a good job. Obviously when we put, Ohio Valley Connector in well at that firm for $650 million a day, so there is a available capacity there prospectively. So, that itself will help some of the flexibility and the different liquidity points on the system.

Q - Vavesh Ladoy

Okay. Thanks. And then on MVP could you remind us what the factors are for the different push and pulls driving the $3 billion to $3.5 billion of CapEx? What would cause it to be higher versus lower?

Dave Porges

Again, well obviously there is a lot of factors there. Obviously the big driver is the actual installation and that we are working through with the contractors the length of the route. Obviously some of the different lengths in terms of any mileage were to be expanded and so overall locking down those particular contractors and the installation cost is a key driver. So, that’s really where we we’re working towards and narrowing that spread as we get closer to the installation day.

Q - Vavesh Ladoy

And then finally a quick one on the maintenance CapEx. We saw a pump and 4Q. Maybe can comment on that and how we should be thinking about in 2016?

Dave Porges

Well, yes that’s often times is about the timing. Really I don’t think there is any material difference between historic or where we are headed into 2016. But again a lot of times the main part of the maintenance capital gets going into the spring into the summer period time and then even into the fall. So really that can be somewhat lumpy depending on weather but it tends to be rather consistent and just in this particular fourth quarter we closed a lot of the project out late -- early into the fourth quarter in mining.

Randy Crawford

We guided the 25 million for 2016.

Operator

Our next question comes from Timm Schneider with Evercore.

Timm Schneider

Good afternoon, guys. More of a conceptual question for you guys. And I know you have E&P up at EQT but a big part of the EQM story has been demand pull, right, which I think doesn't get the proper credit, I guess that it deserves. So how do you guys think just conceptually about current gas prices, net lower price environment in terms of balancing what may be going on up at EQT versus the increased demand that you guys are seeing from your utility customers, especially on MVP and potentially what's the opportunity to build on that, specifically MVP potentially project beyond what you guys kept outlined?

Randy Crawford

There still is as we sit here now there is still throughout the yield, so if you had stripped away seasonal effects. But a need for Marcellus, let's call it Marcellus Utica producers to get more gas out of the basin and to those markets. And we do think that Marcellus Utica as a basin has a very nice cost advantage on the upstream side and that will support more takeaway project. But they need to see the benefits of that by having those takeaway projects show up. So, with lower prices we -- of course two reasons, or there's a couple of reasons right now of course it's the surplus in, in inventory but to the extent that upstream companies have simply gotten more efficient. I think they just have accept that they don't get to keep all of that extra earnings over the course of time and that means the prices come down and right now we're seeing a bit of an overshoot on that but I think they all understand they're going to be living with a lower natural gas price environment. I actually think that situation is more beneficial to the folks in the lower cost basin so our sense is that overtime we will continue to see Marcellus Utica take share away from other basins and that's going to continue to support takeaway projects both for EQM and frankly for other companies. And again if it's going to be I don't think as is always the case, you are not going to see all those projects that gets shown on a various -- variety of lists get built but overtime you are going to continue to see the need for more takeaway from the Marcellus Utica.

Dave Porges

Okay. And I would just add to that, that the fact is that the market is noticing everything that they just talked about in terms of the growth in the Utica Marcellus, the cost basin and the pricing and with their continued expansion and need for access to natural gas, primarily around may be on yes I think electric side of the business that you will continue to see them and imports to them reaching back and they will access this basin. And I think that that will continue to be part of our strategy and certainly was with the addition of Con Ed.

Operator

Our next question comes from Barrett Blaschke with MUFG Securities.

Barrett Blaschke

Great quarter and it seemed like the transmission business particularly did very well on a margin basis. Can you give us a little color on what pushed the sense per MMBtu up -- the remnant from MMBtu up so quickly?

Dave Porges

Well again I think that we've consistently focused on that and we leveraged the -- really at the end of the day it's really leveraging the strong asset footprint that we have around our transmission network being able to be able to move additional volumes in a manner and so I give a lot of credit to the operations team, the gas control teams that really optimizes the system to be able to take advantage of latent capacity as additional volumes come on. So, it's been a positive attribute for our system for years and we continue to execute.

Barrett Blaschke

Do you feel like there's a kind of a consistent level that we saw this quarter or is there going to be some flexibility kind of going forward?

Dave Porges

You have to keep in mind that one of the large customers in Equitrans is utility that won't flow on 100% load factor, so if you're using transmission volumes as your denominator it's going to look higher. They actually pay based off their reserve capacity. That's probably what you're seeing…

Randy Crawford

You got it.

Dave Porges

So that's probably what you are seeing is [Multiple Speakers].

Randy Crawford

I think that is a good point yes we are the primary supplier of the Pittsburgh utility and they tend to move more volume in the winter heating system, as Nate said, and pay a fixed monthly demand consistently around the year or so.

Barrett Blaschke

There could be a little seasonality in it, too?

Randy Crawford

Yes, absolutely.

Operator

Our next question comes from Richard Lee with Knights of Columbus.

Richard Lee

I'm just wondering if you guys can give some numbers on your current debt level and also your lease obligation?

Randy Crawford

It is current debt level.

Dave Porges

Yes at the end of the quarter you're going to see a K next week [Multiple Speakers].

Randy Crawford

500 million of long-term debt, and right now we have got 50 million of net cash. Yes is there a follow-up?

Nate Tetlow

Yes just a second.

Operator

And that does conclude the question-and-answer session. I'd like to turn the conference back over to Mr. Tetlow for any additional or closing remarks.

Nate Tetlow

Great, that concludes the call. Thank you all for listening.

Operator

And that concludes today's presentation. Thank you for your participation.

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