Midcoast Energy Partner's (MEP) Management on Q4 2015 Results - Earnings Call Transcript

| About: Midcoast Energy (MEP)

Midcoast Energy Partners, LP (NYSE:MEP)

Q4 2015 Results Earnings Conference Call

February 17, 2016, 08:30 AM ET

Executives

Sanjay Lad - Investor Relations

Gregory Harper - President and Principal Executive Officer

Stephen Neyland - Principal Financial Officer and VP of Finance

Poe Reed - Chief Commercial Officer

Jonathan Rose - Treasurer

Noor Kaissi - Controller

Analysts

John Edwards - Credit Suisse

Sunil Sibal - Seaport Global Securities

Robert Balsamo - UBS

Sharon Lui - Wells Fargo

Operator

Good day, ladies and gentlemen and welcome to the 4Q 2015 Midcoast Energy Partners, LP Earnings and 2016 Guidance Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Sanjay Lad, Director of Investor Relations. Sir, you may begin.

Sanjay Lad

Thank you, Shinel. Good morning and welcome to the 2015 fourth quarter earnings call and 2016 financial 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 Investor section of our website at midcoastpartners.com. A replay of this call 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, Mr. Greg Harper, President and Mr. Steve Neyland, Vice President of Finance. Available for the Q&A session, we also have Mr. Poe Reed, Chief Commercial Officer Midcoast Energy Partners, Mr. Jonathan Rose, Treasurer and Ms. Noor Kaissi, Controller.

Moving forward to slide two, this presentation will include forward-looking statements. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding the company's future plans and expected performance are forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. The risks associated with forward-looking statements have been outlined in the press release and the Partnership's 2014 Annual Report on Form 10-K.

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 Investor section of our website.

Please turn to slide three. I will now turn the conference over to Mr. Greg Harper, President.

Gregory Harper

Thank you, Sanjay. Good morning and welcome. Our agenda for the day includes a few short introductory remarks and a brief update on how we are positioned for 2016. Steve will then present our fourth quarter and full year 2015 financial results and look ahead to our 2016 priorities. I'll follow up with an update on our 2016 outlook at MEP and how we are positioned at Midcoast to continue to navigate through this weak commodity product price environment. We will then close with a Q&A.

To begin, we're pleased with the Partnership's strong financial performance during the fourth quarter and full year 2015. Natural gas system volumes and NGL production were in line with our upper expectations and our full year financial results benefited from a number of actions executed to strengthen the underlying business. The meaningful operating and administrative cost reductions and greater volume retention and forecast enabled MEP to exceed the top end of our full year 2015 adjusted EBITDA and distributable cash flow guidance.

Now let me reinforce. Midcoast achieved over $70 million of annual operating and administrative cost reductions in 2015 directly benefiting distributable cash flow growth to our unit holders. Our previously disclosed divestures of non-core assets enabled MEP to focus on our core gathering and processing business. Importantly, in addition to reducing associated operating costs these actions mitigate significant ongoing maintenance and integrity capital expenditure burdens.

We're pleased with our investments in East Texas and Eaglebine. While we are still working to fully integrate and optimize these assets, we are encouraged by the produce activity in the region even in the current environment. With the solid 2015 results we achieved full-year distribution coverage of 1.12 times.

We did recommend to our Board to maintain our distribution for the fourth quarter consistent with the prior quarter to reserve cash flow, distribution [ph] coverage and enhance the Partnership's financial flexibility. We will continue to recommend quarterly to our Board of Directors a distribution that is sustainable and commensurate with our ability to execute on other cash generation strategies available to us.

So our industry remains in a weak commodity price cycle is expected to persist through 2016. Because of this we anticipate low commodity market fundamentals to continue to weigh on our producers drilling programs which we expect will result in lower volumes on our natural gas and NGL systems. While we saw modest volume declines across our systems in 2015 we too constructive actions well in advance to strengthen our cash flow certainty and enhance our business efficiencies and those efforts will continue.

In addition to the sustainable cost reduction measures and other complimentary actions we have significantly reduced our capital expenditure forecast for 2016. Also keep in mind that our 2016 forecasted commodity based cash flows are more than 90% hedged at prices well above the current market levels.

Collectively our actions in addition to those announced by our sponsor, Enbridge Energy Partners or EEP are designed to help Midcoast Partners navigate though the current commodity price down-cycle and to position MEP to respond as commodity market fundamentals improve. We will discuss these actions in more detail later in the presentation.

In light of the heightened focus on reducing costs and capital expenditures in our business I would like to reinforce that safety and operational reliability are foundational is who we are at Midcoast. These are key principles within the Enbridge enterprise. In fact, our performance in 2015 for both employee and contractor recordable entry frequencies was the lowest since we began operating our gas pipelines and processing assets over 10 years ago. In that light, I would like to express my thanks and recognize the efforts of all of our dedicated employees for the safest year on record so far.

Please move forward to slide four. While we don’t control the producer drill bit we can manage our business accordingly and the cost management initiatives executed in 2015 has enhanced MEP's competitiveness. These are sustainable cost reductions which will be leveraged as we navigate the low commodity price environment in 2016.

As the chart demonstrates, in 2015 we reduced annual operating and administrative expenses by over $70 million when compared to the full year 2014. This is a year-over-year decrease of about 18%. We will continue to ensure that operating and administrative costs are aligned with the current and projected levels of producer activity and focus efforts to further reduce costs and achieve additional operational efficiencies in 2016.

As previously announced in our third quarter earnings call we closed on the divestiture of certain non-core assets in addition to closing on an management arrangement with an industry leading natural gas marketer to enhance market access for our systems natural gas production.

We have been operating smoothly under this asset management agreement during the fourth quarter 2015 and the first quarter of this year and we'll plan out that this arrangement reduces our working capital needs which is especially important during the winter period when we typically would be carrying a large amount of working capital associated with storage inventories.

This natural gas marketing arrangement also mitigates our exposure to transportation demand charges for resident gas. Collectively, these actions have further streamlined and simplified our business model and enhanced our focus on core gathering and processing strengths.

Please turn to slide five. Building on the solid foundation established in 2015 we will continue to progress our strategic priorities in 2016. We remain keenly focused on strengthening our core gathering and processing business through the retention of existing system volumes and addition of new supply and further optimization for asset base.

We will continue to manage our costs relative to current and anticipated operating levels and pursue additional efficiency measures on our system. We have made meaningful progress on our objective to enhance our businesses' cash flow certainty and grow our demand based and fee base gross margin strength. Building our successes in 2015 we intend to continue to manage our capital projects prudently. We've taken steps to strengthen our balance sheet at MEP by simply reducing our growth capital expenditures forecasted for 2016 which Steve will discuss in more detail in a moment.

We will also look for opportunities to engage and partner with third-parties to consolidate operations where it makes sense to do so. In this regard, Midcoast is advantaged by the scale and scope of our assets and our systems access to premium natural gas residue and NGL outlets. Finally, we will also continue to evaluate opportunities to rationalize non-core assets in order to strengthen our overall business, platform and reduce debt.

So please turn to slide six. I will now turn the call over to Steve to discuss the Partnership's financial results. Steve?

Stephen Neyland

Thanks Greg. Let's begin with a recap of our fourth quarter and full year 2015 financial results. MEP's adjusted EBITDA for the fourth quarter was $26.6 million with distributable cash flow of $16.5 million. For full year 2015 MEP reported adjusted EBITDA of $104.1 million and distributable cash flow of $73.4 million. These results exceeded the high end of our previously disclosed full-year guidance range for both metrics represent respective increases of 33% and 62% over last year's results.

Distribution coverage for the fourth quarter was 1.0 times with full-year coverage of 1.12 times. Fourth quarter adjusted EBITDA inclusive of other cash items of the Midcoast operating level was $61 million and $246.9 million for full-year 2015. Our debt-to-EBITDA at the end of the fourth quarter was 3.9 times.

Turning to the operational charts on the right side of the slide, low commodity price fundamentals resulted in sequential natural gas and NGL volume declines on our systems. Additionally cold weather around our Anadarko asset and flooding around our East Texas assets resulted in a temporary reduction in system volumes and NGL production during December.

We note the main items eliminated from these adjusted results for the fourth quarter include unrealized noncash mark-to-market net gains and losses and other items noted in our supplemental slides. For further details on our financial results by quarter I encourage you to look at our supplemental slides that are posted on our website.

Let's move forward to slide seven. At Midcoast we have a systematic and disciplined risk management program in place. Our hedging program has been effective in securing our commodity based cash flows for 2016. The charts shown on this slide indicate that a significant portion of our 2016 cash commodity based cash flows for the gathering, processing and transportation segment has already been hedged to weighted average hedge prices well above current market levels.

Securing over $170 million cash flows we are greater than 90% hedged for 2016 and approximately 40% hedged for 2017, a 10% change in the 2016 commodity prices impact on MEP [ph] by approximately $2 million. Our risk management program enhances the Partnership's cash flow while strengthening our capabilities to navigate challenging market fundamentals.

Please turn to slide eight. With the backdrop of the recent down unsure commodity markets we want to provide an update on our risk profile and perspective on track next for 2016. We are continuing to make progress on our strategic objective to increase demand and fee-based business at Midcoast.

As we have added new business and existing contracts have been renewed our commercial team has been focused on transitioning the business to demand and fee-based contract structures whenever possible. This type of long-term structural change will take time to implement. However, we are encouraged by the progress made to date.

The risk profile pie chart in the bottom left quadrant of the slide is demand based business increasing to approximately 20% in 2016 from about 16% achieved in 2015. As discussed, we are well hedged in 2016 which leaves approximately 5% of our cash flows being subject to direct commodity price fundamentals [ph].

Turning to the right side of the slide the chart shows that approximately 90% of the Partnership's credit exposure is with investment grade counterparties; non-investment grade counterparties is just 12% of our gross margin. This exposure is spread across roughly 160 counterparties. Additionally, we mitigate credit risk through the use of letters of credit, investment grade parental guarantees and prepayments. While approximately 88% of our counterparties are investment grade rated we will continue to manage our credit risk prudently in what may be a challenging year for some our customers.

Please turn to slide nine. Due to anticipated reductions in our customers drilling programs; we expect the lower volumes on our natural gas and NGL systems to materialize over the course of 2016. As such, our adjusted EBITDA and distributable cash flow outlook in 2016 is expected to decrease compared to 2015. We have taken a conservative approach in developing the 2016 outlook.

Given the high level of certainty inherent in today's commodity price fundamentals, we expect producer drilling plans to continue to come into focus as the year progresses. We are expecting full year Midcoast operating adjusted EBITDA inclusive of other cash items to be between $155 million to $185 million. We forecast adjusted EBITDA at MEP for 2016 to be between $55 million and $75 million. Distributable cash flow at MEP for 2016 is forecasted to be between $25 million and $40 million exclusive of any potential sponsor support.

As a result of the previously announced distribution support from our sponsor MEP expects to maintain a one-time coverage ratio of the then declared distribution. We are providing our financial guidance without consideration for any dropdowns from Enbridge Energy Partners.

We are forecasting total natural gas volumes and our gathering processing and transportation segment to be between 1600 to 1785 thousand MMBtu per day. NGL production is expected to be between 70,000 to 75,000 barrels per day.

Please turn to slide 10. Let's begin with the chart on the left which shows forecasted 2016 capital expenditures at a 100% Midcoast operating level and then the amount that will be proportionally funded between Enbridge Energy Partners and MEP based on our relative interest.

To preserve MEP's financial stability we have significantly reduced our growth capital expenditures as per 2016. Net of joint funding MEP's capital expenditures are forecasted to be approximately $45million for 2016; a 65% decrease from 2015. The reduction in capital expenditures is reflective of producer activity levels. We have $320 million of available capacity under our credit facility at the end of 2015 and $18 million cash.

Please turn to slide 11 and I will turn the presentation back over to Greg for wrap up.

Gregory Harper

Thanks Steve. Last year our sponsor EEP or Enbridge Energy Partners announced actions to enhance MEP's ability to maintain 1.0 times distribution coverage that will then be declared distribution until 2017 or through 2017 actually. Well MEP's 2015 results were strong throughout the year and above 1.0 times coverage without any assistance. The distribution agreement was put in place in July 2015 with our sponsor in order to provide immediate support through 2017 when and if needed.

Next EEP has indicated they will be continue to support the growth of Midcoast through its co-investment alongside MEP; both our projects on and off of Midcoast's existing asset footprint. Of course in this current environment, as Steve just mentioned we're being even more judicious with our capital.

The long-term drop-down program of additional interest in Midcoast operating remained strategic both EEP and MEP, but expect EEP to be pragmatic relative to the timing in this tumultuous equity market. Finally, our sponsors demonstrated a track record of supporting MEP and having a strong sponsor positions MEP to navigate challenging market conditions.

Let's move forward to slide 12. In closing, I would like to reiterate a few key takeaways. We are pleased with our financial performance in 2015. We remain focused on executing our strategic priorities to strengthen the underlying business and enhance our ability to deliver sustainable value for our unit holders over the long term. The cost reduction measures we have taken are sustainable and are expected to enhance MEP's competitiveness going forward and will be done safely and reliably.

Looking ahead we expect low commodity market fundamentals to continue to affect our industry and the way our producer drilling outlooks. But we expect to build upon our successful cost management initiatives executed in 2015. We will also continue to pursue incremental opportunities to further reduce costs and optimize our asset portfolio commensurate with the current and projected operating levels.

Additional interest, we anticipate minimal capital expenditures for 2016 and the Partnership will continue to build upon, explore a number of cash generation strategies to preserve cash flow, strengthen coverage and enhance the Partnership's financial flexibility.

MEP's sponsor EEP has demonstrated a track record of support. We have a distribution agreement in place with EEP to support 1.2 times coverage of then declared distributions for 2017 collectively executing our strategic priorities and the support actions undertaken by our sponsor are expected to position MEP to navigate the current low commodity price cycle in 2016.

I will now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from John Edwards of Credit Suisse. Your line is now open, please go ahead.

John Edwards

Yes, good morning everybody.

Gregory Harper

Good morning, John.

John Edwards

Just a question on the going forward, I mean given the guidance obviously as 2016 progresses balance sheet leverage will move up considerably higher and so I was just wondering if you could sort of talk about how you are thinking about the Enbridge and MEP arrangement, maybe sustainability of that and what would – where does it have to get to rethink that, maybe if you could just comment on some of those relationship issues?

Gregory Harper

Yes, thank you John. So let me just talk about Midcoast and what Enbridge does and what they consider us at the Enbridge level and even at the EEP level and maybe for their calls. But what I can tell you at Midcoast, we have obviously the debt metrics in our line of sight. We understand where they are today which is very positive relative to the coverage requirements. So we exited the year very strong. We will look to focus on cash generating opportunities and other self-help measures as we go through the year, John; to really focus on preserving that metric and keeping it in line with what we want to keep it in line at.

John Edwards

Right, but I mean given the line of sight that we have today looks like a deterioration is likely and so I am just if you can talk on what's the contingency plans, if you will, I mean we can all see that pretty clearly, that's what I am trying to get to, how do you think about, I mean it looks like it is a very challenging situations. So I am just trying to figure out where you go next with, obvious try to keep costs as low as possible, balance sheet as strong as possible, but you can kind of see this coming at you here?

Gregory Harper

I agree and again those are things that would be considered at the Enbridge and Enbridge Energy Partners level and they are being looked at I mean of course and things we looked at even through last year, but we managed through last year in 2015 very successfully. I think we have sufficient time and space relative to our metrics to execute some actions that I have going on at the Midcoast level to generate again cash flow at the EBITDA level as well as to reduce debt.

So, I think those are the things that kind of line of sight for 2016 on us that we can control within Midcoast is kind of what we are focusing on. And we'll let [ph] and I am on the Board of EEP, so we discussed these things, John and I am not going to give you any picture that one getting by us, so I mean we were looking at all of our opportunities with the vehicle. We want the vehicle to be strong for the partners and for Enbridge Energy Partners as well as for Enbridge Inc.

John Edwards

Okay, fair enough and then are there additional, I mean you did obviously a great job of cutting costs in 2015, are there additional operating cost reduction opportunities maybe beyond what you put in the press release that kind of thing?

Gregory Harper

Yes I think john we will, again we targeted $50 million last year and we achieved $70 million. We feel good about the run rate relative to how we exited 2015 on the cost side. However, I would say that you know Ken [ph] and I talk quite a bit about if the production levels come in where we are forecasting and I mentioned this in the call and my notes that it’s not about where we are today, it is where we are forecasting, that’s how we are going to drive our cost is to where we project volumes to be.

So, I think there is additional room relative to if the producers line up like they indicate they'll line up right now as far as production levels will be, probably have a better cost structure than there is today.

John Edwards

Okay, all right, thank you very much.

Gregory Harper

Thank you.

Operator

Thank you. And our next question comes from Sunil Sibal of Seaport Global Securities. Your line is now open. Please go ahead.

Sunil Sibal

Yes, hi good morning guys.

Gregory Harper

Good morning.

Sunil Sibal

Couple of questions from me, I mean just touching up on John’s question earlier in terms of the OpEx reduction potential, so it seems like, on the volume side you are taking quite a bit of haircut. So is it fair to assume that you have kind of a proposal hair cut on the OpEx side built into your assumptions at this movement?

Gregory Harper

I’d say we have a little bit of that built in. I would say that again, based on our track record, I think [indiscernible] and his team as well as Poe and his team can probably do better than the forecast. But what we try to do is look at one side [ph] when we provide our guidance range and what we can see today, this is where our costs are. But again, we'll continue to look at optimization between asset areas, personnel and everything that we – and how we operate the system completely from top bench to bottom. So I think there is additional room, but we do have some built in obviously.

Sunil Sibal

Okay, that’s fair and then, how should we be thinking about the trajectory in 2016 for cash flows spend and volumes? So obviously you are almost like half of the first quarter so far and if you can just talk a little bit about volumes are tracking so far, I think in your prepared remarks you talked about some weather events also impacting December, I would presume some of that has kind of impacted the January also?

Gregory Harper

Yes, so yes we had flooding in East Texas and then extreme cold in West Texas in the fourth quarter. The East Texas persisted a little bit longer and flooding to recede. So that would impact into January. But now and Poe, they are not in the room with me, I'm sorry, but if you want to comment I believe the volume has come back on as we projected in our guidance.

Poe Reed

That is right Greg. These were producer volumes that were shut in due to a river flooding, wells being in lower lying areas that those they had received mostly in the volumes back to kind of pre flood levels.

Sunil Sibal

Okay, so I mean, then from a trajectory point I would presume that basically received some impact in Q1 of these events, was there any impact on this in your Q4 results in terms of dollar values?

Gregory Harper

Yes, there would have been.

Stephen Neyland

Yes, I’ll take that Greg. Yes it is about a million dollars of impact as it relates to the fourth quarter results and we are looking at probably on a, on an average for the quarter is around 20,000 MMBtu a day from a volume metric perspective.

Sunil Sibal

All right, that’s helpful. And then lastly on leverage and then your decision to kind of maintain distribution, especially if at equity evaluation is not rewarding you kind for that distribution I was kind of curious how do you think about those issues longer term?

Gregory Harper

Yes, I reference in our call, typically you put together a distribution policy that is long looking. I think as we talk to the Board we talk about the distribution quarterly and we will be quarterly recommendations to the Board about how we looked at the prior quarter and how we are looking ahead to the quarter in front of us. So I think it is a little more from a strategic perspective condensed timing when we looked at our distributions. But obviously we exited 2015, that was our fourth quarter in distribution and we exited with a healthy coverage ratio for the year and even for the quarter 1.0, so we felt good about where we are on the distribution, recommendation and the Board did too.

Sunil Sibal

Okay. That’s all I had. Thanks guys.

Gregory Harper

Yes.

Operator

Thank you. And our next question comes from Robert Balsamo of UBS. Your line is now open. Please go ahead.

Robert Balsamo

Hey good morning.

Gregory Harper

Good morning.

Robert Balsamo

Few of my questions have been answered, just hoping to get a little bit more color, if you could elaborate on the recontracting focus, what regions you’ve seen turned up, you said East Texas, is that just shifting from commodity to more fee based contracts and...?

Gregory Harper

Okay. Sure and I will probably turn it over to Poe in a second, but as I have said before in a down commodity cycle we're not going to proactively pursue recontracting those that are coming up, but as contracts are coming up, we are being aggressive on how we would contract those. So Poe do you want to take it from there?

Poe Reed

Yes, and East Texas is a good area to point to. We had to Greg’s point a couple of renegotiations with some of the large producers in East Texas second half of last year where we took some commodity exposure out, went to fee based, but got some additional term, got some additional acreage dedication. So to the point of not just going to fee for fees sake, but trying to make sure that at the end of the day, we’ve got more acreage longer term, so on and so forth.

Robert Balsamo

I think it is helpful. Do you disclose roughly what percentage might be rolling over this year?

Gregory Harper

We do not.

Gregory Harper

I think we have said it before although it is not in our documents, but typically a third.

Robert Balsamo

Okay. And then I think in the call it was mentioned greater volume retention is expected is that just production not declining as quickly as anticipated or is that competition capturing additional volumes or just…?

Gregory Harper

Yes, that’s a good question and something we talked about on prior quarters, where we’re bringing gas into the Anadarko Basin out of the Mississippi Lime, those volumes are coming in at higher volumes and stayed higher throughout the year than what we were projecting and partly it’s on a demand based component volume commitment deal. So that was one of the larger deals and then I think East Texas some of our volumes were, yes the decline curve in East Texas is a little shallower than we have projected.

Robert Balsamo

All right, great. Thanks. That’s it from me.

Operator

Thank you. [Operator Instructions] And our next question comes from Jeremy Tonet of JPMorgan. Your line is open, please go ahead.

Unidentified Analyst

Hi good morning, this is actually Andy stepping in for Jeremy. First question on the 2016 growth CapEx number, particularly the $20 million of expansion capital, do you view that at this point as kind of discretionary at this point with some flexibility throughout the years that it has most of the growth CapEx been earmarked and committed already?

Gregory Harper

Poe, you want to take that?

Poe Reed

Yes I would view this as largely opportunistic. We have several negotiations underway. We talk about a broader activity slowdown, but we do have pockets particularly East Texas where we’re seeing producers active looking at some line extensions, so on and so forth. So those negotiations many of them are in flight, but I would consider it kind of discretionary at this point.

Unidentified Analyst

Yep, great, thank you, that is helpful. And then on the volume guidance outlook for 2016, just curious if you can provide – peel back the onion a little and provide more of kind of a quarter by quarter view or some type of outlook for us to get a sense of the directionality that you see volumes going throughout the year? And then kind of a second part to that question is, do you have any visibility or any disclosures you can make on the DUC inventory within your acreage or how many rigs are currently operating on your acreage?

Gregory Harper

Steve you want to take the first and Poe the second?

Stephen Neyland

Yes sure, just from a broad perspective and like speaking of the numbers you compare 2015 numbers to 2016 and just speaking in terms of wellhead production year-over-year is off about 15% and our NGL production is off of 11%, so it is off left as we have seen our plants stay more full relative to the wellhead. Of the year-over-year difference between the two about two thirds of that is really around the - Anadarko area and as we have seen when we see most of the slowdown as it relates to that.

In terms of drilling, I think it’s as Greg noted in his comments it is hard to get a long-term read given there is a lot of commodity challenges as far as what is the forward-curve liked by our producers and so we have a more conservative or more negative view of production fall off as we move through the year.

Poe Reed

And with respect to kind of activity in the area, as Steve mentioned the Anadarko area probably will be in the area that we’re seeing most impacted by volumes. There are probably, it is somewhere in the range of probably seven rigs running in and around our footprint in that area which would be certainly be down from historical levels. When you look at the North Texas area, there is not a lot of activity, certainly not Barnett, much in way of Barnett wells being drilled.

Moving to East Texas and East Texas is an area where I would say we see volumes continue to – we referenced lessen the way it declines, where we also see some rig activity. I don’t have an actual count in kind of our footprint area at this point somewhere in the 10 to 11 rigs. We are seeing some horizontal Haynesville wells being drilled in the kind of eastern part of our East Texas footprint. We continue to see some Cotton Valley drilling as well. So that is in a generally down environment a bright spot.

Unidentified Analyst

Great. That is helpful and thanks very much for taking our questions.

Gregory Harper

All right.

Operator

Thank you. And our next question comes from Sharon Lui of Wells Fargo. Your line is now open. Please go ahead.

Sharon Lui

Hi good morning. Just a question about the low end and high end of guidance, is the key driver just in terms of your volume assumptions in terms of that ranges?

Gregory Harper

That is, that would be key, yes.

Sharon Lui

Okay. And then I guess just following up on leverage concerns, maybe if you could talk about maybe some of the measures that the sponsor could take to address those leverage concerns, do you think maybe you could perhaps take additional equity or participate in the largest stake in the Group CapEx and any discussions with the banks to maybe increase the covenant levels?

Gregory Harper

Sure, and as I have mentioned before I really prefer to defer any questions about what EEP could on our behalf to the EEP and focus on what we can do for ourselves at Midcoast from a self help perspective. Obviously, from a unit holder perspective, the mode or the operating agreement or distribution agreement in place we put in last year is very supportive of the unit holder relative to our distributions when they declared with 1.0 coverage.

As far as, looking after our debt to EBITDA metrics, again we will be looking to do things on our own from cost management to obviously bringing in additional business. The denominator is key in there bringing in additional cash flows as well as cash flows from maybe non-core assets. Before we would go to EEP for help, so I think those would be the things that we would be looking at. And as I mentioned before, I mean EEP and Midcoast will be prudent about how we spend capital, so, we'll be in there with them thinking through projects and as Poe brings them to the table. JR, I know you are on the line, I don’t know if you want to talk about our discussions with banks, I doubt you do, but go ahead if you are there?

Jonathan Rose

Yes, Greg at this time we haven’t had any discussions with banks about moving any covenants. I think that would be somewhat premature, we'll be working through that this year.

Gregory Harper

Yes, you know, Sharon as I mentioned before we've exited the year with pretty good standing relative to those metrics and so we feel pretty good on how the calculation is made on a rolling 12-month basis, so we got time to take care of few things on our own. This is the way I look at it.

Sharon Lui

Okay, thank you.

Gregory Harper

Thanks Sharon.

Operator

Thank you. And I’m showing no further questions at this time. I would now like to turn the call over to Mr. Sanjay Lad for closing remarks.

Sanjay Lad

Great, thank you Shinel. We appreciate your interest in Midcoast Energy Partners and remind you that I will be available for any follow-up questions you may have throughout the day. Thank you and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

Gregory Harper

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!