EQT Midstream Partners' (EQM) CEO Dave Porges on Q1 2016 Results - Earnings Call Transcript

| About: EQT Midstream (EQM)

EQT Midstream Partners, LP (NYSE:EQM)

Q1 2016 Results Earnings Conference Call

April 28, 2016 11:30 a.m. ET

Executives

Nate Tetlow - Director of Investor Relations

Dave Porges - President and Chief Executive Officer

Rob McNally - Senior Vice President and Chief Financial Officer

Randy Crawford - Executive Vice President and Chief Operating Officer

Pat Kane - Chief Investor Relations Officer

Analysts

TJ Schultz - RBC Capital Markets

Kristina Kazarian - Deutsche Bank

Bhavesh Lodaya - Credit Suisse

Timm Schneider - Evercore

Barrett Blaschke - MUFG Securities

Operator

Greetings, and welcome to the EQT Midstream Partners and EQT GP Holdings First Quarter Conference Call. [Operator Instructions] As a reminder this conference is being recorded.

I'd now like to turn the conference over to your host, Nate Tetlow, Director of Investor Relations. Thank you. Nate, you may now begin.

Nate Tetlow

Thank you, Rob. Good morning and welcome to the first quarter 2016 earnings calls for EQM and EQGP. With me today are Dave Porges, President and CEO; Rob McNally, 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 877-660-6853, and the confirmation code is 13634057. 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 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 press release and under Risk Factors in EQM's Form 10-K for the year ended December 31, 2015, and in EQGP's Form 10-K for the year ended December 31, 2015, both of which are filed with the SEC and as updated by any subsequent Form 10-Q.

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 Q1 adjusted EBITDA of $142 million and distributable cash flow of $133 million. We exceeded our adjusted EBITDA guidance for the quarter as a result of increased gathered volumes on the Jupiter gathering system. The Jupiter system also feeds into our Equitrans system, so we also realized higher than expected transmission volumes from EQT production.

For the quarter, EQM adjusted operating revenues were $169 million or 17% higher than the same quarter in 2015. Gathering revenues were up 24%, primarily from higher contracted firm gathering capacity. On the transmission and storage side, revenues were up 10%, driven by a 22% revenue increase from EQT. In the first quarter, we experienced lower transmission throughput from utility customers due to the warmer than normal winter weather and we also had lower third party producer throughput year-over-year.

Despite the reduction in third throughput, the third party transmission and storage revenue was flat versus last year. This dynamic highlights the revenue certainty from contracts with a significant firm reservation component. In the first quarter, 83% of total revenues were generated by firm reservation fees which insulate EQM from commodity and volume exposure. Adjusted operating expenses for the quarter were up about $4 million, which is consistent with the growth of the business.

Based on the strong first quarter results, we are increasing our full year guidance for both adjusted EBITDA and distributable cash flow by $10 million. We now forecast 2016 adjusted EBITDA of $540 million to $560 million and distributable cash flow of $470 million to $490 million. We expect second quarter adjusted EBITDA of $133 million to $138 million, which includes the impact of a $7 million revenue reduction in Q2 versus Q1 from the seasonal nature of our utility customer contracts.

One quick item I mention related to EQGP. For the full year we expect the SG&A expenses that are unique to EQGP to be about $3 million. In the first quarter these SG&A expenses came in at $1 million. However, we expect a somewhat lower run rate for the rest of the year in order to hit the $3 million forecast. At EQM, we recently announced a cash distribution of 74.5 cents per unit for the first quarter of 2016, which is an increase of 3.5 cents per unit over the fourth quarter and is 13.5 cents per unit or 22% higher than the year ago quarter.

At EQGP, we announced a quarterly distribution of 13.4 cents per unit which is 10% higher than the fourth quarter distribution. 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 28% per unit distribution growth which would result in EQGP distribution growth of at least 40%.

Moving on to some of our organic growth projects. Starting with the Ohio Valley Connector. We are a few months into the construction phase and have already completed several key milestones, including 100% of the tree clearing and crossing under the Ohio River. We have nearly completed the earthwork at the two compressor sites and have about two-thirds of the necessary grading complete. We are on track with our construction schedule and expect to have the pipeline in service by year-end. The pipeline is contracted for 650,000 dekatherms per day.

During the first quarter, we also began construction of the 600,000 dekatherm per day, high pressure trunk line for Range Resources. We have completed 100% of the tree clearing for both phase 1 and phase 2 and are about one-third complete with the earthwork at the compressor site. We recently began pipeline construction and remain on schedule to have phase one in service in the second half of this year.

Moving to Mountain Valley Pipeline. We don’t have much to update you on since the last earnings call. We continue to work with FERC on the approval process. We expect to receive the notice of schedule from FERC in the second quarter. As a reminder, the notice of schedule will provide the timeline for the final environmental impact study, or EIS. We continue to target a late 2018 in-service date. Now for an update on the remaining drop down inventory. As EQT said on their earnings call this morning, they are currently working through the internal process which includes all necessary accounting, legal and commercial work. We expect the drop down to occur in the second half of 2016. As EQT mentioned, there is about $40 million of EBITDA to be dropped down, with an expected value of roughly $300 million.

As we come off an excellent quarter in terms of financial and operational results, I want to highlight where we are building for the long-term. Our strategy is simple, connect the Marcellus and Utica supply to demand markets. Execution of projects like OVC, MVP and the [header] [ph] pipeline are all steps that are making our system one of the premier pipeline systems in North America. Our existing pipeline connectivity coupled with the added reach of our organic projects will create a hub network with access to the Northeast, the Gulf Coast, Midwest, Mid-Atlantic, Southeast and also local markets.

This market access differentiates our system from competing systems that only offer a single market. In addition, to our existing organic projects. We are focused on unlocking more value through new projects that will extend our network to new and growing market.

In closing, we continue to execute on our strategy and look forward to continued value creation for our unit holders. And with that, I will turn it back to Nate.

Nate Tetlow

Thank you, Randy. Operator, we are now ready to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeremy Tonet with JPMorgan. Please go ahead with your question. Mr. Tonet, your line is open for questions.

Unidentified Analyst

Hey, this is [Neon] [ph] for Jeremy. I just had a quick question. So I guess given the balance sheet strength at around $1 billion of MVP related spend in each for '17, '18, how are you thinking about the debt and equity funding split?

Rob McNally

Hi, this is Rob McNally. Sorry, could you repeat the question?

Unidentified Analyst

Sure. I guess, given the kind of current balance sheet strength at around $1 billion of spend for MVP in each of '17, '18, how are you thinking about kind of the funding split there for debt and equity.

Rob McNally

Yes. Just first, the MVP capital is about $1.5 billion for the total project. So you might be a little behind the numbers. We have been targeting 3.5 times debt to EBITDA over the long term. So I think over the construction phase of '17 and '18 we will kind of gradually get to that targeted level.

Unidentified Analyst

Got you. That’s helpful. And I guess in terms of the broader strategy. So given the growing interest in MVP and the opportunity expand there, how do you think about maybe the balance between some [underappreciated] [ph] demand for projects versus serving activity on [indiscernible] EQT?

Randy Crawford

Well, I think we have a strong alignment with EQT but again I think that alignment about a demand pull projects which MVP, with some producer push for obviously a demand pull, certainly increases the value of that pipeline and ultimately increases that to all of our shippers. And our strategy overall is to build the hub of liquidity, so from a producer's perspective, having those demand pulls that are reaching all the way back to the Marcellus, I think will only enhance expansion of MVP down the road and certainly attract more and more shippers to our midstream infrastructure.

Dave Porges

And frankly in this environment versus what existed maybe a couple of years ago, it does seem, I mean one can just look at the environment and observe that the demand pull projects tend to look like they are in a little bit better shape than some of the producer push projects or the supply push projects. I mean I think we have observed before, we are the only entity that is an owner or shipper on MVP who is not at core, fundamentally a demand site entity. And our impression is that the other projects that are similar are in better shape than the ones that are pushed by -- from the supply side.

And part of that, also is the credit rating. I mean if you are building a pipeline, frankly you would rather have the folks who have the credit rating that happened to be where the world is right now for the demand side and I would say, you would probably rather not have a lot of the credit exposure to some of the producers. It's just the way the market is.

Operator

Our next question is from the line of TJ Schultz for RBC Capital Markets. Please proceed with your questions.

TJ Schultz

Just one thing from me, really. Randy, on the regulatory process for MVP, just trying to get the comfort level on that and service date. If there are any particular regulatory hurdles or major milestones you need to clear to get even more comfortable there. It sounds like, or I guess what we should expect from the EIS that would cause any change to the outlook of that in-service date?

Randy Crawford

TJ, good morning. Certainly the notice of schedule is the key driver that will set that specific EIS, the environmental impact study. And more broadly, really I think and I have talked about this previously about the work that the team did upfront to avoid a lot of those areas of high consequence if you will. Particularly around the forest service and other areas where we have avoided those areas upfront. So as we have answered all of the data requested of [indiscernible]. We have not had any real show stoppers. Well, we had minor modifications that are well along the way. I mean we feel really good about that.

Also, from the standpoint of getting in service into '18, a recent ruling around the northern [indiscernible] which extends the tree clearing period will give this additional time. If the timing were to slip a bit, we still believe we will be right on schedule but to the extent it does, that allows us additional time to clear trees that wasn’t really built into the original schedule. So that upfront work, the data request that we are seeing from FERC and working really hand in hand with the communities and the FERC staff, gives us strong confidence that we are going to be able to put this pipe into service.

And Dave mentioned the demand pull as well, so the absolute need for the project, I think are key drivers that give us the confidence that the pipe will be in service on schedule.

TJ Schultz

Okay. Good. Makes sense. I guess just one more. I wasn't able to listen to the EQT call. It sounds like they discussed the drop down. Just the timing on that. That's the second -- any more granularity there? I thought we were expecting that kind of first half of the year? Kind of what's driving that, or what is the outlook on when that ultimately gets dropped down?

Randy Crawford

Nothing has really changed except the fact we are working through the process. I think on the EQT call they talked about the second half of the year as we work through the accounting and some of the commercial contracts and such. So, again, I think it's just the process that is taking place, but no change in terms of strategic, or strategy and the ultimate drop down.

Operator

Our next question is from the line of Kristina Kazarian with Deutsche Bank. Please go ahead with your question.

Kristina Kazarian

Nice job today. Any more color you guys could give on shipper conversations, both on MVP and OVC? So on MVP are we still looking to add shippers, tone of these conversations? And on OVC, I know historically we talked about potentially getting shipper interest emerging after it comes online and we are getting a lot closer to it coming online. So nice job there. But have we had any progress or is it may be lagging a bit because of the commodity environment?

Randy Crawford

Well, Kristina, no news necessarily to report on that but absolutely there is, a good bit of conversation is going on, in particular right around OVC. I will address that first. Obviously the fact that that is becoming a reality and will be in service here by year-end, that’s certainly got the interest of the producers in that area and region. So I am cautiously optimistic that as the year goes on and there is some price recovery, certainly those are headwinds around the development plans of some producers. And so that uncertainty is a factor. But the fact as commodity prices appear to be firming, those discussions have picked up in earnest. And so we are cautiously optimistic there.

With respect to MVP, we continue to talk to a variety of demand pull customers on that pipeline and so we will continue that. I think the [BDE] [ph] team is aggressively pursuing some opportunities. So, again, things are moving very well.

Kristina Kazarian

Okay. And then, a regional follow-up for me. First, relating to EQT, I skimmed the transcript from the call before, but are we getting any closer to being able to quantify the dry Utica opportunity for EQM? And then the second part of it is, regionally there are a couple of asset packages that are up there. Maybe how are you guys thinking about any opportunities for EQM as some of these things come up on the midstream side.

Randy Crawford

Well, I think to take the latter part of your question first, on the EQT calls we have talked about the areas that the EQT is looking at in terms of acquisition, possible acquisitions of acreage. And we had also mentioned that those are strategically placed right around our midstream assets. So certainly if successful and EQT were to acquire additional acreage that would be advantageous to EQM. So we certainly work together on those opportunities going forward. So we see that. The other part of your question, Kristina, I am sorry?

Kristina Kazarian

Update on how we are thinking about the dry Utica. I saw we got a couple -- one new [indiscernible] I think this quarter that you guys talked about earlier today, so just midstream opportunity around that.

Randy Crawford

Yes. We continue to work with the upstream unit in terms of their ultimate development plans but we are early. We are early in the development of that. And so I think that we continue to utilize our strong asset position to move these Utica gas to market. That’s certainly competitive advantage that we have with the infrastructure we have in our footprint. And really the key driver in terms of EQT is ultimate development plan there. So we are a little early on but the team is working together to really scope out what the larger development plans could be. But nothing more to report beyond that.

Operator

Our next question is from the line of Bhavesh Lodaya with Credit Suisse. Please go with your question.

Bhavesh Lodaya

On Mountain Valley, it remains on track for the end of 2018. I believe some time before that the pipeline begins early in service on part of the pipeline to deliver gas to Columbia. Is that still on schedule and what kind of EBITDA we should expect in this initial phase?

Randy Crawford

Well, we have done an open season to look at that possibility and really as a pipeline we want to be able to provide as much liquidity as early as possible. But again, a lot of that is dependent on shipper demand. And so we have not built any EBIT forecast in for that or any earlier EBIT at this point in time. And so we will evaluate that as the market continues to evolve around the commodity pricing and such but at this point the plan is to begin the construction in the West Virginia area and to tap the Columbia line early. But, again, that’s all part of the FERC certificate process. So we will have to stay tuned on that.

Bhavesh Lodaya

Okay. And on the drop down, thanks for the color. Can you comment on what type of contracts we could see? Maybe similar to the previous contracts and will that come with any growth prospects?

Randy Crawford

Yes, to the growth projects. And I think we have been very consistent at EQM and EQT in terms of firm commitments going forward. So I think that’s a similar structure that we will implement in this dropdown. And in terms of growth, again, this is a growth asset. There is a lot of development that will be beyond what the original assets provide. And so we tend to always look forward in terms of the future growth in addition. So I think, really, in summary it's similar to the Jupiter in the Northern West Virginia asset dropdowns if you will. It's what we could expect. Also the Allegheny Valley Connector, which is a FERC regulated pipeline as well, which is somewhat different from the Marcellus gathering assets. They are backed by long-term contracts with the utilities.

Bhavesh Lodaya

Okay. Thanks. And if I could move to the transmission volumes. We are seeing a move over the last year basically from capacity volumes turning lower, but volumetric based service is going higher. If you could help me understand this shift in the volumes.

Randy Crawford

Yes. I think it's pretty straight-forward. We are constructing the Ohio Valley Pipeline and so we are continuing to move volumes with our latent capacity. Once OVC comes on those lines will be firmed up and move to the different category. So that’s what you are seeing right now, is volumes in excess of firm that we are able to manage through at this time. And those volumes will essentially be firmed up when OVC comes online.

Bhavesh Lodaya

Okay. And a final one for me. The $7 million in other income for the quarter, can you give us some details around that and how should we think about this line item for the year?

Rob McNally

Yes. When we did the Northern West Virginia drop, there was a preferred interest component that came with that drop. It's about $11 million for the year. That now hits other income that started this quarter. And then there is some AFUDC equity that’s in there as well but that gets backed out in the DCF calculation. So it's those items that are in there. But the piece that really hits the EBITDA is that preferred interest piece which started this quarter.

Bhavesh Lodaya

Is that a good number going ahead for the year?

Rob McNally

Yes.

Operator

Our next question is from the line of Timm Schneider with Evercore. Please go ahead with your question.

Timm Schneider

So I had a basin wise kind of, I guess more of a technical question. If you are looking at ATEX, it is running full in terms of ethane that can be extracted out of the basin. I know it's not really on you guys because you don't own any processing capacity. So I was wondering, what's your view on -- are we going to run into these heat spec issues that we used to see? I think it was back in 2013 when [Setco] [ph] was issuing critical notices every day, and you actually had to bring in dry gas from the Rockies to blend it down. And then the follow up to that is, I think, Equitrans, I used to think of it as just a massive blending pipeline, so is it a potential tailwind for Equitrans.

Randy Crawford

Yes. I mean I think for our standpoint, I mean QT is a large dry gas producer. So the Equitrans system has a majority of gas that is in the dry areas and we have the flexibility to blend that gas out going forward. So I think from that standpoint as a company we are in solid position to be able to move our gas. More broadly, I do recall those times around bringing the gas from [REX] [ph] and such but at this point, I don’t foresee that as an issue directly with EQT or EQM systems.

Operator

Our next question is from the line of Barrett Blaschke with MUFG Securities. Please go ahead with your question.

Barrett Blaschke

Just a quick question. On the transmission side, it looked like the throughput fees really picked up quarter-over-quarter. Is that related to going more on the volumetric based services and less on the firm capacity reservation? What was the driver there?

Randy Crawford

The driver there is that we exceeded the firm demand quantities on the Jupiter gathering systems, as I said in my comments. And so we have been moving volumes in excess of firm along that system. But again we are able to accommodate those volumes at this time and again the firm quantities will pick up when the Ohio Valley Connector comes online. So I think that’s what you are seeing is our ability -- the flexibility in EQM system to be able to move gas to a variety of markets allows us take those opportunities and then we ultimately firm them up when the projects come in.

Barrett Blaschke

Okay. Do you expect the rates to come back down as they become firm or do they stay kind of at this level?

Randy Crawford

I think what's going on is, the revenue is driven of the firm reservation capacity amount. So whether they are flowing gas or not, you collect that revenue. 83% of our revenue is from firm components. So if you are using the throughput as your denominator, it's going to look like the rate is going up but in actuality the rate is the same. It's just the revenue is driven off the firm reservation capacity amount.

Operator

Thank you. At this time I will turn the floor back to Nate Tetlow for closing or additional remarks.

Nate Tetlow

That concludes our call. Thank you all for listening.

Operator

Thank you. Today's conference has concluded. You may disconnect your lines at this time and thank you today for your participation.

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