EQT Midstream Partners' (EQM) CEO Dave Porges on Q2 2016 Results - Earnings Call Transcript

| About: EQT Midstream (EQM)

EQT Midstream Partners, LP (NYSE:EQM)

Q2 2016 Earnings Conference Call

July 28, 2016 11:30 AM ET

Executives

Nate Tetlow - Director of IR

Dave Porges - President and CEO

Rob McNally - SVP and CFO

Randy Crawford - EVP and COO

Pat Kane - Chief Investor Relations Officer

Analysts

Jeremy Tonet - J.P. Morgan

Kristina Kazarian - Deutsche Bank

Richard Verdi - Ladenburg

Christine Cho - Barclays

Operator

Greetings, and welcome to the EQT Midstream Partners, EQT GP Holdings Second Quarter Earnings joined Conference Call. At this all participants are in a listen-only mode, a question-and-answer session will follow the formal presentation. [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 Tetlow, you may begin.

Nate Tetlow

Thank you, Doug. Good morning and welcome to the second 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 13637691. The call will also be replayed for seven days on our website 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 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, 2015, and in EQGP's Form 10-K for the year ended December 31, 2015, both of which are on file 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 second-quarter adjusted EBITDA of $138 million and distributable cash flow of $129 million. Q2 was another strong operational quarter and the financial results reflected that as we came in just above the high end of our adjusted EBITDA guidance for the quarter. In the quarter, EQM adjusted operating revenues were $165 million or 19% higher than the same quarter last year. Gathering revenues were 23% primarily from higher contracted firm gathering capacity and increased volume. On the transmission and storage side, revenues were up 14%, driven by a 21% revenue increase from EQT. EQM continues to be highly insulated from commodity and volume exposure as 82% of second-quarter revenues were generated by firm reservation fees.

Adjusted operating expenses for the quarter were up about $4 million which is consistent with the growth of the business. As a result of our operational and financial performance to-date, we are increasing our full-year guidance for both adjusted EBITDA and distributable cash flow. We now forecast 2016 adjusted EBITDA of $555 million to $565 million and distributable cash flow of $495 million to $505 million. We expect third-quarter adjusted EBITDA of $135 million to $140 million. At EQM, we recently announced a cash distribution of $0.78 per unit for the second quarter of 2016, which is an increase of $0.035 per unit over the first quarter and is $0.14 per unit or 22% higher than a year ago quarter. At EQGP, we announced a quarterly distribution of $0.15 per unit, which is 12% higher than the first quarter distribution and 63% higher than the corresponding full second quarter distribution last year. 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 would result in EQGP distribution growth of at least 40%.

Now moving on to an update of our major growth projects. I'm pleased to report that these projects are on plan and on budget. The Ohio Valley Connector is well into construction and as of last week we had 90% of the pipe welded out. The project has been progressing according to our plan and we continue to be on track to have the pipeline and service during the fourth quarter. As a reminder, EQT is an anchor ship around OVC with 650,000 dekatherms per day of firm capacity and the pipeline is expandable to over 1 Bcf a day. Our other major project in the construction phase is the 600,000 dekatherms per day high-pressure truck lines for Range Resources. This project is on schedule with 80% of the phase 1 pipeline being welded out. Phase 1 is on track to be in service later this year with phase 2 scheduled to be in service during the first half of 2017.

Moving onto the Mountain Valley Pipeline, in late June, we received the FERC notice of schedule which indicated the final environmental impact study, EIS is expected to be issued on March 10, 2017. Based on the FERC schedule we anticipate construction commencing in mid-2017 and we continue to target a late 2018 in-service date. While this construction period is a few months shorter than our original plan, we are confident that we have an actionable plan that still meet our original in-service target. On the operation side, now that we have more certainty around construction timing we are preparing to lock in contractors. The 42 inch diameter pipe is under contract and we have received the air quality permit for the compressor site. So, in summary for MVP, we’ve crossed another key milestone in the FERC process and with the receipt of the notice of schedule and we are making solid progress with the operational preparation.

On the expected asset drop from EQT, we don't have any further updates since our last call. We expect to drop down to occur in the second half of 2016 and as EQT as mentioned in the past there is about $40 million of EBITDA to be dropped down with an expected value of roughly $300 million. Sticking with EQT for a moment, as you saw in this morning's in press release or heard them discuss on the call, EQT production is increasing drilling activity in the second half of 2016. We are currently working with EQT production to determine their gathering needs for their new development. The increased drilling activity will not change our CapEx plan for this year and any incremental gathering investments will be included in our 2017 capital budget, which we plan to announce in December. The increased activity is a clear positive indicator with throughput growth in 2017 and beyond.

Now turning to the balance sheet and funding, during the second quarter we raised $217 million through our ATM program. At the end of the quarter, we had $84 million of cash and full availability on our $750 million revolver. Given our current balance sheet strength, we have suspended the ATM program and have no plans to tap the equity markets for the remainder of 2016. We will fund both the upcoming drop-down and the remaining 2016 CapEx with cash on hand and available debt capacity. As we have all seen over the last 12 months, capital markets can be simple, which only reiterates our belief that a strong balance sheet is critical especially during times like now where investment opportunities are abundant. Over the long term, we continue to believe that 3.5 times debt to EBITDA is an appropriate investment grade target and we expect to reach that target over the next several years as we continue to advance our growth strategy. In summary, the completion of the Ohio Valley Connector and phase 1 of the Range header products this year will bolster our strategy to grow our premier supply and market hub, the increased liquidity created by the addition of new market outlooks coupled with our strong balance sheet will position EQM to attract additional market share associated with the recently announced industry capital spend increases.

And with that I will turn it back to Nate.

Nate Tetlow

Thank you Andy, operator we are now ready for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeremy Tonet from J.P. Morgan. Please proceed with your question.

Jeremy Tonet

Congrats on the strong quarter there, just want to touch basis as far as the recent Statoil acquisition made upstairs and I want to know at later date if this could provide any future growth opportunities for you guys?

Dave Porges

Well, certainly with our innovative model we believe so, in fact we are actively working with Williams and EQT production to really determine the best strip for EQM but we believe there are opportunities for gathering and we do continue to explore other midstream solutions in connection with this acquisition, so yes we do.

Jeremy Tonet

With regards to the equity issuance to the ATM, congratulations on being able to access the equity markets. But just wondering when do you guys see yourself hitting the target leveraged that you talked about because by your numbers you are close to one and seems like you're still kind of long ways off at this point. So just wondering if anything drove kind of extra conservative here to access that equity?

Rob McNally

Hi, this is Rob, I would say that consistent with Randy's comments, it really is going to be over the next several years as we guide significant CapEx spend primarily with MVP coming, will give us an opportunity to get to appropriate levels over the next call it two years or little more than two years.

Operator

Our next question comes from the line of Kristina Kazarian from Deutsche Bank. Please proceed with your question.

Kristina Kazarian

[indiscernible] taken one of the gas pipelines down there with Mountain Valley coming online in the next two years, are we getting closer to thinking about other ways EQM can get involved in this market just high-level big picture question?

Dave Porges

It's a fair question Kristina and I would say that we obviously believe in the fundamentals of the Southeast market and we’ve seen recently with the significant growth in gas-fired power generation demand, we certainly believe in MVP and are always looking toward the ability to do low-cost expansion with that project to really bring a needed supply source into the Southeast market. So, obviously I think that's a confirmation of the fact that gas is certainly a fuel of the future and is of need into the Southeast market. And so yes, over time we will work diligently to continue to bring much needed Marcellus and Utica supply to that region and we'll continue to work toward that.

Kristina Kazarian

And then just a follow-up, I know with the EQT increasing its second half drilling activity, I know you said I'm not going to get my CapEx update until December but in that December update will I also maybe get some color on how I’m thinking about dry Utica or am I still thinking opportunities around that are probably more 2018-ish when I get more development level?

Dave Porges

I think that you will certainly the accelerated drilling activity of the EQT production is certainly bodes well for EQM and we will certainly get our share of that growth. And with respect to the Utica, we’re very excited about that opportunity but I think on the call with EQT, they’re going to continue to evaluate those results that they've experienced to this point and so may be a little bit later with respect to the Utica, but certainly the Marcellus in the short term is providing significant opportunity for continued growth.

Kristina Kazarian

And then last clarification one for me, good currency, [indiscernible] just why has the drop taken so long or how should I be thinking about this?

Rob McNally

I don't think, there is nothing really so much to read into it, as it's a process that we go through with the Conflicts Committee and so I think that again, we’re moving forward and we should be able to have that accomplished here in the second half, Kristina.

Kristina Kazarian

Perfect. Thanks guys.

Operator

Our next question comes from the line of Richard Verdi from Ladenburg. Please proceed with your question.

Richard Verdi

Hi, good morning, guys. Thanks for taking the call and good quarter here. I just have a couple of high level questions. Thinking about the backlog of organic growth projects on the table, coming online through 2018, I'm wondering if you could give us a sense of what’s beyond 2018 on the organic growth projects front. I mean, could we expect the next cycle of organic growth projects to mirror the size of the line, what we’re seeing now at the Ohio Valley, the Range trunk line in Mount Valley or could we see a couple of very sizeable projects, the next two growth projects being announced, just some color here would be really helpful for modeling?

Randy Crawford

Sure. I think that obviously the Marcellus and Utica basin is probably the most economic and best basin in certainly the country and the world and we continue to see growth in volumes in that area, which is going to drive EQM’s growth. With respect to more, I think in the long line header projects, it’s similar to what we are talking about with OVC and Range. I would point out that as we build out and I’ve talked about this in the past, as we build out our network and attract additional markets and our supply hub, which I think is attractive ultimately to producers, it will position us for other low-cost expansion opportunities. So as we put the basin, such as Ohio Valley connector with a 650 contracted capacity, we’ll be able to expand that as we build out gathering going forward. So I think you’ll see continuing leverages of the existing asset footprint for solid returning low-cost expansion opportunities. But in addition to that, more header pipe such that the payback is quicker than say a long line project and we’ll build a lot more laterals along those lines over the future, post 2018.

Dave Porges

This is Dave Porges. I think you're going to wind up seeing that we’ll continue to track the growth of EQT. I mean, if you listen on to the EQT call, they had mentioned that in the core of the core, only 20% of its developed. And so you’re going to see a lot of growth out of that. As you know, we feel that it’s a lot more economically attractive to go after those organic projects, but especially as is the case of the EQT project and frankly with the Range project, those that leverage off the existing assets that we have also. So those are the really attractive places to go. And with EQT’s position there and then the position of other producers that EQM has agreements with, we think that you're going to see a lot of, as Randy was saying, those types of projects, which are going to wind up with better returns than you get with long line pipes.

Randy Crawford

And I would just put note that, as I've talked about in the past that the demand market as it continues to reach back, looking at the EQT midstream hub and the access to an abundant supply in a variety of producers, I think we’ll continue to increase commitments from the market as well. So we’ll continue to access more markets and build out the laterals that we talked about.

Richard Verdi

That's great color. Thank you. That actually answered my second question. I just have one follow-up though. Again, it's high-level, but I’m curious. Given that footprint in the Marcellus, is there a potential for the partnership to ever think about adding a water business to the portfolio. I mean, Antero has been very successful on the waterfront, Western Gas is now contemplating entering this realm and listen, I know Aqua America, American Water Works are in your footprint, providing water services, but given your relationship with EQT Corp, the partnership could exclude other players, with these types of tariff on each barrel of water, I mean, that's a meaningful business and maybe that business grows through treating. So is that, is something like that -- adding something like that to the portfolio a possibility and similarly in a similar way, if you could not. Is it possible that partnership could look at entering a business outside of the core business, but still within that core competency to bolster growth, the partnership has a lot of potential in our view, we're just kind of wondering what the possibilities could be in front of it?

Dave Porges

We absolutely agree with that. We do take that kind of a broader view of that and as I think you probably know, we've had a concern that many MLPs only look out 2 to 3 years and that you really need to be looking out longer than that. Along those lines, water is an interesting possibility. And we are still looking at whether that’s a good fit or not. The concern and maybe it’s one that we wind up getting over, but the concern is that it doesn't have quite the annuity features that the MLP investors are looking for in the gathering business. There is changes going on all the time and how completions occur, what you do with the water. So once we put in the gathering system, with MVP, what the contracts are, they go out for, like 15 years, but 20 years, but we all think, the odds are MVP is going to continue to go beyond 20 years, right. So that's an annuity that goes way beyond what the average investor actually looks at, but at some point, you get to the end of that. Essentially, with the gathering systems, whether it’s for EQT or Range or for somebody else, there will be wells near that and those wells themselves are going to have lower volumes. They will continue to produce for decades, even though the volumes wind up being lower. It’s not clear to us at this point that water fits that profile and we do worry about the possibility of building up a business that looks attractive for two, three, four years and then starts looking less than attractive. So we do want to work through that issue more to figure out whether that's a good fit or not, and more broadly though, we agree with you that those are the kinds of things that we need to be looking at.

Richard Verdi

That's excellent color. Thank you very much for the time guys and hey, great quarter guys. I appreciate it.

Operator

Our next question comes from the line of Christine Cho from Barclays. Please proceed with your question.

Christine Cho

Good morning, everyone. Last quarter, the parent kind of talked about potential midstream opportunities in M&A and in the neck of the woods, I was wondering if we could get an update on that and is this something that EQM is even interested in doing, given you have your hands full at the organic CapEx?

Rob McNally

Good morning, Christine. So what I would say is, well, our focus has been on dropdowns and the organic growth and we do routinely assess the value proposition of assets that we would expand and extend our partners in supply hub, right that would connect our hubs in new and diverse markets. So we are well-positioned to capitalize on that value, creating inorganic opportunities and to the extent that they come available, I would stress, in our footprint, we will maintain our financial discipline. But we’ll take a look at those opportunities, again consistent with our strategy of expand and extend our hub.

Dave Porges

They are going to be more attractive though, if there is organic opportunities that come on top of them. I don't think, the marketplace from our perspective, is littered with sad stories of MLPs that make acquisitions and other MLPs that don't have a lot of growth. We are trying to create value and if it’s more organic growth opportunities at something that many opportunities can't do, then that is going to look a lot more attractive than if we’re just working up.

Christine Cho

And would any deal has to be done at EQM or just given the huge cash balance you got on the EQT balance sheet, I was wondering would you incubate it at the top and drop it down later, is that on the table or?

Rob McNally

There is nothing that's, near enough term, that we’ve actually worked through that. So we’re open minded, but frankly, we haven't had occasion to work through those mechanics, but I would say assuming such a thing came down the pipe, we would be open minded.

Christine Cho

Okay, great. And then just a follow-up on the Southeast market, a lot of these utilities have teamed up with pipes and I’m curious are these utilities going to be incentivized to get their incremental gas needs from the pipeline they have an equity interest in or do you think all these guys will still be looking to take capacity from other lines regardless to diversify?

Randy Crawford

Well, they would have to speak for themselves. I mean, we certainly have done our partnerships in particular with MVP with some very sizable utilities and I think that as I've said in the past, it's difficult to ignore the Marcellus and Utica, which is becoming one of the largest basins in North America. So I would expect that those large users of natural gas utilities in particular would want to diversify and have direct access to the Marcellus and Utica.

Christine Cho

Okay. And then the parent, as you mentioned, announced, what was it like, 63 more well that they’re doing and some of that’s Upper Devonian. So, are all these wells going to be able to tie into your existing gathering systems or do you have to build a new one for, I don't know, the Upper Devonian?

Randy Crawford

No. I think the Upper Devonian and Marcellus tend to be on the same pads and we’ll tend to leverage the existing systems to the extent that is possible, but as I said in the opening remarks, we’ll work through just the additional capital that will be required as we go through our process with our board later this year. But with the OVC coming on and the gathering assets that we have in place, we’re certainly attempting to bring as much volume as we can on the existing systems and leverage those assets as David had mentioned earlier.

Dave Porges

But as you’re looking through this, your working assumption should be that we’re never building new systems for the Upper Devonian. That will never happen.

Christine Cho

But you will for Utica if that works?

Dave Porges

It could be because of the pressures, yes, that’s possible. With the Upper Devonian, all it does is increase the utilization of systems that we've either already built or we would need to build as part of the new Marcellus system. So in that respect, it of course is very economical for EQM, but I mean, the most extreme example all would do is resulting slightly more capital to build slightly larger systems, but never new systems.

Christine Cho

I see, okay. And then last question from me, this is probably a question I should have asked on the parent call, but can you remind us of how much processing commitments you have up at the parent, current utilization of that and then I think you also have an option to upsize your commitment on a plant, is that right?

Dave Porges

That's right. At Mobley, we currently hold, I believe its 570 million a day, and we have the opportunities, an additional 150 million that has been added recently that we have the options to expand. So, and we’re moving closer to 100% load factor.

Christine Cho

Okay. So close to 100% utilization, on that 150, is there a certain time you have to exercise that buy or no?

Dave Porges

No.

Christine Cho

Okay, great. Thank you.

Operator

There are no further questions. I'd like to hand the call back over to management for closing comments.

Nate Tetlow

Great. That concludes the call. Thank you all for listening.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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