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Edited Transcript of EQM earnings conference call or presentation 27-Apr-17 3:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 EQT Midstream Partners LP and EQT GP Holdings LP Earnings Call

Pittsburgh, Apr 27, 2017 (Thomson StreetEvents) -- Edited Transcript of EQT Midstream Partners LP earnings conference call or presentation Thursday, April 27, 2017 at 3:30:00pm GMT

TEXT version of Transcript

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Conference Call Participants

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* Nate Tetlow

EQT Midstream Partners LP - Director, IR

* Rob McNally

EQT Midstream Partners LP - CFO

* Steve Schlotterbeck

EQT Midstream Partners LP - President, CEO

* Christine Cho

Barclays - Analyst

* Kristina Kazarian

Deutsche Bank - Analyst

* Lisa Hyland

EQT Midstream Partners LP - SVP, COO

* Jeremy Tonet

JPMorgan - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to EQT Midstream Partners and EQT GP Holdings first quarter 2017 earnings conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to Nate Tetlow. Thank you. You may begin.

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Nate Tetlow, EQT Midstream Partners LP - Director, IR [2]

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Thank you. Good morning and welcome to the first quarter 2017 earnings call for EQM and EQGP. With me today are Steve Schlotterbeck, President and CEO; Rob McNally; Senior Vice President and CFO; Lisa Hyland, Senior Vice President and Chief Operating Officer 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 13650788. The call will also be replayed for seven days on our website at EQTmidstreampartners.com.

In a moment, Rob will discuss the financial results and Steve will provide an operational update. We will then 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 news release and under risk factors in both EQM and EQGP's Form 10-K for the year ended December 31, 2016, both of which are filed with the SEC and as updated by any subsequent Form 10-Q's.

Today's call may also contain certain non-GAAP financial measures. Please refer to this morning's news release and our analyst presentation, which will be posted to our website for important disclosures regarding such measures including reconciliations to the most comparable GAAP financial measure. With that I'll turn it over to Rob.

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Rob McNally, EQT Midstream Partners LP - CFO [3]

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Thank you, Nate. This morning EQM reported first-quarter adjusted EBITDA of $169 million and distributable cash flow of $155 million. In the quarter, EQM operating revenues were $203 million or 9% higher than the same quarter last year. Gathering revenues were up 4% primarily from higher contracted firm gathering capacity.

On the transmission and storage side, revenues were up 15% driven by a 32% increase in firm reservation fee revenue. The increase in firm commitments is primarily from the incremental 650 million cubic feet per day of firm capacity by EQT on the Ohio Valley Connector which came online in the fourth quarter of last year. The quality of our cash flow profile continues to be reflected in the results as we generated 92% of revenues from firm reservation fees in the first quarter.

Operating expenses for the quarter were up about $10 million primarily from higher depreciation and amortization and O&M expenses both driven by assets being placed into service during 2016. At EQM we recently announced the cash distribution of $0.89 per unit for the first quarter of 2017, which is 19% higher than the first quarter of 2016. And at EQGP, we announced a quarterly distribution of $0.191 per unit, which is 43% higher than the first quarter of last year.

For 2017, we forecast annual distribution growth of 20% for EQM and 40% for EQGP. Beyond 2017, we continue to target 15% to 20% annual distribution growth for several years for EQM. This equates to 30% to 40% annual distribution growth for EQGP.

Now turning to the balance sheet. We ended the quarter with $42 million of cash and zero drawn on our $750 million revolver. In the quarter, we maintained a 1.5 times coverage ratio and continue to hold strong leverage metrics with debt to EBITDA currently around 1.5 times. We continue to be in excellent shape from both a growth outlook and funding perspective. I'll now pass the call to Steve for his comments.

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [4]

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Thanks, Rob. I'll start with the operational update. The construction of the header pipeline for Range Resources is progressing as planned and we continue to expect an on-time in-service date in the second quarter. Once complete, the 25 mile high pressure pipeline will provide 600,000 decatherms per day of firm capacity and is backed by a 10-year commitment.

Moving to the Mountain Valley Pipeline, we continue to make progress on the regulatory front as we received the 401 water quality certificate from West Virginia in the first quarter. Also in the quarter, FERC issued an updated notice of schedule for environmental review which designated June 23 for receipt of the final EIS. We believe this updated schedule provides adequate time to receive the notice to proceed by November and keeps us on track to hit the year-end 2018 target in-service date.

With construction anticipated to start in November, we refined the 2017 capital forecast to $200 million. This is simply a timing revision as the majority of the MVP capital is still expected to be spent in 2018. On the gathering side, we continue to collaborate with EQT production on development plans across EQT's core Marcellus acreage position. Gathering CapEx is expected to ramp throughout the year, consistent with the cadence of 2017 production activity which results in volume growth for the year being weighted to the back half.

Before opening the call to your questions, I want to briefly comment on our cash flow profile. Some of the EQM cash flow characteristics we routinely highlight are greater than 90% of revenues from firm reservation charges meaning no volume or commodity exposure associated with that revenue and this is consistent across both transmission and gathering.

Also, 90% of revenues from investment grade counterparties, with the largest customers being EQT and Peoples Natural Gas, a Pittsburgh-based utility. And long-term fixed fee contracts, which include 16-year weighted average life on the transmission side and eight years on the gathering side. These characteristics provide tremendous stability to our business model and provide great transparency to our investors.

But taking it a step further, what drives these cash flows is effectively investing capital in projects that generate returns in excess of our cost of capital. We typically talk about returns on organic projects in the terms of a 5 to 7 times EBITDA multiple or generating mid to high-teen returns. Frankly, most if not all MLPs talk about similar goalposts.

Looking back over the past five years, you can see through our reported numbers that we have executed on what we say. The return on capital employed at EQM has been consistently near 20% since the IPO in 2012. Our approach is to invest in projects that are backed by firm commitments and, when possible, build in upside to project returns through low-cost expansion opportunities. This model has been effective in establishing our predictable and growing cash flow profile and we intend to continue with this same disciplined approach going forward.

In summary, we had another solid quarter from both the financial results and operating perspective. We look forward to executing on the opportunity set in front of us, investing and solid returning projects and ultimately creating significant value for our unitholders. With that I'll turn it back to Nate.

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Nate Tetlow, EQT Midstream Partners LP - Director, IR [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Christine Cho, Barclays.

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Christine Cho, Barclays - Analyst [2]

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Good morning, everyone. I wanted to start with -- your E&P affiliate has acquired some acreage over the last six months. That was dedicated to another party. We saw you guys renegotiate the Statoil dedications last year. So are you guys thinking about doing something similar here? And to add to that, we saw one of your peers get into a processing JV. As you think about building CapEx post MVP, is processing something that you guys would like to get back into or are you busy with trying to expand your footprint -- pipeline footprint?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [3]

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Christine, certainly we are looking to renegotiate some aspects of the contracts that came with the Trans Energy and Stone acquisitions and I think we remain highly confident that we will do that. We're just looking at taking a holistic view at it and it takes some time to renegotiate those. But I think just like we did with Statoil, we expect that there is a win-win opportunity for both parties. So we continue to pursue that and remain pretty confident that we'll get something beneficial done.

On the processing side, yes, we saw that JV and I think certainly now as we've expanded our -- or EQT has expanded their exposure to wet acreage in the basin, their view is that the growth of wet gas will be a little faster than otherwise assumed at EQT. And I think that might now create enough scale for us to consider ways for us to get into that part of the business.

I would say more likely through an avenue like the joint venture that was announced by one of our peers rather than us starting from scratch and trying to build a processing business on our own. I think that might be a bridge too far for us. But I think something along the lines of a joint venture certainly might make sense.

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Christine Cho, Barclays - Analyst [4]

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And can you especially remind us what is your processing agreement right now? Is it multiyear or is it life of lease?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [5]

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The processing agreements are -- they are multiyear. They are not tied to leases, and our marketing arrangements allow us to take the products and market them ourselves, which we are looking at as we build scale, whether we should do that and take the marketing on ourselves rather than let MarkWest do it on our behalf.

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Christine Cho, Barclays - Analyst [6]

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But, MarkWest does the marketing for you guys right now. They just cut you a check?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [7]

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Yes.

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Christine Cho, Barclays - Analyst [8]

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How high -- so it looks like your NGL production is somewhere between 40,000 and 50,000 barrels a day, potentially higher if ethane is consistently in the black up there. How high can this NGL production go over the next couple of years?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [9]

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I don't know if we're ready to provide a multiyear forecast on that, Christine.

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Christine Cho, Barclays - Analyst [10]

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Okay, but do you think it would get to a place where you would feel comfortable taking capacity on some of these NGL take away projects?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [11]

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Oh, yes. I think it is definitely possible. And the reason we are not ready to give numbers is we are still incorporating the acquisitions and EQT is relooking at the development plans with the new acreage. So, the multiyear forecast isn't solid yet, but clearly with the addition of fairly significant amount of much wetter acreage, we will be building scale in that much faster than we thought, say a year ago. So, I think definitely that is something we will be looking at.

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Christine Cho, Barclays - Analyst [12]

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Okay, fair enough. Thank you so much.

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Operator [13]

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Kristina Kazarian, Deutsche Bank.

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Kristina Kazarian, Deutsche Bank - Analyst [14]

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Morning, guys. So I'm going to go a little weeds on the first today but can you guys just remind me -- I get a lot of questions around MVP and it helped me out as well, but like in specifics, around tree clearing, like when push comes to shove, what's the first data I need to start? What's the last data I need to finish to hit in-service and kind of what else I should be watching for. Is there like a timeframe on Virginia permits? Just any incremental details on that would be lovely.

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Lisa Hyland, EQT Midstream Partners LP - SVP, COO [15]

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Well, on the tree clearing -- this is Lisa Hyland -- on the tree clearing, we have at least until the end of March to do the tree clearing for MVP. So if you look at mid-January, early February, if we can start clearing the trees, we would be able to do -- to get the whole route cleared up in that timeframe. So, I think we still have plenty of time to get the trees down based on our current expectation of when we will get the notice to proceed. You had a second part of that question, I'm --.

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Kristina Kazarian, Deutsche Bank - Analyst [16]

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Yes, the latter part, what we should be watching timeframe for in terms of other permits, particularly maybe timeframe on Virginia stuff or whatnot?

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Lisa Hyland, EQT Midstream Partners LP - SVP, COO [17]

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So, clearly the FERC permit is the first thing that we'll be looking for, and in addition to that, we'll be looking for permits from Virginia on the 401 and we have been in contact with those folks and are expecting that in the early fall timeframe.

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Kristina Kazarian, Deutsche Bank - Analyst [18]

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Got it. And then my second question, taking a bit of a different direction is, when I am thinking strategy wise around the EQT midstream portfolio of companies going forward, so a little bit of a different angle from Christine's question which is how to how do I think about what we turn this Company into over the longer-term? Is a pure play dry gas name? Almost all take or pay? Is it more of a bigger regional midstream player? And also keeping in mind what we're thinking about in terms of EQGP monetization running two tickers below EQT at the same time. So a lot of parts to that question.

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [19]

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So I think strategically, I think our view is that we are building a Marcellus regional major player in the midstream business. So not -- it doesn't necessarily limit us to dry gas and I think the view is MVP is obviously fully in focus for us right now. But as we start to get confidence in getting that project going and look beyond, I think we see opportunities to expand our reach from Marcellus but even further into the higher growth markets, particularly the South East and the Gulf Coast.

So we're -- there are just thoughts at the current time, but I think that's our view is having a connection between the biggest supply base in the US and the biggest growth demand basins could provide a real competitive advantage for EQM and EQGP. So that's kind of strategically where we're thinking. I think it's premature to talk about specific projects beyond MVP that do that, but that's kind of how we're viewing the business.

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Kristina Kazarian, Deutsche Bank - Analyst [20]

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And then the latter -- sorry --.

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Rob McNally, EQT Midstream Partners LP - CFO [21]

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There is a significant amount of growth that will come to EQM because of EQT's consolidation strategy and the growth in production expected at EQT will, over the medium to long-term, drive a significant amount of growth for EQM as well.

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Kristina Kazarian, Deutsche Bank - Analyst [22]

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And the latter part of the question, which means we've got our two tickers now. We've also in the back of our mind have have GP monetization up at that the parent as well. How do I think -- just updated thoughts on that?

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Rob McNally, EQT Midstream Partners LP - CFO [23]

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So, I would say that running the two tickers is fine; it's accomplished some of the purposes that we wanted for it to accomplish. But we do recognize that as we are now in the high splits and as the IDR take continues to grow, that it makes the cost of capital at EQM higher. And so at some point in the lifecycle of the entities, it's likely that there will have to be a simplification of some kind to take care of the cost of capital burden that EQM is faced with. Certainly there is some potential for EQT to monetize some portion of its stake in EQGP for capital, but there's no hurry to do so.

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Kristina Kazarian, Deutsche Bank - Analyst [24]

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Perfect. Thank you, guys.

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Operator [25]

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Jeremy Tonet, JPMorgan.

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Jeremy Tonet, JPMorgan - Analyst [26]

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Good morning. Just picking up on a piece of an earlier question there when you talked about your NGLs and you might look to -- if you're going to market it for yourself, take commitments on pipelines to move them. Would you possibly look to parlay that commitment into an equity stake into any of those projects? I mean could you integrate further downstream? It seems like processing is on the table with NGL pipes or fracs. Could that also be on the table as well?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [27]

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Yes, absolutely. I think anything where we have enough scale to be able to ask for an equity stake in any midstream related project is exactly the way we would be thinking about it.

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Jeremy Tonet, JPMorgan - Analyst [28]

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Okay, great. Thanks. And then just as far as EQM, management later dated -- Lisa, congratulations in the COO role, but the last we saw there was a search firm that was looking for a long-term replacement there. Just wondering if you could provide any updated color there as far as how that process might be going and whether you are looking internal or external candidates or anything you could share?

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Steve Schlotterbeck, EQT Midstream Partners LP - President, CEO [29]

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Yes, Jeremy, I think we've tried to be pretty open that Lisa has, for quite a while now, intended to retire in the first quarter of 2018, so that was always the plan and there's been no change to that and that really gives us the chance to take our time and search for the right replacement for Lisa.

Lisa has been key in getting MVP to where it at and we're really relying on her to get us through the permitting phase and into the construction phase. And we're going to take the next, whatever it is, nine months or so, to do a thorough search for the right replacement and that will include external and internal candidates. I think it will be an open book search for us.

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Lisa Hyland, EQT Midstream Partners LP - SVP, COO [30]

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11 months, but who's counting? (laughter)

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Jeremy Tonet, JPMorgan - Analyst [31]

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Sounds good. Thanks for that. That's it for me.

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Operator [32]

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Thank you. It seems we have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any closing comments.

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Nate Tetlow, EQT Midstream Partners LP - Director, IR [33]

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

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Operator [34]

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Thank you, ladies and gentlemen. You may disconnect your lines at this time and thank you for your participation.