Summit Midstream Partners, LP
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Welcome to the Q4 2016 Summit Midstream Partners, LP Earnings Conference Call. My name is Richard, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I’ll now turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

[Marc Stratton:]

Thanks, Operator, and good morning, everyone. Thank you for joining us today to discuss our financial and operating results for the fourth quarter of 2016. If you don't already have a copy of our earnings release, please visit our website at www.summitmidstream.com, where you’ll find it on the Homepage or in the News section. With me today to discuss our earnings is Steve Newby, our President and Chief Executive Officer; and Matt Harrison, our Chief Financial Officer. Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations. Although, we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance of such expectations will prove to be correct. Please see our 2015 annual report on Form 10-K as updated and superseded by our current report on Form 8-K/A which was filed with the SEC on September 1, 2016, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. And with that, I'll turn the call over to Steve Newby.

[Steve Newby:]

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call this morning. As usual, I will begin with a few comments on the quarter and then I will turn it over to Matt for more detail of our quarterly financial results. I will then wrap-up by discussing our outlook for the balance of the year, including our 2017 financial guidance. Yesterday, we announced our fourth quarter and full year 2016 operational and financial results. It was another strong quarter for SMLP with fourth quarter adjusted EBITDA of $72.7 million and full year adjusted EBITDA of $291.6 million, which compares to the top end of our 2016 guidance range of $290 million. I want to commend our employees on their focus and execution in making 2016 a strong year for Summit, despite the extreme volatility we saw in the first half of the year. On January 26 we announced our fourth quarter 2016 distribution of $0.575 a unit, which implies a distribution coverage ratio of 1.19 times. Leverage at the end of the year was 4.2 times. Both of these measures also came in better than we expected at the beginning of 2016. Yesterday, we also reaffirmed our 2017 financial guidance, which was originally released on January 26. The guidance implies the midpoint of $305 million of adjusted EBITDA for 2017 with an expectation of strengthening performance throughout the year and a fourth quarter 2017 annualize run rate between $325 million and $345 million or a 12% to 19% increase over our annualized fourth quarter ‘16 run rate. In the Utica, Williston, Barnett and Marcellus volumes were weaker in the fourth quarter compared to the third quarter, which is a trend that we expect to see continuing in the first half of 2017. This expectation relates almost entirely to the six-month to nine-month timing lag between when the producer moves a rig into an area and where we start to see the production impact of that new rig on our gathering infrastructure. To give you a better sense of how this works, the third quarter of ‘16 was Summit’s best quarter ever in terms of volume throughput, despite also being the worst quarter ever for us from a rig count perspective. We troughed in rig count in September on our systems. However, volumes were strong due to rig activity that occurred in late ’15 and early ’16 together with more active completion work from our customers. Fast forward three months and rig levels have nearly doubled our system so far in ’17. This increase in rig count is the primary driver behind our bullishness on the second half of ’17 compared to the first half and it’s something I am going to try to touch on more specifically as we walk through the various operating segments. Our Piceance and DJ segment continue to be a bright spot for us in the fourth quarter with volume throughout of 615 million cubic feet a day up 4% over the prior quarter. We have now had two consecutive quarters of impressive volume growth in Western Colorado. Our customer turned 36 new wells sales in the fourth quarter and in December we completed a 90 million a day expansion of one of our major pipeline segments in Western Colorado and saw our customers utilize that additional capacity almost immediately. We continue to see the benefits of this area from recent producer acreage trace, which we expect will be a trend that continues in 2017 and it’s also a theme that we have seen in other basins namely Barnett. Rig activity remains healthy in the Piceance and DJ and our customers of an inventory of 60 drilled but uncompleted wells as of fiscal year end ’16, both of which will contribute and what we believe will be another strong year for that segment. In the Barnett volumes were down approximately 6% over the third quarter. However, we remain optimistic that volumes will begin to stabilize by the middle of ‘17 with upside to volume growth beginning in the second half of 2017. Over the last 12 months four of our five largest customers in the Barnett which represent more than 85% of our Barnett segment volumes has sold their acreage to new owners. The largest announced transaction which involved Total and Chesapeake relates the acreage that hasn’t been drilled in nearly three years. Two of the remaining three transactions involved private equity-backed acquires with a singular focus on the Barnett. We currently have two work-over rigs on our system and we expect to see a drilling rig move on to our system next month. Our Williston segment averaged 82,000 barrels per day liquid throughput and 17 million cubic feet a day of associated natural gas throughput in the fourth quarter, both down from the prior quarter. The quarter-over-quarter decrease really relates to two factors, first, the third quarter with the beneficiary of 28 docks that were turned in line during the quarter, which compares only four turn in line in the fourth quarter. We think that some of this weakness may extend to the first half of 2017, but we are encourage during the fourth quarter see new drilling activity began on acreage dedicated to our crude oil gathering systems. Second, as I am sure you are aware this has been a very harsh winter in North Dakota, which had a negative impact on our December throughput. We have a large employee base in North Dakota and I am impressed every day by their hard work and positive attitudes in very challenging working conditions. Customer wise in the Williston, we have one customer exist bankruptcy in the fourth quarter and another solid acreage to a private equity-backed buyer both of which we view positively. Additionally, we are watching the press closely in relation to SM Energy’s announced marketing of its Divide County acreage, much of which is gathered and dedicated on to our Polar and Divide gathering systems. Finally, we are pleased to see the recent development related to the Dakota Access pipeline. We expect this takeaway solution is a big positive for the basin and we have already seen basis differentials there. We anticipate that our [ph] Dapple (738) interconnect will be in service by the end of the second quarter of ‘17 and we anticipate significant deliveries from our system to [ph] Dapple (745). In the Utica versus related to our 100% owned assets in Summit Midstream Utica, volumes were down approximately 10% compared to the third quarter and related almost entirely through a curtailment by one of our customers in the month of October given low realized local natural gas prices. In addition we saw a 20 million cubic feet a day pad taken off-line in December as one of our customers conducted simultaneous drilling and completion activity of several new wells, that activity will facilitate incremental volume growth in the first half of ’17. We estimate that these temporary curtailment activities impacted our quarterly volumes by approximately 40 million cubic feet a day, the cited volumes all return to production in November. Looking ahead, our customers have been operating up to two rigs in our AMI recently in the growth project that we announced last quarter which will alleviate the customer’s production constrains allow them to access more advantages downstream pipeline is on track and expect to be in service in the second quarter of ’17. Our 40% owned Ohio gathering interest, volume throughput was 848 million cubic feet a day in the fourth quarter, up 6% from the third quarter. Much of this growth relates to 16 new wells that were turned in line in August of 2016. This area has been one of the biggest beneficiaries of rig count growth increasing from zero in September to between three and five of late. However, like we discussed earlier in the call, we expect the six-month to nine-month delay until we start to see the benefit of that rig activity, so in the next two quarters, we anticipate volumes remain flat to slightly down. JV is expecting commission of the Larew Compressor Station in the first quarter 17, we are eager to see the impact of compression on the dry gas field that’s been produce without compression for nearly two years. In addition to providing lower fuel pressure to current traditional volume throughput the compression services will also an incremental fee. Big picture, we think 2017 will be a big year in Utica for producers to begin positioning themselves to take advantage of what we believe will be better netback in the basin for gas and liquids beginning in 2018. Additionally, several of our customers have made large commitments to certain of the new takeaway pipeline that will be coming online at that time. So certain amount of the anticipated production growth is based on their interests and satisfying those commitments levels. Finally, on the cost front, one of the metrics we watch very closely is our controllable operating expense for 1000 cubic feet equivalent, which was down in 2016 for the second year in the row. Over the past several years we've invested heavily in internal systems, controls and integration that have allowed us to control costs and increase efficiency, despite fairly rapid growth. I’d like to applaud our employees for keeping such a close eye on expenses without comprising system integrity or safety. And with that, I will turn it over to Matt who will review the quarter in more detail.

[Matt Harrison:]

Great. Thanks, Steve. SMLP reported net income of $14 million for the three months ended December 31, 2016, compared to a net loss of $220.9 million in the fourth quarter of 2015. Net income in the fourth quarter of 2016 included $24.7 million noncash Deferred Purchase Price Obligation expense. In conjunction with the 2016 dropdown transaction we recognize a liability on our balance sheet for the Deferred Purchase Price Obligation to reflect the estimate of the remaining consideration to be paid in 2020 for the acquisition of the 2016 dropdown assets. We discount remaining consideration on the balance and recognize the change in present value on the income statement. The change in present value comprises both the time value of money concept, as well as any adjustments to the expected value of the Deferred Purchase Price Obligation. Net loss for the three months and year ended December 31, 2015 included $250.5 million of noncash charges recorded in the fourth quarter of 2015, including goodwill impairment charges of $203.4 million related to Polar and Divide and $45.5 million related to Grand River. Adjusted EBITDA for the fourth quarter of 2016 was $72.7 million compared with $68.5 million for the fourth quarter of 2015. The $4.2 million increase in adjusted EBITDA was primarily due to the increase in natural gas volume throughput on our Utica Shale and Piceance/DJ Basin segments and increases in MVC payments on our Williston Basin segment as a result of commissioning the stamping -- stampede lateral in the first quarter of 2016. These increases were partially offset by natural gas volume decline in our Barnett segment and increases in G&A in the fourth quarter of 2016 compared to 2015. Adjusted EBITDA in the fourth quarter of 2016 included approximately $17.3 million related to MVC mechanisms for our natural gas gathering and crude oil transportation agreements. Additional tabular detail regarding MVCs is included in the fourth quarter earnings release. Distributable cash flow totaled $52.8 million in the fourth quarter. This implied a distribution coverage ratio of 1.19 times related to the fourth quarter distribution of $0.575 for limited partner unit paid on February 14. CapEx for the fourth quarter totaled $20 million, of which $4.4 million was classified as maintenance CapEx. Also the partnership made approximate $11.4 million of capital contributions related to Ohio gathering in the fourth quarter. We have $648 million of debt outstanding under our $1.25 billion revolving credit facility at December 31, 2016 and $602 million of available borrowing capacity. Total leverage as of December 31, 2016 was 4.21 times. On February 8, 2017 we issued 500 million senior unsecured notes due 2025 at a coupon of 5.75%, a proceeds were used primarily to repurchase the 7.5%, 300 million senior unsecured notes due 2021 including redemption fees and expenses and to partially repay the revolving credit facility. SMLP also reaffirmed its financial guidance for 2017. We expect 2017 adjusted EBITDA to range from $295 million to $315 million. We expect quarterly adjusted EBITDA to increase throughout 2017 guiding to an annualized fourth quarter 2017 adjusted EBITDA run rate of between $325 million and $345 million. We expect 2017 distribution coverage to average 1.15 times to 1.25 times. And with that, I will turn the call back over to Steve.

[Steve Newby:]

Thanks, Matt. As Matt mentioned, earlier this month we issued $500 million of senior notes that what we believe is an attractive long-term cost of 5.75%. Proceeds were used to refinance our $300 million or 7.5% notes repaid borrowings under our revolver. In combination with 5.5 million unit primary equity issuance in September of last year, the bond deal represents the second major step in positioning our balance sheet with settlement of the deferred payment in 2020. Going forward we plan to continue to be opportunistic with shifting away that payment we would expect to begin utilizing our ATM program for proportion of our equity needs which we think are manageable in the $100 million to $150 million range a year between now and 2020. Under referred payment specifically and with the benefit of 12 months of hindsight we think the structure is working exactly as intended. When you think about where we were at this time last year with crude prices below $30 and our cost of capital approaching 20%. Our GP’s high growth Utica and Bakken assets were exactly what SMLP needed and the deferred payment structure provided what we believe was the most financially efficient means for executing the transaction. While both the commodity markets and our currency is shrinking considerably during that time, the 6.5 time investment multiple embedded in the deal has remained the same. We think that under almost any scenario you draw up a 6.5 time investment in these high-quality Utica and Bakke4n assets will create tremendous long-term value for SMLP. Combined that purchase price with the option value embedded within the structured to finance the deferred payment opportunistically and you have a transaction that will create significant distributable cash flow growth for our LP investors. On our outlook we are much more bullish on 2017 then we were on 2016 and are very encouraged by the growth in rig count behind our systems and the recent developments regarding major long-haul pipelines coming out of both the Bakken and the Utica. Additionally, we benefit greatly from the fact that we and our GP invested over $2 billion of capital in new infrastructure since the beginning of 2013, which has created very high margin growth opportunities for us in the near-term as our producers in-build drill and utilize existing capacity of our system. This capital investment also limits are ongoing growth CapEx needs as reflected in our guidance, which in turn continues to further strengthen our balance sheet. The recent rig activity expectations for the long-haul pipeline and our operational skill are all key factors behind our 2017 financial guidance and specifically our belief that by the second half of ‘17 we will see a step change in our results compared to the first half of this year. While we are more constructive on the commodity markets than we have been, we continue to watch the fundamentals closely, mainly crude oil inventories and crude oil rig count, we will not be surprise to see volatility in crude oil prices over the next six months to 12 months. Over the immediate term we are more bullish on gas than crude and I will take this opportunity to remind you that nearly 75% of our volumes in 2016 are natural gas versus crude, a statistic that we expect to increase in the coming years as our natural gas throughput in the Northeast outpaces expected liquid throughput at Williston. Commercially, our focus remains on first expanding our core platform areas. However, we are continuously evaluating opportunities to make an entrance into new areas. Interestingly, the strategy of refinancing our deferred payment is also creating a situation where we have a balance sheet that is well-positioned to be more competitive large scale M&A. Although, I will tell you that we have and we will continue to remain disciplined on that front. We are cautious with some of the multiples of cash flow we are seeing in asset level M&A market and believe they could be priced to perfection which is something that rarely occurs in any industry much as one where the base business is moving in volatile price commodity. So in summary, we are very pleased with our fourth quarter and fiscal year ‘16 results and very excited about the outlook for ‘17 and beyond. We guided to our second half of ‘17 that will be much stronger than the first half and I think that once we begin to see that ramp materialize we will in a great position to resume distribution growth. With that, I will turn it over to operator to open it for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question on line comes from Kristina Kazarian from Deutsche Bank.

[Kristina Kazarian:]

Good morning, guys.

[Steve Newby:]

Hi, Kristina.

[Kristina Kazarian:]

So, I'm just trying to get a little more color around expectations and assumptions behind growth recovery in the back half of the year, particularly in the Utica. Is the -- I guess my clarification questions are, is the current rig activity we've seen enough, meaning, is it just a matter of time, do we need more, does it have to do with waiting for takeaway to come down and we see the DUCs pull down ahead of that? Just what are like the catalyst data points I should be watching for or have we already seen them?

[Steve Newby:]

Yeah. It’s Steve. I think we have seen some of them, the rig count what we saw happen in the fourth quarter -- later -- late in the fourth quarter and its flowed into the first quarter of this year too is an acceleration of rig count in the area. And I think that you are going to see a pretty fairly consistent rig count in the area this year as people, producers hit it pretty hard, Kristina, I think, they are hitting it hard for the back half of ‘18 -- ‘17 and into ‘18 with the expectation that the long-haul comes on basis repairs itself. So I think we have seen some of it. I think we want to see -- we are expecting to see it as you have seen ramp in the back half of year for us and I think that's what we are watching closely as well too if that materializes, which really will mean completion activity from the first half and fourth quarter drilling -- fourth quarter ’16 drilling.

[Kristina Kazarian:]

All right. So when I get that growth in the latter part of the year and we'll just go with get that. Can you help me understand what the drivers of resuming actual distribution growth would be after that, is it coverage, is it leverage, is it better line of sight on ‘18 volumes, how do I think about that?

[Steve Newby:]

Yeah. I think you hit on most of them. I think we want to see that growth materialize and I think that something we are going to -- we are watching closely and I don’t think we are going get ahead of that related to distribution increases. So we are going to have to see that and have a pretty good line of sight that that's materializes, because I think the key point here is when we start distribution increases, again, we are planning on starting and keeping them and not sort of step function up and then flat for a while. We are planning on a pretty systematic process here. So we're looking at, one, the growth materialize, two, we are very still focus on our balance sheet and coverage, because we still have deferred payment and I think that deferred payment starts to become very, very clear as we head into ’18, because it’s key off ‘18 and ’19, right. So we start to get a lot more comfort around the level of that payment beginning in the back half of ’17 as we head into ’18.

[Kristina Kazarian:]

Perfect. Then the last one for me, we saw a secondary coming out of the sponsor earlier this year. Can you guys just give me some color around messaging, should we expect to see more of these and how does it impact any thoughts around equity pre-funding the deferred payments?

[Steve Newby:]

Yeah. I am glad you asked. Let me say a couple things backdrop for their sales. First of all, since the IPO which was in 2012, our sponsors sold a net 2.5 million units, so about $50 million net. So it's not, I mean, they thought, they’ve taken back units on dropdown, they bought back obviously, used a full $100 million buyback this time last year in the first quarter and early second quarter last year. So to them actually that -- the deal they did here couple weeks ago, we were fully on Board with, in fact, I would tell you, management was very supportive and we wanted to do it really to increase liquidity and our units as well, truly that’s a big comment we get back from our investor base. The second backdrop I would give you is, just a year ago they dropdown over a $1 billion asset, took a third of it, which was at book value, took a third of the payment upfront, deferred the other two-thirds of it for four years, with no financing costs related to it. So they’ve obviously been very, very supportive and I think you're going to see, will they sale units in the future, I suspect they will, I don't think they are going to -- they are not rushing out to sale that at these levels for sure. But I don’t think you are going to see themselves 32 million -- they 32 million units left. You are not going to see them sale 32 million units. It’s going to have to be measured and I don't think it's -- there is any real-time constraint on that. We had a window where we weren’t going to be doing primary really and primary is going to take the front place on equity issuances. It’s not going to be their secondary so.

[Kristina Kazarian:]

Perfect. Thanks for the updates and looking forward to volumes in the second half.

[Steve Newby:]

Yeah. Thank you.

[Operator:]

Thank you. Our next question on line comes from Tristan Richardson from SunTrust.

[Tristan Richardson:]

Hey. Good morning, guys.

[Steve Newby:]

Good morning.

[Tristan Richardson:]

Just curious, Steve, I think you addressed this some in the prepared comments, but I'm curious how weather has been in the current quarter for Bison and kind of how that factored into the guide?

[Steve Newby:]

Yeah. So there is two sorts of things that it impact. We -- first we had just -- and you probably heard this with some other operators in the Bakken. But we had by the end of the year about 6 feet of snowpack in the Bakken and so it definitely affected December. It affect some January volumes too, both on the crude and gas side, just because the ability to get to pads both for our producers and for us. The other thing that it will affect now as it get warmer there, because it had get warmer, is you are going to have a tremendous amount of snow melts, which typically hits us in the March timeframe with mud and the state will actually close down roads related to that too. So that’s the other item we are watching. The other thing that impacted us a little bit on is just operating costs, when you have to remove 6 feet of snow from you compressor sites and other areas it just cost money and so it impacted us slightly there as well too. All of that is in our guidance, so, I mean, there's nothing -- is not going to impact us within from that standpoint. It just -- it did have a slight impact in the fourth quarter. The more impactful issue in the fourth quarter for us on gas volumes was Aux Sable shut down for two weeks. So our delivery point shut down for maintenance. It was normal maintenance and that actually impacted us more than weather did in the quarter, but weather did have a small impact. Hopefully that helps.

[Tristan Richardson:]

No. That’s great. That’s helpful. And then, just more of a clarification question, Steve, just going back to your comments on the ATM sort of seeing the opportunities to start using that again, did you say it would be more really to fund equity component and CapEx or I think you mentioned it in conjunction with an eye on the deferred payment or how should we think about ATM CapEx…

[Steve Newby:]

Yeah. I will start and Matt maybe can jump in to. But the way we look at the deferred payment as we get somewhere around $400 million or so of equity to issue over the next three years to satisfy. So $100 million to $150 million call it a year. That just for -- just to satisfy the deferred payment. We anticipate doing a large portion of that probably off our AT M over the next three years and so that's what I was referring to. The way we’ve capitalized the company and the way we’ve set it at from the outside of the dropdown was, we don't really need the capital markets to execute our growth plan, status quo, not including acquisitions or any other big projects that we may do. So I think that's still what we anticipate, so the ATM program would be for the deferred payment. In addressing that, I do want to say, we can also give units if we need to, to the GP to satisfy that if we need to. So that option is always there and it’s at the option of the MLP. Matt, do you have anything?

[Matt Harrison:]

Yeah. I will just add to, Tristan, that we are going to opportunistically pick our spot in the debt capital markets as well over the next three and three and half years and that's what you saw two weeks ago when we did the $500 million bond deal.

[Tristan Richardson:]

That’s great. Thank you guys very much.

[Steve Newby:]

Yeah. Thanks, Tristan.

[Operator:]

Thank you. Our next question in line comes from Ethan Bellamy from Baird.

[Ethan Bellamy:]

Good morning.

[Steve Newby:]

Hi, Ethan.

[Ethan Bellamy:]

Steve, I apologize if I missed this, but is the North Dakota weather going to be a factor in the first quarter of ‘17 as well?

[Steve Newby:]

Yeah. What I was telling Tristan, Ethan is that, I do expect, it did have an impact, somewhat of an impact in January. Again, I think, these are smaller impacts. The other thing we watch and we watch it every year coming into spring in North Dakota, this year in particular just because the heavy snowfall is actually when the snow melts, if you are familiar with that area, you get a lot of mud and they actually will close the roads down and so that’s the other thing we are watching. That impact hasn’t hit us yet. But it just now starts to get warm there, warm enough to start melting 6 feet of snow. So we are watching that, that impact as well too. But it had -- it did have an impact in January, Ethan, again not at a large one, the biggest impact we have on volumes from North Dakota in the fourth quarter on the gas side was Aux Sable shut down that I mentioned, that was more impactful.

[Ethan Bellamy:]

Got it. And gas has obviously rolled pretty hard year-to-date, are you seeing any like rig stuff, necessarily deferred completions or anything presently?

[Steve Newby:]

Not yet. I think, you look at our -- in my discussions over the last month or so, I have been out, see a lot of our big customers and I would say, a lot of them had hedged ‘17 already in, probably during the months of November, December and we have pretty strong months. I think what the rollover here will affect more in my opinion will probably be in ’18 as guys kind of layer in hedging there and try to gauge activity, but we're not going to know that until towards the end of the year. So I don't think it is going to affect as where it currently stands much of ‘17 yet. So we will see.

[Ethan Bellamy:]

Okay.

[Steve Newby:]

I think the bigger, yeah, one of the bigger issues, Ethan, for us is basis repair in the Northeast, right. So -- we had -- one of our producer shut in in October in the Northeast and I think gas went below a buck in the local market when the hub was at $3 -- a north of $3. So in the Northeast we would tell you, we don’t need $3.5 gas, right. We just need basis to be normalized some level of normalization. So that I think that’s come in, given some of the recent announcements and but it will take, I think, it’s going to help with Rover and I think there is some other ones behind Rover that will help in the couple years going forward.

[Ethan Bellamy:]

Okay. And then did you disclose what the EBITDA was on the dropdown assets for 2016, so we can track the deferred payment?

[Steve Newby:]

Yeah. So they are right in line with our guidance. They came in line I think we guided to the midpoint of $80 million for the dropdown assets. They hit that right spot on even with a little bit weaker performance at SMU due to shut in, we just talked about. And the deferred payment will be printed on Monday when we drop our K, it’s at $800 million -- I think the undiscounted amounts $830 million. So it’s right in the, I think, when we did the deal it was at $860 million. So it's sort of right in that range still. So our expectations really haven't changed much for deferred payment.

[Ethan Bellamy:]

Okay. That's helpful. And just one last one to just go back to Rover, do you -- would you expect sort of a step change the day Rover starts to come live in terms of flowing volumes, did they -- would you think that they're going to drill wells, stack those up and be ready to take advantage of the capacity day one, is it -- when we are thinking about modeling this is going to be a GAAP operating and incremental build?

[Steve Newby:]

I think you are going to see and I will comment as far as our systems go, right. They have definitely stepped up drilling in the area I am sure you track the rig activity up in the Northeast and they definitely stepped it up. We expect to see, we did a transaction last fall to help, we are going to deliver some gas to eventually Rover for them. I expect that to come on as we said in our prepared remarks in the second quarter. So we would expect to see gas come on for us related to say prior to Rover coming on, so some more of incremental build up to delivering the Rover. And I suspect that’s going to be the case. I don’t think you are going to see them complete 50 wells right before Rover comes on and flow to. I think it’s going to be step change in incrementalization and they are obviously drilling heavily to target that commitment. Does that help?

[Ethan Bellamy:]

Good stuff. Thank you.

[Steve Newby:]

Yes.

[Ethan Bellamy:]

Yes. Very much so. Appreciate it.

[Operator:]

Thank you. Our next question on line comes from Derek Walker from Bank of America Merrill Lynch.

[Derek Walker:]

Hey. Good morning, guys.

[Steve Newby:]

Hi, Derek.

[Matt Harrison:]

Hi.

[Derek Walker:]

Most my questions have been answered, but I guess, you mentioned some of the companywide sort of cost control efforts there. I guess, where else do you see some of those efforts today and are you kind of through that program today or I guess how do you see that ramping throughout ‘17?

[Steve Newby:]

Yeah. I think we feel that a very good job the last, so we’ve seen on, so what we measure Derek is, what we call controllable OpEx. We have a lot of pass-throughs like power and things like that that are better pass-throughs for our producers, so these are things we can control. We saw a 6% reduction in ‘14 and then another, sorry, in ‘15 and then another 7% reduction in ‘16 on our controllable OpEx per Mcfe. So those are -- that is very incremental to the business, right, because that just starts controlling cost and efficiency more. I think, I will put it this way. I don't think we have in our guidance are anticipating another decline like that in ‘17’s controllable OpEx to that level, right. So to the extent we can manage that to maybe some upside there, but we -- you got to be, we are pretty cautious on costs, it’s been like you can only control so much, right, you got so much. So I think we are pretty conservative on that as far as ‘17 goes related to cost, just because we had two really good year so far in the past.

[Derek Walker:]

I appreciate that, Steve. I guess just the last one for me is just on the, I think, you briefly touched upon some asset level M&A, I guess, are you seeing that around particular areas, is it around your existing systems or any color around that front?

[Steve Newby:]

I think it's more new areas and the high -- and obviously the high growth markets in basins and they are great basins, I mean, I don’t anybody’s going to dispute the geology in the rock and the productive capacity of some of these areas. We like all those price structure had little bit some of the levels of asset purchases. But I will say also, we are not in those areas. We don’t have operational synergies that some others do. So that obviously is an impact as well too. So I am not knocking with some other folks do. I am sure they have good reason to do it. So but I think and I think you will see us look heavily at areas we would definitely like to scale up in our existing areas. We said that pretty consistently and so opportunities to do that are going to be very, very interesting to us, because we have liked some guys in West Texas. We have operational synergies in those areas. So -- and so I think that's what you are going to see us focus on. We will start to see little bit more activity overall in the M&A market. No surprise there as capital markets and commodity markets are firmed up.

[Derek Walker:]

Yeah. Thanks, Steve. Appreciated it.

[Steve Newby:]

Yeah, Derek.

[Operator:]

Our next question on line comes from Lane French from Baird. Please go ahead.

[Lane French:]

Hey. Good morning, guys. Could you guys going into some more detail about your amended gathering agreements with two of your larger Barnett customers, perhaps provide some more color on the structuring of that and how you expect that to incentivize additional drilling and completion activity over the course of the year?

[Steve Newby:]

Yeah. I will and I -- I am going to be a little cautious because I don’t want -- I can’t go into too much detail on -- too much on gathering agreements. But I will tell you the general structure of them. It is basically giving them, so in the Barnett we are fully connected to all of our pads where we have mark 72 -- 76 pads connected. So we don’t have CapEx for well connection costs on an ongoing basis. These are very incremental volumes, infill drilling extremely incremental. So what we have done with couple of the guys there is try to incent them on a go-forward drilling volume basis to drill with incentive rates and we use this structure in some other areas too, it’s been successful. And so that’s what we have done. It’s more on growth volumes that it is existing what PDPs and so that that’s what we have done and we think it will take a little bit of time, right, you had Total come in. you had the Saddle guys. It takes a little bit of time to get your permitting gone and your process gone, this is -- our systems in Arlington, so it's the city environment, urban environment, so that takes little bit more time. So what we try to layout in the prepared remarks is some of this is we are going to see in the back half of the year as well too, just because the timing of those guy get going. And then what we’ve told folks specific to those producers is Total in particular, I think, focus more -- much more initially and probably most of ‘16 activity. Our last producer really didn't put any CapEx in the basin even to maintain well and so, I think, that’s what took us focus on right away. So we’ve seen this play out, this is the story we have seen play out less in Western Colorado too where acreage trades. We understand little bit on the timing of it, where we see growth from that acreage trading and so we are trying to get little bit of color on how that story should play out. So does that help on the DGA? I mean, that’s how it was structured. I don’t want to get into details of the individual agreements obviously but…

[Lane French:]

Okay.

[Steve Newby:]

… ultimately that is how it works.

[Lane French:]

All right. Thanks for the color.

[Steve Newby:]

Thanks, Lane.

[Operator:]

[Operator Instructions] Our next question on line comes from Matt Niblack from HITE. Please go ahead.

[Matt Niblack:]

Hi. Thanks for taking my question.

[Steve Newby:]

Hi, Matt.

[Matt Niblack:]

So the quarter-over-quarter -- hi. The quarter-over-quarter growth in the Piceance was really encouraging to see. Could you maybe comment on that, is that something you see sustained perhaps in spite of the recent drawdown in the net gas curve or is that a result of kind of a one-time burst of wells coming online, any color there would be great?

[Steve Newby:]

Yeah. So, it’s Steve, Matt. So, yeah, we have seen now two quarters, third quarter and fourth quarter pretty good growth. We actually do think it’s sustainable. We got pretty good line of sight in that area for ’17 and the reason is pretty straightforward, right. So we have three of our top four customers now are single basin private equity-backed well-capitalized companies that are drilling heavily and they have come in and they have a different cost basis in their processors and they have come in and brought new in some instance new technology and completion technology to the area as well too. So we are seeing the effect of that. It was -- we saw the acreage trades as much as 18 months ago and so now we are seeing the effect of that -- those acreage trades hit and we think it is sustainable in the ‘17 and we are pretty confident of that given our line of sight. So, the fourth, three of the four, the other fourth one that hasn’t traded yet, we think is one to keep an eye on, it’s our largest customer out there and it’s our largest acreage dedications out there and when if that acreage trade, I think, it’s going to be a big positive sign as well too for area out there.

[Matt Niblack:]

Great. It's certainly encouraging to see that gap closing. It makes the roll-off, putting on some roll-off less scary. One other question on the Utica and this deferred payment. There have been a lot of detailed questions here. But, I guess, on a high level, when you're still guiding to the full estimated payment, the $350 million or so. Is that because there just hasn't been enough data to change the guidance or is that because when you look at producer drilling into the back half of this year, you have specific data that supports the guidance?

[Steve Newby:]

Yeah. So it’s the later and let me, we have to print, we have to publish in our filings every quarter, the undiscounted amount of the deferred payment and in the discounted amount of the deferred payment. And the undiscounted amount of the $830 million. I said we are going to publish on Monday in the K. Last quarter it was right around there as well too. I think when we initially did the drop it was $860 million, right. So it’s been sort of in that range. We don’t publish anything in our K that is not -- that number is look at every quarter based on forward estimates, based upon our belief and discussions with producers, our belief in discussions on CapEx. And so it’s a -- this isn’t a number we just sort of always quarter-to-quarter, it’s pretty well vetted by us, by our already -- auditors as well too. I mean, it’s not a -- it’s a major assumption and it’s treated as. So what you should take from that is our expectation haven’t changed that much. They move around quarter-to-quarter different things, CapEx up or down, volumes up or down forward looking, but overall we are still pretty close to where we thought on the dropdown. And you hit on the probably the biggest theme related to all of that is what we are seeing is a pretty big ramp in activity overall going into ‘18 and we think that will roll into ’19 too. It’s just guys who are ramping activity is basis improve and liquid basis improve as well too in that area. I will say, we put a $1.2 billion in the Utica between ‘13 and ’16. Most spend by our GP by the way. And we went from 14 rigs to one rig on our AMI during that time period. So what we are now seeing is just sort of what I hope is something back to normality not a cycle as we have spending $1.2 billion. So I think that helps.

[Matt Niblack:]

No. That does help. And just one follow-up on that then, so when you are aggregating your producers' CapEx plans and what not to get to that view, what number of rigs are you expecting to exit 2017 at on that Utica acreage?

[Steve Newby:]

Well, I have to get it for you, Matt. I don’t have in front of me. But I mean it’s pretty consistent probably with what's going on now in the Utica I would say. We think, as I said, to Kristina’s question earlier, I think, we plan to -- we expect to see fairly consistent activity throughout the year on our acreage. So I would look at where -- what’s running today and that's probably pretty consistent with what we expect.

[Matt Niblack:]

Great. Thank you.

[Steve Newby:]

Yes. Always.

[Operator:]

At this time, I see we have no further questions in queue. I would like to turn the call over to Steve Newby for closing remarks.

[Steve Newby:]

Thanks everybody for joining and have a good weekend.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.