Summit Midstream Partners LP (SMLP) 2015 Q2 法說會逐字稿

Good morning, and welcome to the second quarter 2015 Summit Midstream Partners LP earnings conference call. My name is Brandon, and I'll be your operator for today.

(Operator Instructions)

Please note that this conference is being recorded, and I will now turn it over to Mr. Marc Stratton, Senior Vice President and Treasurer. Mr. Stratton, you may begin.

Okay, great. Thanks, Brandon, and good morning, everyone. Thank you for joining us today as we discuss our financial and operative results for the second quarter of 2015. If you don't already have a copy of earnings release, please visit our website at www.summitmidstream.com where you will find it on the homepage or in the news section.

With me today to discuss or quarter earnings are 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 will 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 that such expectations will prove to be correct. Please see our 2014 annual report on Form 10-K which was filed with the SEC on March 2, 2015, 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, distributable cash flow, and adjusted distributable cash flow. These are non-GAAP financial measures, and we have provided a reconciliation 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.

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call today. I'll begin by discussing our second-quarter highlights, and then I will turn it over to our CFO, Matt Harrison, for additional details on our second quarter financial results. I'll end the call with additional comments on our outlook for SMLP for the balance of 2015, as well as the ongoing development activities at the Summit Investments.

Yesterday we announced financial and operating results for the second quarter of 2015, which were in line with our previous guidance. For the quarter, we reported adjusted EBITDA of $53.7 million, which includes $600,000 of transaction costs related to our May acquisition of the Polar and Divide gathering assets in the Bakken shale from Summit Investments. Adjusting for these transaction costs, our normalized second quarter adjusted EBITDA was $54.3 million. This was down 1.3% relative to the first quarter of 2015, and up 7.3% over the second quarter of 2014. Adjusted distributable cash flow for the second quarter totaled $40.4 million, which was down 1.6% relative to the first quarter of 2015, and up 7.6% over the second quarter of 2014. Just to remind everyone, our financial and operating results for all periods discussed today include the as [pulled] historical results for Polar and Divide.

On July 22, we announced our second-quarter distribution of $0.57 a unit, which represented a 9.6% increase over the second quarter of 2014, and 0.9% increase over the first quarter of 2015. This was SMLP's 11th consecutive quarterly distribution increase since going public in September of 2012. Our distribution coverage ratio for the quarter was 1.0 times, and for the first half of the year was 1.07 times. Our diversified business model benefited us in the second quarter, as the natural gas volume declines in our gathering systems related to the first quarter of 2015, were offset by stronger-than-expected liquids volume growth in the Bakken. On the natural gas side, average throughput for the second quarter was 1.52 Bcf a day, which was down approximately 4% from the first quarter of 2015 average of 1.58 Bcf a day. Relative to the last year period, our total natural gas volumes were up approximately 8%. Most of SMLP's natural gas volume declines in the first quarter can be explained by our Barnett Shale gathering asset, DFW Midstream, which declined from 403 million cubic feet a day in the first quarter, to an average of 356 million cubic feet a day in the second quarter. Recall that DFW had a very strong first-quarter, given the connection of 10 new wells in late December 2014. Initial production declines from these wells, combined with a delay in the expected commissioning of another large 10 well pad site in the second quarter, negatively impacted our volumes at DFW. In addition, we had two active rigs working during the second quarter, which also led to volume declines, as pads are typically taken off-line from production during drilling and completion operations. The two rigs in our area, compared to a total of three drilling rigs working in the entire Barnett, which reflects the widely held belief that DFW sits atop of the core of the core of the Barnett Shale.

Our customers on the DFW Midstream system currently have 17 drilled but uncompleted wells, and they are in the process of drilling another 11 wells -- new wells by the end of 2015. We expect that these 28 wells will be completed and commissioned throughout the second half of 2015 and into the first half of 2016, which will stimulate volume growth beginning in the fourth quarter of 2015 and into 2016. Antero volumes in the Mountaineer Midstream system which originate from interconnections with Crestwood and Antero Midstream's low-pressure gathering systems were virtually flat in the second quarter, relative to the first quarter at 542 million cubic feet a day. Compared to the second quarter 2014, Mountaineer second quarter 2015 volumes were up 48.2%. As we had previously guided, we expect volumes to decline throughout the second half of this year, as production rates from existing wells upstream of our system decline, but we expect such strong annual volume growth in calendar year 2015 over calendar year 2014. Based on information from Antero, there are over 20 wells that have been drilled but uncompleted behind our system that are expected to come online beginning in 2016, as basis differentials compress due to the increased takeaway capacity from the region. Given current commodity price levels including basis differentials in the Northeast, we remain cautious on the near-term outlook for volumes on the system, but we expect to see returning volume growth in 2016.

On Grand River, volumes averaged 604 million cubic feet a day in the second quarter of 2015, which was down 2% from the first quarter, and down 10.1% from the year ago quarter. Volumes declines were primarily associated with Encana's continued lack of drilling activity in the area, and slower drilling activity from WPX. As we have noted in the past, we are highly contracted on Grand River, and volume declines do not necessarily affect our cash flow from the area. Partially offsetting the Encana and WPX declines was volume growth from several of other customers in the area, including Ursa and Black Hills who are actively drilling in the area. During the second quarter, we had a total of five rigs running behind our Grand River system, which we view as positive given the challenging price environment for both NGLs and natural gas. However, we continue to remain cautious on this area the near-term given current pricing dynamics. Again, we are highly contracted in this area, and given our MVC mechanisms, we do not expect volume declines to translate into significant cash flow declines.

Our Bison Midstream system which reflects the performance of our Williston Basin gas segment gathered an average of 17.3 million cubic feet a day of associated natural gas production in second quarter of 2015, which was in line with our guidance, and just slightly down from the 17.9 million cubic feet a day in the first quarter. More challenging for us in this area, was direct commodity price realizations related to a single POP contract on the Bison Midstream system, which continued to fall in the second quarter, relative to the first quarter, and the second quarter of 2014. Our average realizations in the second quarter of 2015 were $0.65 per Mcf versus $0.90 per Mcf in the first-quarter of 2015, and $1.96 per Mcf in the second quarter of 2014, again, underscoring the challenging commodity price environment. Fortunately for Summit, this revenue represents less than 1.5% of the MLP's total cash flows, and overall we have a very low amount of direct exposure to commodity prices.

Offsetting the Bison volumes declines are our Polar and Divide assets, which reflect our Williston Basin liquids segment. Our liquids business, which includes crude oil and produced water gatherings services across Williams and Divide counties in North Dakota, continues to outperform relative to our expectations from when we announced the drop down in early May. Total liquids volumes were up 13% relative to the first quarter, and up 81% over the second quarter of last year. Liquids volumes in the Bakken are benefiting from a number of factors, including our continued development of the system to connect new pad sites, and take market share away from third-party truck gathering, the implementation of enhanced completion techniques from our customers, and our strategic location in the core area of the basin. Throughout the quarter, our customers average eight drilling rigs behind the Polar and Divide system, which underpins our expectations for continued volume growth through 2015 and beyond, as we continue to expand our system. In addition, our Stampede lateral project which will provide our customers with another crude oil delivery option to the Columbus rail hub serving the East Coast markets is on track to be in service by the end of this year. Recall that this project is underpinned by minimum volume commitments.

Overall, our financial and operating performance in the second quarter was in line with our guidance. While we remain cautious on natural gas volume outlook for the balance of 2015, given the weak commodity price environment and it's impact on our customers CapEx budgets, we believe that our 2015 guidance adequately accounts for these slowdowns. We also believe that our limited direct commodity price exposure, diversified operations, and high level of MVCs position us well relative to others, since volume declines for many of our customers protected by our MVC mechanisms. In response to a challenging commodity price environment, I would like to commend our employees for working hard at finding ways to reduce operating expenses without sacrificing safety or reliability. SMLP's OpEx in the year to date period is down approximately 4% relative to the OpEx in the fourth quarter of 2014 period. In addition, activity levels at Summit Investments, our general partner, which I will touch on later on this call, remains strong and provide SMLP with high-growth visibility over the next three years. So with that, I'll turn it over to Matt to review the quarterly financial results in more detail, before I conclude our formal remarks.

Thanks, Steve. Adjusted EBITDA for the second quarter of 2015 was $53.7 million, compared to $50.6 million for the second quarter of 2014, an increase of approximately 6%. The $3.1 million increase in adjusted EBITDA was primarily due to the increase in volume throughput on the Polar and Divide and Mountaineer Midstream systems. In addition, the adjusted EBITDA for the second quarter of 2015 included $600,000 of transaction costs related to the Polar and Divide drop-down transaction. Adjusted EBITDA in the second quarter of 2015 included approximately $14.4 million related to MVC mechanisms from our gas gathering contracts. This amount included $3.5 million of minimum shortfall payments that were recognized as gathering revenue, $2.1 million associated with a net increase in deferred revenue related to MVC shortfall payments, and $8.8 million associated with quarterly adjustments related to future projected annual MVC shortfall payments. Additional tabular detail regarding MVCs is included in the second-quarter earnings release.

SMLP reported net income of $5 million for the three months ended June 30, 2015, compared to net income of $5.6 million in the second quarter of 2014. Adjusted distributable cash flow totaled $40.3 million for the second quarter of 2015. This implies a distribution coverage ratio of 1.0 times relative to the second-quarter distribution of $0.57 per limited partner unit to be paid on August 14, 2015. Capital expenditures for the second quarter of 2015 were approximately $35 million, of which $2.2 million was classified as maintenance capital expense. We had $279 million of debt outstanding under our revolving credit facility at June 30, 2015. The borrowing capacity under our $700 million revolver was approximately $421 million at June 30, 2015. Total leverage at the end of the quarter was 3.95 times. SMLP narrowed its adjusted EBITDA guidance for 2015 to a new range of $210 million to $220 million. This guidance reflects a full-year of Polar and Divide's results. Now with that, I'll turn the call back over to Steve.

Thanks, Matt. As Matt mentioned, we are narrowing our FY15 adjusted EBITDA guidance to a new range of $210 million to $220 million. This guidance excludes the impact of additional drop-downs from Summit Investments for the balance of 2015. We expect that this adjusted EBITDA guidance will result in distribution growth as fourth-quarter 2015 over the fourth quarter of 2014 of 4% to 6% in distribution coverage of 0.95 to 1 times for the full year. Again, this is without any additional drop-downs during 2015.

We continue to see positive signs of regarding the volume and cash flow ramp in our assets at Summit Investments, particularly across our Utica systems. This is one of, if not the most economically viable basins in the country for producers, and we continue to expect very large volume growth in these assets well into 2016. In Ohio gathering, our 40% JV with MarkWest Utica EMG, we had average volumes of 583 million cubic feet a day for the second quarter, which was up more than threefold from the period last year. Further, at the end of the second quarter, we commissioned our dry gas system which has been initially designed to gather up to 1 Bcf a day of gas in southeastern Ohio. Producers continue to test and develop this area, and average EURs in the area range of upwards of 15 Bcf, with initial production rates consistently in excess of 25 million cubic feet a day. We believe that these initial results set us up for significant volume growth at these assets over the foreseeable future.

Summit Utica, our 100% owned natural gas gathering system that serves XTO's dry gas Utica acreage in Belmont and Monroe counties is also beginning to ramp up nicely. We completed our first pad site tie-ins for XTO in the second quarter, and we will commission our dehy stations during the third quarter. The pace of pad connections and resulting volume growth is expected to accelerate significantly over the next 12 months, as XTO continues to actively drill the acreage. Finally, we remain very active on the commercial side in the Utica, and we believe that we are well-positioned at both the Ohio gathering and Summit Utica to win our fair share of future business from producers operating in and around these service areas.

With regard to drop-downs, as we've discussed in the past, we'd like the market to view our drop-down strategy over the course of the next three years, versus how the timing lays out in any one calendar year. In other words, we feel very confident that an average of $400 million to $800 million of drops will occur over the next three years, but the timing of the drops may be lumpy as it relates to any given calendar year, especially during this challenging commodity environment which tends to slow down the pace of development. However, because of the demonstrated ramp up of our Utica business, the drop-down schedule for those assets are starting to become much clearer to us. So although we currently expect that we will be at the low end, or even potentially below the low end of the drop-down range for 2015, we expect the average over the next 2 1/2 years to be well within the range, and we expect that all current assets at Summit Investments will be drop down to the MLP by the end of 2017.

So in closing, while we recognize the difficult commodity price environment in which we and our customers are currently operating, our assets are performing well, our 2015 financial guidance accounts for expected volume throughput declines over the back half of the year, and we are strategically located in the best parts of the basins in which we operate. We have built SMLP and structured our fee-based gathering agreements with MVC mechanisms to underpin our volume expectations and protect our cash flows, particularly in challenging commodity price environments. We continue to execute on our strategic plan to significantly grow our asset base, diversify the MLP's geographic exposure, and expand our customer roster and services offering. Summit is uniquely positioned to transform itself over the next several years, by opportunistically making accretive acquisitions from our General Partner, which is currently executing on approximately $2 billion of development CapEx, the majority of which is occurring in the Utica Shale. So as you think about Summit over the course of 2015, and into 2016 and 2017, you should consider the fact that we have visibility towards drop-down transactions that will effectively double 2015's adjusted EBITDA by 2019, and in the process become one of the premier midstream service players operating in the core of the Utica Shale. So with that, I'll open it up to questions. Brandon?

(Operator Instructions)

Kristina Kazarian, Deutsche Bank.

Hey, Kristina.

Kristina, if you could unmute your line? Okay, we'll take the next question. Praneeth Satish, Wells Fargo.

Hey, guys. Good morning.

Hey, Praneeth.

Just a couple quick questions. I guess, just first in the Barnett. As you look at volumes for the balance of the year, I know you said there's a potential for a rebound in Q4. But would you expect continued weakness in Q3, or has that stabilized at this point? What's the outlook there?

Yes, Praneeth, I think our expectation is probably continued slight weakness in Q3, and a fairly strong rebound in Q4. The large-pad site that was expected to come on in Q2, and the delay in that actually was not -- a producer holding off, they had a mechanical issue in the delay, so it wasn't a -- it was an economic decision. We expect that to come on in early Q4, and that should lead to a pretty sharp increase.

Got it. And then, on the rate redetermination mechanism on Polar and Divide, can you just remind us again, when that rate takes effect, specifically what quarter? And then, has anything changed there, in terms of your expectations with the movements in commodity prices, et cetera?

Yes, I think there's a couple different rate redeterminations, so it depends on which one we're talking about. One takes place the end of this year, I believe, so at the end of calendar year 2015. And then I believe, another takes place at the end of calendar year 2016, right, Matt? Yes. So at the end of calendar 2016. And so, I think our expectations have not changed based upon what we're seeing, and related to those rate redeterminations, and what we think will occur.

Got it. And then, just last question. I mean, obviously, equity prices, valuations have come down across the sector. And as you look at potential drop-downs and having to issue equity at these levels, is that something you would consider? Or could the sponsor maybe drop down assets at lower multiples to offset that, or would you hold off for higher prices? I guess, just generally, how are you thinking about that?

Yes, it's a good question. I will answer first, and then if Matt, if you have anything to add as well too. I think first, I think our sponsor has demonstrated in the past, and will continue to demonstrate support to execute our strategy on drop-downs. We expect 2016 to be a very, very active year on drop-downs, particularly for our Utica assets.

Obviously, in the current markets, in the current environment, the volatility of the current environment creates, not just in drop-down transactions, in any transaction I think you're seeing in the M&A market, a fairly big bid-ask spread, given the volatility, even if it's between you general partner and your MLP. So obviously, that has some effect. But looking out over the next couple of years, we would expect to continue executing our strategy, and if need be, I think our general partner has shown it will be supportive. Do you have anything? Hopefully that helps, Praneeth.

Yes. Thank you.

Tristan Richardson, SunTrust.

Hey good morning, guys. Just curious if you could remind us -- you talked about Stampede being planned to complete at the end of the year. As we look at 2016, could you remind us the commercial activity going on with that line? I mean, are we fully committed there, or curious -- an update on that?

Yes, so we upsized the line, so we are not fully committed on it. We made a decision to build it slightly bigger, but with the MVCs we have underpinning it, underpin it to sort of to our metric, which is a 6 to 8 times build level on a cash flow for assets. And so, we do have capacity there to further increase commitments on the line or throughput on the line. So, and it's -- construction has gone well, or is going well, and as I said, we expect it to be on by the end of the year.

And relative to the Polar and Divide drop-down guidance that we provided during the transaction, we basically provided guidance that has that at [MINS] (multiple speakers) in 2016.

Okay. That's really helpful. And then, just in terms of Summit Investments, the Summit Utica piece, have you guys talked about it, and could you refresh my memory, what are the long-term plans for that, in terms of maybe potential size of that system over the next couple of years? What's the total capacity that you're thinking about for that system?

Yes. So I think let's delineate, the Summit Utica, Summit Midstream Utica is our 100%-owned system that serves Exxon or XTO. That system's being built for 0.5 Bcf a day. That's right now, strictly for XTO's needs, that amount. Obviously, we can expand the system from there, through compression and other mechanisms. And so, but that's what the current plan is for them. And their partner in that is AU or now I think Ascent is what they've renamed themselves. So that's the current plan.

Okay. That's helpful. Thank you guys very much.

Kristina Kazarian, Deutsche Bank.

Try it again. I'm sorry about that, guys. I don't know what happened.

You're back.

I'm back. So thanks for the volume update numbers on the JV. Those were good numbers there. Can you guys touch a bit on your thoughts on -- given the MWE MPLX merger with respect to your JVs? I know you said the assets are ramping well, but does this change the timing on drops? How you're thinking about the assets? Just -- that would be great.

Yes, so, I'll take it, it's Steve. We've had a lot of discussions with MarkWest since their announcement. I don't think it changes anything related to the JV. It doesn't change anything related to our timing of when that comes down to the MLP. I actually think, if you look at it -- at their -- the announcement in MPLX, I actually think it's going to be a positive, particularly on our condensate piece of the JV. If everyone will recall, we have Ohio Gas gathering as part of the JV, and that we have Ohio Condensate as part of the JV too.

So the stabilizer, our condensate stabilization facilities is basically full today. And we think that merger could bode well for future commercial activity around that asset as well. So, no, I think if anything it's a net positive for commercial development of downstream projects from the JV.

Perfect, that's helpful. When I'm thinking about the dropable backlog and time frame on future drops, does the current environment change maybe the math of dropping down completed, versus underdevelopment assets, and how do you to want me to think about that?

I think the current environment, as I mentioned -- I think what it changes, is this kind of volatility makes it very hard to get something done, even when it's with your JV -- it's just like I said, the bid-ask is fairly wide. I think we'd like to see things quite frankly normalize a little bit. From a development standpoint, I would guide you -- I think 2016 is going to be a big year, as we continue to ramp these systems through the back half of 2015 and into 2016.

So we have said to the market in the past, we continue to say, we want these assets to come down with the continued growth, organic CapEx associated with them. So our goal is not to spend everything up at the general partner. It's actually to bring the assets down, with CapEx associated with them. I think that would be particularly true with some of Utica, with our 100%-owned system. But I think what changes are -- not changes, but I think the thing that's affecting the timing is, just the market currently and the volatility related to it.

And then, last one from me. Can you guys just touch a little bit -- I know you've talked a lot bit about the capital markets and openness there, but the rationale behind not using the ATM in Q2. Is that timing related, is it market environment related, and how do you want me to think about that on a go-forward basis?

Yes, I'll let Matt touch on that one.

Thanks, Kristina. So as everybody knows, we put up a $150 million ATM program in June. And that's basically just to provide another source of capital, another option for capital as we move forward through our growth cycle. The way that we have financed our operations has been much more episodic, right, so drop-down transactions, net of financing in conjunction with that. Typically, and what we intend to do with ATM program, is more of a perpetual issuance of equity. And so, as these drop-downs have come down the MLP, which then bring with them organic growth going forward, you may be look to us, to start using ATM program. But in the immediate future, we have really no anticipation to use the ATM program.

Perfect. That's it for me. Thanks, guys. Nice job, guys.

Jeff Birnbaum, Wunderlich Securities.

Hey, Jeff.

Yes, sorry I lost it. Can you hear me?

Yes, we got you.

Yes, Thanks. Phone issues seem to be the theme of this Q&A so far. So a couple questions from me on assets that the general partners start. There been several dry gas acreage areas that have been thought to be up for bid. And I was kind of wondering if you could comment on, if Summit Investments has been actively bidding or engaged there, and kind of how use the prospects going forward for you?

Yes, hey, Jeff, this is Steve. I'll try and to comment on as much as I can, and obviously, we don't want to get too detailed on commercial activity. But we believe, and have communicated before that there is significant billions of dollars of infrastructure needed to be built in the Utica, particularly in the southeastern core, in particularly in the dry gas area of the Utica. It's a very active region commercially, I think you're right about that. And as producers, there has really been a shift over the past six-plus months to the dry gas area.

And so, we are very, very active commercially in the area I would say. Others are too. I don't want to lead you to believe there is not significant competition, and there's several big players in the area including us, and I think it's a very active area. I think we'll be successful in growing our footprint there as we move forward. But these answers, yes, there's a lot going on, a lot that needs to go on over the next couple of years. And I think we'll end up getting our fair share.

Okay, thanks, Steve. And the comments on drop-down guidance being at the low end, or even perhaps below the low end of the range in 2015. I get what you have been saying about not getting to focused or caught up on timing in any calendar year, but could you maybe just talk a little bit about what factors in particular, are leading you to think that, or give those comments today? Is that more financing or market driven, more development driven, in terms of the assets that you want to drop, being where you want them, when you want to drop them? Perhaps just some color there?

Yes, I'd say, again, it's Steve, and Matt could [foot note] me too. I think it's all of the above. First, is development cycle, and where we are in the development cycle. And although we are seeing tremendous growth in the Utica assets, and the dry gas area really just starting to come on here in the last several months. We still -- they still have slowed down from a year ago levels. I don't want to pretend that it hasn't. Obviously, rigs have dropped everywhere, and Utica hasn't been immune from that. So it's development cycle of the assets, so that's definitely a consideration.

And look, I think on the financing side, as I mentioned when you have high -- particularly when you have very high growth assets and a pretty good runway of -- on those -- on that growth, that combined with, I would say a pretty extreme level of volatility in the capital markets, that creates bid-ask spreads, and difficulty in completing any transaction. And that includes drop-down transactions from the general partner, so the capital markets obviously play a role in that.

I do think though, as I said over the next 2 years, 2.5 years, by the end of 2017, all of the current assets are going to be at the MLP. I think 2016 is going to be a very big year for us as well too, as far as drop-downs. So I hope that helps give you some guidance.

Yes, and we continue our drop-down strategy is that the drop-down will provide immediate accretion, right, to distribution. So that's part of the thought process as well.

Got it. So call it, regardless of market conditions, you still think that as we move into 2016 and 2017, all those assets will come down and be dropped accretively to the LP?

Yes. I always hesitate on saying regardless of all market conditions, because that's a little dangerous. But I think in any normal -- in anything that could be considered fairly normal, we think our -- we believe strongly believe they will -- and we strongly believe our general partner will be supportive to affect that.

Okay, great. And one last quick housekeeping one for me. On the guidance [point] which I believe you mentioned earlier on the call, I think it's now going to be -- correct me if I'm wrong -- you said 4% to 6% growth year over year on the distribution 4Q over 4Q was about 0.95 coverage. Did that include anything in that by way of drop-downs?

Yes, so (inaudible). So it's 0.95-to-1 coverage, and 4% to 6% distribution growth, without any additional drop-downs. And that's really consistent with what we had previously relayed. Last call we had 7% to 8% at the low end of our guidance on drop-downs. So really where we are today without any additional drop-downs, it's 4% to 6%.

Got it. Thanks a lot, guys.

Jerren Holder, Goldman Sachs.

Good morning, I was wondering you if you -- good morning guys -- I wondered if you could talk about maybe where there's volume risk, I guess relative to MVC levels. You guys pointed out Grand River is pretty highly contracted, and so further potential falling declines there, doesn't really impact cash flow. But how should we think about the other regions?

Yes, I think the biggest area, if and hopefully it's come across as the Barnett, and we are -- we have MVCs there, we are just significantly above them, and have been for years now. And so, that's probably our biggest risk area, Jerren, and really as we've talked in the past, that area is lumpy. It's definitely lumpy when you have drilling activity and completion activity, and then unexpected was one of our big producers had a mechanical issue. We had a big pad coming on, and so it just pushed that back. But that's the area where we probably have the most risk.

It's high-margin gas for us. The other area is obviously Mountaineer, we're above our minimums there. That's much lower margin gas, it's high-pressure system. So -- but that's the other area. But the biggest by far is DFW.

Thanks. And I guess, in terms of the Utica again, just given some of the really strong well results we've seen from some of the E&P companies, how does that sort of change the potential CapEx you think you could spend in just your, call it, footprint?

Yes, it's a great question. And one of the things it's doing, interestingly enough, it's actually lowering our CapEx requirements at both the JV and our 100%-owned system. And the reason is, these wells are so big and so strong, they actually don't need compression for -- now we are looking at potentially several years. So down-hole pressure is so strong in them, they can basically balk interstate pipeline pressures for several years. It's quite frankly, something we haven't seen in other areas.

So that actually -- when you take out compression assets, that's going to lower CapEx. It's a pretty big positive. You're still getting the volume, of course. So that's why, when I made my comments about some of Utica, and we said we're bringing on two dehy stations, we did make the comment we are bringing on two compressor stations, because we're not. So that's the net effect of a very unique basin.

All right. Great, thank you.

Elvira Scotto, RBC Capital Markets.

Hi, just a quick follow-up for me. The 0.95 times distribution coverage, is that a full-year number or is that a 4Q number?

That will be an average for the full year, 0.95 to 1 for the full year, Elvira.

Okay. And then, can you just remind us what your target coverage is, and how you balance coverage versus distribution growth, especially in a market where distribution growth may not get fully valued?

Yes, absolutely. It's a good question it's -- an art, not a science. I would say our target is [105] to [1,1 ]. I think we relayed that previously to the market, given our high-level of contracted cash flows. We're a little bit below that now.

We have the benefit of having a high degree of visibility with our growth quite frankly into 2016 and are able to affect a coverage ratio, and distribution growth because of our high degree of visibility on future growth. So that's how we balance it. I think, obviously, our distribution growth per unit growth, this year is going to be down from last year, so given the commodity price environment and the overall environment. So we are cognizant of that. But I think that's how we view it. Matt, is there anything you want to add?

I think Elvira, you pointed on something, are you getting any benefit from -- basically if you wanted to bring down coverage and increase growth, and we would agree you. I don't think the market is really robust for that type of strategy, so we're going to take coverage pretty conservatively.

Thanks. That's all for me.

(Operator Instructions)

Andy Gupta, HITE Hedge.

Hi, morning. Thanks for taking my question. Just to follow up on two quick questions. One is on CapEx needs for the rest of this year. There is some talk about maybe using the ATM or not. Can you just define that a little bit more? Do expect to have enough balance sheet capacity to do this, or do you foresee coming in the market, sort of at a marketed deal?

I'll just say, we have some CapEx organically, actually planned for the end of the year. Most of it relates to our Polar Divide assets, and a few clean-ups at our other systems. And what may happen as we -- especially at Stampede, right, as you ramp that up, you may see leverage go from 3.95, maybe go up 0.1 or 0.2 from there, but nothing significant. And as then those [casuals] come on, it will come back down to 4 and below. But there are no -- we don't have any thoughts of executing on the ATM program.

Thank you. That make sense. One quick clarification on the distribution. The 4% to 6% without drops, that's 4Q, 2015 not 4Q, 2014, right?

That's right, yes.

And any insight into 2016 distributions right now or no?

I wouldn't say right now. Obviously, for us it's the pace and timing of drops, so it'd affect that in a large, large way. So I don't think we're quite there yet. Other than I'll say, as I said three times now I think on the call, 2016 we think will be a big year for drops, particularly our Utica assets.

Great, thank you.

We have no further questions at this time. I will now turn it back to our speakers for closing remarks.

Great. We appreciate everybody joining us today, and have a good weekend, and we'll talk to you soon.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.