Summit Midstream Partners LP (SMLP) 2016 Q4 法說會逐字稿

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 will now turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

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 that 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 Please see our 2015 annual report on Form 10-K as updated and superseded by our current report on Form 8-K-A which was filed with the SEC on September 1, 2016, as well as our other SEC filings, for a listing of factors that could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.

With that, I'll turn the call over to Steve Newby.

Thanks Marc. Good morning, everyone, and thanks for joining us on the call this morning. As usual, I'll begin with a few comments on the quarter and then I will turn it over to Matt for more detail on our quarterly financial results. I'll 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 a midpoint of $305 million of adjusted EBITDA for 2017 with an expectation of strengthening performance throughout the year and a fourth-quarter 2017 annualized run rate between $325 million and $345 million, or a 12% to 19% increase over our annualized fourth quarter of 2016 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- to nine-month timing lag between when a producer moves a rig into an area and when 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 2016 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 2015 and early 2016, together with more active completion work from our customers.

Fast-forward three months and rig levels of nearly doubled in our system so far in 2017. This increase in rig count is the primary driver behind our bullishness on the second half of 2017 compared to the first half, and is something I'm going to try to touch on more specifically as we walk through the various operating segments.

Our Piceance/DJ segment continued to be a bright spot for us in the fourth quarter with volume throughput 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 customers turned 36 new well 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 in this area from recent producer acreage trades, which we expect will be a trend that continues in 2017, and is also a theme that we have seen in other basins, namely the Barnett.

Rig activity remains healthy in the Piceance and DJ and our customers have an inventory of 60 drilled but uncompleted wells as of fiscal year-end 2016, both of which will contribute to 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 2017 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, have sold their acreage to new owners. The largest announced transaction, which involved Total and Chesapeake, relates to acreage that hasn't been drilled in nearly three years. Two of the remaining three transactions involved private equity backed acquirers 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 of 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 was the beneficiary of 28 DUCs that were turned in line during the quarter, which compares to only four turned in line in the fourth quarter. We think that some of this weakness may extend into the first half of 2017, but we were encouraged during the fourth quarter to see new drilling activity begin on acreage dedicated to our crude oil gathering systems.

Second, as I'm 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 had one customer exit bankruptcy in the fourth quarter and another sell its 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 think this take-away solution is a big positive for the Basin and we've already seen basis differentials near them. We anticipate that our [Dapple] interconnect will be in service by the end of the second quarter of 2017 and we anticipate significant deliveries from our system to Dapple.

In the Utica, first, as it relates to our 100% owned asset, Summit Midstream Utica, volumes were down approximately 10% compared to the third quarter and related almost entirely to a curtailment by one of our customers in the month of October, given low realized local and 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 on several new wells. That activity will facilitate incremental volume growth in the first half of 2017. We estimate that these temporary curtailment activities impacted our quarterly volumes by approximately 40 million cubic feet a day. The shut-in volumes all returned to production in November.

Looking ahead, our customers have been operating up to two rigs in our AMI recently, and the growth project that we announced last quarter, which will alleviate a customer's production constraints and allow them to access a more advantageous downstream pipeline, is on track and expected to be in service in the second quarter of 2017.

For 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 early in the call, we expect a six- to nine-month delay until we start to see the benefit of that rig activity. So over the next two quarters, we anticipate volumes will be flat to slightly down. The JV is expecting commission of the Larew Compressor Station in the first quarter of 2017, and we are eager to see the impact of compression on a dry gas field that has been producing without compression for nearly two years. In addition to providing lower field pressures to encourage additional volume throughput, the compression services will also carry an incremental fee.

Big picture, we think 2017 will be a big year in the Utica for producers to begin positioning themselves to take advantage of what we believe will be better net-backs 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 pipelines that will be coming online at that time, so a certain amount of the anticipated production growth is based on their interest in satisfying those commitment levels.

Finally, on the cost front, one of the metrics we watch very closely is our controllable operating expense for 1,000 cubic feet equivalent, which was down in 2016 for the second year in a row. Over the past several years, we have invested heavily in internal systems, controls and integration that has allowed us to control costs and increase efficiently despite fairly rapid growth.

I'd like to applaud our employees for keeping such a close eye on expenses without compromising system integrity or safety.

And with that, I'll turn it over to Matt to review the quarter in more detail.

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 includes a $24.7 million non-cash deferred purchase price obligation expense. In conjunction with the 2016 drop-down transaction, we recognized 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 drop-down assets. We discount the remaining consideration on the balance sheet and recognize the change in present value on the income statement. The change in present value comprises both a 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 non-cash 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 to $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 stampede lateral in the first quarter of 2016. These increases were partially offset by natural gas volume declines 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 relative to the fourth-quarter distribution of $0.575 for a 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 approximately $11.4 million of capital contributions related to Ohio Gathering in the fourth quarter.

We had $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%. The 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'll turn the call back over to Steve.

Thanks Matt. As Matt mentioned, earlier this month, we issued $500 million of senior notes at what we believe is an attractive long-term cost of 5.75%. Proceeds were used to refinance our $300 million of 7.5% notes to repay borrowings under our revolver. In combination with our 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 for settlement of the deferred payment in 2020. Going forward, we plan to continue to be opportunistic with chipping away at that payment and would expect to begin utilizing our ATM program for a portion of our equity needs, which we think are manageable in the $100 million to $150 million range of a year between now and 2020.

On the deferred 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 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 believed was the most financially efficient means for executing the strength of the transaction.

While both the commodity markets and our currency have strengthened considerably during that time, the 6.5 time investment multiple embedded in the deal has remained the same and we think that, under almost any scenario you draw up, a 6.5 time investment in these high-quality Utica and Bakken assets will create tremendous long-term value for SMLP. Combine that purchase price with the option value embedded within the structure 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 than 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 have 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 infill drill and utilize existing capacity on our system. This capital investment also limits our 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 new long-haul pipelines and our operational scale are all key factors behind our 2017 financial guidance, and specifically our belief that, by the second half of 2017, 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, namely crude oil inventories and crude oil rig count, and would not be surprised to see volatility in crude oil prices over the next six to 12 months.

Over the immediate term, we are more bullish on gas than crude, and I'll take this opportunity to remind you that nearly 75% of our volumes in 2016 were 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 liquids throughput in the Williston.

Commercially, our focus remains on, first, expanding in our core platform areas. However, we are continuously evaluating opportunities to make an entrance into new areas. Interestingly, the strategy of pre-financing our deferred payment is also creating a situation where we have a balance sheet that is well-positioned to be more competitive than large-scale M&A, although I will tell you that we have and 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 less one where the base business is moving a volatile price commodity.

So, in summary, we are very pleased with our fourth-quarter and fiscal year 2016 results and very excited about the outlook for 2017 and beyond. We've guided to a second half of 2017 that will be much stronger than the first half, and I think that, once we begin to see that ramp materialize, we will be in a great position to resume distribution growth.

With that, I'll turn it over to the operator to open it up for questions.

(Operator Instructions). Kristina Kazarian, Deutsche Bank.

Good morning guys. 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. 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 the catalyst-data points I should be watching for or have we already seen them?

Yes, it's Steve. I think we've seen some of them. The rig count, what we saw happen in the fourth quarter, late in the fourth quarter and it's flowed into the first quarter this year too, is an acceleration of rig count in the area. And I think that you're going to see a pretty fairly consistent rig count in the area this year as people, producers hit it pretty hard, Kristina, and I think they are hitting it hard for the back half of 2018 -- or 2017 and into 2018 with the expectation that some long haul comes on and basis repairs itself. So I think we've seen some of it. I think we want to see -- we are expecting to see it, as you've seen, ramp in the back half of the 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 the fourth-quarter drilling, fourth-quarter 2016 drilling.

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 2018 volumes? How do I think about that?

Yes, I think you hit on most of them. I think we want to see that growth materialize, and I think that's something we are watching closely, and I don't think we are going to 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 materializing, because I think the key point here is when we start distribution increases, again, we are planning on starting and keeping them, and that's sort of a step function up and then flat for a while. We are planning on a pretty systematic process here. So we are looking at, one, does the growth materialize? Two, we are very still focused on our balance sheet and coverage, because we still have a deferred payment, and I think that deferred payment start to become very, very clear as we head into 2018, because it's key off of 2018 and 2019. So we start to get a lot more comfort around the level of that payment beginning in the back half of 2017 as we head into 2018.

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? How does it impact any thoughts around equity pre-funding the deferred payments?

Yes, I'm glad you asked. Let me set a couple of things backdrop for their sale. First of all, since the IPO, which was in 2012, our sponsor has sold a net 2.5 million units, so about $50 million net. So it's not -- they've taken back units on drop-downs. 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 then actually the deal they did hear a couple weeks ago we were fully on board with. In fact, I would tell you management was very supportive and wanted to do it to really increase liquidity in our units as well too, because 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 dropped down over $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 supportive, and I think you're going to see -- will they sell units in the future? I suspect they will. I don't think they're going to -- they are not rushing out to fill them that these levels for sure. But I don't think you're going to see them sell 32 million -- they have 32 million units left, you're not going to see them sell 32 million units. It's going to have to be measured, and I don't think there's 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 -- front -- front place on equity issuance. It's not going to be their secondary.

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

Tristan Richardson, SunTrust.

Good morning guys. 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.

Yes. So, there's two sort of things that it impacts. First, we had just -- and you all have 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. It so it definitely affected December. It's affected some January volumes too, both on the crude and the gas side, just because of the ability to get to pads, both for our producers and for us.

The other thing that it will affect now as it has gotten warmer there, because it has gotten warmer, is you're going to have a tremendous amount of snow melt, which typically hits us in the March time frame 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 it impacted us a little bit on is just operating costs. When you have to remove 6 feet of snow from your compressor sites and other areas, it just costs money. So it impacted us slightly there as well too. All of that is in our guidance, though. It's not going to impact us 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. So hopefully that helps.

No, that's great. That's helpful. And just more of a clarification question, 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? I think you mentioned it in conjunction with an eye on the deferred payment. How should we think about ATM CapEx (multiple speakers)

Yes, I'll start and Matt can jump in too. The way we look at the deferred payment is we've got somewhere around $400 million or so of equity to issue over the next three years to satisfy it, so $100 million to $150 million, call it, a year. That's just for -- just to satisfy the deferred payment. We anticipate doing a large portion of that probably off our ATM 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 from the outset of the drop-down 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. And so I think that is still what we anticipate. So, the ATM program would be for the deferred payment and 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 --

Yes, I'll just add too, Tristan, that we are going to opportunistically pick our spot in the debt capital markets as well over the next 3, 3.5 years. And that's what you saw two weeks ago when we did the $500 million bond deal.

That's great. Thank you guys very much.

Ethan Bellamy, Baird.

Good morning. Steve, I apologize if I missed this, but is the North Dakota weather going to be a factor in the first quarter of 2017 as well?

Yes, 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 of the heavy snowfall, is actually, when the snow melts, if you're 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's just now starting 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 did have an impact in January, Ethan, again, not a large one. The biggest impact we had on volumes from North Dakota in the fourth quarter on the gas side was the Aux Sable shut down as I mentioned. That was more impactful.

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

Not yet. I think -- look, in my discussions over the last month or so, I've been out to see a lot of our big customers, and I would say a lot of them had hedged 2017 already in during the months of November, December, when we have pretty strong months. I think what the roll-over here will affect more, in my opinion, will probably into 2018 as guys try to layer in hedging there and try to gauge activity. But we are not going to know that until towards the end of the year. So I don't think it's going to affect, as where it currently stands, much of 2017 yet. So, we'll see.

I think the bigger -- yes, one of the bigger issues for us is basis repair in the Northeast. So to give you an -- we had one of our producers shut in in October in the Northeast. I think gas went below $1.00 in the local market when the Hub was at $3.00 or north of $3.00. So, in the Northeast, we would tell you we don't need $3.50 gas. We just need basis to be normalized, some level of normalization. So that, I think that's coming, given some of the recent announcements, but it will take -- I think it's going to help with Rover and I think there are some other ones behind Rover that will help in the couple of years going forward.

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

Yes. So, they were right in line with our guidance that came in -- I think we guided to a midpoint of $80 million for the drop-down assets. They hit that right spot on, even with a little bit weaker performance at SMU due to the 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 amount is $830 million. So it's right in -- 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, overall, haven't changed much for the deferred payment.

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

I think you're going to see -- and I'll comment as far as our systems go. They have definitely stepped up drilling in the area. I'm sure you track their rig activity up in the Northeast, and they definitely have 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 the prepared remarks, in the second quarter.

So, we would expect to see gas come on for us related to Ascent prior to Rover coming on. So it's more of an incremental build up to delivering the Rover. And I suspect that's going to be the case. I don't think you're going to see them complete 50 wells right before Rover comes on and flow to it. I think it's going to be step change in incrementalization, and they are obviously drilling heavily to target that commitment. So, does that help?

Good stuff. Thank you. Yes, very much so. Appreciate it.

Derek Walker, Bank of America Merrill Lynch.

Good morning guys. 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 2017?

I think we've done a very good job the last -- so we've seen -- so, what we measure, Derek, is what we call controllable OpEx. And we have a lot of pass-throughs like power and things like that that are pass-throughs to our producers. So these are things we can control. We saw a 6% reduction in 2014 and another -- or sorry, in 2015, and then another 7% reduction in 2016 on our controllable OpEx per Mcfe. So that is very incremental to the business, because that's just us controlling cost and efficiency more.

I think I'll put it this way. I don't think we, in our guidance, are anticipating another decline like that in 2017's controllable OpEx to that level. So to the extent we can manage that, there may be some upside there. But we are pretty cautious on costs. You can only control so much, cut so much. So I think we are pretty conservative on that as far as 2017 goes related to costs just because we've had two really good years so far in the past.

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

I think it's more new areas and obviously the high-growth markets in basins. And they are great basins. I don't think anybody's going to dispute the geology in the rock and the productive capacity of some of these areas. We, like others, probably scratch our had a little bit at some of the levels of asset purchases. But I will say also we are not in those areas and we don't have operational synergies that some others do. So, that obviously is an impact as well too. So, I'm not knocking what some other folks do. I'm sure they have good reason to do it.

But I think -- and I think you will see us look heavily at areas. We would definitely to scale up in our existing areas. We've said that pretty consistently, and so opportunities to do that are going to be very, very interesting to us because we have, like some guys in West Texas, we have operational synergies in those areas. So I think that's what you're going to see us focus on. We are starting to see a little bit more activity overall in the M&A market, no surprise there as capital markets and commodity markets have firmed up.

Thanks. I appreciate it.

Lane French, Baird.

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?

Yes, I will, and I'm going to be a little cautious because I don't want to -- 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. What do we have, Marc, 72, 76 pads connected? So we don't have CapEx for well connections costs on an ongoing basis. These are very incremental volumes. Infill drilling is extremely incremental to us. So what we have done with a couple of the guys there is try to incent them on a go-forward drilling volume basis to drill with incentive rates. And we've used this structure in some other areas too; it's been successful. And so that's what we've done. It's more on growth volumes that it is existing PDPs. And so that's what we've done and we think it will take a little bit of time, right? You've had Total come in, you've had the Saddle guys. It takes a little time to get your permitting done and your process done. Our system is in Arlington, so it's a city environment, urban environment, so that takes a little bit more time.

So, what we tried to lay out in the prepared remarks is some of this we're going to see in the back half of the year as well too just because of timing of those guy getting going.

And then what we've told folks specific to those producers is Total in particular I think focused much more initially and probably for most of 2016 (technical difficulty) activity. Our last producer really didn't put any CapEx in the Basin, even to maintain wells, and so I think that's what Total is focused on right away. So we've seen this play out. This is a story we've seen play out in western Colorado too where acreage trades. We understand a little bit on the timing of it when we see growth from that acreage trading, and so we are trying to give you a little bit of color on how that story should play out. So does that help on the DGAs? That's how it was structured. I don't want to get into details of the individual agreements, obviously, but ultimately that is how it works.

Thanks for the color.

(Operator Instructions). Matt Niblack, HITE.

Thanks for taking my question. So 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.

It's Steve. Yes, we've seen now two quarters, third quarter and fourth quarter, pretty good growth. We actually do think it is sustainable. We've got pretty good line of sight in that area for 2017. And the reason is it's pretty straightforward, right? We have three of our top four customers now are single-basin private equity backed, well-capitalized companies that are drilling heavily, and they've come in and they have a different cost basis than their predecessors. And they've come in and brought new -- in some instances new technology and completion technology to the area as well too. So we are seeing the effects of that. It was -- we saw the acreage trades as much as 18 months ago, and so now we are seeing the effects of those acreage trades hit, and we think it is sustainable into 2017 and we are pretty confident of that given our line of sight. So the fourth -- so, that's 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. It's our largest acreage dedication out there. And when and if that acreage trades, I think it will be a big, positive sign as well too for our area out there.

It's certainly encouraging to see that gap closing. It makes the rolloff or the eventual rolloff 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 that's because, when you look at producer drilling into the back half of this year, you have specific data that supports the guidance?

Yes. So, it's the latter. And let me -- we have to print, we have to publish in our filings every quarter the undiscounted amount of the deferred payment and the discounted amount of the deferred payment. And the undiscounted amount of the $830 million I said we're 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, so it's been sort of in that range.

We don't publish anything in our K that is not -- that number is looked at every quarter based on forward estimates, based upon our belief and discussions with producers, our belief and discussions on CapEx spend. And so it's a -- this isn't a number we just sort of roll with quarter to quarter. It's pretty well vetted by us, by our auditors as well too. It's not -- it's a major assumption and it's treated as such.

So what you should take from that is our expectations 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 drop-down.

And you hit on probably the biggest theme related to all of that is what we are seeing is there's a pretty big ramp in activity overall going into 2018, and we think that will roll into 2019 too. It is just guys who are ramping activity as basis improves and liquids basis improves as well too in that area.

I will say we put $1.2 billion in the Utica between 2013 and 2016, most spent 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 normalcy, not a cycle as we are spending $1.2 billion. So hopefully that helps.

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?

I'll have to get it for you. I don't have it in front of me. But 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 -- 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.

Great. Thank you.

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

Thanks, everybody, for joining and have a good weekend.

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