Summit Midstream Partners LP (SMLP) 2012 Q3 法說會逐字稿

Welcome to the third quarter 2012 Summit Midstream Partners earnings conference call. My name is Sandra, 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.

All right. Thank you, Sandra. Good morning, everyone. This is Marc Stratton. I'm the Treasurer of Summit Midstream and Head of our Investor Relations activities. I'd like to thank you for joining us today as we discuss our financial and operating results for the third quarter 2012. If you do not already have a copy of our third quarter earnings release that was issued yesterday, please visit our website at www.summitmidstream.com, where you will find it in the news section. With me are Steve Newby, our President and Chief Executive Officer and Matt Harrison, our Chief Financial Officer.

Before we begin, I would like to note that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of expected volumes, future operating expenses, and planned capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations. These statements are based on management's beliefs and assumptions, and are also made based upon information that is currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties, and assumptions.

If one or more of those risks materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those expected. These risks are discussed in greater detail in our Rule 424b prospectus on file with the Securities and Exchange Commission. Please also note that on this call we will use the terms EBITDA, adjusted EBITDA, distributable cash flow and adjusted distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our third quarter 2012 earnings release.

Finally, I would like to point out that our initial public offering closed on October 3, 2012. As such, the third quarter 2012 operating and financial results included in our earnings release and discussed on today's call are the results of Summit Midstream Partners LLC, the predecessor of Summit Midstream Partners LP. With that, I will turn the call over to Steve Newby.

Thanks, Marc. Good morning everyone, and thanks for joining us for Summit's third quarter earnings call, our first as a public company. Yesterday we announced our third quarter results for 2012. Our results were very solid, both financially and operationally. We reported adjusted EBITDA of $23.1 million, which included $2.7 million of nonrecurring expense. Our adjusted distributable cash flow was $21.9 million. Both of these amounts were up significantly over third quarter of 2011 amounts of $13.2 and $12 million, respectively. Of course, the third quarter 2011 amounts did not include the results of Grand River Gathering, which closed in the fourth quarter of 2011.

Our total volumes for the third quarter averaged 958 million cubic feet a day, which was increase of 9.4% over third quarter of 2011. That does include the pro forma results of the Grand River acquisition. More relevant, our third quarter average volume was 45 million cubic feet a day, or 4.9% over first half of 2012 average volumes. Volume growth over the first half was driven by several factors. First, DFW volumes were up 16.9% over the first half of 2012 and averaged 380 million cubic feet a day for the third quarter. The increase was primarily related to existing customers increasing production on previously connected pad sites. We did connect and start flowing the first Beacon gas during third quarter, and that helped slightly in third quarter '12 volumes.

The increased volume in DFW was offset by a slight decline in volumes transported at our Grand River Gathering asset. Grand River volumes were 578 million cubic feet a day, or averaged 578 million cubic feet a day for the quarter, which is 1.7% below the first half of 2012. This decrease was in large part due to fill issues experienced by one of our large producers during the third quarter, which affected approximately 20 million cubic feet a day of production that flows on the Mamm Creek System. I'd like to remind everyone that the Grand River System is actually three systems, our Mamm Creek, South Parachute, and Orchard systems, with each one covered under different commercial agreements with different producers. In the third quarter we continued to see volume declines in Orchard. This area flows most of the Mancos and Niobrara dry gas, and as Encana has reduced its drilling in the area given current commodity prices, we are seeing the natural declines from the wells.

Both South Parachute and Mamm, absent the field issues discussed above in Mamm, saw steady drilling activity and slightly growing volumes compared to first half of '12. To remind everyone, our Grand River System is highly contracted at a minimum volume commitments, so lower transported volumes do not directly correlate to our revenue line. This is particularly true in the Orchard System, where we enjoy significant volume commitment. On the growth front, our large compressor project at DFW, the Unit 10 project, continues on schedule and will be commissioned in early December. We expect this capacity to be commercially available in early first quarter of '13. The project, along with some pipeline looping that is occurring, will add 40 million cubic feet a day of capacity to the DFW system.

During the third quarter, we spent approximately $6.2 million on the project. We completed one pad tie-in for the Beacon during the quarter at DFW, four other pad tie-ins, two for Beacon and two for Chesapeake are currently under construction. All of those pad sites contain existing wells. At Grand River, our CapEx for the quarter was $9.4 million, and was primarily associated with the continuing installation of our custody transfer meters, which is related to the acquisition from Encana last fall and the buildout of our medium pressure system in the Orchard area. The Orchard capital being spent is supported by significant volume commitments over the next 15 years that were part of the transaction we negotiated with Encana last year.

At Grand River we remain excited about the emerging Mancos and Niobrara shale development in the Piceance. Several producers in the area, WPX being the most vocal, have now come out with some encouraging comments about the potential of the formations, and we have seen that with the gas flowing from those formations on our system. Our recently closed Red Rock Gathering acquisition at our general partner also has a development project related to the liquids area of the Mancos. Combined, our assets in the Piceance are extremely well positioned to capture this growth as producers increase their activity around the Mancos and Niobrara formation.

In addition, over the past several weeks you may have seen that there have been several upstream transactions involving our existing customer base in the Piceance. Nucor has announced an additional large JV with Encana, and Terra has sold their assets in our dedication area to a large private operator, and BBC has sold a working interest in their acreage to Vanguard. Although it's too soon to see the impact of these transactions in general, we view the developments as a positive sign to future activity levels, given the substantial amount of capital being deployed by new participants in the basin.

Turning to our financial guidance, in yesterday's press release we gave 2013 full year financial guidance of $110 million to $120 million of adjusted EBITDA, and LP distributed growth of 8% to 10%. This range in growth will be achieved without the effects of any drop-down transactions or other significant acquisition and development activities. The guidance is given with the belief by us that 2013 will remain challenging for both natural gas and NGL prices, which will affect overall drilling activities by our customers. However, our fee-based, highly contracted business model, combined with the location of our assets in core producing areas with significant gas existing behind our systems, gives us the ability to achieve attractive distribution growth, even in a challenging commodity price environment. In addition, we continue to maintain a very strong balance sheet with a large amount of borrowing capacity which, when combined with the support from our sponsor, allows us to maintain significant financial flexibility to pursue growth initiatives. And with that, I will turn it over to Matt.

Great. Thanks, Steve. I will cover the results of Summit Midstream Partners LLC, the predecessor of Summit Midstream Partners LP. Adjusted EBITDA for the three months ended September 30,2012 was $23.1 million compared to $13.2 million for the three months ended September 30, 2011, an increase of about 75%. The $9.9 million increase in adjusted EBITDA was primarily due to the October 2011 acquisition of the Grand River System. The Grand River System contributed $17.1 million to total revenue and $7.6 million to operation and maintenance expense during the three months ended September 30, 2012. Gas gathering agreements at the Grand River System also contributed approximately $3 million of adjustments related to MVC shortfall payments for the three months ended September 30, 2012.

Net income for the three months ended September 30, 2012 was $7.4 million, compared to $9.1 million for the three months ended September 30, 2011, a decrease of approximately 25%. Depreciation and amortization expense related to the Grand River System was $5.9 million during the three months ended September 30, 2012, also interest expense increased $2.5 million as a result of higher balance drawn on the revolving credit facility in 2012 compared to 2011. Adjusted EBITDA and net income for the three months ended September 30, 2012 include approximately $1.7 million in transaction costs related to the predecessor's acquisition of ETC Canyon Pipeline LLC and approximately $1 million related to adjustments in ad valorem tax estimates for the Grand River System for 2012. As a remainder, although the ETC Canyon acquisition impacts the predecessor's financial results, it is not an asset of the MLP going forward.

Moving onto the nine months ended September 30, 2012, adjusted EBITDA was $74.7 million, compared to $37 million for the nine months ended September 30, 2011, an increase of approximately 102%. The $37.7 million increase in adjusted EBITDA was primarily due to the October 2011 acquisition of the Grand River System. The Grand River System contributed $51.4 million to total revenues and 19.8 million to operation and maintenance expense during the nine months ended September 30, 2012. Gas gathering agreements at the Grand River System also contributed approximately $10.4 million of adjustments related to MVC shortfall payments for the nine months ended September 30, 2012. Net income for the nine months ended September 30, 2012 was $24.1 million, compared to $27.7 million for the nine months ended September 30, 2011, a decrease of approximately 13%.

Depreciation and amortization expense related to the Grand River System was $17.1 million during the nine months ended September 30, 2012. Interest expense increased $5.2 million as a result of the higher balance drawn on the revolving credit facility in 2012, also the $5.4 million of (inaudible) interest expense for the nine months ended September 30, 2012 was related to the $200 million promissory notes that were issued to our sponsors in connection with the acquisition of the Grand River System in October 2011. The promissory notes were partially prepaid in May 2012, and the remaining balance was paid in full in July 2012, excuse me. Adjusted EBITDA and net income for the nine months ended September 30, 2012 included approximately $1.7 in transaction costs related to the predecessor's acquisition of ETC Canyon Pipeline LLC and $200,000 in transaction costs related to the Grand River System acquisition.

CapEx for the third quarter of 2012 was approximately $21 million. Prior to becoming a publicly traded partnership in October, we did not make a distinction between maintenance and expansion capital expenditures. We had $344.2 million of debt outstanding under our revolving credit facility at September 30, 2012. The borrowing capacity under the credit facility is $550 million. In connection with the closing of the IPO of common units on October 3, 2012, Summit Midstream Partners, LP, or SMLP, repaid $140 million of outstanding debt on the revolving credit facility, which leaves us with approximately $345.8 million of availability. Pro forma for the $140 million repayment of debt in October 2012, total leverage would have approximated 2 times. That concludes our formal remarks, and now we will turn it over to Sandra and Q&A.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And the first question is from Derek Walker from Bank of America Merrill Lynch. Please go ahead.

Good morning, guys.

Good morning, Derek.

Just a quick one on the guidance. I know you mentioned 8% and 10% there with no drop-downs. Can you give some color, at least as far as what you're assuming for the number of rigs behind the DFW System, as well as the Grand River?

Yes. Hey, Derek this is Steve.

I'll give you a little bit of color, maybe on overall volumes. I would assume overall volumes roughly flat with average volumes here in '12. Not much drilling -- additional drilling -- on the DFW System. We don't really require a lot of drilling on that system, given the amount of gas, the amount of wells that we have -- what we call waffles, waiting to be connected, being shut-in on the system. So I think we have one running today, and I think that's probably consistent with what we're assuming for '13.

Then in Grand River and the Rockies, we're seeing an average of anywhere from three to six rigs running in our area; and that's fairly consistent, I think, with what we're assuming in '13. But overall, I would tell you we're assuming an actual slight decline in Grand River volumes in '13.

Got it. Okay.

So overall flat, with a slight decline in Grand River.

Okay.

Does that help?

Yes. No, that's helpful. I appreciate that.

Then just one more from me is just -- you guys get any idea on potential drop-downs? I know you have the Canyon asset up at the Parent level. Any idea of when you guys might be able to drop those down?

Yes. I would say -- maybe put it a little different way. We have some significant projects that are being executed on at Red Rock, which are the Canyon acquired assets up at the GP. Those projects -- we anticipate those projects being complete roughly 12 months from today, give or take a couple of months, and I would tell you we believe we need to get through those projects before we look at dropping the asset down.

Okay, great.

(Operator Instructions)

And at this time we have no further questions.

Great. Thanks, Sandra.

You're welcome.

Thank you everybody for joining us. Obviously, if you have additional questions, please follow up with us off-line.

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