Summit Midstream Partners LP (SMLP) 2012 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter 2012 Summit Midstream Partners earnings conference call. My name is John 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 would now like to turn the call over to Marc Stratton, Treasurer, Head of Investor Relations. You may begin, Marc.

Thanks, John, and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the fourth quarter and full year of 2012. If you do not already have a copy of our earnings release that was issued yesterday, please visit our website at www.summitmidstream.com, where you'll find it in the News section.

With me today are Steve Newby, our President and Chief Executive Officer; and Matt Harrison, our Chief Financial Officer. Before we begin, I'd like to note 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 plants and objectives for future operations.

The statements are based on management's beliefs and assumptions. 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. Such statements are subject to certain risks, uncertainties and assumptions. If one or more of these 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 Form S-1 on file with the Securities and Exchange Commission.

Please also note that on this call we use the terms EBITDA, unadjusted EBITDA, distributed cash flow, and unadjusted distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our fourth-quarter 2012 earnings release.

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

Thanks, Marc. Good morning, everyone. Thanks for joining us today. I'll discuss our fourth-quarter financial highlights; our business operations; and then, I'll turn it over to Matt for more details on our financial results. I'll then end the call with some key growth areas we're focused on for the balance of 2013.

Yesterday we announced our financial and operating results for the fourth quarter of 2012. We had a very good fourth quarter, with adjusted EBITDA of $28.6 million, and adjusted distributable cash flow of $24.7 million. Both of these measures were up significantly over the fourth quarter of 2011. Adjusted EBITDA was up 44%, while adjusted distributable cash flow was up 22%.

Please note, however, that the fourth quarter of 2011 did not include a full quarter of results from our Grand River Gathering subsidiary, which we acquired at the end of October of 2011. Sequentially, and what we think is a more appropriate comparison, adjusted EBITDA was up 23.8% over the third quarter of 2012, while adjusted distributable cash flow was up 12.6% from the third quarter of 2012.

Total throughput volume in the fourth quarter averaged 933 million cubic feet per day. This was 2.6% lower than average daily volumes in the third quarter of 2012. All of the volume decreases experienced in the fourth quarter were related to our Grand River system, and primarily came from our Mamm Creek and Orchard systems; which, as we have stated in the past, are supported by significant minimum volume commitments.

Because of the minimum volume commitments, or MVCs, embedded in our gas gathering agreements, we recognize lower volume-based gathering revenue but higher MVC shortfall payments, essentially muting the impact to cash flows in the quarter. Matt will discuss our MVC mechanisms in greater detail later in the call.

You should also keep in mind that we tend to see the effect of wellhead production freeze-offs (technical difficulty) Grand River during the winter. And we believe that had an effect on total throughput volume, as well.

The DFW Midstream system recorded average daily volume throughput of 387 million cubic feet per day in the fourth quarter of 2012, which helped to offset some of the volume declines in the Grand River. This amount was up 1.7% over the third quarter of 2012.

Fourth-quarter volumes were impacted, however, by several days of downtime at our largest compressor station, where we installed and began commissioning a new 6000-horsepower compressor, which we call our Unit 10 project. The Unit 10 project became operational in early January, and increased system capacity from 410 million to 450 million cubic feet per day. After adjusting for this downtime, DFW volumes averaged 394 million cubic feet per day, or an increase of 3.7% over the third quarter of 2012.

Interestingly enough, and interesting to note, DFW's volumes increased in the fourth quarter without having any new wells come online. The volume increases were solely related to volumes from existing connected wells being increased by our producers. Additionally, at the end of the fourth quarter, our customers still have approximately 20% of the total wells in our system shut-in. This equates to 60 wells. And when combined with wells waiting on us to connect, we have close to 100 existing wells in inventory.

We believe this further supports that we have a large amount of additional gas behind our system that is insensitive to near-term drilling activity.

With that, I'm going to turn it over to Matt to review the financial results in more detail.

Great. Thanks, Steve. I'll cover the results of Summit Midstream Partners, LP; and Summit Midstream Partners, LLC, the predecessor of Summit Midstream Partners, LP, or SMLP.

SMLP completed its initial public offering on October 3, 2012. Results prior to our IPO refer to our predecessor, and results subsequent to our IPO refer to SMLP.

Adjusted EBITDA for the three months ended December 31, 2012, was $28.6 million compared to $19.8 million for the three months ended December 31, 2011, an increase of 44%. The $8.8 million increase in adjusted EBITDA was primarily due to the October 2011 acquisition of the Grand River system. Adjusted EBITDA for the fourth quarter of 2012 increased $5.5 million or 24% compared to the third quarter of 2012. This quarter-over-quarter increase was primarily the result of higher volume throughput on our DFW system; increased revenue from condensate sales on our Grand River system; and around $800,000 of future MVC shortfall payments. Also, adjusted EBITDA in the third quarter of 2012 included $2.7 million of nonrecurring transaction costs and ad valorem tax expense.

Moving on to our MVCs, we billed $7.2 million of MVC shortfall payments in the fourth quarter of 2012, primarily from our gas gathering agreements associated with our Grand River system. Approximately $4.8 million of these MVC shortfall payments were recognized as revenue on the income statement, and the remaining $2.4 million were recognized as deferred revenue on our balance sheet.

Adjusted EBITDA in the fourth quarter of 2012 included approximately $4.4 million, due to the MVC mechanisms in our gas gathering agreements, including a $400,000 negative adjustment related to MVC shortfall payments. Additional tabular detail regarding MVCs is included in our fourth-quarter earnings release.

Adjusted distributable cash flow was $24.7 million in the fourth quarter of 2012. This implies a distribution coverage ratio of 1.21 times of fourth-quarter distribution paid in February of 2013. CapEx for the fourth-quarter 2012 was approximately $16 million, of which approximately $2 million was classified as maintenance CapEx. We had $199.2 million of debt outstanding under our revolving credit facility at 12/31/2012. The borrowing capacity on our $550 million facility is approximately $350 million.

Total leverage at December 31, 2012, was 1.8 times. As Steve mentioned, management is reiterating its adjusted EBITDA guidance for fiscal year 2013 of $110 million to $120 million. We believe that the attainment of this target should facilitate distribution growth for our limited partners of 8% to 10% in 2013. CapEx for 2013 is anticipated to be between $35 million and $55 million, of which $6 million to $8 million of that relates to maintenance CapEx.

All of this guidance excludes the effects of any potential asset drop-downs from the owner of our general partner, Summit Investments.

Now I'll turn the call back over to Steve.

Thanks, Matt. I'd like to now discuss our outlook for the rest of 2013, and what we believe will drive future growth at the MLP. First, on our existing business -- and I'll re-iterate what Matt said -- we announced on our third-quarter call, we expect to increase in distribution per unit 8% to 10% this year, and generate adjusted EBITDA of $110 million to $120 million. That 8% to 10% distribution growth is off of our $0.40 per unit [MTD], which we exceeded with our fourth-quarter 2012 distribution of $0.41 per unit.

As Matt mentioned in his comments, we covered that fourth-quarter distribution at 121 times, which is in-line with our full-year target. It's important to note, this guidance excludes the benefit of any potential drop-downs from the owner of our GP, Summit Investments.

As we sit here today, we feel highly confident in achieving our previously issued guidance. Our core business is performing well. It's highly contracted, with growing MVCs, and has very little direct commodity price exposure. Specifically in the Barnett, we continue to see steady drilling activities. And with the addition of compression capacity that came on in January, we have increased our ability to recognize growth from volumes we believe are already connected and ready to flow in our system.

To date, we are pleased with the performance and utilization of the Unit 10 project. We are also currently connecting four pad sites that will come on in the first half of 2013. And each of those pad sites have existing drilled wells on them. At Grand River, as we discussed in the third-quarter call, we expect volumes to slightly decline in 2013 relative to 2012. However, given our MVC contracts, we will see very little financial impact. And, in fact, we actually expect cash flow to increase this year, as our customers' MVCs step up in 2013.

We continue to see steady drilling activity at Grand River from our largest customer, Encana. Encana has a JV partner which enhances producer economics, and helps sustain steady drilling activity in our area of operation. Overall, the core business is performing well. We continue to have highly contracted and steadily increasing cash flows, while also maintaining significant upside through the gas price recovery, particularly in the Mancos-Niobrara, which has gotten some recent good press from WPX's announcement of their first well.

Summit Investments, the owner of our GP, has been very active over the past six months. Summit Investments now has a diversified business across gas gathering and processing; crude gathering; and watering gathering; with a large foothold in the Uinta, DJ-Niobrara, Bakken plays, [truly] the highest crude growth basins in North America. At 2013 at Summit Investments, we will be installing over 200 miles of pipeline, and bringing online two fee-based natural gas processing plants.

As far as drop-down timing goes, we expect that Summit Investments will offer its first asset to the NLP in the next 3 to 6 months. We anticipate the first asset to be offered will come from the recently completed Bear Tracker acquisition. We view the acquired Bear Tracker assets, which we have renamed Meadowlark Midstream, to consist of 2 to 3 asset packages that will be offered to the MLP over the next few years.

As we stated in our third-quarter call, we still expect that Summit Investments will offer some or all of its Red Rock assets to the MLP in the next 9 to 12 months. In general, the integration of Red Rock is ahead of schedule. We're driving significant cost synergies out of the business. And the development projects we've previously highlighted are going well.

So, overall, if you take a step back, we have a large amount of inventory of midstream assets at Summit Investments that we expect to be offered to the MLP over the next few years. We believe these drop-downs will diversify the geographic areas in which we operate, the service offerings we provide to our customers, and significantly grow distributable cash flow.

To facilitate the execution of this plan over the next several years, we have a strong and under-levered balance sheet; high existing distribution coverage; and significant liquidity.

So, with that, I'll open it up for questions. John, do you want to open up the line?

(Operator Instructions). Ethan Bellamy, Baird.

Good morning, guys. Congrats on the solid quarter. A few questions for you -- first, I'd like to dig in a little bit more to the Mancos-Niobrara. Obviously, those WPX results are pretty compelling. Is that a potential driver for the Orchard system, or all three systems in the area? And do you have any of your existing acreage dedication -- how much of that might be prospective over the contiguous acreage that would come from a new agreement?

Hey, Ethan, thanks. This is Steve. I think the WPX announcement -- they've obviously been the most vocal on the Mancos-Niobrara. I would say Encana has been the most active, though, on drilling the Mancos-Niobrara, but WPX put out some interesting results. For those who haven't seen, they announced the results of their first well, of a 7 to 10 Bcf well, and that they drill it for $5 million to $6 million to cost.

So with that being the case, obviously that's a large well and very economic, even at these prices. So we're very excited with that data point. To answer your question, I would tell you all of our Grand River system is prospective for the Mancos-Niobrara. We have a good slide in our posted deck on our website of announced and public wells that have been drilled in the Mancos-Niobrara, and those wells overlay our existing system. So you can get a good idea of the acreage overlay from the Mancos-Niobrara.

The well that WPX drilled is just north of the river, so it's not flowing on our existing system; but the Orchard area, yes. The Orchard area is basically transporting, today, Mancos for production from Encana. And we would anticipate that that system growing as they come back in -- and Encana comes back in and drills more Mancos-Niobrara. That system is also -- as we explained to folks in the past -- that system is highly underpinned, contractually.

Okay. And then just turning to the assets available for drop-down -- a couple questions on those. Can you give us, ballpark, any idea of the amount of EBITDA that's being potentially dropped in, say, the one that's due in the next 3 to 6 months? And then maybe EBITDA in aggregate? And I understand, if not. And then, also, do you have the human capital and the operational bandwidth in place for those assets? Or do you need to build onto those over time?

Let's talk about size a little bit. And you're right, I'll talk about this in maybe relation to total amount. I would tell you, we believe we have somewhere in the neighborhood of $1 billion worth of assets at the Summit Investments, our GP, to drop down over the next several years, I would say. And we believe those drop-downs will occur in, call it, 3 to 4 different transactions. So you can probably look at size that way.

And I would tell you, our anticipation is that they are all somewhat similar in size over the next couple of years. As far as operational bandwidth, I would say yes, we have a very large -- one of the things that has helped us tremendously with the Bear Tracker acquisition is we already had a very large operating presence in the Rockies. And so we've been able to move folks around very efficiently, and put some of our highly skilled operating personnel in the Bakken. And I would tell you, we are extremely excited about the growth prospects in that area going forward.

Okay, thank you.

Ted Durbin, Goldman Sachs.

Thank you. I was just trying to understand a little bit of the commentary around the Grand River -- and realizing there is MVCs there -- but it was down pretty much sequentially every quarter in 2012. Are you saying that you'll be down again, on an average 2013 basis, versus an average 2012 basis? Or do you think -- let's say we've hit the bottom here in the fourth quarter, and you say we'd stay flat for here on volumes in Grand River?

I think we are, overall -- and I would caution that this really -- Grand River is really three separate systems, Ted. And they are contracted separately. So I want to make that point, because it definitely matters exactly where we are talking about. So let me give you a little more color. We actually think, overall, Grand River volumes will be down. We're projecting to be down about 4% year-over-year -- so average 2013 to average 2012. That's what we anticipate, sitting here today.

A lot of those declines are coming -- where we are seeing them come is in the Orchard area. And that is simply related to Encana's pull-back of drilling Mancos-Niobrara. And I would tell you we're very insensitive to that, from a cash flow perspective. That system is highly underpinned. It will get drilled eventually by them. And it's just a price determination for them on natural gas.

So that's where we're seeing volumes. We're also seeing it from some other third-party customers, as well. But, again, those guys are under long-term and significant MVCs.

That's helpful, thanks. And going -- coming back to the drop-downs, then, that you've talked about, which sounds like $1 billion. Should we assume that you will want to add some leverage as you go here? You said you were, I think, south of 2 times levered now. You'll maybe finance some of those drop-downs over time more with that than with equity, let's say?

Yes, I think -- look, I think we have -- and we did it on purpose, coming out of the IPO -- we have a very under-levered balance sheet today, particularly given the level of contracted cash flow we have. So we would anticipate -- yes, we would anticipate using some of that under-levered capability with the drop-downs. (Multiple speakers) very supportive of GP, very well capitalized GP as well, too. Our Summit Investments owner of our GP, so we have a lot of capability there, too, to help the MLP execute the drop-down plan.

And, Ted, this is Matt -- in the past, we've said, and we're still there -- from a long-term perspective, we are kind of a 3 to 4 times debt to EBITDA target for SMLP.

Got it. And then the last one for me is on the distribution itself. And you had the bump here right out of the gate. How are you thinking about -- EBITDA guidance is kind of the same as it was that you had in the prospectus. But you bumped right out of the gate. I'm just trying to think about the timing of -- are you thinking this is kind of a -- every quarter you are going to raise -- did you see something better this quarter, so you said hey, let's come out strong on the very first one? I'm trying to think about how you are thinking about that relative to that guidance on EBITDA, at least being similar to what it was before.

Yes, no, it's a good question. And I think we would tell you, we are more of a steady increment than lumpy, I think is our plan. I don't think you'll see a significant amount of volatility in getting to that 8% to 10%. I think for coming out of the box higher, I tell you, as we told people, it was a good quarter, as you can see. I think we are already at our target coverage in the first quarter. And we felt like -- felt very good about the balance of 2013, so we decided to come out a little higher. No other magic other than that.

Sounds good. Okay. That's it for me. Thanks, guys.

(Operator Instructions). Helen Ryoo, Barclays.

Thank you. Good morning. I'll start with a clarification question on your distribution guidance. Is the 8% to 10% -- is that based on an exit rate in 2013? Or is that a full-year 2013 distribution versus your annualized MTD?

Yes, Helen, it's Matt. That's the exit rate, so fourth quarter compared to fourth quarter.

Okay, great, thank you. And then going back to the drop-down assets, could you talk about how much CapEx is being spent by Summit Investments in building out the Bakken assets at this point? And I think you said that that's going to come down in 3 to 6 months, or at least that would be the first package of the transaction.

Yes, I think -- hey, Helen, it's Steve -- as I mentioned, we're putting in more than 200 miles of pipe and a couple processing plants. So at Summit Investments overall, that's not necessarily just in the Bakken. We're looking at -- if you look at the acquisitions over the last six months, it's been north of $700 million. We'll spend probably a couple hundred million dollars this year up at Summit Investments.

Okay, so is that the level of spending that will take place before things get dropped down? Or maybe some of that will -- you guys will have to take on because -- I guess what I'm trying to understand is, these projects, they will -- would they come to you with significant organic investment opportunity?

Yes, our approach or view of that is, when the asset is offered to the MLP, and in the MLP it's still going to have -- it still needs to have significant growth opportunities around it. What we're trying to do, and doing at the Summit Investments level, is really getting the assets and the big projects up and running and operating. So we would still anticipate, given in these areas and given what's going on, they're still going to have runways for growth, organic growth, around them.

Okay. So I guess your organic CapEx budget would probably be much higher than the level you're spending right now. Given these assets, what will be (multiple speakers)?

Yes, let me clarify. The couple hundred million dollars we were talking about is going to be -- that's what we anticipate being completed up at Summit Investments this year.

Okay.

So, I just wanted to make a point that we still believe, even after being offered and coming out of the MLP, there are still going to be organic growth opportunities around the assets.

Okay, got it. And then, first, another clarification question regarding the MVCs payments. So, I guess you guys billed $7.2 million in the quarter. And what flew through your EBITDA is $4.4 million, so that essentially the rest will be received in first quarter?

Actually, it's a little bit different than that, Helen. So, we billed $7.2 million. And of that $7.2 million, the $4.8 million relates to MVC shortfall payments billed relative to Grand River. If you see, in that table in our press release, $3.6 million of that had already been recognized in adjusted EBITDA through the course of 2012. So of the $7.2 million, $4.8 million of that went right to revenue. But we had already recognized some of that -- $3.6 million of that in adjusted EBITDA over the course of the year. So the net impact of the $4.8 million was $1.2 million. And then the total impact, then, would be $4.4 million of the $7.2 million.

Okay. So, essentially, there's nothing spilling over into next year that's related to the MVC.

Yes, so the part that spills over would be, on here, the MVC shortfall payment adjustment -- DFW. There's $800,000 of -- and that's the context of accruing for an anticipated MVC shortfall payment that will come next year.

Okay. And could you update us -- what was the MVC payment you're expecting for 2013? What's embedded in the guidance?

In the guidance, it's close to $13 million.

Okay. And that's essentially all coming from the Grand River side. You're not expecting any anything to come from DFW.

Well, that $13 million is related to Grand River. Actually, no, it will be more than that because of the -- so, it would be around $20 million at Grand River, and then like $1.5 million from DFW.

Okay. So, in total, $21.5 million of EBITDA coming from MVC, that's in 2013 guidance?

That's correct.

Okay, great. Okay, Thank you very much.

(Operator Instructions). And I'm showing no further questions at this time.

Great. We appreciate everybody joining us. If you have further questions, you can follow up with us off-line. Have a good afternoon.

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