Summit Midstream Partners LP (SMLP) 2013 Q2 法說會逐字稿

Welcome to the second quarter 2013 Summit Midstream Partners/Summit LP Earnings Conference Call. My name is Cliff and I will be your Operator today. 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 Mr. Marc Stratton. Mr. Stratton, you may begin.

All right. Thanks, Cliff, and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the second quarter of 2013. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.SummitMidstream.com, where you will find it on the home page or in our news section.

With me today to discuss our quarterly earnings results 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 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 2012 Annual Report on Form 10-K and our other SEC filings for a listing of factors that could cause our actual results to differ materially from expected results. 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 second quarter earnings release.

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

Thanks, Marc. Good morning, everyone. Thanks for joining the call. I am going to begin by discussing some second quarter highlights, our business operations, and then I am going to turn it over to Matt for more details on the financial results. I'll then follow back up and end the call with some additional comments on our second half outlook.

Yesterday, we announced our financial and operating results for the second quarter. It was an extremely active quarter with multiple transactions that positioned us for future success.

First, on June 4, we completed our first drop-down transaction, Bison Midstream, from our general partner for $250 million. Bison is an associated gas gathering system in the Bakken Shale which is highly contracted over the next several years from several large producers. It gives us exposure to the Bakken Shale, one of the highest growth crude oil basins in North America.

Our second quarter results, due to pooled accounting, which Matt will go into further, include Bison results for the entire second quarter, even though the transaction closed on June 4.

Second, on June 21, we completed the acquisition of Mountaineer Midstream from MarkWest for $210 million. Mountaineer is a high pressure gas gathering system in the heart of the liquids-rich area of the Marcellus Shale, again one of the highest growth production basins in North America. It is also underpinned by a long-term fee-based agreement with Antero, who is one of the largest producers in that area.

Of note, our second-quarter results only include nine days of the Mountaineer results.

In support of both these transactions, we issued 4.8 million units to our general partner for a total proceeds of $150 million. We also increased the availability under our revolving credit facility by $50 million to $600 million total and completed a senior notes offering for $300 million.

So all in all, busy quarter; a very productive quarter, and really positions Summit in two of the higher growth basins in the US while further diversifying our business across crude oil and liquids-rich basins. We did this while increasing the diversity of our capital sources, enhancing liquidity, and using the flexibility that we have with our well-capitalized general partner.

On the volume front, total throughput volume in the second quarter averaged 918 million cubic feet a day, which was basically flat to the second quarter of 2012. When comparing the second quarter of 2013 to the second quarter of 2012, the 19% increase in DFW volumes, basically offset a 15% decline year-over-year Grand River volumes.

Recall that Grand River is a highly contracted system, so declining volumes do not necessarily translate in declining cash flow. In fact, in most cases, they translate into higher MVC shortfall payments. In addition, the inclusion of Bison volumes also helped offset Grand River declines, although Bison is an associated gas gathering system, so those volumes are fairly small.

At DFW, total volumes for the second quarter averaged 395 million cubic feet a day, which was up 19% over the second quarter of 2012, but down 5.6% from the first quarter of 2013. If you recall, the first quarter of 2013 was a record volume quarter for us at DFW, and included some flush production from previously shut-in wells that were able to flow with the expansion of our compression.

For the second quarter, we connected one new pad, brought on 14 new wells. Offsetting the new pad and the wells was drilling and completion activities by our customers, on some of the largest and most productive pad sites on the system. Although this activity is good for the long-term, higher drilling and completion activities, as we have mentioned in the past, can have short-term negative impacts to our volumes as producers shut the pad down during those activities. We estimate these activities accounted for a reduction of about 10 million cubic feet a day in second-quarter volumes.

A positive note is the continued ramp up of Beacon volumes during the quarter. Beacon is one of our private independent producers on the system and we continue to bring on additional pad sites related to the contract we executed last summer with them.

In our press release last night, we also announced the expansion of the gathering agreement with Beacon to connect five new pad sites, and the expansion of our service offering at DFW with the addition of natural gas CO2 trading for all of our customers. Total CapEx for these projects is about $20 million. Most of that is expected to be incurred in the second half of this year, and the projects will come on in the first part of 2014.

These are very attractive projects for DFW; expected build multiple of about 4 times EBITDA. For Grand River, volumes decreased 6% over the first quarter of 2013 as we saw continued declines from customers where we provide high pressure transportation and compression services. The Piceance in general continues to be challenged in this gas price environment and with NGL prices depressed particularly, I think.

At GRG, we benefit from a very high level of contracted volumes to help insulate our cash flows from volume fluctuations. Give you an example of this; during the second quarter, total revenue on GRG when adjusting for deferred revenue in MVC payments was basically flat with first quarter when you adjust for our seasonally high condensate revenue. So, normalized revenues is flat, even though volumes declined 6%.

We now have two new areas to discuss, and I will start with Bison first. Second-quarter volumes in Bison averaged 16.8 million cubic feet, which was flat over the first quarter. This was due to several factors, including some operational improvements we made after purchasing the system.

Installation and new compression, which temporarily affected volumes through the downtime associated with the installations, and continued active drilling and completion activity, which, like in DFW, affects volumes as producers bring down pad sites when they do that.

We continue to see very active drilling in the area. Four rigs of one of our customers are currently drilling on the system and several other rigs are working in our service area.

As we discussed at the time of the dropdown, we will continue to add compression throughout 2013 and expect to expand the system to move up to 30 million cubic feet a day. We are doing this in response to customer activity and expected volume increases, although I will caution you, it could be lumpy given the installation of compression and the active drilling activity. Activity remains very strong around Bison and we continue to work on several optimization and expansion projects.

On Mountaineer, again, our high-pressure system in the Marcellus, second quarter volumes averaged 133 million cubic feet a day. The volume ramp continues at the pace we expected and we believe we will see volumes continue to increase over the next 18 months, as MarkWest brings their plant to the full 800 million cubic feet a day of capacity at the Sherwood facility, and infrastructure in the area catches up to the high level of drilling activity in the area.

I'll remind everyone that we only owned this system for nine days in the second quarter, so financial results don't really include the asset. I'll speak to this a little bit later in my comments, but I will add that we are very, very encouraged by the organic growth opportunities surrounding the asset.

So with that, I'm going to turn it over to Matt for more commentary on our financial results.

Thanks, Steve. I will cover the results of Summit Midstream Partners, LP, or SMLP, and Summit Midstream Partners, LLC, or Summit Investments, the predecessor of 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. Also, SMLP acquired Bison Midstream from a subsidiary of Summit Investments on June 4, 2013.

The transaction was considered an acquisition from a common controlled entity. Therefore, the Bison Midstream dropdown acquisition has been accounted for on an as-if-pooled basis for all periods in which common control existed, resulting in the combination of SMLP and Bison Midstream results beginning on February 16, 2013.

Adjusted EBITDA for the three months ended June 30, 2013, was $33.5 million. That compares to $26.7 million for the three months ended June 30, 2012, an increase of approximately 26%. The $6.8 million increase in adjusted EBITDA was due to, first, the dropdown acquisition of Bison Midstream on June 4, which contributed approximately $5 million of adjusted EBITDA in the second quarter of 2013.

The acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $300,000 of adjusted EBITDA over the nine days that SMLP owned Mountaineer Midstream in the second quarter of 2013, and also higher volume throughput on our DFW Midstream system, which averaged $395 million a day in the second quarter of 2013 compared to $331 million a day in the second quarter of 2012.

Also, certain of SMLP's gas gathering agreements on its Grand River system contained annual MVC and gathering rates that increased in -- I'm sorry. And these MVCs grew in the first quarter of 2013 compared to 2012, and also the rates in the first quarter of 2013 compared to 2012. These contractual volume and rate increases helped mitigate the 15% volume throughput decrease on the Grand River system when compared to the second quarter 2012.

The increase in adjusted EBITDA of our second quarter of 2013 was also offset by $2.4 million of nonrecurring transaction costs associated with the Bison Midstream and Mountaineer Midstream transactions.

Adjusted EBITDA in the second quarter of 2013 included approximately $7.5 million related to MVC mechanisms from our gas gathering agreements. This amount included $6.7 million of adjustments related to MVC shortfall payments, of which $3.7 million was associated with the net change in deferred revenue and $3 million was associated with quarterly adjustments related to future projected annual MVC shortfall payments.

$800,000 of previously recognized deferred revenue related to the DFW Midstream system was brought into gathering revenue on the income statement because a customer's time period to utilize the MVC shortfall payment had expired.

We billed $4.5 million of MVC shortfall payments in the second quarter of 2013 from our gas gathering agreements associated with Grand River and DFW. This $4.5 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet. You can find additional tabular detail about our MVCs on our second quarter earnings release.

Adjusted distributable cash flow totaled $28.4 million in the second quarter of 2013. This implies a distribution coverage ratio of 1.20 times, [to the] second quarter distribution of $0.435 per limited partner unit to be paid on August 14, 2013.

CapEx, excluding acquisitions for the second quarter of 2013, were approximately $16.5 million, of which approximately $3.8 million was classified as maintenance CapEx. We had $265.1 million of debt outstanding under our revolving credit facility at June 30, 2013. The borrowing capacity under our $600 million revolving credit facility is approximately $335 million.

A subsidiary of SMLP issued $300 million of 7.5% senior notes due 2021 in the second quarter of 2013. Total leverage as of June 30, 2013 was 4.0 times.

With that, I will turn the call back over to Steve.

Thanks, Matt. First, some housekeeping. We are reaffirming our full-year guidance that we revised in June with the acquisitions at $140 million to $150 million of adjusted EBITDA. We are also reaffirming our distribution growth of 18% to 22%, and that is over the $0.40 [EMQD].

I'll help folks out a little bit with the math. Our second quarter of 2013 distribution that we announced was $0.435. That is 8.75% over the $0.40 MQD. So you can see that we expect to ramp up our second half distributions given our guidance on full-year growth. Hopefully, this makes sense as we get the full impact of the cash flow and accretion of our acquired assets.

Now for our second half outlook, and we will start with DFW. During the quarter, we have seen several of our producers pick up activity levels and pick up discussions with us about future activity levels. This partially manifested itself in the expanded deal we did with Beacon. Although this activity will make our volumes a little lumpy at DFW, we view these discussions to be very positive to supporting a continued high, long-term utilization rate on the asset.

I'll also point out two things related to this. First, customer diversity matters and has helped us at DFW. We have eight customers on the system and they are a diverse group of large and small, public and private companies.

Second, our area in the Barnett is in the core of the core. So, even in a challenging price environment, activity levels have remained fairly stable and appear to be potentially increasing with certain customers. In addition, we are now operating in two new areas and they happen to be two of the best growth basins in North America -- the Bakken and the core of the Marcellus.

Activity at Bison, our Bakken asset, remains high. For the balance of 2013, we are focused on increasing compression capacity and reliability, connecting production related to the significant drilling activity around the system and executing on several growth projects in and around the area. We are building a scalable very highly skilled operating platform in the Bakken, which we -- and we believe that capability will serve us, our customers, and our unit holders well in the future.

In the Marcellus, although we have only owned the asset for a month, I will tell you the opportunities for organic growth in the area are exceeding our expectations. This area in the Marcellus has not only some of the richest gas in the entire basin, but also some of the largest wells. That combination is supporting a very high level of drilling activity, which is driving organic growth opportunities higher than we expected at the time of the acquisition.

The volume ramp on Mountaineer is on track and we expect to see a nice bump in the second half of the year as new production comes online and begins to fill our already built out asset.

Finally, I feel like I should provide some color on the GP, which remains our primary development vehicle for the Summit enterprise and will be the source of significant growth for our MLP over the next several years. As we have previously discussed, we are currently executing on approximately $250 million of organic CapEx at Summit Investments for 2013.

We brought the initial phase of our crude oil and water gathering system in the Bakken on in May, and we expect to continue to ramp that system up throughout the balance of 2013 and into 2014. We are building two processing plants in Colorado, one in the liquids-rich Mancos, another in the DJ Basin, and both of these facilities will be completed by the end of 2013. I'll also add that both of these facilities are covered under 10-year take or pay fee-based processing arrangements.

So all in all, the development for 2013 at the GP is on track, it is on budget, and we will have numerous projects completed by the end of the year. In addition, we now have in excess of $250 million of additional growth projects on the board at the general partner, which we believe will be successful in winning our fair share. Most involve further development of our crude, gas, and water transportation system in the Bakken.

As announced on June 25, we executed an agreement with a major Bakken producer to expand our crude and water gathering activity in Williams County. Activity level is robust in the basin and, as I mentioned earlier, we are building a very large operating platform to be able to deliver superior service for our customer base.

Finally, on dropdown timing, since I am sure I will get asked, we have been consistent on this message and will remain so. We said in the first quarter we believe the current assets at Summit Investments will be offered to the MLP over the next 18 to 24 months, and represented approximately $1 billion of assets value.

We completed the first one in the second quarter for $250 million and we remain confident the other assets will be offered now over the next 12 to 18 months. Given the development commentary above, there is potential on an upside of total size of future asset drop downs, but we will see how things develop over the balance of the year. As we complete these dropdowns, Summit Midstream will become more diversified with increasing EBITDA contribution from crude oil, from liquids, and water transportation services, while we will maintain a significant upside to increase natural gas production.

With that, we are going to open it up for questions so, Cliff, if you don't mind.

(Operator Instructions) Ethan Bellamy, Robert W. Baird.

Hey, guys. Congrats on the solid quarter. With regards to the shut-in volumes in the DFW segment, has that come back online? And do you expect any kind of incidents like that in the current quarter?

Hey, Ethan; this is Steve. We have seen some of them come back online now here in the third quarter as completion activities sort of move away after they finish their frac jobs.

We do anticipate some of that to occur. And, really, it is a long-term positive. It means there is drilling and completion activity in the basin.

So what occurs is, as you probably know, they bring down the pad site -- and we do have large pad sites at DFW. Those pad sites are brought down while producers are drilling on the pad and completion activities occur on the pad. So we do -- they will be somewhat lumpy. We anticipate that to continue as activity level remains pretty constant there.

Okay. Any big, new, exciting Mancos wells worth talking about that you might get volumes from?

No. I think we will have more to talk about towards the end of the year as we bring some -- as we bring the facility on at the general partner -- the processing facility. Because we will be processing the liquids-rich part of the Mancos there, so I suspect we will have more. Nothing yet on that front.

Okay. And then last one, you talked about the sponsor and activity up there at the top. What does the balance sheet look like? And is there firepower for additional acquisitions up top to rebuild the inventory?

And then, looking forward on the dropdowns, are those all going to be cash deals? Or should we expect the parent to take some equity at some point?

So again, we have a very supportive sponsor and ultimate sponsor, as I think we have demonstrated over the past several years. And this is Matt talking.

We have a revolving credit facility -- $150 million revolver up at the general partner that we utilize, so that we are not making capital calls for little deals. So we do have actual -- the ability to have bank debt up at our GP.

On the second piece, if we talk about dropdowns, we have been pretty consistent. We intend to operate the MLP at a 3 to 4 times debt to EBITDA type of environment. So we would anticipate -- I wouldn't necessarily say that every deal we do would have equity with it and debt with it, would line right up in there, but that the long-term would be that we would operate in that band.

I appreciate that nuanced answer. Thank you so much, guys.

(Operator Instructions) I am showing we have no further questions at this time.

Okay. Well, great. We appreciate everybody joining. And obviously if you have follow-up questions of us, please don't hesitate to give us a call. Thank you.

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