Summit Midstream Partners LP (SMLP) 2013 Q3 法說會逐字稿

Welcome to the Q3 2013 Summit Midstream Partners LP earnings conference call. My name is Vivian, and I'll be your operator for today's call.

(Operator Instructions)

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.

Thanks, Vivian, and good morning, everyone.

Thank you for joining us today as we discuss our financial and operating results for the third 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'll find it on the homepage or in the 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 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 actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA, distributable cash flow, and adjusted distributable cash flow. These are non-GAAP financial measure, and we provide reconciliations to the most directly comparable GAAP measures in our third-quarter earnings release.

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

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call.

Before we get started, I just wanted to wish everyone on the call and all of our employees happy early Veteran's Day. 30% of Summit's employees are military veterans, so Monday's a special day for us. I'll begin by discussing our third-quarter 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 additional comments, including comments on our 2014 guidance that we released yesterday afternoon.

Yesterday, we announced our financial and operating results for the third quarter of 2013. It was a solid quarter and one where our recent acquisitions and more diversified operations began to show their effect. For the quarter, we had adjusted EBITDA of $39.1 million and adjusted distributable cash flow of $28 million. Adjusted EBITDA was up 69% year over year and 17% quarter over quarter. The year-over-year increase was due primarily to the benefit of having Bison and Mountaineer in 2013, while the quarter-over-quarter results benefited from the inclusion of Mountaineer for the full quarter.

If you'll recall, we completed the Bison drop-down and the Mountaineer acquisition at the end of second quarter 2013. Adjusted distributable cash flow was up 28% year over year but down 1% quarter over quarter. The quarter-over-quarter decrease was due almost exclusively to the higher interest expense from our bond offering which we completed in June. We approved quarterly for the semiannual payment of this interest.

As we mentioned on the second-quarter call, we took the opportunity to use our excess coverage in the first half of the year to invest in our balance sheet for the long-term fixed rate tranche of debt. We announced on October 24 our third-quarter distribution of $0.46 a unit, which was a 5.75% increase over the second quarter distribution. Our coverage ratio for the first nine months of 2013 was 1.23 times, still above our 1.2 times target for the full year. On the volume front, total throughput volume in the third quarter averaged just over 1 Bcf a day, which is a new record for Summit. The 6.7% growth over the second quarter was due to the continued ramp up of volumes on the Mountaineer system.

Let's take a little bit deeper dive in each system individually. At DFW, total volumes for third quarter averaged 381 million cubic feet a day, which was down 3.75% over the second quarter. Volumes were impacted because the third quarter is when we have our state regulatory shutdown of the system which lasts for two days. This affected volumes by approximately 5 million a day, so after adjusting for that event, volumes were 2% lower quarter over quarter.

We continue to have active drilling in the area. We had three rigs working at the end of the quarter. This is beneficial for us longer term but did contribute to lower quarter-over-quarter volumes, as producers shut in or curtailed the affected pads during drilling operations. We connected one pad site during quarter for Beacon, and work is ongoing on two additional pad site connections for Beacon. They continue to be active in our area, and they're now one of our largest customers on the system. In addition, the installation of the large natural gas treating facility we announced last quarter remains on track for start up in the first quarter of 2014.

For Grand River, volumes averaged 489 million cubic feet a day in the third quarter, which is basically flat over the second quarter. After seeing volume declines in the fourth quarter of 2012 and first quarter of 2013, we've now seen two quarters of relatively flat volumes on Grand River. I'll remind everyone that in this area, Summit benefits from a very high level of contracted volumes that help insulate our cash flows from fluctuations. However, our cash flow actually will grow in this area as our contract portfolio had step-ups in rate and volume commitments.

Third-quarter volumes in our Bison associated gas gathering system in the Bakken averaged approximately 17 million cubic feet, which was flat over the second quarter of 2013. We continue to see significant drilling around our system, and we are doing a good job of connecting pad sites prior to first production. Offsetting higher volume growth are two things; first, we continue to increase compression capacity on the system which has caused some volume disruption as we install the units; and second, we saw some operational disruption in the third quarter, actually into the fourth quarter as well too, related to the handling of produced water on the system. We're installing some equipment to help alleviate the problems, and we're turning the corner on this operational issue. On a positive note, we're very encouraged that there's a substantial amount of gas in the field for us to transport, and our customers continue to actively drill the area. We fully anticipate the increase in compression capacity to be utilized once we complete the installations.

On another positive note related to Bison, during the third quarter we executed a revised agreement with Aux Sable Midstream to process up to 25 million cubic feet of system gas at their large Chicago processing facility. This revised agreement provides us firm capacity and also enhances our own and our customers' recovery factors and economics. As volumes grow, we anticipate this revised agreement providing us enhanced cash flow and firm capacity with no additional CapEx required.

On Mountaineer, which is our high pressure gathering system in the Marcellus, third-quarter volumes averaged 135 million cubic feet a day, which compared to an average second-quarter volume of 133 million cubic feet a day. The third-quarter volumes were impacted by an NGL line issue that MarkWest had during the third quarter, which caused a curtailment of volumes on our system into the Sherwood processing facility. The line was down for about half of the third quarter. The issue's now been resolved. Volumes have more than recovered on the system, and we're now transporting over 200 million cubic feet a day on Mountaineer. The volume ramp up on this asset is well under way.

We mentioned on the last earnings call that we were very encouraged by organic opportunities around the Mountaineer asset. Yesterday, we announced the amendment to our Antero agreement to almost double the capacity on the system. The Zinnia Loop project will add nine miles of 20-inch pipe line that will take our overall capacity on Mountaineer to over 1 Bcf a day. The agreement is covered under the existing contract which has 12 years remaining on it. We anticipate an in-service date by the end of third quarter 2014 for the project.

The execution of this agreement obviously bodes well for the prospects of the area, our system, and the Sherwood processing complex. We're excited to announce this significant project within five months of closing the transaction. We're also excited to expand our relationship with Antero and MarkWest whose plant we delivered to.

Before I turn it over to Matt, to summarize the quarter, the assets are performing well despite a few operational challenges during the quarter. We remain highly contracted with over 3.7 TCF of gas committed to us over the next 10 plus years. In addition, our new areas of operation, the Marcellus and Bakken, are poised to deliver significant growth for us in 2014. I'll discuss that a bit further when we go over 2014 guidance.

With that, I'll turn it over to Matt.

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 referred 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 an entity under common control. Therefore, the Bison Midstream drop-down acquisition has been accounted for on an asset pool basis for all periods in which common control existed, resulting in the combination of SMLP and Bison Midstream financial results beginning on February 16, 2013.

Adjusted EBITDA for the three months ended September 30, 2013, was $39.1 million compared to $23.1 million for the three months ended September 30, 2012, an increase of approximately 69%. The $16 million increase in adjusted EBITDA was due to, one, the drop down acquisition of Bison Midstream on June 4, 2013, which contributed approximately $4.9 million of adjusted EBITDA in the third quarter of 2013; the acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $2.7 million of adjusted EBITDA in the third quarter of 2013; and $1.7 million of transaction costs in the third quarter of 2012, compared to $100,000 in the third quarter of 2013.

Also, certain SMLP's gas gathering contracts on its Grand River system contain annual minimum volume commitments, or MVCs, and gathering rates that increased in the beginning of 2013. These contractual volume and rate increases helped mitigate the 18% volume throughput decrease on the Grand River system when compared to the third quarter of 2012.

Adjusted EBITDA in the third quarter of 2012 included approximately $9.5 million related to MVC mechanisms from our gas gathering contracts. This amount included $1.9 million of minimum shortfall payments that were recognized as revenue, $4.5 million associated with quarterly adjustments related to future annual MVC shortfall payments, and $3.2 million associated with the increase in deferred revenue related to MVC shortfall payment billings on our Grand River system. This $3.2 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet. Additional tabular details regarding MVCs is included in the third-quarter earnings release.

Adjusted DCF totaled $28 million in the third quarter of 2013. This implied the distribution coverage ratio of 1.12 times third-quarter distribution of $0.46 per limited partner unit to be paid on November 14, 2013. CapEx for the third quarter of 2013 was approximately $20.7 million, of which approximately $3 million was classified as maintenance CapEx. We had $265 million of debt outstanding under our revolving credit facility at September 30, 2013.

Also, on November 1, 2013, Summit Midstream Holdings, wholly owned subsidiary of SMLP, closed on an amendment and restatement of its revolving credit facility whereby it increased its borrowing capacity from $600 million to $700 million, extended the maturity from May 2016 out to November 2018, added a $200 million accordion feature, and reduced its leverage based grid by 75 basis points to a new LIBOR base grid of 1.75% to 2.75%.

The borrowing capacity on our $700 million revolving credit facility is approximately $435 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 September 30, 2013, was approximately 3.9 times.

With that, I'll turn it back over to Steve.

Thanks, Matt.

First, some housekeeping on the rest of 2013, we are confident in achieving our full year adjusted EBITDA guidance of $140 million to $150 million. Year to date, we've grown our distribution 15% over the $0.40 minimum quarterly distribution. We previously guided to 18% to 22% growth over the $0.40, and we're confident in hitting that number.

Yesterday, we released 2014 financial guidance with adjusted EBITDA of $170 million to $180 million, which we expect will lead to distribution growth of 10% to 12%. To be clear, this is 10% to 12% over our expected fourth-quarter 2013 distribution per unit. Our CapEx guidance for 2014 is $60 million to $70 million of growth CapEx and $15 million to $20 million of maintenance CapEx, so 10% to 12% distribution growth status quo with our current business profile. As I said before, our assets are performing well. We're seeing some good growth around them, and this is manifested in our robust growth outlook for 2014.

Keep in mind when comparing our growth CapEx to our distribution growth that our strategy of doing our heavy organic development at the general partner leads to outsized distribution growth at the MLP with limited growth CapEx. Also, we continue to have a very large contract portfolio with commitments that escalate in both rate and volumes. Important to note, this guidance is without any drop-down activity from Summit Investments, the owner of our general partner. We expect to be a double-digit distribution per unit grower, without any drop-down activity, while maintaining healthy coverage.

As we have in the past, I feel like we should provide some color at the GP, which remains the primary development vehicle for the Summit enterprise. Last week, we announced an operational update highlighting several initiatives at the GP. They were all positive developments for Summit. First, we executed a processing agreement with a large producer in Western Colorado that will allow us to optimize our system further in that area and increase profitability. For those not familiar with our operations, this agreement is on our Red Rock gathering system.

Second, in September, we brought online our gathering system and processing plant in the DJ Niobrara. This system is under a long term, fee-based processing arrangement with a large independent producer. This is an active area, and we expect continued growth in and around this asset.

Finally, we began commissioning our Divide crude oil gathering system in October. The system is being built to support the activities of several large independent producers in the area. We also announced the expansion of our Polar crude oil gathering system with the execution of a new 10-year contract with an independent producer active in the area. This agreement was part of the approximately $250 million of additional CapEx that we discussed last quarter. We're excited to convert some of these opportunities into actual projects. We expect to be successful in other organic growth projects in the area as well.

I wanted to take a step back for a minute and frame for everyone the crude oil and water gathering system we're building at the GP, as I think it can sometimes get lost or buried in press releases. We currently have under contract and are executing the build-out of a crude and water gathering system in Williams and Divide Counties that will consist of 235 miles of crude lines and 125 miles of water lines. In total, the system will be capable of moving 170,000 barrels per day of crude oil and 150,000 barrels per day of water. That's quite a large system we're developing, and I don't think we're done yet. We continue to see multiple opportunities, given our position to increase the scope and scale of our Bakken footprint.

In summary at the GP, our continued high activity level in the development front, coupled with our ability to bring projects in on time and on budget, bode very well for continued healthy inventory of assets that will be offered to the Partnership.

Finally, on drop-down timing I will say no real change on our thoughts on this front, although we've added several new development projects at Meadowlark. We expect these projects to be online in 2014 and offered to the MLP by the end of 2014. As we stated before, the drop-downs will significantly increase the scale and diversity of the MLP when included at the Partnership.

With that, I'll open it up for questions. Vivian, can you open up the line?

(Operator Instructions)

Derek Walker, Banc of America Merrill Lynch.

Good morning guys.

Good morning.

The first question I have is just on the Mountaineer system with the looping project. It seems like you're getting significant pick up in capacity there with very little CapEx. What are some of the returns you expect there? Then the second part of that question is, I think the Sherwood processing plant's being expanded up to 800 a day. This is going to a little over a BCF a day. Do you see any additional expansion opportunities in late 2014 or early 2015?

Yes, thanks, Derek. This is Steve. I'll take those. First, Antero announced and MarkWest announced I think this week the Sherwood facility's being expanded to 1 BCF a day. That is something we hadn't anticipated, so that expansion Antero has contracted that already with MarkWest, and I think they announced that. This is a very, very active area. If you follow Antero and you follow MarkWest, and follow Presswood too, I think all four of us would speak highly of the area and the activity in the area and what's going on. This project for us, you're absolutely right, it effectively doubles the capacity of the system through a looping project. I will tell you it's safe to say that it's highly incremental to the MLP from a return standpoint, so highly accretive. We're very excited about it, and it's also covered under a step-up in minimum volumes from Antero.

Got it. Thanks. Next question is, as far as shortfall payments, do you a expect similar level in Q4 2013? Regarding 2014 guidance, what are some of your volume assumptions and guidance there?

I'll take the MVC question, yes. We would expect similar MVC activity in the fourth quarter relative to the third quarter. I will tell you, in the fourth quarter is when the Encana payment will run through the MVC, so it will net to a similar effect but it'll be more ups and downs.

Derek, this is Steve. On volumes for 2014, let me give you some color there. I would anticipate in general flat volumes at Grand River and DFW as well too, and then growing at Bison and Mountaineer, probably not hard to figure those two out. I will tell you on Grand River, just to reiterate, volumes don't equal our cash flow there. We do expect our revenue and cash flow to be growing there, given our contract portfolio.

Okay, got it. If I may, just one more, at the GP level at Red Rock, you mentioned the decommissioning of the North Douglas system. What are some of the potential cost saves there? Do you ever see a scenario where the North Douglas system could be recommissioned?

I'll take it in inverse order. Yes, on recommissioning. You may get recommissioned in other areas, not necessarily in Western Colorado. I think our agreement with the large producer will take care of our capacity in that area. On cost savings, fairly significant. We're going to get a pick up there on two things. We're going to get cost savings, but we're also going to get a pick up on our recoveries and producer recoveries and that helps us as well too. We do have a few percent of proceeds contracts within that portfolio, so I don't think we're going to release numbers on either of those since it's at the General Partner, but they are fairly substantial for that Western Colorado system.

Okay, that's it for me. I appreciate the time, guys.

Justin Agnew, Robert W. Baird.

Good morning. Can you guys talk about what assets within the GP that you guys are interested in dropping first, and the strategy around diversification and that kind of stuff?

Yes, Justin, this is Steve. I'm going to take the asset a little bit different. Let's talk about which ones will finish development, we think, in sequential order because as we've said in the past, what we're doing at our GP is basically using it to incubate our heavy organic development. As those assets get finished, they'll be offered. I'll take it that way, and you can connect the dots. We anticipate our two big projects at Red Rock. We're building a processing facility for Black Hills. We anticipate that project to be done by the end of 2013, early 2014 time frame. We're also in the midst of building out a gathering system for WPX. That again is covered under a very nice contract, and we anticipate that to be substantially complete. That'll go on into 2014, but substantially complete by end of 2013 as well too. Those assets are finishing up the heavy development here over the next several months.

At our Meadowlark subsidiary, we have several different things going on. As I mentioned in my comments, and as we mentioned in the release last week, we have commissioned our gathering system in the DJ and our plant in the DJ Niobrara. That's an active area. It'll still ramp up but that system's online and running. Then our crude oil systems, which I would really guide you to start thinking about those systems, Polar and Divide as almost one system, those systems will continue pretty heavy development, given our commercial activity through most of 2014.

Got it. Long shot here, any chance you want to discuss run rate EBITDA of the GP?

I don't, no. Yes, go ahead.

There's still a lot of development to do, so it's really not a very meaningful number.

I think we'll be consistent. We have north of $700 million of assets, so asset value up at that level.

Got it. Thanks, guys.

Lin Shen, HITE.

Good morning. Thank you. I saw your file S-3, and I'm just wondering maybe it's time for you guys to tap the market to pre-fund your drop-down and also your CapEx? Should I expect some secondary, primary in your future from you guys, or maybe probably wait for next drop-down timing?

Yes, this is Matt Harrison, and then I'll take that one. We dropped our shelf registration statement basically the first day we were eligible to drop our shelf. We responded to the SEC basically the first day that we could respond to the SEC. There really was no intention on signaling any timing or anything on any equity or debt offerings with that, but we will continue to iterate that we intend to operate this portfolio of assets in a three to four times leverage type of environment or state, and to $700 million to $800 million of drop-downs coming by the end of 2014. We will need to do some things at the right time from an equity and debt standpoint.

Okay, so currently, I was thinking you're about 4 times leveraged, am I correct?

Yes, we're just under 4, 3.9 times at the end of Third Quarter.

Okay, thank you very much.

Michael [Wise, Joss Linda] Capital.

Hi, guys. Two quick questions. Are most of the operational issues behind you? Then two, even though you're projecting 10% to 12% organic growth, you are expecting drop-downs before 2014, correct?

Yes, hi, Michael. This is Steve. I'll take those. Let's take the operational issues first. The operational issues at Mountaineer weren't really our issues, but they are behind us. MarkWest has repaired their line. It came back up in early October. It was an NGL line that affected the capacity of the Sherwood facility. That's what happened there, and it's fully repaired. It's up and running, and as I mentioned our volumes have significantly increased through this quarter. That's behind us. At Bison, I don't want to get too technical. It had to do with some produce water. I think that's getting behind us. We're putting in place some equipment and some engineering fixes. That'll go on over the next several months, but we've identified the problem. We're fixing it, and we expect it to not occur through 2014.

I think your second question was on growth, let me clarify one of your statements. The 10% to 12% is actually distribution growth per unit. You're absolutely right, that's 10% to 12% without the credit of any drop-downs. In our guidance, we don't put in our drop-down beliefs, so we'll reguide the markets when we complete those drop downs. That's 10% to 12% without any assumed drop-down activity.

Based on what you see today, you do assume some drop down before the end of 2014?

Yes, we've communicated previously to market, affirmed it today. We anticipate the assets at our General Partner today to be offered to the MLP by the end of 2014 completely.

Thank you very much.

Noah Lerner, Hartz Capital.

Thank you. Good morning, everyone.

Hi, Noah, how are you?

Good, good thanks. I was just hoping you might be willing to have some comment. Based on the election results on the anti-frac in a couple of those towns, I know they're not in your area of operation right now, but the papers are talking about the forces feeling bold and to go for statewide ban, or at least moratorium. I'm just curious how you're reading the tea leaves out there, how you or maybe you along with some of your other contemporaries are looking to defend the ability for the drillers to frac because it feeds into our assets?

Noah, just to clarify, I think you're talking about Colorado?

Yes.

I'll say, trying to read the tea leaves on anything political is probably not a place where I want to go. But I would tell you I think you're right in the sense as it affects us and our operations. It is somewhat regionalized in Colorado. Western Colorado, as you would imagine, we're not seeing a lot of impact out there. That's an area that has had oil and gas operations for quite some time, and different than what I would say is going on in the Wattenburg and in the DJ. We're in the northern part of the DJ, right by the Wyoming border, so we're also not seeing really an impact as it relates to our assets as well. I'd just tell you overall, the oil and gas piece of the Colorado economy is fairly significant, and well-defined, well-regulated already, compared to other places in the country. I think we'll get through this.

Great, thanks a lot.

I'm not showing any further questions at this time.

Thank you, everyone. Please, as always, follow-up if anything further comes up and we appreciate your time.

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