Summit Midstream Partners LP (SMLP) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013 Summit Midstream Partners, LP earnings conference call. My name is Sylvia, and I will be your operator for today.

(Operator Instructions)

Please note that this conference is being recorded.

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

All right, thanks, Sylvia. Good morning, everyone, and thank you for joining us today for the Summit Midstream Partners' fourth-quarter and full-year 2013 earnings call. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at summitmidstream.com where you will find it on the home page or in the news section. With me today to discuss our earnings, as well as our Red Rock drop down announcement, are Steve Newby, President and Chief Executive Officer, and Matt Harrison, 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 2013 annual report on Form 10-K, which was also posted last night, 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 will use the terms EBITDA, adjusted EBITDA, distributable cash flow, and adjusted distributable cash flow. These are non-GAAP financial measures, and we've provided reconciliations to the most directly comparable GAAP measures in our earnings release.

Finally, yesterday we launched a public equity offering. We will not be commenting on this offering, and we will not be answering any questions regarding this offering during this call.

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

Thanks, Marc. Good morning, everyone, and thanks for joining the call. I'm going to briefly review the fourth quarter, and then I'll turn it over to Matt to review our financial performance in more detail. I'll end the call with a discussion around our Red Rock drop down, our revised 2014 guidance, and our outlook for the Summit Enterprise.

Yesterday we made three major announcements. First, we announced the drop down of Red Rock Gathering from our general partner, Summit Investments, to the MLP for $305 million. Second, we announced our financial and operating results for the fourth-quarter and full-year 2013. And then finally, we announced the launch of a primary equity offering to help finance the Red Rock drop down. During the call, we're going to discuss our earnings results and the Red Rock drop down, but as you guys probably know, we cannot discuss the equity deal, given we are in the market today.

First on our financial results: For the quarter, we reported adjusted EBITDA of $39.1 million, and adjusted distributable cash flow of $28.5 million. These were up 37% and 15%, respectively, over the fourth quarter of 2012. The year-over-year increase was due primarily to the benefit of having Bison and Mountaineer in our 2013 results. Our fourth-quarter results were affected by severe Winter weather across the vast majority of our operating areas, and our Bison operating issues.

On January 23, we announced our fourth-quarter distribution of $0.48 per unit, which was a 4.35% increase over the third quarter. For the FY13, our adjusted EBITDA was $145.5 million, which was just above the midpoint of our annual guidance. And we delivered 20% total distribution growth per unit over our $0.40 MQD. We delivered this growth while covering our distribution at 1.19 times for the year. Needless to say, it was a strong 2013 that saw us deliver significant distribution growth and value creation to our unit holders.

On the volume front, total throughput volume in the fourth quarter averaged 1.1 Bcf a day, which was another record for Summit Midstream, and represented 14% growth in volumes year over year, and 4% growth in quarter over quarter. Growth on the Mountaineer system is exceeding expectations, as we averaged close to 200 million cubic feet a day for the fourth quarter, up 46% to the third quarter of 2013.

The Mountaineer system is ramping ahead of our acquisition case, and we plan on beginning construction on the Zinnia Loop project in the second quarter of 2014, with a completion date in the third quarter. This project will nearly double capacity on the Mountaineer system from 550 million cubic feet a day to over 1 Bcf a day. The growth in Mountaineer has helped us offset weaker volumes at DFW, Grand River, and Bison for the quarter.

At DFW, total volumes for the fourth quarter averaged 370 million cubic feet a day, which was down 3% over the third quarter. We estimate that weather impacted volumes by approximately 10 million cubic feet a day on the system during the fourth quarter. In addition, Chesapeake, our largest customer, continues to have minimal activity in the area, and this has led to their volumes declining.

While we expect this to continue over the near term, we are fortunate to have customer diversity at DFW, and we expect that these declines will be partially offset in 2014 by continued drilling activity in our area from Beacon, Vantage, and XTO. These three were active in the fourth quarter, and continue to be active in 2014.

Please keep in mind: Drilling activity in this area can lead to volatile throughput, as producers tend to bring down pads for that activity. We estimate pad level drilling affected volumes by an additional 12 million cubic feet a day in the fourth quarter. As an update, we did commission the amine-treating facility in the first quarter of this year at DFW, and it's running at full capacity.

For Grand River, volumes averaged 483 million cubic feet a day in the fourth quarter, which was down 1% from the third quarter. The big news on Grand River was the decision in December of 2013 by Encana to pause their 2014 Piceance drilling under their partnership with Nucor, the large steel manufacturer. We'll discuss the impact of that decision later in the call when we review 2014 guidance and the Red Rock drop down announcement. I will remind everyone that at Grand River, Summit benefits from a very high level of long-term contracted volumes that help inflate our cash flows from significant volume fluctuations.

On Bison, we announced on the third-quarter call that we were performing operational enhancements to the system to help solve some hydrate issues that were affecting our volumes. These improvements continued into the fourth quarter, and were completed during this current quarter. Volumes for the fourth quarter averaged 14 million cubic feet a day, versus the 17 million cubic feet a day in the third quarter.

In addition to these improvements, the various producer operational issues you most likely have heard about in the fourth-quarter calls due to severe Winter weather. Just as a data point, the average temperature in December in our Bison operational area was zero degrees -- that was the average. It was the coldest December on record in that area in the last 30 years. So, that kind of weather affects both us and our customers.

So, before I turn it over to Matt to summarize the quarter, we continue to see substantial volume growth for Mountaineer, which is offsetting volume decline at DFW and Grand River from our anchor customers. Bison, as we expected, was a choppy quarter due to our operational improvements. And severe Winter weather across our systems had a negative impact on the quarter.

So, now I'll turn it over to Matt.

Thanks, Steve. I will cover the results of Summit Midstream Partners, LP, or SMLP.

Adjusted EBITDA for the three months ended December 31, 2013, was $39.1 million, compared to $28.6 million for the three months ended December 31, 2012, an increase of approximately 37%. The $10.5-million increase in adjusted EBITDA was primarily due to the drop down acquisition of Bison Midstream on June 4, 2013, which contributed $4.5 million of adjusted EBITDA in the fourth quarter of 2013, and the acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $3.3 million of adjusted EBITDA in the fourth quarter of 2013.

In addition, certain of SMLP's gas-gathering contracts on its Grand River system contain annual MVC, or minimum volume commitments, and gathering rates that increased in the beginning of 2013. These contractual volume and rate increases helped mitigate a 12% volume and throughput decrease on the Grand River system when compared to the fourth quarter of 2012.

Adjusted EBITDA in the fourth quarter of 2013 included approximately $10.4 million related to MVC mechanisms from our gas-gathering agreement. This amount included: $14.1 million of minimum short-fall payments that were recognized as revenue; a negative $10.8 million associated with quarterly adjustments related to future projected annual MVC short-fall payments; and $7.1 million associated with the increase in deferred revenue related to the MVC short-fall payment billings on our Grand River system. The $7.1 million of MVC short-fall payments was recognized as deferred revenue on our balance sheet. Additional tabular detail regarding MVC is included in the fourth-quarter earnings release.

Adjusted distributable cash flow totaled $28.5 million in the fourth quarter of 2013; this implies a distribution coverage ratio of 1.08 times for the fourth-quarter distribution of $0.48 per LP unit paid on February 14, 2014. CapEx for the fourth quarter of 2013 was approximately $19.6 million, of which approximately $2.7 million was classified as maintenance CapEx.

We had $286 million of debt outstanding under our revolving credit facility at December 31, 2013. The borrowing capacity under our $700-million revolving credit facility is approximately $414 million. A subsidiary of SMLP issued $300 million of 7.5% senior notes due 2021, in June of 2013. Total leverage as of year end was 3.7 times.

Last night, SMLP announced that it has executed an agreement to acquire Red Rock Gathering from a subsidiary of Summit Midstream Partners, LLC, the owner of our general partner, for $305 million in cash. The drop down transaction is expected to close before March 31, 2014. SMLP revised its 2014 adjusted EBITDA guidance from an original range of $170 million to $180 million, to a new range of $190 million to $210 million.

This upward adjustment reflects the impact of the Red Rock transaction, partially offset by approximately $5 million of adjusted EBITDA attributable to lower-than-expected volume throughput on the Grand River system stemming from Encana's December 2013 announcement to suspend natural gas drilling in the Piceance Basin in 2014. In response to the Encana announcement, SMLP also lowered its 2014 maintenance CapEx guidance, which is expected to offset the $5-million reduction in 2014 adjusted EBITDA, resulting in a minimal impact to SMLP's 2014 adjusted distributable cash flow.

It is important to note that SMLP is acquiring Red Rock from an affiliate of our general partner. The transaction will be considered an acquisition from an entity under common control. Therefore, the Red Rock drop down acquisition will be accounted for on an as-if-pooled basis for all periods in which common control existed, resulting in a combination of SMLP and Red Rock financial results beginning on October 23, 2012. Therefore, adjusted EBITDA guidance for 2014 includes a full year of Red Rock's results.

Also in conjunction with the Red Rock transaction, SMLP revised its distribution growth outlook from 10% to 12%, and now expects to pay a distribution per unit for the fourth quarter of 2014 at 15% to 20% over the $0.48 per LP unit paid for the fourth quarter of 2013.

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

Thanks, Matt. First, let's discuss the Red Rock drop down and the revised guidance for 2014. As Matt said, yesterday we announced that SMLP, and the Grand River subsidiary specifically, will purchase, for $305 million, the Red Rock Gathering system from Summit Investments. The transaction has been approved by all parties, and will be completed by the end of the first quarter.

The transaction multiple is 8.7 times the expected next 12 months of EBITDA contribution, which includes $19 million of additional CapEx during that period. The transaction will be immediately accretive to distributable cash flow per unit. It will also provide nice growth for the next several years, as we continue to ramp up volumes from the ongoing gathering system buildout for WPX, our largest customer, and from our newly commissioned gas-processing plant for Black Hills. Both of those projects are under long-term minimum volume commitment contracts.

Overall, Red Rock will add 570 Bcf of new volume commitments to our current 3.6 Tcf of MVCs over 10-plus years. Furthermore, I think the transaction highlights the value proposition for SMLP unit holders with Summit's ability to acquire and develop assets at our general partner, and then offer those assets to the MLP without substantial development risk. This allows the transaction to have immediate accretion, while also allowing the MLP to control its capital structure much more effectively.

As Matthew said with the drop down, we are revising our FY14 guidance to $190 million to $210 million of adjusted EBITDA, which we expect will lead to 15% to 20% distribution growth over our $0.48 paid in the fourth quarter of this year. Of this amount, we expect Red Rock to contribute $30 million of adjusted EBITDA for FY14. This includes 10 months of the new DeBeque processing facility for Black Hills, which was commissioned this month. We also expect WPX volumes to continue to ramp up throughout the year.

The positive effect of Red Rock will be partially offset by the $5-million impact to 2014 adjusted EBITDA that we believe will occur as a result of the suspension of drilling by Encana at GRG. We believe that impact will begin to show itself in the back half of 2014, from the pause in drilling in areas that we are either over our MVCs in Grand River, or do not have MVCs. Encana has focused their efforts on production operations to limit declines, but we believe it's too early to tell just how those efforts will play out.

Interestingly, the drilling pause will lead to a lower maintenance CapEx expenditure at SMLP in this area, as we reduce our well-connection CapEx by approximately $5 million. So, on balance, although negative to adjusted EBITDA, the pause in drilling will actually be neutral to distributable cash flow due to lower maintenance CapEx.

As we have in the past, I feel like we should provide some color as the GP -- or on the GP, which remains the primary development and growth vehicle for the Summit Enterprise. In December, we announced that Summit Investments had reached an agreement to purchase Gulfport Energy's interest in Ohio Gathering. Ohio Gathering is the MarkWest EMG company that is executing the gas gathering and condensate stabilization buildout in the southern core of the Utica shale.

The interest, which we closed on in January, includes the option to buy up to 40% of Ohio Gathering at invested capital. Our GP fully intends to exercise this option in the second quarter of 2014. This is the largest transaction to date for Summit Investments, as we plan, with MarkWest EMG, to invest approximately $3 billion in the Utica shale over the next several years in gathering and condensate infrastructure. The Utica is one of the top growth basins in the US, and we believe Ohio Gathering is well positioned in the southern core area for wet gas, dry gas, and condensate.

We are also excited on enhancing our relationship with MarkWest, who we believe is the premiere developer and operator of midstream infrastructure in the northeast. Our two teams are already working closely together, and I believe the combination will form a leading midstream company in the Utica.

In addition to the Utica, our other big growth area at Summit Investments is the Bakken shale. Our development of crude-oil gathering and water gathering services in the Bakken continues to be robust. We have announced two expansions of the crude-oil system to date. We are seeing multiple opportunities for further expansion. We are planning to spend more than $250 million in the Bakken around our crude-oil systems over the next 12 months.

Summit Investments now has approximately $1.7 billion of investment ongoing, including the Utica, Bakken, and DJ Niobrara regions. The investments span across crude oil, water, wet gas, condensate, dry gas, and processing. Of the $1.7-billion amount, approximately $1 billion of CapEx will be spent in 2014.

We now expect, given our activity level at the GP, to be able to offer, on average, $300 million to $500 million of drop downs annually to SMLP over the next several years, including 2014. In addition, because we are minimizing the development and cash flow timing risk to the MLP, we expect the transactions to be immediately accretive to distributions per unit, and we'll be able to control our capital structure at the MLP much more effectively.

So, as we look back on 2013, we're proud of our first year as a public company. We delivered 20% distribution per unit growth, and our unit price has almost doubled. We have also transformed the Business from just 18 months ago when we went public. We are now in 4 of the top 10 growth basins in the country, with leading positions in 2 of those: the Bakken and the Utica. So, the future is bright for SMLP.

And with that, I'll open it up for questions. Sylvia, you want to open up the lines?

(Operator Instructions)

Jerren Holder, Goldman Sachs.

Want to start on the dropdown strategy, I appreciate the extra color around the outlook over the next few years. But going back to original expectations of all of your assets, or at least the original ones, to be dropped into 2014, is that still the case? Or, given the extra growth CapEx opportunities you're seeing at the GP level, is that essentially being pushed out? How should we think about that?

I would think about it, Jerren, as given the significant development -- the other big piece of that original strategy was our crude oil system. And I think what we're seeing around our crude oil system is significant opportunity to expand that system. So, we're trying to delineate when -- how far out to the right that pushes the opportunity to drop the system down, and do we look at dropping it down in pieces or certain pieces of it. So, I think we're more comfortable now looking at it over a longer period of time, given the development activity at the GP. Does that make sense?

Yes, it does.

A significantly larger amount over the next 3 to 5 years.

Got it. And, on that $300 million to $500 million annual number, is that based on the current Niobrara, Bakken, and potential Utica assets? Or does that include future acquisitions or developments that the GP could make?

Yes, so the $1.7-billion amount currently being invested in GP is what we have today at the GP. That doesn't include any forward-looking or future activity or future development. It's what's within our grasp today at the GP, it's a very important point. Because it's obviously -- we're still seeing opportunities for additional development and we think those will come to fruition as we move more into 2014 and we'll update that $1.7 billion as we do.

Got it. And, lastly, if you could probably comment a little bit on those opportunities including additional acquisitions, like where, what regions, what type of assets most likely would those incremental opportunities not include in the $1.7 billion likely be?

Yes, I would think about them as our top two growth regions are in the Bakken and the Utica. And what we're seeing is the ability to invest significantly around our core areas in those two basins to expand our systems. And so that's really the large majority of the $1.7 billion is going to be spent in the Bakken and the Utica.

Okay, thank you.

Ethan Bellamy, Robert W. Baird.

A few questions. What's the maintenance CapEx on the acquisition?

Yes, so our maintenance CapEx is -- our revised guidance is $15 million to $20 million, so it's the same as previous. And the reason is, we're taking out maintenance CapEx from Grand River of about $5 million, and so maintenance CapEx on Red Rock's approximately about $5 million also.

Okay, that's helpful. I appreciate that clarity.

Again, that's an annual number, too, Ethan. That's not the nine-month number, it's an annual number.

Any lumpiness there or can we pro-rate that through the year?

Yes, I wouldn't -- there's not a lot of lumpiness. It'll be spent consistently throughout the year. Nothing major going on in that area in one quarter or the next.

Okay. And then, outside of the 80% fixed fee, what do those other contracts look like and what kind of commodity exposure do we have?

Yes, we have some condensate sales, and then I'd say mostly the balance is probably some POP from our processing operations. We have two processing plants at Red Rock. One's DeBeque, which is all fixed fee. And then we have Harley Dome, which includes some POP contracts.

Okay. Are you going to hedge that?

It's probably not enough to hedge, to be candid with you.

Okay.

It's not significant enough of the EBITDA contribution to really hedge.

Okay. And just a couple more questions about the GP, and these are probably more specific than you'll want to answer. But do you -- with respect to the general partner, will you be full on development opportunities in Ohio or would you look at M3 when that comes available? And then, how far afield can we expect the GP to look in terms of other assets like, for example, the Ho-Ho pipeline or crude oil pipeline, that kind of thing?

Yes, I'll try to answer that, probably not as specific as talking about specific assets, but our GP looks at a lot of things. Our MLP looks at a lot of things, so both of them do. I would say, right now we're probably -- we're focused on executing on the $1.7 billion and we think that'll grow of opportunities at the general partner. Will we look at other areas? Absolutely. Particularly if customers want us to look at other areas to provide service to them. But I think, right now, we have a lot going on in the Bakken and the Utica.

Okay. Thank you.

Helen Ryoo, Barclays.

Couple of questions. So, starting with your Utica, the option that you will be exercising in the second quarter at the parent level, how much do you need to pay at the parent to exercise that option?

Yes, so we're not going to disclose that, because I think MarkWest and ourselves have decided not to disclose that for a variety of reasons. But the nature of the payment will be to catch up CapEx at book value for what MarkWest EMG has already invested. And then, obviously, we'll also put in some dollars for the next couple of months of CapEx as well, too. So, it will be significant, and we are spending $1 billion -- the $1billion of CapEx at the GP includes obviously that catch-up payment.

Got it, okay. And then, there is also the condensate gathering project up there. Could you maybe talk about the size and the contract, and when this asset will likely come down?

So I think you -- to clarify, Helen, you said on the condensate?

Yes, yes, so you have two things going on, one is the Utica gathering JV and then the other one is the condensate project which is, I guess outside of the $3-billion opportunity you talked about, so maybe a little bit more color on that.

Yes, let me clarify that. So the $3 billion of CapEx includes gas gathering, so wet- and dry-gas gathering, and then also it includes -- the JV includes anything on the condensate side as well, too.

The initial asset being developed in Ohio Gathering is the condensate stabilization facility, and that's included in the $3 billion of CapEx. What's not included is any kind of condensate gathering operations, pipeline operations, to gather condensate.

And the real reason is, I don't think us or MarkWest really know enough right now to know how exactly that's going to play out and if it's going to needed. So at the stabilization facility, volumes will be trucked there initially, and then there could be -- definitely could be potential going forward to put in some condensate gathering as well, too. And our JV does contemplate that, that would be in Ohio Gathering.

Okay, that's helpful. Moving on to your MVC on Grand River, how far does that contract go out at this point, given current payments are offsetting some future fees? Could you maybe update us with how to think about the Grand River MVC?

So Grand River, the largest customer is Encana. They're obviously -- and the largest MVC component is Encana. So their MVCs go out to 2026, and important to note -- I want to make sure we clarify -- they don't have a credit mechanism. So, they can't use MVC payments today to offset gathering fees in the future. So, that's obviously 12 years left on -- from a volume commitment standpoint, on those contracts. And actually the acre [staycation] goes even beyond that, another 10 years beyond that.

Okay. So, you have 12 years left on the Grand River MVC?

On the Encana portion of the Grand River MVC, yes.

Right, okay, got it. And then, lastly -- I'm sorry, go ahead.

No, I was going to say, in our overall portfolio of MVCs averages about 10.3 years total on our 4.3 Tcf of commitments.

Right. And that includes some MVCs you have in Barnett, which you're not really benefiting from.

That's right, yes. For the most part, we're above our MVCs in Barnett, depends on by customers but that's right for the most part.

Right, okay. And then, lastly, on the Red Rock deal, could you maybe talk about the volume growth profile on that asset, the richness of gas, the drilling activity, that kind of thing?

Yes, I'd love to. So, a couple of things going on. That asset, when we purchased it from Energy Transfer, really got us into what we thought was the liquids part of the Mancos Niobrara. Our plant for Black Hills is processing Mancos Niobrara liquids-rich gas, we're processing roughly 18 million or so today on the 20 million-a-day plant. It's 1,200 Btu plus gas, 4 to 5 GPM. So, it's pretty rich gas. So, that's going to provide growth going forward.

And then the other growth aspect is the WPX contract. So, there was originally a 12.5-year contract with WPX, there's about 10 years, a little over 10 years left on it, where we're building out a pretty substantial gathering system for WPX. We'll connect hundreds of wells over the next several years. So, overall, we actually expect volume growth at Grand River, which now includes Red Rock, to be very attractive here over the next few years, as we increase both WPX and Black Hills volumes.

Thank you very much.

And we have no further questions at this moment.

Well, thank you, everybody, for joining us this morning. And please follow up if you have additional questions. Thanks.

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