Summit Midstream Partners LP (SMLP) 2014 Q1 法說會逐字稿

Welcome to the Q1 2014 Summit Midstream Partners LP earnings conference call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Marc Stratton. Mr. Stratton, you may begin.

Thanks, Dawn and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the first quarter of 2014. 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 homepage or in the news section.

With me today to discuss our quarterly earnings 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 2013 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 measures and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. With that, I will turn the call over to Steve Newby.

Thanks, Marc. Good morning, everyone and thanks for joining us on the call this morning. I will begin by discussing our first-quarter highlights and then I'll turn it over to Matt for more details on our financial results. I will then end the call with some additional comments on our 2014 guidance and outlook.

Yesterday, we announced our financial and operating results for the first quarter of 2014. The quarter highlighted our diversified operations as Summit achieved record volumes during the first quarter of 1.3 Bcf a day, which was up 20% year over year and 7% quarter over quarter. These strong results were achieved even as severe winter weather continued across our asset base and a slowdown in our Barnett Shale area was offset by strength in our Marcellus and western Colorado operations.

The big news during the first quarter was the drop-down of Red Rock Gathering from our general partner, which we completed in March for $305 million. In conjunction with the dropdown, we also completed our first follow-on equity offering, which totaled $400 million and was split 50/50 between primary and secondary units. We expect that this dropdown will help drive growth across SMLP's western Colorado assets for years to come, particularly as we diversify our exposure to some of the most active producers in the Piceance, including WPX, Black Hills and Ursa.

As we discuss our operating and financial results today, it is important to note that the results of Red Rock, because it is considered to be an entity under common control, are pooled and retrospectively included in our current period and prior period operating and financial results. For the quarter, we reported adjusted EBITDA of $46.6 million, which included approximately $500,000 of transaction costs associated with the Red Rock dropdown. We also reported adjusted distributable cash flow of $28 million. Adjusted EBITDA was up 26.5% year over year and adjusted distributable cash flow was up 5.8% year over year. The year-over-year increase was due primarily to the benefit of having a full quarter of operating and financial results for Bison and Mountaineer in 2014.

On April 24, we announced our first-quarter distribution of $0.50 a unit, which was a 4.2% increase over the fourth quarter of 2013 and a 19% increase over the first quarter of 2013. Our coverage ratio for the first quarter was 1.13 times, right in line with our 1.1 to 1.2 times guidance for the full year.

On the volume throughput front, as I mentioned earlier, our total average throughput was 1.3 Bcf for the quarter, up 20% year over year. The growth over the fourth quarter -- and 7% quarter over quarter. The growth over the fourth quarter was due to the continued rampup of volumes on Mountaineer and growing volumes on our newly acquired Red Rock Gathering assets.

At DFW, total volumes for the first quarter averaged 348 million cubic feet a day, which was down 6% from the fourth quarter of 2013. We saw weakness in the first quarter from some of our largest customers in addition to a delay in some well connections during the quarter. We connected 13 new wells during the first quarter; however, most of those occurred late in the quarter and late in March and did not have a material impact on our average daily throughput for the quarter. We have already seen some bounceback in the second quarter and we continue to have active drilling in the area with two rigs working at the end of the first quarter. In addition, we commissioned our large natural gas treater during the first quarter and it is running at full capacity. The benefits of that project should be fully realized in the second quarter and beyond.

For Grand River, which now includes our Red Rock Gathering assets, volumes averaged 665 million cubic feet a day in the first quarter, which is up 3.5% over the fourth quarter of 2013. Red Rock volumes were up over 10% while legacy Grand River volumes were up about 1.5%. The increase in Red Rock volumes is significant because those are higher margin volumes for us versus our legacy Grand River volumes.

During the quarter, we benefited from strong drilling activity under our long-term deal with WPX and the commissioning of our new 20 million a day DeBeque processing plant. The plant came on in March, so we should see the full impact and benefit of the facility during the second quarter and beyond. We are excited about the potential growth around the DeBeque facility and we will keep you updated as the asset grows throughout the rest of 2014.

I will remind everyone again that, at Grand River, we benefit from a very high level of contracted volumes that help insulate our cash flows from volume fluctuations as our contract portfolio has step-ups in rate and volume commitments. First-quarter volumes at our Bison gas gathering system in the Bakken averaged approximately 12 million cubic feet a day, which was down from 14 million cubic feet a day in the fourth quarter of 2013. This was related to the unseasonably cold weather in North Dakota, which affected both our operations and our customers' ability to complete wells and consistently flow gas. We continue to see significant drilling around our system and there is currently a high level of completion activity, which we expect to see the benefits of throughout the rest of 2014.

Switching over to Mountaineer, this asset continues to outperform our initial projections from the time of the acquisition last June. We averaged 285 million cubic feet a day for the first quarter, which was up 44% from the fourth-quarter level. We are also under construction on our Zinnia Loop project and we continue to anticipate having that project in service in the third quarter of this year. As a reminder, that project is further underpinned by a commitment from Antero. So when we purchased Mountaineer, we were targeting volume levels in the fourth quarter of this year of approximately 375 million to 400 million cubic feet a day. Today, with Zinnia Loop, we are contracted for effectively 385 million cubic feet a day and we expect this system to be well ahead of those levels by the fourth quarter of this year.

So before I turn it over to Matt to summarize the quarter, our diversified asset base really showed in the first quarter as weakness at DFW and severe weather at Bison were overcome by strength at Grand River and Mountaineer. We continue to benefit from a high level of contractual MVCs throughout the Company. Our total portfolio was 4 Tcf and that portfolio has an average life of over 10 years. Over the next five years, we have 1.2 Bcf a day under minimum volume commitments.

In addition to this underpinning, we have strong growth from our existing MLP asset base, which we expect to deliver 15% to 20% distribution per unit growth in 2014. So with that, I will turn it over to Matt to review the financial results in more detail.

Great, thanks, Steve. I will cover the results of Summit Midstream Partners LP or SMLP. SMLP acquired Bison Midstream and Red Rock Gathering from a subsidiary of Summit Investments on June 4, 2013 and March 18, 2014. The transactions were considered acquisitions from an entity under common control. Therefore, the Bison and Red Rock dropdown acquisitions have been accounted for on an as-if pool basis for all periods in which common control existed. So Bison Midstream financial and operating results are combined with SMLP beginning on February 16, 2013 for the rest of the first quarter of 2013 and all of the first quarter of 2014. Red Rock Gathering results are in the first quarter of 2013 and in the first quarter of 2014.

Adjusted EBITDA for the three months ended March 31, 2014 was $46.6 million compared to $36.9 million for the three months ended March 31, 2013, an increase of approximately 26%. The $9.7 million increase in adjusted EBITDA was primarily due to the acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $4 million of adjusted EBITDA in the first quarter of 2014, the dropdown acquisition of Bison Midstream, which contributed approximately $2.3 million of incremental adjusted EBITDA in the first quarter of 2014 compared to 2013, the proportionate contribution of higher margin throughput volumes from certain customers on the Grand River system and a decrease in operating expenses on our Grand River system. These increases in adjusted EBITDA were offset by a decrease at DFW Midstream as a result of lower volume throughput in the first quarter of 2014 compared to 2013.

In addition, certain of SMLP's gas gathering agreements on its Grand River system contain annual minimum volume commitments or MVCs and gathering rates that increased in the beginning of 2014. Adjusted EBITDA in the first quarter of 2014 included approximately $13.4 million related to MVC mechanisms from our gas gathering agreements. This amount included $1.4 million of minimum shortfall payments that are recognized as revenue, $8.2 million associated with quarterly adjustments related to future projected annual MVC shortfall payments and $3.8 million associated with increased and deferred revenue related to MVC shortfall payment billings. Additional tabular detail regarding MVCs is included in the first-quarter earnings release.

Adjusted distributable cash flow totaled $34.3 million in the first quarter of 2014. This implied a distribution coverage ratio of 1.13 times the first-quarter distribution of $0.50 per limited partner unit to be paid on May 15, 2014. CapEx for the first quarter of 2014 was approximately $40.1 million, of which approximately $5.1 million was classified as maintenance CapEx. We had $391 million of debt outstanding under our revolving credit facility at March 31, 2014. The borrowing capacity under our $700 million revolving credit facility is approximately $309 million. A subsidiary of SMLP issued $300 million of 7.5% senior notes due 2021 in June of 2013. Total leverage as of March 31, 2014 was 3.9 times. SMLP reaffirmed its 2014 adjusted EBITDA guidance of $190 million to $210 million and distribution per unit growth of 15% to 20%. With that, I will turn the call back over to Steve.

Thanks, Matt. First to reiterate what Matt said, we are reaffirming our full-year 2014 adjusted EBITDA guidance of $190 million to $210 million and distribution per unit growth of 15% to 20% over our fourth-quarter distribution of $0.48. The first quarter of this year was a good start for Summit in delivering those full 2014 results.

Our CapEx guidance for SMLP also remains the same at $100 million to $115 million of total CapEx and $15 million to $20 million of maintenance CapEx. It's important to note as we always do this guidance does not include any additional dropdown activity or acquisition activity for 2014. We have previously disclosed that our general partner, Summit Investments, has approximately $1.7 billion of capital expenditures over the next few years. Of this amount, we expect to spend close to $1 billion this year with 70% of that occurring in the Utica and 30% in the Bakken.

We continue to see a high degree of activity around our Bakken and Marcellus Utica footprints as producers ramp up drilling activities in these areas and these areas remain infrastructure-constrained. I fully anticipate us to add to the current CapEx inventory at the general partner throughout the remainder of this year. In the Bakken, we continue to ramp up our crude oil and water systems in Williams and Divide counties and we expect 2014 to be a critical year, particularly on the crude oil side as we complete our large gathering buildout, add additional customers and enhance our system by diversifying our downstream connections. We are also seeing a large number of opportunities to further expand our system in this area and are confident that we will be able to discuss further expansions over the next few quarters.

And finally, in the Utica, we are progressing on our buy-in of our 40% interest in Ohio Gathering, which will occur by the end of the second quarter. The activity level at Ohio Gathering remains strong as the JV continues building out infrastructure for its existing customers and continues to be involved in multiple growth projects in and around its growing footprint. These projects are across the wet gas, dry gas and condensate windows of the play. We expect to see a pretty significant rampup in 2014 for Ohio Gathering as producers increase activity across the three production windows and the JV continues the infrastructure buildout. We remain very excited about this new area for Summit and we believe the JV is in the core area of the Utica and from that, we will see additional growth opportunities above and beyond our base case. So the development activity at the GP remains strong and I would expect us to continue to add to the inventory of growth CapEx at Summit Investments throughout the course of 2014.

One thing I'd like to note, as I mentioned earlier, we completed the dropdown of Red Rock in March for $305 million of proceeds and with that, the GP sold an additional $200 million of secondary units. All of these proceeds, over $500 million, are being reinvested in our business to Summit Investments in order to fund our large organic growth platform. So we continue to have a very supportive and well-capitalized general partner that will help drive our growth in asset diversification over the next few years.

Finally, on dropdown timing, with the dropdown of Red Rock and our buy-in of Ohio Gathering, we revised our views on dropdown to an average of $300 million to $500 million per year for the next several years. We remain comfortable with that guidance and as we have relayed, we evaluate assets at our GP as they develop, as we derisk them and as they exhibit a level of cash flow stability suitable for SMLP. We expect this level of dropdown activity to help us achieve double-digit distribution per unit growth over at least the next several years. So with that, we will open it up for questions. Dawn?

(Operator Instructions). Jerren Holder, Goldman Sachs.

Good morning. I just wanted to start off I guess with -- obviously there's a lot of organic opportunities going on at both MLP, as well as the general partner level. But how are you guys looking at it from an additional acquisitions of assets whether it is in the Bakken, Utica or other regions? What is the outlook there, what type of opportunities are you seeing and your general appetite for incremental opportunities?

Yes, thanks, Jerren. This is Steve. I think in both areas sort of our two big growth areas, the Bakken and the Utica, my view is we will see a couple opportunities in both areas as folks, either be it producers or others, sell assets or assets are consolidated. I think we remain interested in those two areas if it is complementary to our strategy in those areas. So I don't think we are completely focused. We obviously will remain active in those two areas, but completely closed off to third-party acquisitions. We will definitely review them and I think there will be -- I suspect there will be several opportunities here over the next 12 months in those areas, but we review them as they become available.

Okay. And sticking with the Bakken there, I mean we are currently doing gathering, but is expanding into processing in that region also an area that you guys would be willing to enter? Obviously, there is a lot of flaring going on and the region still needs a lot of infrastructure. So is that an area you guys think you will be open to?

We have reviewed it in the past and I think we will continue to review it. Last August, we did a transaction with Aux Sable effectively creating what we call a paper plant where we have capacity in their Chicago processing facility. That deal is expandable by us as well and then I think there is other opportunities in plants surrounding us where we could do something similar.

So I think to the extent we have those types of opportunities and we feel like there is enough processing capacity where we can access it, I think that is probably our preferred route, but we will and I think we will continue to evaluate our own processing needs if we feel like we need to do that as well too. We definitely have the experience within the Company to execute on those and actually within that region as well too.

And I guess lastly in the Bakken at the parent level, the assets are essentially in service, but can you I guess comment a bit on where they are in terms of being derisked and just general timing that it will be MLP-ready?

That is a good question. I think it is not a -- I wouldn't say it is a science by any stretch. We are -- our crude oil system, which is Polar and Divide, continue to see -- in 2014, they will throughout the balance continue to see a pretty significant rampup. Of the two areas, I'd say Polar is probably more mature, although it is still -- we added and expanded that system, started in the fall of last year and that expansion is just coming online now. So we will still see the benefits of that throughout the next quarter or two. But of the two areas, that is probably the more developed area, but we are still seeing a pretty high level of connection activity at both of those areas and will probably for the next several quarters. And we are still seeing, I would say, and I mentioned in my prepared remarks, still seeing a very robust commercial activity around that system as well too.

Okay, thank you. That is it for me.

Justin Agnew, Robert Baird.

Hey, good morning, guys. Just with respect to some of the Colorado ballot initiatives on the fracking and potential setback rules, I mean does anything like that exempt any of the producers from their MVCs or are those contracts pretty rocksolid?

No, I don't think they would and most of that activity, the ballot activity, is occurring -- is not occurring, let me put it this way, is not occurring in the Western part of the state on the local level. So it is not having an effect out there anyway. It is really not having an effect yet on anywhere there is any kind of hydrocarbon production in the state anyway. But, no, our MVC contracts wouldn't be affected by that activity.

Got it. And then could you guys maybe quantify the kind of bounceback you guys are expecting in the second quarter in DFW from those well connections that came on late in the quarter?

Yes, we have got to be careful on that given we are in the middle of the second quarter. I think we connected 13 wells. Those 13 wells came on really in March, so really at the end of the quarter. You can probably do your own math on the type curves and the IPs of those wells, but we will see a bounceback in 2Q at DFW. And I will tell you, we still have a couple rigs working in that area too. So there still is a pretty decent level of development drilling. Our volumes were impacted, I think, in the first quarter both by colder than normal weather, but also we expected some of that completion activity to occur a month or two earlier than it did.

Got it. Thanks for the color. That is it from me.

(Operator Instructions). Derek Walker, Bank of America Merrill Lynch.

Hey, good morning, guys. Just a couple ones from me. I believe in your formal remarks, you mentioned that the legacy Grand River volume I think decreased I think 1.5% and I believe within guidance, it's a $5 million impact to Grand River on the legacy side. I know you guys haven't changed guidance, but is that still on track as far as that impact goes or I guess how are you seeing Grand River at this point throughout the remainder of the year?

Yes, well let me clarify too first. What we saw in the first quarter at Grand River, on the legacy Grand River volumes, which is impacted by the EnCana Nucor JV, was actually those volumes grew about 1.5% quarter over quarter. And partly that is mainly due to there was basically an inventory of wells to be completed at Grand River by EnCana and part of those came on during the fourth quarter and so that is partly why we saw that growth.

So the second part of your question on how it affects us throughout the remainder of the year, you are right. On our last conference call, we basically said it was going to have a negative sort of $5 million impact. I think we are still monitoring that. It is going to be -- we won't have much more updating -- it is going to be in the back half of this year and mainly we are looking at probably a fourth quarter type impact because as you get through this inventory of wells, I think they have still got a few more left in inventory to complete and bring on. Then that slowdown or stoppage of the JV drilling really won't have an impact till probably the back half or last quarter. So there is no change. A long-winded answer of saying there is no really change in our thought process on Grand River and we have accounted for that obviously in our guidance for the year.

Got it. I appreciate the color there. And then just switching over to Mountaineer and the Loop project you have there, just trying to get a better sense on sort of timing of your project and then MarkWest project and sort of what your expectations are on a potential kind of ramp in volumes there. It sounds like your project is coming just a little bit ahead of MarkWest's expansion at the processing facility. I guess going into early 2015, I guess how should we kind of think about those volumes ramping up?

Yes, it's a good question. The sequence is MarkWest -- so our project will increase capacity of the high-pressure system to a little over a Bcf a day. MarkWest is actually increasing their plant -- had announced the increase of their plant to a Bcf a day and then just I think yesterday or the day before announced they were going to further increase it to 1.2 Bcf a day, the Sherwood complex and I think that is probably the latter half of 2015 at that last train, second quarter of 2015 that last train comes on. So that is the staging.

I think we continue to see -- this asset continues to outperform our projections. So we fully expect it to continue to ramp throughout the course of 2014. I would say we expect to use the Zinnia Loop by the end of 2014, so it adds another 0.5 Bcf a day. I don't think we will fully utilize it, but I think we will utilize a portion of that capacity by the end of 2014. And then I think beyond there, Antero has still guided the market and have a very large inventory of wells drilled and a very active drilling program in (inaudible). So I would suspect we will continue to see growth there from them as it is one of their core areas. It is -- it continues to outperform I would say our original projections.

Okay, great. And then the last one I have is just around Red Rock's actual contribution for the quarter. I know you guys do the pooling method leaving the annual guidance -- you guys actually do have I think $30 million of EBITDA contribution. I am sure there is a little bit of a ramp there, but if you were just to assume when you guys actually close that transaction, is it fair to say that the contribution of Red Rock is around say $5 million-ish? I know you guys reported $47 million on the pooling method, but just wanted to get a sense of what the legacy business was.

Yes, I will let Matt take that one.

So Derek, as you mentioned, we had talked about Red Rock contributing about $30 million of EBITDA. As you know, we brought the DeBeque processing plant on in March of 2014. So the EBITDA will not be ratable, so if you divided $30 million by 4, that would be $7.5 million a quarter. So it is obviously less than $7.5 million in the first quarter and your numbers aren't too far off.

Okay, excellent. I appreciate the time, guys.

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