Summit Midstream Partners LP (SMLP) 2014 Q2 法說會逐字稿

Welcome to the second-quarter 2014 Summit Midstream Partners, LP earnings conference call. My name is Christine and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Okay. Thanks, Christine, and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the second 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 would 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 Please see our 2013 Annual Report on Form 10-K, as updated and superseded by our current report on Form 8-K filed with the SEC on July 3, 2014, as well as our other SEC filings, for a listing of factors that could cause actual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 have provided a reconciliation to the most directly comparable GAAP measures in our earnings release.

And with that, let me 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 second-quarter highlights, and then I'll turn it over to Matt for some more details on our financial results. I'll then end the call with some additional comments on our outlook for the second-half of 2014.

Yesterday, we announced our financial and operating results for the second quarter. We continued our trend of reporting sequential quarterly volume growth with another record of 1.4 Bcf a day for the second quarter. This was approximately 7% over first-quarter volumes and 32% over the second quarter of 2013. More important is that each of our assets had sequential quarterly volume growth. The growth was due to several factors, including better weather, as we came out of the severe winter of the past -- winter effects of the past two quarters; the continued high activity level and growth in the areas around our systems; and the great job our operational team has done to keep our assets running at a very high reliability level.

On the growth front, we announced in early June, $300 million of new Bakken projects at our general partner, Summit Investments, which effectively replaced the asset value of the $305 million Red Rock drop-down in March of 2014. Included in these projects is our first agreement to gather gas, crude, and water in the Bakken for Hess in their North Goliath field. So we continue to increase the growth visibility of the MLP with approximately $2 billion of asset development at our general partner, which will fuel future drop-downs to the MLP.

For the quarter, we reported adjusted EBITDA of $48 million, which was up 30% year-over-year and 3% quarter-over-quarter. Adjusted distributable cash flow totaled $34.7 million, which was up 14% year-over-year and 1.4% quarter-over-quarter. The increase in adjusted EBITDA was due to the increased volume that I previously mentioned, driven primarily by Mountaineer Midstream, which was acquired in late -- second quarter of 2013.

Also in the first quarter, we completed the drop-down of our Red Rock Gathering asset. Red Rock has been growing substantially over the last four quarters, and is currently outperforming even our drop-down assumptions from back in the first quarter. On July 24, we announced our second-quarter distribution of $0.52 a unit, which was a 4% increase over the first quarter and a 19.5% increase over the second quarter of 2013. We achieved this growth with a coverage ratio for the first half of 1.11 times.

On the volume throughput front, as I mentioned earlier, our total average throughput was 1.4 Bcf a day for the second quarter, which is up 32% year-over-year and 7.2% quarter-over-quarter. While each asset saw increases quarter-over-quarter, the largest driver of our volume increase was our Mountaineer asset. The volume ramp in Mountaineer continues to outpace our expectations, with volumes up 20% quarter-over-quarter to an average of 366 million cubic feet the second quarter.

Through July, we have continued to see volume growth at Mountaineer, and we now expect our Zinnia Loop project to be complete and in service by the end of August. As a reminder, the Zinnia Loop project will add 500 million cubic feet of additional throughput capacity. And our expectation is that we will utilize a portion of this incremental capacity by the end of August, as Antero continues to be very active in drilling and completions of the area.

At DFW, total volumes for the second quarter averaged 350 million cubic feet a day, which was up slightly from the first quarter. As we have mentioned on the last few calls, we have been battling declines from our anchor producer on the system, so any growth here is a positive sign. Furthermore, we believe volumes have bottomed out at DFW in the first half of this year, and we expect to see growth throughout the balance of 2014.

Our positive outlook is supported by several factors. First, we announced last night in our press release the pending $11 million bolt-on acquisition of Texas Energy Midstream. We expect the transaction to close this month. For us, this transaction unlocks acreage adjacent to our existing footprint by adding three new pad sites -- two with a new customer, and one with our existing customer, Beacon. The area that this covers is very good acreage and in close proximity to acreage in our existing system, where some of the Barnett's largest wells have been drilled. It also gives us some additional compression capacity alternatives in the area.

We also recently executed a letter of intent with one of our existing customers, Vantage, to expand our pipeline capacity to their pad sites to accommodate a significant increase in drilling activity planned by them over the next several years. Vantage has some of the best acreage in our system and in the Barnett, and they have been a big customer for us the last few years. So we are very pleased to partner with them on enhancing the system to meet their expected volume growth.

So we feel very good about the outlook on DFW for the balance of 2014 and into 2015. These two events give us confidence that will not only offset declines in Chesapeake production, but that will actually see nice growth in DFW volumes for the balance of 2014.

For Grand River, which now includes our Red Rock assets, volumes averaged 662 million cubic feet a day in the second quarter, which was up 1.4% over the first quarter. The decline in volumes from Encana's reduced drilling activity is being offset by growth from several other customers, including Ursa and WPX.

Similar to DFW, we expect to see increased activity around Grand River during the second half of 2014, which will help offset most of the Encana declines. As I mentioned earlier, the Red Rock asset, which we dropped down in the first quarter of this year, continues to perform well, and is exceeding the expectations we had at the time of the drop-down. A good data point here is that quarter-over-quarter volume growth at Red Rock was up 18%.

Second-quarter volumes in our Bison gathering system in the Bakken averaged approximately 15.4 million cubic feet a day, which is up from 12.2 million cubic feet a day in the first quarter. Our system enhancements helped drive the volume increase along with warming weather. These factors allowed us and our customers to restore some gas to our system. Importantly, we saw building volumes throughout the quarter at Bison, and we ended the quarter with June volumes averaging 19 million cubic feet a day. We've seen these increases continue into July and early August as well.

We are currently executing on four separate compression expansion projects at Bison, including two new stations, to support expected producer volume increases from the continued active drilling around our system. These expansions will take our compression capacity up to 32 million cubic feet a day by the end of the first quarter of 2015.

So before I turn it over to Matt to summarize the financial results in the quarter, we experienced volume growth throughout the quarter across our entire asset base. Producer activity is strong across all four of our assets, and we expect to see increased volumes across each of our operating areas for the balance of 2014. In addition to this growth, we continue to benefit from a high level of contractual minimal volume commitments throughout the Company. Our total portfolio is 4 Tcf, with an average life of over 10 years. And over the next five years, we have 1.2 Bcf a day under minimum volume commitments.

So with that, I'll turn it over to Matt.

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.

These transactions were considered acquisitions from an entity under common control; therefore, the Bison and the Red Rock drop-down acquisitions have been accounted for on an [asset-pooled] basis for all periods in which common control exists. Therefore, our Bison Midstream financial results are combined with SMLP beginning on February 16, 2013, and Red Rock Gathering beginning on October 23, 2012.

Adjusted EBITDA for the three months ended June 30, 2014 was $48 million compared to $36.8 million for the three months ended June 30, 2013, an increase of approximately 30%. The $11.2 million increase in adjusted EBITDA was primarily due to the acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $3.5 million of incremental adjusted EBITDA in the second quarter of 2014 compared to 2013; the proportionate contribution of higher-margin throughput volumes from certain customers on the Grand River system, the startup in March 2014 of our DeBeck plant at Grand River, and a decrease in OpEx on our Grand River system.

These increases in adjusted EBITDA were offset by a decrease at DFW Midstream as a result of lower throughput volume the second quarter of 2014 compared to 2013. Also, certain of SMLP's gas gathering agreements on this Grand River system contain annual Minimum Volume Commitments, or MVC, and gathering rates that increased in the start of 2014.

Adjusted EBITDA in the second quarter of 2014 included approximately $12.9 million related to MVC mechanisms from our gas gathering contracts. This amount included $2.3 million of minimum shortfall payments that were recognized as revenue; $5.8 million associated with quarterly adjustments related to future projected annual MVC shortfall payments; and $4.8 million associated with the increase in deferred revenue related to MVC shortfall payment billings. $4.8 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet. Additional tabular detail regarding MVCs is included in the second-quarter earnings release.

Adjusted distributable cash flow totaled $34.7 million in the second quarter of 2014. This implies a distribution coverage ratio of 1.09 times for the second-quarter distribution of $0.52 per Limited Partner unit to be paid on August 14, 2014. CapEx for the second quarter of 2014 was approximately $23.2 million, of which approximately $4.8 million was classified as maintenance CapEx.

We had $426 million of debt outstanding under our revolving credit facility at June 30, 2014. The borrowing capacity under our $700 million revolving credit facility was approximately $274 million at June 30. A subsidiary of SMLP issued $300 million of 5.5% notes due 2022 in July of 2014. The $295 million of net proceeds were used to repay a portion of the revolving credit facility. Total leverage as of June 30, 2014 was 3.9 times. SMLP reaffirmed its 2004 adjusted EBITDA guidance of $190 million to $210 million in distribution per-unit growth of 15% to 20%.

With that, I'll 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 2013 distribution of $0.48 per unit. We are revising our growth CapEx upward, given the acquisition of TEM and the additional compressor expansion projects at Bison. Our revised CapEx guidance is $125 million to $135 million, with maintenance CapEx still expected to be between $15 million to $20 million for the year. Important to note, as we always do, this guidance does not include any drop-downs or acquisition activity.

In June, we announced an additional $300 million of organic capital spend by our general partner, Summit Investments. All of this CapEx is focused around our existing crude, water, and now gas gathering systems in Williams and Divide counties. These projects span multiple customers and various services, and include our first exposure to crude oil storage; enhancement of our gathering system by adding additional rail and pipeline interconnects; and the first what we call trifecta of natural gas, crude oil, and water deal for one customer, Hess.

The Hess transaction is significant for us, as it will be a multi-year buildout across three commodities for one of the largest producers in the Bakken. It's a real credit to both our commercial and operating teams to finalize the deal with Hess in their core North American operating area.

In the Utica, we closed in our buy-in of 40% interest of Ohio Gathering in late May. We expect to continue to spend a large amount of capital, approximately $1.2 billion in total, over the next three to five years, as the JV builds out infrastructure for its customer base in its fast-growing basin. To put the size and scale of our Ohio Gathering interest into perspective, we believe that in the next three to four years, our 40% interest in Ohio Gathering is expected to be larger than the current size of our MLP.

We also believe that Summit has a unique advantage to be able to execute this development at our general partner, and insulate the MLP from associated development, capital structure, and volume ramp-up risks. Although we are very focused on the current organic projects at the general partner, we continue to see a fairly robust level of additional growth opportunities around our footprint, and particularly in the Bakken and Utica.

In June, we completed a transaction that will add another potential capital source for funding at our general partner. We converted GE's approximately 6.5% ownership interest of Summit Investments into a preferred security. So Energy Capital Partners now owns 100% of Class A membership interest in Summit Investments.

In conjunction with the exchange transaction, we structured the ability for the general partner to access additional funds under this same preferred structure. This new preferred structure, together with our continued access to sponsor equity, bank debt, and operating cash flow, give our general partner very strong capital access to continue to pursue large-scale organic development.

Finally, on drop-downs, with the drop-down of Red Rock Gathering for $305 million and our buy-in of Ohio Gathering, we revised our views last quarter on drop-downs to an average of $300 million to $500 million per year for the next several years. We remain confident now that we have this level of drop-downs for the next several years.

Our crude oil assets in our Polar and Divide areas of the Bakken continue to ramp up nicely, and we believe that ramp-up will continue through the rest of this year. We believe the visibility and consistency of cash flow of these assets become much clearer in the first half of 2015. I will also remind everyone that we anticipate these assets will come down to the MLP with continued growth prospects and associated CapEx.

With that, I will open it up to questions. Christine?

(Operator Instructions) Jerren Holder, Goldman Sachs.

Just want to start off with the Marcellus assets. You guys highlighted that MarkWest continues to expand its Sherwood processing complex, 1.4 Bcf, nameplate stated right now. Your expansion is going to be about 1 Bcf. Can you talk about the potential to continue to expand your, call it, Mountaineer system? How much can you go in terms of capacity at a low cost, call it, level before you need to start adding newer lines?

Yes, I think, Jerren, as far as additional looping projects, there's probably some availability on the northern part of the system. The Zinnia Loop was more in the southern part of the system, and that's really what's getting used the most, and where a large percentage of the volume is coming from. So, we still have -- we still would have availability to do some Expansion Projects in the northern end of the Mountaineer system, but I think Zinnia pretty well will tap out the southern end.

And there's probably a few things we could do. We also have the ability to add additional compression to the system as well, too. So it's not all just pipeline capacity as well. And I think for the quarter, we probably delivered over 70%, I think? (multiple speakers) 74% is what Mark is telling me -- of the actual volumes into the Sherwood facility. So, came through Mountaineer.

Got it. Thank you. And I guess switching over to the Utica, I mean, we've seen, I guess, recently this week, joint venture startup maybe taking away some of those gathering opportunities, the upside potential I think you guys highlighted in your Analyst Day outside of your gathering focus. Can you talk a bit about kind of the opportunities you guys are still seeing out there outside of your, call it, higher gathering focus?

Yes, I think -- I think you've said the -- you mentioned the Regency JVs would -- I think I caught that (multiple speakers) --

(multiple speakers) Yes. I would say there is multiple other opportunities, and there will be even additional opportunities in the years to come, around the basin further south of our AMI, to the east of our AMI, to the west of our AMI. So that won't be the only project being done, I would say, from a -- and that's more -- that was more of a trunk-line for dry gas. It's been on the Board for a while. It was on the Board actually with PVR before Regency purchased them.

So, we're still seeing a pretty active level, when you put it that way, of opportunities around the footprint. And I would say a very active level of opportunities for expansion within the JV as well too.

Okay, thanks. And I guess (multiple speakers) --

We feel good that that $1.2 billion will grow over the next several years.

Got it, thanks. And one more. Are you seeing any changes, I guess, in customer behavior? We are starting to see, I guess, some of your customers think about forming their own MLPs, maybe be a little bit more serious about that than they have been in the past. Are you seeing maybe that they would be more likely to build some of their projects themselves versus, say, using the services of other midstream providers like yourself? Are you seeing some of that behavior changing?

Not really. Not from what it's been over the last several years anyway. I think some of our customers that have midstream operations in Antero would be a good one -- have had them for a while now and have had the focus on doing their own gathering in that instance. Yet we're still doing other things for Antero. And they're obviously our big customer in the Marcellus.

So, I don't know that we are seeing any kind of change there -- sea change of guys wanting to go out and do their own midstream. It does require a fair amount of skill set and talent and people to be able to execute on some of these large-scale developments.

All right. Thank you.

In fact, I'd tell you, Jerren, to add to that, to go the other way, we just executed a deal with Hess, and obviously they have a fairly large footprint in the Bakken in their own midstream things, so.

Got it. Thanks.

Justin Agnew, Robert W. Baird.

Can you talk a little bit about the tightening of flaring rules up in the Bakken and any impacts you are seeing on the Bison system, really, if at all? And then maybe to piggyback on that, any impacts from the Kodiak Whiting deal and any consolidation you see up there?

Yes, thanks, Justin. Let's take the flaring first. I think everyone's keeping a close eye on it, including us and operators; producers, as well, too. I would tell you, overall, it's probably been -- so far; it's early -- but so far, a positive for us and probably other folks -- other of our peers.

Mainly, the benefit we've seen so far is additional planning by producers and multi-year planning by producers, as far as looking out in having to determine how they are going to capture gas as they apply for drilling permits. And so, any time we can get our customers to help or be with us on multi-year planning, that's beneficial for us, as you would imagine.

And so that's been the primary benefit. I think we need to see how it plays out, really, over the next 12 months or so. And it is fairly new and things are getting more defined as we get into it. But so far, it's been -- that's been a positive.

On Kodiak and Whiting, the second part of your question, we think it's a positive. I think Whiting was pretty clear on the call announcing the acquisition, that they are going to increase rigs -- Kodiak rigs from 7 to 12; they're going to add five rigs to the Basin -- or to the Kodiak acreage. We think we'll get some of those, obviously, in the Polar area.

And so -- and then we had already previously announced the pretty large expansion that's part of the $300 million of capital with Kodiak anyway. And so they were ramping up in that area anyway. And so we view it as a positive.

I do think you are starting to see acreage consolidation in and around our system. The SM transaction of them buying Baytex's acreage, I think, is, in general, a positive. SM is a big customer of ours on the Divide system already. And they're consolidating acreage up there. And I think you'll see more of that, obviously. And look, I think we're well-positioned to be a service provider to those guys as they grow.

Got it. Thanks. And then, there's been some talks about Denton County banning fracking. And I know none of your assets are directly in that County, but do you see any risk of any spillover or any NIMBYism to any of the DFW assets?

We don't. Denton has got a, I'd say, a history of -- this is not a new event for that area. And so we think it's fairly isolated in that area and we don't see any spillover. In fact, as I mentioned in my comments, a couple of our customer advantage being the biggest ones is ramping up pretty significantly. So we don't, is the answer, I think there. We feel pretty good about that area and how the community interacts with the producers.

Got it. Thanks. And then staying on DFW, I know there's expectations to grow volumes here in the back-half of the year. Can you maybe ballpark that for us, if you are comfortable doing that?

Yes, I think, as we've said before, I think, pretty consistently, our goal is to really stay between the $350 million to $400 million range of DFW. And we think we bottomed out at $350 million -- really close to $350 million a day average for the first half of the year. So, we think you're going to see an increase in that still in that range through the second half of the year. But that's pretty incremental to us, as you can imagine.

Got it. Thanks. That's it for me.

(Operator Instructions) Elvira Scotto, RBC Capital Markets.

Can you provide a little more detail around this acquisition? I think it mentions in here that the current throughput is about 13 million cubic feet a day. What's the capacity? And how do you expect this to grow alongside your DFW systems?

Yes. So, the current capacity of TEM -- of Texas Eastern Midstream is 30 million cubic feet. Really limited by compression capacity on that system today. We -- there's two producers, one of which is Beacon. We expect them to be pretty active on their -- in this area into next year. And so we do expect to see some volume growth around the system.

The other thing this gives us is the potential to tie it into our existing system through pipe connections, and give us some optionality potentially on compression capacity as well too. That area can be expanded from a compression capacity standpoint pending things like permits and things like that.

So, it's really, for us, a pretty, I would say, attractive, accretive bolt-on. It's just south of our White pad on our existing system for those that are familiar with our maps. So I think within a couple of miles of that pad site. So, hopefully, that gives you enough color. It's about 1000 acres, I believe, is what is being added.

Okay, great. Is there -- are you willing to share kind of a multiple that you paid for this?

You know, it's small, but it's probably in the neighborhood of, what, six times or so. That's probably the next -- yes, afford book on what's currently planned for drilling, so.

Okay, great. And when you talked about the DFW system kind of in that range of $350 million to $400 million kind of grown in the back-half, does that include this acquisition?

It does. And this acquisition is not going to close until this month. So we won't -- we will get a couple of months' worth of that volume. But yes, it does include that, Elvira.

Okay, great. And then just my final question. On the Zinnia Loop, how do you expect that to ramp over time?

Yes, it's a good question. I think we've been wrong mostly on Mountaineer ramping, but wrong in a good way. It's been probably above our expectations. But we do believe there is gas ready and waiting to come on once MarkWest finishes their next train at Sherwood. And I think that's coming on toward the end of this month, I think, is what they are planning there. So, they are going to bring on another 200 million a day train.

We think there's a fair amount of volumes waiting, and we think we'll get a good portion of those volumes through our system. So, we will see a chunk again, we think, here in the end of the third quarter. And we actually think Zinnia will get used here by the end of the third quarter as well too, which is, quite honestly, above our expectations. When we initiated the project, we thought it actually would be utilized more towards the end of 2014 initially, so.

Okay, great. Thank you very much.

Yes. Thank you.

Thank you. We have no further questions at this time. I would like to turn the call back to our speakers for closing comments.

Well, thanks, everybody for joining us. Hope everybody has a good weekend and can get through earnings season alive. And we'll talk to you soon.

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