Summit Midstream Partners LP (SMLP) 2015 Q4 法說會逐字稿

Welcome to the fourth-quarter 2015 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, Senior Vice President and Treasurer. Please go ahead.

Thanks, operator, and good morning everyone.

Thank you for joining us today to discuss our financial and operating results for the fourth quarter of 2015, as well as our drop down announcement of all operating assets from Summit Investments to SMLP, which was included in our fourth quarter 2015 earnings release.

If you don't already have a copy of our earnings release, please visit our website at summitmidstream.com, where you will find it on the homepage or on the News section.

We have also posted a slide presentation on our website homepage entitled 2016 Drop Down of Summit Investments' Operating Assets, which outlines the drop down transaction in greater detail. We will refer to certain slides in this presentation during the call.

With me today to discuss our earnings and the drop down transaction is 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, liquid 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 Please see our 2014 annual report on form 10-K, as updated and superseded by our current report on form 8-K, which was filed with the SEC on September 11, 2015, as well as our other SEC filings for a listing of factors that could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 provide reconciliations to the most directly comparable GAAP measures in our most recent earnings release.

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

Thanks, Marc. Good morning, everyone. Thanks for joining us today on the call. We have a lot to cover today, so we will jump right in.

First. I'm going to make a few comments on the fourth quarter's performance, and then I will turn it over to Matt before I finish the call by reviewing yesterday's major announcement regarding the accelerated drop down of all of our operating assets from Summit Investments to SMLP.

To prepare for that discussion, I will refer you to our website at summitmidstream.com, where we have posted slides outlining the transaction.

First, related to our fourth-quarter performance. Despite a continuation of the challenging commodity price backdrop, we are pleased with our quarterly results, which were in line with our expectations and our guidance. In the quarter, we generated $53.3 million of adjusted EBITDA, and for the year we generated $210.4 million of adjusted EBITDA.

Our fourth-quarter distribution of $0.575 per unit was flat with the distribution paid for the third quarter of 2015 and up 2.7% over the distribution paid for the fourth quarter of 2014. Our distribution coverage ratio was 0.94 times for the fourth quarter, and for 2015, it was 0.98 times.

Operationally, our fourth-quarter was highlighted by our Bakken liquids volumes of approximately 66,000 barrels a day, which is up 28%, sequentially, over the third quarter of 2015. Our liquids volumes were primarily driven by our Polar & Divide customers that commissioned over 30 new wells at the end of the third quarter and into the fourth quarter. Coupled with our ongoing work to catch our existing crude, and produce water volumes that were previously being gathered by trucks.

Production in the Williston Basin, as a whole, has been declining since December of 2014, compared to a 40% increase in volumes on our liquids gathering systems over that same period. While we remain cautious about ongoing rig and completion activity in a sustained $30 per barrel price environment, we remain bullish about our footprint in the core production areas of Williams and Divide County.

Since I'm sure we will get multiple questions on counterparties during this call, we will hit the issue head on. Our main customers in the Bakken are EOG, Whiting, Zavanna, Oasis and SM. Three of our liquids customers, Whiting, Zavanna and SM were actively drilling in our service area during the fourth quarter, and collectively they maintained an inventory of over 40 drilled, but uncompleted wells, or DUCs, in our area, that we anticipate will positively impact our Williston liquids volumes in the first half of 2016.

We are aware of recent announcements from our core customers about reduced activity levels, and that has been built into our guidance for the year.

Earlier this month, we announced the commissioning of the Stampede Lateral in the Bakken, which has enabled global partners to source crude off of our gathering system for rail delivery to East Coast refineries. In addition, we are finalizing the connection of our crude gathering system in Enbridge's North Dakota Pipeline System, which we expect will be completed in the next few weeks.

These new delivery points provide our customers with optionality when pulling crude oil in our system enable them to move barrels from one point to another in order to maximize their netbacks. Both the Stampede Lateral and the Little Muddy project are expected to drive cash flow growth in 2016, relative to the financial results in 2015.

Our financial results in the fourth quarter were also highlighted by the December 1 commissioning of a 10 well pad site on our DFW Midstream system. These wells came on strong, increasing average throughput to 356 million cubic feet per day in December, compared to an average of approximately 300 million cubic feet per day in October.

For the quarter, DFW averaged 325 million cubic feet per day, which was flat compared to the third quarter of 2015. These two new wells continue to produce at high levels and are expected to lead to increased average volume growth in the system in the first quarter of 2016, compared to the fourth quarter of 2015.

Looking forward at DFW, we continue to expect a new 11 well pad site to begin flowing early in the second quarter of 2016. This same customer is also drilling six new wells on another pad site that is already connected to our system, which we believe will be a nice growth catalyst in the second half of 2016, with no incremental CapEx required from us.

In the Barnett, our largest customer is Chesapeake Energy. Chesapeake's operated production accounts for approximately 30% of our total volumes on the DFW Midstream system, but less than 5% of our expected total gross margin for SMLP in 2016.

Unlike in other areas, or other contracts that Chesapeake has, they are not paying us any shortfall payments, and we don't expect them to, given their current production. We maintain a very healthy relationship with Chesapeake, as we do with all of our customers.

I will also remind folks that the area we service in the Barnett is not only the core of the core, but is also under the city of Arlington. To say we have a competitive advantage here would be a dramatic understatement.

Volume throughput on the Mountaineer Midstream system averaged 366 million cubic feet per day, in the fourth quarter, down approximately 20% from the fourth quarter of 2014. The decreased volume throughput in the fourth quarter of 2015 was primarily due to the volume curtailments from Antero, due to low realized prices in the Northeast at the end of the year.

As many of you already know, natural gas netbacks in the Northeast were particularly challenged during the fourth quarter, amidst an unusually warm start to the winter season. These curtailments have largely been lifted as Antero announced the commissioning of a new third party regional takeaway pipeline, which, according to them, is projected to significantly increase their netbacks in 2016.

Future volumes on the Mountaineer system will primarily be dependent on Antero's pace of completion activities related to 50 previously identified DUCs. We've identified 32 of these DUCs that will flow on the Mountaineer system from interconnections with both Antero Midstream and Crestwood. We expect that we will receive incremental volumes from their completion activities related to a minimum of 10 of these DUCs in 2016.

Our Piceance gathering system also continues to perform well primarily as a result of the high-level of contractual MVCs under Piceance acreage. While volumes continue to decline, as a result of general inactivity, primarily from Encana, our MVC shortfall payments continue to provide SMLP with a stable source of cash flow.

Customers, such as Ursa and WPX, continue to remain active in the area, and we are encouraged by the recent announcement by WPX to sell their Piceance acreage to Terra Energy Partners. We have received a number of questions about this acreage sale, and what we can say is that our gathering contracts will be assigned from WPX to Terra.

Also, in our experience, whenever acreage trades hands, it's generally positive for future drilling activity and volume growth, and that the acquirer is able to reprice the acreage based on current strip price. We are excited to gain Terra as a customer, and we look forward to working with them in a future.

In addition to our operational performance, we are continuously focusing on cost controls, both operating costs and G&A. We measure and manage this on a currency basis, given our continued growth. For 2015, our controllable operating costs, for all of Summit, were down 5% over 2014, while our G&A costs were down 6.5%. The net here is that we are laser focused on this. We have the capability to monitor it and manage it, and we do that continuously.

Finally, I mentioned this in yesterday's earnings release, but I think it is worth repeating. Over the last several months, we have received a great deal of inquiry, as have most in our industry regarding our counterparty exposure. While we believe that we have a strong and high-quality contract portfolio, our role as a third party gatherer and our position in the midstream value chain is the best mitigant to any counterparty exposure we have.

The vast majority of our gathering assets are directly connected to our customers wellheads and pad sites. Our gathering systems are typically the first third-party infrastructure through which our customers commodities flow, and in many cases, the only way for our customers to get their production to market. As a result, we believe that we are a critical service provider and cannot be easily substituted.

We also expect that our customers will continue to perform, as we continue to perform, pursuant to our long-term contracts. With that, I'll turn it over to Matt to review the quarter in more detail and the deferred payment structure in more detail.

Thanks, Steve.

Adjusted EBITDA for the fourth quarter of 2015 was $53.3 million compared to $54.1 million for the fourth quarter of 2014. The $800,000 decrease in adjusted EBITDA was primarily due to a 12% decrease in volume throughput in our natural gas, mostly offset by a 40% increase in volume throughput in liquids.

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 2015.

Adjusted EBITDA in the fourth quarter of 2015 included approximately $14.5 million related to MVC mechanisms from our natural gas gathering agreements. This amount included $28.4 million of minimum shortfall payments that were recognized as gathering revenue, $13.2 million associated with the net increase in deferred revenue related to MVC shortfall payments, offset by $27 million associated with quarterly adjustments related to future projected annual MVC shortfall payments.

Additional tabular detail regarding MVCs is included in the fourth quarter earnings release.

SMLP has reported a net loss of $220.5 million for the three months ended December 31, 2015, compared to a net loss of $34.1 million in the fourth quarter of 2014. SMLP reported a net loss of $186.8 million for the year ended December 31, 2015, compared to a net loss of $14.7 million for the year ended December 31, 2014.

Net loss for the three months and year-end of December 31, 2015 included $250.5 million of non-cash charges recorded in the fourth quarter of 2015, including goodwill impairment charges of $203.4 million related to the Polar & Divide system, and $45.5 million related to Grand River.

Recall that SMLP paid approximately $290 million for the Polar & Divide system and drop-down transaction in May, 2015. Given the nuances of accounting for entities under common control, SMLP's financial statements were recast to include Polar & Divide at Summit Investments' carrying value, which approximated $415 million at May 2015.

Adjusted distributable cash flow totaled $38.3 million in the fourth quarter of 2015. This implied a distribution coverage ratio of 0.94 times, relative to the fourth quarter 2015 distribution of $0.575 per limited partner unit paid on February 12, 2016.

CapEx for the fourth quarter of 2015 were approximately $28.8 million, of which approximately $2.8 million was classified as maintenance CapEx.

We had $344 million of debt outstanding under our revolving credit facility on December 31, 2015, and $356 million of available borrowing capacity. Total leverage as of December 31, 2015 was 4.2 times.

Yesterday, SMLP announced a $1.2 billion drop down transaction to acquire all the operating assets from Summit Investments. In conjunction with the close of this transaction, SMLP will make an initial payment of $360 million. A deferred payment, which is currently estimated between $800 million and $900 million, will be paid no later than December 31, 2020.

The deferred payment, which is outlined in detail on slide 6 of the presentation, will be equal to first, 6.5 times the actual, average adjusted EBITDA of the drop down assets for 2018 and 2019. Second, less all CapEx incurred for the drop down assets between the initial close and through the deferral period. Third, plus cumulative adjusted EBITDA of the drop down assets from initial close and through the deferral period. And finally, less the $360 million initial payment.

At the discretion of SMLP, the deferred payment can be made in either cash, SMLP common units or a combination thereof.

In conjunction with the closing of the drop down transaction, SMLP has received binding commitments to increase the capacity of its revolving credit facility from $700 million to $1.25 billion. SMLP will use borrowings under its upsized revolving credit facility to fund the $360 million initial payment.

Pro forma for this initial payment, borrowing capacity under the $1.25 billion revolving credit facility will exceed $500 million. Pro forma for the drop down transaction, SMLP provided guidance for 2016 with adjusted EBITDA expected to range from $260 million to $290 million. This includes approximately $75 million to $85 million of adjusted EBITDA from the drop down assets.

Given the challenging commodity price backdrop, coupled with the current volatility in the debt and equity capital markets, SMLP will take a measured approach regarding distribution per unit growth in 2016. In the near-term, SMLP intends to focus on building distribution coverage and strengthening its balance sheet. We expect SMLP's distribution coverage ratio for 2016 to range from 1.1 to 1.2 times. That ends my remarks, and I'll turn it back over to Steve.

Thanks, Matt.

Needless to say, we are very excited about this transformational drop down, as it enhances SMLP's growth profile and operating scale, while diversifying us into a Utica shale and DJ basin and expanding our existing operating footprint in the Bakken.

To give you a bit of context, we have been working on and refining this particular transaction for many months as part of Energy Capital Partners' previously disclosed strategic options review. There were three primary objectives behind the transaction.

First, we wanted to create significant financial strength at SMLP to combat this commodity cycle, which we believe will last for longer than any of us want. We accomplished that as our 2016 distribution coverage will be 1.1 to 1.2 times and will grow significantly over the next several years.

In addition, the transaction is leverage neutral to SMLP for 2016, but we expect leverage to decrease over the next several years as EBITDA increases from our drop down assets, and we utilize the excess cash coverage we have to fund our capital expenditures.

Second, we wanted to remove any and all capital markets risk from SMLP for at least the extent of the commodity price cycle, because right now, for energy companies, those two are linked. We have done that, and in fact, we have basically removed all capital markets risk as even the deferred payment can be settled with a unit issuance to Summit Investments.

Third, we wanted the transaction to create real, tangible, long-term value to our LP unitholders by transferring our high-growth Utica gathering assets to SMLP in an accretive manner. The financial structure with the deferral is very positive to the MLP, but the real long-term value for our investors is the fact that we're dropping down close to one million dedicated acreage position in the high-growth Utica play, for 6.5 times the average trailing 2018 and 2019 adjusted EBITDA.

If you turn to page 3 of the slide deck, we highlight most of these points. The transaction, as structured, will drop down all of Summit Investments' operating assets to the MLP, will pay an initial purchase price of $360 million, which represents a 4.25 times multiple of our expected 2016 adjusted EBITDA. That 2016 adjusted EBITDA for the drop down assets is $75 million to $85 million.

We will then defer the remaining purchase price until 2020. Very important, however, is that the payment made in 2020 will be based on the actual performance of both EBITDA and CapEx of the drop down assets. So, to repeat again, the MLP is buying these assets at 6.5 times the average trailing 2018 and 2019 actual EBITDA.

In connection with the drop down transaction, we also amended and increased our bank facility from $700 million to $1.25 billion. This increase will provide us with very robust liquidity to execute the continued buildout of the drop down assets and eliminate all financing market risk with our CapEx program. Estimates of expected CapEx program and our liquidity can be found on page 7 of the presentation.

While on that topic, I would like to take the opportunity to thank our banks who, again, stepped up for us in, what I would consider, a very difficult financing market.

So, the net effect is that for 2016, we expect our distribution per unit coverage to be 1.1 to 1.2 times, but important to note is that over the next couple of years, we expect the coverage to be well in excess of 1.2 times while our leverage will be approximately 4 times. We will also set ourselves up to resume distribution growth when the market rationalizes.

So, if you turn to page 4 and 5 of the presentation, I'll review the assets included in today's drop down announcement.

First is Ohio gathering, in which we own a 40% interest in, along with MPLX and EMG. Ohio gathering is a natural gas gathering system spanning the condensate, wet gas and dry gas windows in the Utica shale, with Gulfport as our anchor customer. Ohio gathering represents one of the largest gathering and processing footprints in the core of the Utica shale with over 800,000 dedicated acres from our producer customers operating in Belmont, Monroe, Harrison, Guernsey and Noble counties.

Important to note is our position is only in the gathering assets of Ohio gathering. We also own 40% in Ohio Condensate Company, which is a 23,000 barrel per day stabilization complex servicing both the Utica and Marcellus shales.

Second asset is our 100% owned and operated system Summit Midstream Utica, which is being developed for XTO in the dry gas window is Utica shale. We commissioned the system in the third quarter of 2015, and XTO is very actively drilling this acreage. We expect high-growth over the course of 2016 in the system.

Collectively, with Ohio gathering, the Utica assets represent over 20% of SMLP's expected 2016 adjusted EBITDA. Furthermore, we expect these Utica assets to represent over 40% of SMLP's adjusted EBITDA in 2019.

The next asset is Tioga midstream, a 100% owned and operated crude oil, produced water and associated natural gas gathering system that we developed for Hess in Williams County in the Bakken shale. With Tioga, we have a dedication of approximately 20% of Hess' Bakken acreage to that system.

We completed the buildout for Hess in the fourth quarter of 2015, and like some of our other gathering agreements in the Bakken, this agreement has a rate redetermination feature that protects our downside.

Finally, we dropped down Meadowlark Midstream, a 100% owned entity that is composed of the gas gathering and processing system in the DJ basin, with EOG as the primary customer. We call that our Niobrara gathering and processing system. And in crude oil and produced water system in the Bakken shale, with Howcone as the primary customer that we call our Blacktail gathering system.

In the Niobrara, we own a 20 million cubic feet per day processing facility the processes both the Niobrara and Codell associated gas for EOG. All of the drop down assets are covered by fee-based contracts and represent some of the best and fastest growing assets in our portfolio.

As Matt mentioned, yesterday we also provided financial guidance for 2016, which includes the impact of today's drop down announcement. That guidance as outlined on page 8 of the slides.

Pro forma for the drop down, our 2016 guidance was for adjusted EBITDA of $260 million to $290 million, including approximately $75 million to $85 million from the drop down assets. I will note that consistent with prior drop downs, this guidance incorporates the expected results of the drop down assets on an as-pull basis, as if the transaction closed in January 1.

The 2016 financial guidance is based upon an assumed average and actual gas price of $2.30 per MMBtu, and an average crude oil price of $41 per barrel. Although commodity pricing has very little direct impact on our projections, given our high level of fee-based revenues, they do influence our assumptions on producer activity, which impacts our volume throughput expectations.

Given the challenging commodity price environment, coupled with the current volatility of the capital markets, SMLP will take a measured approach regarding the pace of its distribution per unit in 2016. In the near-term, we intend to focus on building distribution coverage and strengthening its balance sheet, which we think is prudent given the challenging backdrop. BPU growth will be a quarter by quarter analysis in the near-term, again with coverage and leverage taking priority.

As I previously mentioned, pro forma for the 2016 drop down, we expect coverage to be 1.1 to 1.2 times. We do expect that over the next several years, coverage will be higher than 1.2 times, while long-term coverage, after accounting for the deferred payment, to be 1.1 times or higher. Important to note is that the transaction is highly accretable to distributable cash flow, increasing DCF by 30% in 2016 over the fourth-quarter 2015 run rate.

With respect to financial performance across the entire Summit family, including Summit Investments, the fourth quarter of 2015 was the strongest quarter we've ever had, primarily due to the significant ramping up of volumes across our Utica gathering system. Drilling activity continued to be strong across our Utica service area, with three rigs currently running behind our OGC system, and one rig currently running behind our Summit Utica system. Much of the growth we've seen on Ohio gathering in Summit Utica has been due to recent commissioning of dry gas wells.

Today's drop down announcement marks a pivotal moment in Summit's history and a real turning point in our evolution. We are in the process of reshaping the scale, diversification, credit and growth profile of SMLP from a drop down story into an organic growth story with a concentration in the Utica shale.

In 2016, as I mentioned, we expect that 20% of SMLP's cash flow will be generated from the Utica. While this number will grow to more than 40% by 2019. By 2019, we expect 50%, at half of our total adjusted EBITDA to originate from the Northeast.

We also like that this drop down diversifies our customer base by enhancing our exposure to existing customers such as EOG and XTO and adding several new, strong and well-capitalized counterparties into the SMLP customer portfolio, including Gulfport and Hess. Together these customers represent over 70% of the volume throughput associated with the drop down assets.

Finally, the drop down, and the financial strength created by it, will allow SMLP to operate from a position of strength in this uncertain market and afford us a chance to be opportunistic on future investment opportunities.

Although we have gotten a lot of comments over the past six months, or really over the past year, on the commitment level of our sponsor, I would hope that last night's announcement puts those doubts to bed. Not only has ECP shown unprecedented support for this transaction, they are also currently executing on a substantial buyback program as it helps support our unit price.

I would also like to note that they continue to retain additional capital in meaningful quantities to support both SMLP or Summit Investments. We believe attractive investment opportunities will be available over the next several years for those with financial strength, capital access and a proven management team to integrate and grow the business.

With that, I'll turn it over to the operator for questions.

(Operator Instructions)

Kristina Kazarian, Deutsche Bank.

Hello. Nice job on the transaction. A couple quick questions for you. Can you help me walk through the rationale on the structure of the deferral payment. And help me think about how I should be assuming the incremental CapEx drives EBITDA, what development multiple I should be thinking about that, and then the EBITDA ramp associated with the CapEx spend?

Hi Kristina, it's Steve. I'll take the first part. Matt can take a little bit on the CapEx.

The rationale behind it, as we said on my comments, we have been working on it for months, was really to bring the high-growth Utica assets down to the MLP, but have the GP retain both the development risk, performance of the assets, and also the capital expenditure risk as well, and reflect that, and ultimately what the MLP pays for the assets. And so that is the rationalization behind the deferred payment.

And the mechanism behind it is, really what you have is those assets coming down, the MLP getting the benefits of those assets coming down, but really the risk, a lot of development risk, being retained by the general partner.

On the CapEx, I will start it off, let Matt -- he can footnote me. On the CapEx, our CapEx spend is $150 million to $200 million, roughly, on average over the deferral period. Just to give some context of what has gone on up there over the last couple of years, I think we've spent $1.4 billion, or so, up at our GP over the last three years, probably, so the CapEx is coming way down.

A lot of that is because the development cycle of these assets, the completion stage is getting pretty close. And so, the CapEx being spent, going forward, is going to be pretty incremental, because you're getting a lot of your trunkline systems have already been put in place. So I would guide you to, we believe the drop down assets are going to double the MLP from where we were at the end of 2015 by the end of 2019 on an EBITDA basis.

I'll just add to it that the structure then provides, it's 6.5, regardless of the spend over the next four years.

Great. And then can you just talk a little bit as well about counterparty risk. I know you touched on this in some of your prepared comments, but I know you mentioned XTO, Gulfport, Hess, EOG. But can you also talk about, I think you had some Ascent on some of these assets, and just what you're thinking there. And then the follow-on to that is update on conversation with the rating agency since this transaction was announced.

I could take that. There was a bunch in there, so if I didn't get them all, ask them again.

There were two. Sorry.

First, let me go through just high level on our customers. We did some analysis. About a third of our customers, from a margin standpoint, are investment-grade or better. About half are double B or better, and about 85% our single B or better, from a margin standpoint, and this is pro forma for the drop down.

And then if I talk about Ascent. Ascent is in two spots on the drop down asset. They are an OGC customer. At OGC, they represent about 10% of our combined margin. And then they are a non-op in Summit Utica. So, XTO is the operator in the Utica. If you extrapolate the revenue of Ascent there would be about another 8% of our margin. But, again, XTO operates that area.

And then from a rating agency standpoint, we have talked to the rating agencies, and we would expect this to be a neutral type of event for them.

Perfect. Thanks. That's it for me. Nice job today.

Let me add on the counterparties, there's two, just the rate. The significant portion of our minimum volume commitments, that people actually pay us, are higher grade volume commitments, and Encana is, by far, our largest minimum volume commitment. I think we've told the market that pretty consistently. And honestly, they are triple D to, I think Moody's has them at BA1. So that is another important feature when you look at counterparty risk, is what customers are actually paying you MVCs, and what does the credit look like from those customers.

Got it. Thank you.

Thanks, Kristina.

Gabe Moreen, Bank of America, Merrill Lynch.

Question for me. On the ability to buy back debt as part of the modified and upsized revolver. Is that part of the game plan here? Are there any limitations on doing it from an agency or rating perspective? Is any of that assumed in your projected leverage ratio going out a couple of years?

First, it's not assumed in our leverage calculation that we buy back debt. It is allowable under our bank facility. It's allowable, I will just say in a significant amount, if we choose to do it. And I would say that the rating agencies really haven't opined on it relative to buying it back. It's definitely something that we will be analyzing.

And you will see the amendment drop. This adds $100 million basket to buy back our bonds.

And as is a follow-up. Maybe you choose to punt this; but is there any reason you wouldn't buyback some bonds, considering where some of them are trading today?

Again, that's going to be a fancy type of strategy that we're going to continue to look at and review. Certainly, the banks are okay with that.

Okay I will let that drop. Got it.

In terms of the CapEx spend, if leverage goes lower, balance sheet improves, can you help think about what upside to growth CapEx would be here, beyond the buildout of the systems? I gather that a lot of that is dependent on the macro environment and whatnot. But can you talk about upsides where you might see some if some of these systems, if you feel like you can go back to playing more offense.

I will first say, the CapEx we have and the pace we have in the slide deck that we released this morning, and the CapEx forward look assumes no additional growth projects, so it's everything we have under contract today.

Our CapEx is fairly scalable given what we do. It's a lot of well connect CapEx, so it's fairly scalable based upon activity levels, and it tends to slowdown with activity levels down and go up with activity levels up.

We think there is still additional buildout that is needed in the Utica, as the play develops. I would say, we are probably, maybe in the third inning, or fourth inning in the Utica, relative to other plays, and in particular relative to the Marcellus next-door. We think there's going to be significant buildout related to the Utica as it extends from an aerial extent standpoint into West Virginia. That is the dry gas part of the Utica.

So we think our position is very strong today. It allows us, affords us the opportunity to compete favorably for business. And one thing I want to touch on, that I touched on in my comments, is our sponsor retains significant financial wherewithal to support our development activities.

Got it. Got it. Sounds good, Steve. Thanks, very much.

Heejung Ryoo, Barclays.

Just some clarification on the CapEx side, and my apologies if I missed this. You put out a number for the acquired assets, but at this point, what are you thinking in terms of the legacy assets given this environment? Would one assume if this continues, it would be pretty minimal there?

Yes. I would say of the CapEx for 2016, about 20% or so is related to the legacy assets.

Okay.

So it's fairly minimal in this commodity price environment. In several of those systems, like DFW, we builtout all of the pads, so the incremental drilling we announced today that we expect is -- basically comes to us without any capital expenditure.

Got it. And then, in your guidance for 2016, what percentage of the guided EBITDA do you expect to get from the MVC payment? Would it be similar to what you're getting this year or?

Yes. So I would say, from a dollar standpoint, Helen, it would be very similar to what we are getting this year, and then that number would be divided over a larger number, so call it 20-ish%.

And then, the MVCs, these contracts you have. They carryout, please remind me about the term, I think Piceance, that area, is going to probably decline after 2020 in terms of how that MVC is set up. Could you maybe provide a little bit of clarification on how long these MVCs go out? How steep should the decline rate be there?

Our largest MVC payment in the Piceance, by far, is with Encana. It has 10 years left on that contract for MVCs. One of our other large ones is not Mountaineer with Antero, and that has about 10 years left as well. And that one is fairly flat. Encana is fairly flat over the next several years, as well.

And we provided that in our investor decks on that contract portfolio page. Average about 8.5 to 9 years on average. About 9 in the Piceance. About 4 in the Barnett and almost 6 in the Williston basin.

Got it. And then lastly, you touched on this a little bit. I think you said the vast majority of your gathering lines are connected to a wellhead? Is that consistent across your legacy asset versus what is coming down, maybe just provide a little bit more color?

Yes. I think everything coming down is effectively wellhead gathering. Either in the Bakken, Niobrara, or obviously, the largest piece of that, by far, is the Utica. It is all wellhead. Then, the vast majority of our existing business is wellhead. I would venture to say more than 90% of our business is wellhead gathering.

Okay. That is very helpful. Thank you, very much.

Tristan Richardson, SunTrust.

Good morning.

Just curious, previously you talked about asset development upstairs being somewhere closer to $600 million to $700 million over the time period? I'm curious the difference between that number and what you have talked about this morning. Is it mostly market conditions, or just an idea there of the change.

Are you talking about the investment versus the 360? Is that kind of the question, Tristan?

No, sorry. Matt, I think in previous slides, you have said from 2016 to 2019, the Summit Investments CapEx would be somewhere around 600 to 700 versus today saying 400 to 500.

I think part of that is due to the commodity price cycle, Tristan, and development getting pushed out to the right. The other thing that is going on, in the Utica, specifically, is our compression CapEx is coming down significantly and getting pushed to the right significantly. These wells just don't meet compression for up to 18 months, so it is pushing everything to the right there, as well, too.

But I would tell you, that is mainly due to development cycle and commodity prices, related to commodity prices. It fits with my comment before that lower activity levels, our CapEx is somewhat scalable.

Got it.

We spent, and just to give you an example, in 2015, the overall Summit, we spent about $200 million less than we were projecting to spend in 2015, as activity levels came down. So it is scalable.

Got you. Okay. Steve, just to clarify on a comment in your prepared. You said 20% of the pro forma Summit EBITDA would come from, in 2016, would come from Utica. Was that OGC and Summit Utica, or was that specifically Summit Utica?

That is both.

Okay. Okay. That is helpful.

And OGC is ramping significantly, Tristan. It didn't come on until the third quarter of 2015. We didn't commission the system until the third quarter of 2015. Summit Utica.

When Steve talks about Utica, those two assets, and then when he talks about the Northeast. We're adding our Mountaineer asset to it.

Okay, perfect.

And then, lastly, just to go back to your comment about how the sponsor is prepared to be more supportive going forward, et cetera. Are there other mechanisms that you are considering now that the assets are down below, beyond forbearance or accepting units in lieu of cash distribution. Are there other mechanisms of your leverage you can pull if need be?

I would say, yes. We have had a lot of folks talk to us about creative capital raising activities that you have seen some folks, some of our peers do that in the market. I think those mechanisms are available to us.

I think our general view is we have eliminated all capital markets risk with this transaction for years. And so, any view from us to use things like that would be from an aggressive posture versus using them to pay down debt or so forth. We have eliminated any capital markets risk related to our current plan. So it would be used, I think primarily, in us doing something from a growth standpoint. Further growth than what we have.

Helpful. Thanks a lot.

Jeff Birnbaum, Wunderlich.

Good morning. I just wanted to actually follow-up. One quick question on that last comment. So just to understand correctly, you think you've eliminated capital markets risk for years meaning as you evaluate the pace of CapEx this year. And I'm sorry I haven't been able to get the slides off the website, yet to see what you had in there. But you don't think you need to tap the public markets in 2017, either, it sounds like. Is that correct?

We don't believe we have to tap the public markets at all related to this transaction given the ability to issue units to Summit Investment to satisfy the deferred payment.

So, Jeff, we expect to have over $500 million in liquidity closing on the initial purchase. And then with that $1.25 billion facility that we're putting in place, we don't expect, given just this transaction, to have less than $300 million of revolver liquidity throughout that entire deferral period.

And is there, depending on commodity prices and developments and things like that, an upper bound at which you are comfortable taking leverage up to?

Again, this is relatively leverage neutral for 2016, and then, with all of the coverage that we anticipate during the deferral period, it actually will be bringing in leverage in 2017 and forward. So, we are still a four times leverage, longer term outlook company over the longer term.

Okay, and at the GP, can you give us a quick update there about post deal liquidity, and borrowings there as you're talking about their ability to continue to be supportive.

The GP, Summit Investments, will have remaining in its ownership, its IDR ownership, obviously, it owns 30 million units, as well it won't have any leverage up at the GP, so there is no debt up there pro forma, post close of the transaction.

And then, you go further up, our sponsor, as I mentioned, still retains capital available to us to support us in fairly meaningful amounts, too. So that option is still available to us, as well, to participate in growth projects, be it development, organic growth or M&A.

So that $360 million will all be used to pay down debt. There will likely be zero distributions relative, maybe $5 million to $10 million, but basically zero distributions relative to the $360 million.

Got it. Thanks, and just one last one for me.

Steve, you mentioned the price deck is going to, obviously, for your portfolio, influence your assumptions on volumes much more than pop realizations, or something like that. I know it's an inexact science, but given the different price decks that different customers are using for their own guidance, how did you arrive at this deck and the internal volume assumptions you have in there to get to your 2016 guidance, as well as, in many ways, the multiyear CapEx and EBITDA assumed from the drop down assets?

Yes. So, a multiyear, I will take it backwards, Jeff. A multiyear, a large part of our CapEx is really the Summit Utica, as we still build out for XTO. I think we have very good line of sight in that, and very good communications with XTO related to that development. So, we feel really good about that.

How we develop them, it's challenging because of our customer's CapEx budgets have been challenging. I will make one big note related, because I know a lot of folks are focused on the Bakken and our customers there. Our 2016 guidance assumes the recent announcements by some of our anchor customers, namely Whiting, and their activities there. We've known about that for a period of time. That has been built into our, that activity level, or lack thereof, has been built into our 2016 guidance. As I would say, a pretty low activity level overall, as you would imagine in this commodity price environment.

And so for 2016, we did pretty good, given we're connected to the wellhead, and a lot of times that includes us having to develop and build to the wellhead for certain areas, for certain customers, we get pretty good line of sight on 2016. That can obviously change and has changed over the last couple of months. To the extent we know about, we've built it into our guidance. I hope that helps some.

Yes. Thanks for all the answers.

James Carreker, US Capital Advisors.

Good morning. I was wondering if you could talk about the thought behind that deferral payment including the cumulative CapEx, excuse me, the cumulative EBITDA of the systems between now and 2019.

Yes. When you think through the deferral, what, basically you have, is you have the MLP getting the burden of the CapEx spend over that period of time and the benefit of the cash generated by the asset over that period of time. And so those, effectively, come close to pretty much equaling each other out. Actually, EBITDA is probably a little bit higher in our base case assumptions.

And so an easy way to think about it, to try to simplify it a little bit, is if the MLP was going to purchase these assets at the end of 2019 for $1.2 billion, which is the estimate today of the deferred payment plus the upfront price. Based upon our estimate of 2019 EBITDA, it would be right at 6.5 times. So that is another way to simplify it, is the price paid, that we are anticipating to be paid, is right on 2018 and 2019's average EBITDA.

In that scenario, the SMLP would not be responsible for interim CapEx correct?

That is right. And would not get the benefit of the interim EBITDA, either.

I guess that's my question. Is there really, the interim EBITDA, if it all goes back to the balloon payment, how you think about that benefit if it gets tacked on to the principal, so to speak.

Right. So we're basically getting reimbursed for the CapEx spend to the extent that it exceeds EBITDA.

Okay. I see what you are saying. So, given the EBITDA in the interim periods, it gets tacked onto this deferred payment. So how do you balance that with the level of distributions that you make in the interim period? Given that all that increased EBITDA increases the size of that future payment?

Absolutely. So, if you think about coverage and leverage, and the thought of high coverage and lower leverage and that is exactly what we're using that cash flow in the interim. It allows us to, basically, pay for our CapEx program without using the equity of a debt capital market.

I can give you a little more color. We tried to you color in the comments, too. We expect coverage to grow, significantly over the next several years. And we are going to balance distribution growth knowing we have a deferred payment and knowing we want to come out of that after that deferred payment to still be 1.1 times or higher. And four times, or so, levered. So that is how we balance it.

And so you think, with the deferral payment, your target, when you balance maybe cash versus unit issuance, you are trying to target maybe a four times leverage ratio?

That is right. After the deferral period payment, we anticipate to be 1.1 times or higher, and around 4 times levered.

Okay. And then can you talk about, what type of assumptions go into the deferral payment currently estimated at $800 million to $900 million, in terms of, what you need to see out of your producer customers, in terms of either rigs or other activity that gets you to that Bogie in 2020.

I think it's mostly, most of the growth here is Utica. As we mentioned, it's going to be ramping up significantly. Our assumptions on that payment are based upon the current commodity price environment and strip prices and the level of activity that we are seeing today, and not much of an increase in activity going forward.

I want to remind everybody, in the Utica, interesting, because we just in the gathering side, so the shift, the big shift to dry gas Utica is actually very advantageous to us. And so, I think we have four rigs combined, some at Utica and OGC drilling dry gas today. That is very advantageous to us versus wet gas drilling. We just get more volume. We just get paid rate times volumes, so the more volume is actually beneficial to us.

But the expectations are made projecting out that payment based on the current commodity price environment. That goes along with our coverage expectations and our leverage expectations.

Thank you for the color. That is all for me.

Yes, of course. I think we have time for one more question.

Andy Gupta, HITE Hedge.

This is actually Matt for HITE. Thanks for taking the question.

When we think about growth, is it safe to assume that the growth for the pro forma company, after the drop down is overwhelmingly coming from the Utica in your projections, and that you're largely assuming the rest of the operations are fairly flat?

Yes. I think in today's commodity price environment, projected out to 2019 or 2020, I think that assumption is correct of where growth is balanced. It would be the Northeast.

And so, you're seeing that Northeast being enough of a driver of growth that you can move from the 275, or so this year up to some number above 400, even in the current commodity strip projected forward?

That is correct.

And so, that would be, again, within that, that would be overwhelmingly XTO, right? Perhaps Antero and others, but XTO would be the key driver of that, right?

Yes. I think Gulfport, as well, too. We gather Gulfport's gas across all three windows including dry gas, as well. In fact, most of the growth in our fourth-quarter volumes on OGC were actually dry gas volumes coming online. So both of those.

But in your talks with, predominantly those two entities, but also the others across the system, you don't feel that you need to strip to move up. The strip isn't contained in the commodity, so it complies with, the spot price can move up over time, but you don't need the strip in natural gas or in crude oil to move up to hit those targets based on the conversations you've had with your customers?

Yes. Our assumptions, the best way to answer that is, our assumptions are based upon the current commodity price environment, and the reflection that they are giving us or comments they are giving us on their activity levels in that environment. So, yes, one of the reasons we are in the current commodity price environment is because of the Utica. So, they go a little bit hand-in-hand.

Got you. Last clarification.

I know we're at the end of the call. When you said that the pro forma for the deferred payment, you expect the distribution coverage to be at least 1.1. Is it safe to assume that's on the current distribution, or is that unexpected growth in the distribution over time?

There is some implied growth between now and the deferred payment in that from a distribution standpoint.

Okay. Great. Thank you. And, again, congratulations on getting the deal executed.

Thanks, and if we didn't get to your questions, please feel free to follow up with us offline, and we'll be happy to work with you, and we appreciate everybody's attendance. Thanks.

Thank you. I will now turn the call back over to Steve Newby for closing comments. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.