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Summit Midstream Partners LP (NYSE:SMLP)

Q3 2012 Earnings Call

November 13, 2012 11:00 AM ET

Executives

Marc Stratton – Head, IR and Treasurer

Steven Newby – CEO

Matt Harrison – CFO

Analysts

Darrick Walker – Bank of America Merrill Lynch

Operator

Welcome to the third quarter 2012 Summit Midstream Partners Earnings Conference Call. My name is Sandra and I will be your 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. Marc Stratton, you may begin.

Marc Stratton

All right, thank you Sandra and good morning everyone. This is Marc Stratton; I am the treasurer of Summit Midstream and Head of our Investor Relations activities. I’d like to thank you for joining us today as we discuss our financial and operating results for the third quarter of 2012. If you do not already have a copy of our third quarter earnings release that was issued yesterday, please visit our website at www.summitmidstream.com where you’ll find it in the investor section.

With me today are Steven Newby, our President and Chief Executive Officer and Matt Harrison, our Chief Financial Officer. Before we begin, I’d like to note that our discussion today may contain forward-looking statements. These statements may include but are not limited to our estimates of expected volumes, future operating expenses and same capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy and other plans and objectives for future operations. These statements are based on management’s believes and assumptions and are also made based upon information that was currently available to management. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance of such expectations are proved to be correct. Such statements are subject to certain risks, uncertainties and assumptions. If one or more of those risks materialize or should the underlying assumptions prove incorrect, actual results may vary materially from those expected. These risks are discussed in greater detail in our rule 424(NYSE:B) prospects on file with the Securities and Exchange Commission. Please also note that on this call we will use the terms EBITDA, adjusted EBITDA, distributable cash flow and adjustable distributable cash flow. These are non-GAAP financial measures and we provide reconciliations to the most directly comparable GAAP measures in our third quarter 2012 earnings release.

Finally, I’d like to point out that our initial public offering enclosed on October 3rd, 2012. As such, the third quarter 2012 operating and financial results included in our earnings release and discussed on today's call are the results of some of Midstream Partner’s LLC, the predecessor of some of Midstream Partners LP.

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

Steven Newby

Thanks Marc, good morning everyone. Thanks for joining us for Summit’s third quarter earnings call, our first as a public company. Yesterday we announced our third quarter results for 2012. Our results were very solid both financially and operationally. We reported adjusted EBITDA of 23.1 million which included $2.7 million of non-recurring expenses. Our adjusted distributable cash flow was 21.9 million. Both of these amounts were up significantly over the third quarter of 2011 amounts of 13.2 million and 12 million respectively. Of course the third quarter of 2011 amounts did not include the results of Grand River gathering which closed in the fourth quarter of 2011.

Our total volumes for the third quarter averaged 958 million cubic feet a day which was an increase of 9.4% over third quarter of 2011. That does include the pro forma results of the Grand River acquisition. More relevant, our third quarter average volume was 45 million cubic feet a day or 4.9% over first half of 2012 average volumes.

Volume growth over the first half was driven by several factors. First, DFW volumes were up 16.9% over the first half of 2012 and averaged 380 million cubic feet a day for the third quarter. The increase was primarily related to existing customers increasing production on previously connected path sites. We did connect and start flowing the first Beacon gas during the third quarter and that helped slightly in third quarter ’12 volumes.

The increased volume in DFW was offset by a slight decline in volumes transported at our Gran River gathering asset. Grand River volumes were 578 million cubic feet a date are average 578 million cubic feet a date for the quarter which is 1.7% below the first half of 2012.

This decrease was in large part by due to fill issues experienced by one of our large producers during the third quarter which affected approximately 20 million cubic feet a day of production that flows on the Mamm Creek system. I would like to remind everyone that the Grand River system is actually three systems, our Mamm Creek South Parachute and water systems with each one covered under different commercial agreements with different producers.

In the third quarter we continue to see volume declines in Orchard. This area flows most of the Mancos and Niobrara dry gas and as Encana has reduced its drilling the area given current commodity prices, we are seeing the natural declines from the wells.

Both South Parachute and Mamm as the facilities she’s discussed above in Mamm saw steady drilling activity and slightly growing volumes compared to the first half of ’12. To remind everyone our Grand River system is highly contracted in a minimum volume commitments, so lower transported volumes do not directly correlate to our revenue line. This is particular in the Orchard system where we enjoy significant volume commitment. On the growth front, our larger compressor project the DFW the unit 10 project continues on schedule and will be commissioned in early December.

We expect this capacity to be commercially available in early first quarter of ’13 the project along with some pipeline looping that is occurring lack 40 million cubic feet a day of capacity to the DFW system. During the third quarter we spent approximately $6.2 million on the project. We completed one path volume for the Beacon during the quarter at DFW, four other path volumes, two for Beacon and two for Chesapeake are currently under construction all of those path sites contain existing wells.

At Grand River our CapEx for the quarter was 9.4 million and which is primarily associated with the continuing installation of our transfer meters which is related to the acquisition from Encana last fall and the bill out of our medium pressure system in the Orchard area.

The Orchard capital has been spent is supported by significant volume commitments over the next 15 years that were part of the transaction we negotiated with Encana last year. At Grand River we remain excited about the emerging Mancos and Niobrara shale development in Piceance. Several producers in the area, WPX being the most local have now come out with some encouraging comments about the potential of formations, we have seen that with the gas flowing from those formations in our system.

Our recently closed Red Rock Gathering acquisition at our General Partner also has a development project related to the liquid area of the Mancos. Combined, our assets in the Piceance are extremely well positioned to capture this growth as producers increase their activity around the Mancos and Niobrara formation.

In addition, over the past several weeks you may have seen that there have been several upstream transactions involving our existing customer base in the Piceance. Nucor has announced an additional large JV with Encana and (inaudible) sold their assets in our dedication area to a large private operator and BBC has sold a working interest in their acreage to VanGuard.

Although it's too soon to see the impact of these transactions in general we view the development of deposit signed at future activity levels given the substantial amount of capital being deployed by new participants in the basin.

Turning to our financial guidance and yesterday’s press release we gave 2013 full year financial guidance of a $110 million to a $120 million of adjusted EBITDA and LP distribution growth of 8% to 10%. This range in growth will be achieved without the effects of any drop down transactions or other significant acquisition in development activities. The guidance is given with the belief by us 2013 will remain challenging for both natural gas and NGL prices which will effect overall drilling activities by our customers.

However, our fee based highly contracted business model combined with the location of our assets in core producing areas with significant gas existing behind our systems give us ability to achieve attractive distribution growth even in a challenging commodity price environment.

In addition, we continue to maintain a very strong balance sheet with a large amount of borrowing capacity which when combined with a support from our sponsor allows us to maintain significant financial flexibility to pursue growth initiatives.

And with that I will turn it over to.

Matt Harrison

Great. Thanks Steve. I will cover the results, as Summit Midstream Partners LLC the predecessor of Summit Midstream Partners LP. Adjusted EBITDA for the three months ended September 30, 2012 was 23.1 million compared to 13.2 million for the three months ended September 30, 2011 and an increase of about 75%, the $9.9 million increase in adjusted EBITDA was primarily due to the October 2011 acquisition of the Grand River system. The Grand River system contributed 17.1 million to total revenue and 7.6 million to operation and maintenance expense during the three months ended September 30, 2012.

Gas gathering agreement at the Grand River system also contributed approximately 3 million of adjustments related to NVC short fall payments. For the three months ended September 30, 2012. Net income for three months ended September 30, 2012 was 7.4 million compared to 9.8 million for three months ended September 30, 2011, a decrease of approximately 25%.

Depreciation and amortization expense related to the Grand River system was 5.9 million during the three months ended September 30, 2012 also interest expense increased 2.5 million as a result of higher balance drawn on the revolving credit facility in 2012 compared to 2011.

Adjusted EBITDA and net income for the three months ended September 30, 2012 include approximately 1.7 million in transaction cost related to the predecessors acquisition of ETT Canyon Pipeline LLC and approximately 1 million related to adjustments and ad valorem tax estimates for the Grand River system for 2012.

As a reminder although the ETC Canyon acquisition impacts the predecessors financial results, it is not an asset of MLT going forward. Moving on to the nine months ended September 30, 2012 adjusted EBITDA was 74.7 million compared to 37 million for the nine months ended September 30, 2011 and an increase of approximately 102%. The $37.7 million increase and adjusted EBITDA was primarily due to the October 2011 acquisition of the Grand River system. The Grand River system contributed 51.4 million to total revenues and 19.8 million to operation and maintenance expense during the nine months ended September 30, 2012.

Gas gathering agreements at the Grand River system also contributed approximately 10.4 million of adjustments related to NVC short fall payments for the nine months ended September 30, 2012.

Net income for the nine months ended September 30, 2012 was 24.1 million compared to 27.7 million for the nine months ended September 30, 2011, a decrease of approximately 13%. Depreciation and amortization expense related to the Grand River system was 17.1 million during the nine months ended September 30, 2012. Interest expense increased 5.2 million as a result of the higher balance drawn on the revolving credit facility in 2012. Also the 5.4 million of facility interest expense for the nine month ended September 30, 2012 was related to the $200 million promissory notes that were issued to our sponsors in connection in connection with the acquisition of the Grand River system in October 2011. The promissory notes were partially prepaid in May 2012 and the remaining balance was paid in full in July 2012.

Adjusted EBITDA and net income for the nine months ended September 30, 2012 included approximately 1.7 in transaction cost related to the predecessors acquisition of ETC Canyon Pipeline LLC and 200,000 in transaction cost related to the Grand River system acquisition.

CapEx for the third quarter of 2012 was approximately $21 million prior to becoming a publically traded partnership in October, we did not make a distinction between maintenance and expansion capital expenditures. We had 344.2 million of debt outstanding under our revolving credit facility at September 30, 2012. The borrowing capacity under the credit facility is 550 million. In connection with the closing of the IPO of common units on October 3, 2012 Summit Midstream Partners LP or SMLP repaid a 140 million of outstanding debt on the revolving credit facility which leaves us with approximately 345.8 million of availability. Pro forma for the $140 million repayment of debt in October 2012 totaled leverage would have approximated 2.0 times. And that concludes our formal remarks and now we’ll turn it over to Sandra and Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question is from Darrick Walker from Bank of America Merrill Lynch. Please go ahead.

Darrick Walker – Bank of America Merrill Lynch

Just a quick one on the guidance. I know you mentioned 8 to 10% there with no dropdowns, is that assuming, give me some color at least as far as what you’re assuming for the number of ridges between the DFW system as well as the Grand River?

Steven Newby

I'll give you a little bit of color maybe on overall volumes. I would assume overall volumes roughly flat with average volumes here in ’12. Not much additional drilling on the DFW system. We don't really require a lot of drilling on that system given the amount of gas, the amount of wells that we have what we call waffles waiting to be connected and shut-in on the systems. So I think we have one running today and I think that's probably consistent with what we’re assuming in for ’13.

And then in Grand River and the Rockies, we’re seeing an average of anywhere from 36 (ph) ridge running in our area and that's a fairly consistent I think with what we are assuming in ’13, but overall I would tell you, we’re assuming an actual slight decline in Grand River volumes in ’13.

So overall flat with a slight decline in Grand River.

Darrick Walker – Bank of America Merrill Lynch

And then just one more for me, any idea on potential dropdowns? I know you have the Canyon assets as a parent level. Any idea of when you guys might be able to drop those down?

Steven Newby

Yes, I would say, maybe put it a little bit different way, we have some significant projects that are being executed on at Red Rock, which are the Canyon acquired assets at the GP. We anticipate those projects being complete roughly 12 months from today, give or take a couple months and I would tell you, we need to get through those projects before we look at a drop in the asset down.

Operator

(Operator Instructions). At this time we have no further questions.

Steven Newby

Great, thanks Sandra. Thank you everybody for joining us and obviously if you have additional questions, please follow up with us offline.

Operator

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

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