American Midstream Partners LP Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: American Midstream Partners, LP (AMID)
by: SA Transcripts

American Midstream Partners LP (NYSE:AMID)

Q4 2012 Earnings Call

April 17, 2013 8:00 am ET

Executives

Nicholas Noppinger - Director of Corporate Development and Investor Relations of American Midstream GP, LLC

Brian F. Bierbach - Chief Executive Officer of American Midstream GP LLC, President of American Midstream GP LLC and Director of American Midstream GP LLC

Daniel C. Campbell - Chief Financial Officer of American Midstream GP, LLC and Senior Vice President of American Midstream GP, LLC

Steve Bergstrom

Matthew Rowland - Managing Director

Analysts

Edward Rowe

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

James Jampel

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 American Midstream Partners LP Earnings Conference Call. My name is Sue, and I will be your event operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Nick Noppinger, Director of Corporate Development. Please go ahead, sir.

Nicholas Noppinger

Thank you, Sue. Good morning, and welcome to the fourth quarter and fiscal 2012 investor call for American Midstream Partners. Before we start, I'd like to mention that our earnings release can be accessed at the Investor Relations page of our website. Our 10-K was filed with the SEC yesterday afternoon and is also available on our website. A replay of this call will be available later today until May 17.

Leading the call today are Brian Bierbach, Chief Executive Officer; and Dan Campbell, Chief Financial Officer. Also on the call are Steve Bergstrom who was appointed Monday as Executive Chairman of our Board; and Matt Rowland who was appointed as our Chief Operating Officer. Brian and Dan will be discussing our results for the fourth quarter and 12 months ended December 31, 2012, after which, Brian and Steve will provide an overview of the ArcLight transaction which closed on Monday. Afterwards, we will open up the call for your questions.

We would like to remind you to take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to statements made in today's conference call. This call will contain time-sensitive information, as well as forward-looking statements, which are only accurate as of today April 17, 2013. American Midstream Partners expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date, except as required by applicable law. For a full list of the risks and uncertainties that may affect future performance, please refer to the company's periodic filings with the SEC. With that, I'll turn the call over to Brian.

Brian F. Bierbach

Thanks, Nick, and welcome everyone to our earnings call. 2012 was both exciting and challenging for us as we completed our first full year as a public company. Key highlights for 2012 include the acquisition of the Chatom gathering, processing and fractionation assets in Western Alabama, which are operating in line with our expectations. We're excited about the longer-term opportunities with Chatom and look forward to sharing more with you as we move forward.

We also landed our first significant asset development project for Silver Oak Energy in the Woodbine in East Texas. We're proud to announce that earlier this year, we commenced operation on the gathering system for Silver Oak under a long-term midstream services agreement. We view the Woodbine as a strategic development play with significant opportunities to expand our midstream presence.

Shifting to our financial results. Our 2012 gross margin was up year-over-year, but our results were impacted by volatile commodity prices; the unexpected impact of damage resulting from Hurricane Isaac; a decrease in throughput volumes from a customer on the Quivira system; and the turnaround on Bazor Ridge facility. As we sit here today, these events are mostly behind us, and we are enthusiastic about our backlog of expansion opportunities within our asset footprint and additional development opportunities we are in the process of pursuing in new geographic areas.

Before turning the call over to Dan, I want to mention how excited we are about the strategic investment by ArcLight Capital Partners through their portfolio company, High Point Infrastructure Partners, and the accompanying acquisition of the High Point assets. We're going to spend more time on the call talking about this very significant transaction, but in summary, ArcLight has a proven track record of investing in growth-oriented midstream companies, and the High Point system is a strategic asset to our company that extends our reach into new areas in the Gulf of Mexico.

The transaction provides immediate synergies, adds scale, provides our capital -- or improves our capital structure and positions us for continued growth in the midstream sector. We are excited to work with ArcLight and the High Point team to pursue growth opportunities and to create long-term value for our unitholders. With that, I'll turn the call over to you, Dan.

Daniel C. Campbell

Thank you, Brian. My comments today will be brief, and I'll focus on an overview of our fourth quarter and full year 2012 operating results, which will include segment performance and the status of our commodity hedges and our capital expenditures.

Just as a reminder, our earnings release and 10-K include reconciliations of certain non-GAAP items that we'll discuss on today's call, as well as their GAAP equivalents. And we remind you to refer to these reconciliations and additional details regarding results that are contained in our SEC filings.

We reported total gross margin of $12.5 million for the fourth quarter, approximately 6% lower than the prior year period, and gross margin for the full year was $50.6 million, about 10% higher than the prior year period.

In our Gathering and Processing segment, gross margin was $8.7 million in the quarter, and $37.2 million for the full year. Our fourth quarter results include gross margin from the Chatom plant that we acquired in July of last year, offset primarily by plant downtime as part of a plant turnaround in our Bazor Ridge facility, and lower throughput on our Quivira system and Burns Point.

The increase in year-over-year gross margin was primarily the result of Chatom, as well as the full year gross margin from Burns Point, which we acquired in November 2011. And this increase was partially offset by lower volumes on Quivira and Burns Point, the Bazor Ridge turnaround and downtime on our Gloria and Lafitte systems as a result of Hurricane Isaac. And so average daily throughput volume in our Gathering and Processing segment decreased nearly 34% for the quarter, but has improved nearly 16% for the full year.

Average daily NGL production for the quarter was down nearly 39% and down for the year as well. And the year-over-year and quarterly declines were attributable to the turnaround process at our Bazor Ridge system and declines at Burns Point that were partially offset by the production at Chatom, which we acquired during the year.

In our Transmission segment, we reported gross margin of $3.8 million and $13.3 million for the quarter and full year, respectively. Transmission gross margin in the fourth quarter and the full year were roughly flat over the same periods in 2011, and our Transmission segment continues to provide a stable base of cash flow for our company. Our operating expenses were higher for the quarter and for the full year periods as you'd expect due to primarily to the cost associated with the Chatom and Burns Point plants, the acquisitions we did last year and the prior year.

SG&A was higher year-over-year as a result of the ongoing costs associated with being a publicly traded company, as well as pursuing strategic development initiatives, as well as onetime costs related to closing the Chatom acquisition in the third quarter of last year.

Adjusted EBITDA for the fourth quarter and full year 2012 were lower than the same periods in 2012 due to the events that impacted gross margin that I mentioned, as well as the increases in SG&A expenses that were partially offset by the addition of Chatom and Burns Point. And accordingly, our distributable cash flow decreased year-over-year for the same reasons.

With respect to our commodity hedge program, as of December 31, approximately 65% of our expected exposure to NGL prices for propane and heavier NGLs for 2013 is hedged, and we've decided to hedge a lower percentage of our exposure to ethane in 2013.

And as always, the details regarding our hedged transactions can be found in our annual report. And of course, as we look forward, we continue to evaluate hedging opportunities that will provide additional cash flow security in 2013 and beyond.

Regarding capital expenditures, we incurred $7.2 million in the fourth quarter and $11.7 million for the full year. The full year composition of CapEx includes $4.4 million of development; $6.5 million for maintenance; and roughly $0.5 million for our reimbursable projects.

Turning to the balance sheet. As of December 31, we had approximately $130 million borrowed on our revolving credit facility, and our leverage ratio was above the covenant that was allowed in our credit agreement. So over the past several months, we've worked with our lender group to execute a long-term amendment that was finalized this week. And among the other items, the amendment permanently waived the leverage covenant ratio for December 31 and March 31 quarter, modified the leverage ratio of covenants to provide us with some operating flexibility going forward, as well as permitted the issuance of the preferred units associated with the ArcLight transaction that we announced yesterday. And with that, I'll turn the call back over to Brian.

Brian F. Bierbach

Thanks, Dan. Now I'd like to discuss in more detail the transaction that was announced yesterday. Please refer to the supplemental slides that are now available on the Investors section of our website for additional details.

Highlights of the announcement made yesterday include the acquisition by High Point Infrastructure Partners, LLC of 90% of American Midstream General Partner units from AIM Midstream Holdings, and 100% of the subordinated units of American Midstream.

High Point is a portfolio company of ArcLight Capital partners, and this transaction has resulted in the change of control of American Midstream. AIM has retained a passive 10% interest in American Midstream's General Partner.

Steve Bergstrom, the former President and Chief Operating Officer of Dynegy, has been appointed Executive Chairman of the Board of Directors of American Midstream's General Partner.

In addition, Dan Revers and Jake Erhard, both of whom are affiliated with ArcLight, were appointed to the Board. I'd like to express my appreciation to Bob Hellman, Ed Diffendal, and Kent Moore for their contribution to the partnership over the past 3 years.

I will continue as President and CEO, and Dan will continue as CFO of the company. Matt Rowland, Managing Director at High Point, will join our management team as Chief Operating Officer.

We welcome Steve, Matt and the ArcLight team to American Midstream, and we look forward to working together to solidify the company's financial position and to lay the foundation upon which the partnership can grow in the years ahead.

Under terms of the transaction, American Midstream has issued $90 million of Series A convertible preferred units to High Point in exchange for operating assets and approximately $15 million of cash. I think it is worth noting that the High Point assets are expected to generate approximately $10 million to $12 million of annual fee-based EBITDA.

The $15 million in cash proceeds from the issuance of the preferred units was used to pay down debt and pay expenses associated with the transaction. The Series A convertible preferred units were priced at $17.50 per unit, a 3.8% premium to the 30-day weighted average price of AMID's units as of April 12, 2013. These preferred units are entitled to quarterly cash distributions of $0.25 per unit and in-kind quarterly distributions of $0.25 per unit for 6 quarters, after which, they will then receive the full cash distribution.

We are excited about the addition of High Point's operating assets and believe that they will complement our existing asset platform, enabling us to capitalize on commercial and operational synergies, realize cost savings and allow us to pursue already identified growth projects. We are equally enthusiastic about American Midstream's new Board of Directors and management team members, all of whom represent an invaluable set of resources going forward.

We know that through High Point, ArcLight is making a significant investment in American Midstream and is deeply committed to ensuring the financial health and growth of the partnership. Now I'd like to turn the call over to Steve Bergstrom to make some closing remarks. Steve?

Steve Bergstrom

Thanks, Brian. I, too, am very enthusiastic about the opportunity to help guide American Midstream through this very exciting time in the company's history. With the financial and strategic support of ArcLight, I am confident that we will be able to develop the foundation for substantial operational and financial improvement in the coming years.

That being said, as is the case with any transformative events, improvements will take some time to materialize. However, we are confident that incremental progress will be made towards our longer-term goals by way of improved operational performance and corresponding financial health.

Over the coming 6 to 12 months, the American Midstream team will focus on 3 overarching objectives that we believe will, over time, create long-term value for our unitholders.

Our first objective is to complete a comprehensive company-wide asset optimization analysis. This process will begin with the integration of the valuable assets contributed by High Point. The assets that will be integrated within American Midstream include approximately 700 miles of onshore and offshore pipeline, some of which are directly connected to the Gloria, Lafitte and Chalmette systems owned by American Midstream. These pipelines provide producers with a complete range of natural gas gathering and processing service.

With its access to Southeastern gas markets, High Point enjoys a strong index premium relative to other pipeline systems in the region, and its assets are well positioned to transport deep shelf production being developed in the Breton Sound and main pass production areas and to attract deepwater projects in the Mississippi Canyon production area.

In terms of the combined business, we will conduct a thorough asset-by-asset examination of our portfolio. As part of this process, we will capitalize on commercial and operational synergies that exist between the combined systems. Furthermore, we will also identify and act upon cost savings and asset-rationalization opportunities.

Secondly, we will continue to implement the financial restructuring of American Midstream that was jump-started by yesterday's announcement. The infusion of cash and assets into American Midstream solidifies the partnership's financial position and provides greater financial flexibility going forward.

In addition, we are evaluating a permanent restructuring of the partnership's subordinated units and incentive distribution rights. In all of these efforts, we will remain closely aligned with the long-term interest of our unitholders and keenly focused on supporting a healthy, stable MLP platform that can ultimately take advantage of both organic and asset development opportunities.

From a financial perspective, High Point brings us substantial fee-based cash flows and provides enhanced asset diversity, with 65% fee-based cash flows pro forma versus 50% prior to the transaction. It also dramatically improves American Midstream's leverage ratio. Importantly, American Midstream will be able to maintain its current quarterly distribution of $0.4325 per unit to common unitholders, with opportunities to improve on this going forward.

And finally and parallel to our focus on maintaining American Midstream's financial health, we will also be deeply committed to future growth. With the resources of our strong financial sponsor, we will have the ability to pursue organic and external growth projects and what otherwise -- that would otherwise be outside the company's financial resources. Quite frankly, the opportunity that I see for the combined business to grow is what makes me so excited about this transaction. We are working on several identified asset development projects that we are close to finalizing. In addition, we expect that ArcLight will use the partnership as a platform for future M&A activities for midstream projects. The process to identify and prioritize these projects will begin immediately.

In summary, we are energized and excited about the opportunity ahead, and we look forward to reporting our progress to you in the future periods.

With that, I'd like to turn the call back over to Brian.

Brian F. Bierbach

Thank you, Steve. That concludes our prepared remarks. Operator, we're ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Edward Rowe, Raymond James.

Edward Rowe

Pro forma of the new assets, the leverage metrics have dramatically improved. Is there a particular target, capital structure or debt-to-EBITDA metric that you guys are looking for before you start pursuing the growth opportunities?

Brian F. Bierbach

I think that the long-term, as we think about the capital structure, we're an MLP, so obviously, we just started this transformative type of transaction and that there'll be probably some further things that we do, but there's -- we're going to be largely kind of debt and equity, 50-50. And I think, from a leverage perspective, we're going to be somewhere in the low to mid-3s. It's kind of where we would target that. And it'll probably takes us time to get there, but we're headed there, and we've kicked it off strongly with this transaction.

Edward Rowe

Okay, very good. And my next question, when you guys talked about organic and external growth projects, given ArcLight's partner's portfolio, is there any potential for dropdowns to AMID with their portfolio?

Steve Bergstrom

Yes, this Steve. ArcLight's involved in a lot of midstream opportunities. And while we can't guarantee that there'll be anything going necessarily into this platform, it makes logical sense for us to look at a lot -- anything that flows through the ArcLight portfolio of companies as a possibility to do that through this vehicle. As you know, there's a lot of activity in the midstream space and ArcLight's very, very active in this space. And we look for opportunities to be able to do that in the future.

Edward Rowe

Okay. Couple other, I guess, mulling questions. Chatom and the Burns Point, since they're up and running, is there a better OpEx run rate that we should model going forward?

Daniel C. Campbell

Well, we should have -- this year, obviously, we have a full year result of both of them, so we'll have them both here. But I don't think that we have provided any specific detail about either of those that they don't show up as a single segment. Ed, you said -- I think I would just use your model and your assumption there for our full year run rate and go with that.

Edward Rowe

Okay, all right. And last question. In regards to looking at restructuring the subs. Are you guys looking at maybe restructuring the IDRs as putting the 50-50 splits in the next couple of quarters? Or how are you guys looking at the opportunities or strategies around that?

Brian F. Bierbach

Well, we haven't completely thought through that yet. We just want to kind of put that out there as a possibility. We will give you more information on that as we further develop what our plans are, but we just wanted to put that out there as a thought-provoker at this point.

Operator

And our next question comes from Gabe Moreen, Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Outside of the -- looking at individual assets and some of the growth initiatives you might pursue, do you guys have a number both on maintenance and growth CapEx we should expect for '13?

Daniel C. Campbell

For 2013? You have our normalized number that we use for our DCF purposes, Gabe, and we'll update that for the High Point assets, because there's a lot of maintenance capital there. It's not a significant number, sort of go up a little bit, but it won't change it a lot.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. And then...

Daniel C. Campbell

And then we normalize for our DCF, as you know.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Right. And then in thinking about the High Point assets, and I guess, some of the decline rates behind -- production behind the assets, can you talk a little bit about -- I've seen all the fees there coming mostly volumetrically based, but can you talk about decline rates and maybe how we should think about that asset? Winning potential new packages of gas to the system, whether you expect growth in '14 versus '13, just some more color there?

Matthew Rowland

Sure. This is Matt Rowland. Just a reminder, we assumed full operation of these assets, November of last year. And through that process of evaluating them, one of the things that we like most about them was the stable throughput on the system. If you go back, historically, we've had actually a very flat production profile, and we expect that to continue in the future. We still continue to see quite a bit of activity of producers going after -- primarily going after oil, but we'll get the associated -- gas associated with that, and that helps maintain that sustainable throughput. There's been a couple of opportunities that we'll continue to pursue. One of the projects we're working on currently is a connection to the Venice processing plant on the residue side, which we know will boost our throughput in the latter part of this year when that project is complete. And we are actively talking to several producers that we know have deepwater projects on the boards in the next 12 to 18 months. So for now, we're projecting a pretty stable throughput, but we expect that to improve later in the year and into 2014.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. Okay. And then just last one for me, just for a little more pressing on the balance sheet. Dan, you said you wanted to be in the low to mid-3s, and it takes a little while to get there. I mean, given the issuance last -- or announced yesterday, the converts [ph], you think, you need more work outside of just delivering operationally and what occurred yesterday? Or do you think you just kind of want to deliver over the next several quarters and you'll get there?

Daniel C. Campbell

I think, it'll take a period of time and that will depend on what other opportunities we have going forward. But I think, just starting with the transaction yesterday, that will immediately start to bring the leverage down. And then you'll see, over time, other projects that we have an opportunity. We'll continue to do that, but it's going to take a few quarters before we get there.

Operator

And your next question comes from James Jampel.

James Jampel

Most of my questions have already been answered. Can you just talk a little bit of the genesis of the transaction? How it came to be? How you guys reached an agreement like this?

Brian F. Bierbach

Yes. So this is Brian Bierbach. So probably the genesis was we had an established relationship with High Point, given that their assets are located just adjacent to our Southern Louisiana assets, the Gloria and Lafitte systems. So actually, we had gotten to know one another. Our systems are connected together currently, and we had a very kind of productive commercial relationship in place. I think, as we looked at the growth opportunities for American midstream, as well as the synergies that could have been realized from High Point, we started the conversation and that just kind of led to this strategic combination here we just announced yesterday. Matt, do you have anything to add?

Matthew Rowland

No. We viewed it as a natural fit for us to join forces. And it seemed a natural progression for us, and we're excited about the opportunity.

James Jampel

Why not buy out the entirety of the GP?

Brian F. Bierbach

It was just part of the negotiations and part of the structure that was reached, but I think, given the control and the ownership that ArcLight and High Point now have, we're going to be really enjoying the strategic benefits of aligning with a strong industry partner. And I think for all intents and purposes from a going forward standpoint, it functions as a 100% ownership.

James Jampel

And what's the difference between a Class A and a Class B unit in general partner?

Daniel C. Campbell

That's just the way -- that's just really just the split between the 2. It's all that really is. So you've got 90% and 10%, and so you just have the split between the 2 different owners and it helps us to deal [ph] way of voting. Our rights are established. And it's really just to provide that legal structure around how that ownership actually works.

Operator

[Operator Instructions]

Daniel C. Campbell

So this is Dan. It looks like there's not any more questions today. And we appreciate your operating as the operator, and folks thanks for joining us on the call today. If you do have any questions, as always, you can reach us, and please do so. We look forward to talking to you about the transactions.

Brian F. Bierbach

Thanks, everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.

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