Southcross Energy Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: Southcross Energy (SXE)

Southcross Energy Partners LP (NYSE:SXE)

Q1 2013 Earnings Call

May 8, 2013 11:00 AM ET

Executives

Michael Anderson – SVP and CFO

David Biegler – Chairman, President and CEO

Analysts

Edward Rowe – Raymond James

Selman Akyol – Stifel Nicolaus

James Bardowski – Sidoti & Company

Operator

Good morning and welcome to the Southcross Energy Partners, First Quarter, 2013 Financial and Operating Results Call.

As a reminder, today’s call is being recorded and your participation implies consent to such recording.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

With that, I will turn the call over to Mr. Michael Anderson, Senior Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Michael Anderson

Thank you, and good morning. We appreciate you joining us for the Southcross Energy, first quarter, 2013 financial and operating results conference call. With me today, is David Biegler our Chairman, President and Chief Executive Officer. And before we begin, I would like to remind all participants that our comments today may include forward-looking statements.

It should be noted that a variety of factors could cause the partnership’s actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements.

For a complete discussion of these risks, we encourage you to read the partnership’s earnings release and our documents on file with the SEC.

Today’s call may also contain certain non-GAAP financial measures. You can refer to the press release we issued this morning for important disclosures regarding such measures and their reconciliations.

You can also obtain a copy of our press release in the investor relations tab of our website at southcrossenergy.com.

And with those opening remarks, I will now hand the call over to David Biegler. David?

David Biegler

Thank you, Michael. I will start with some comments on our first quarter results and then move through our operating highlights and our current outlook on the business.

Because our last earnings call was on six weeks ago, today’s call will be relatively brief.

To start off, our first quarter adjusted EBITDA of $4.5 million was in line with the $4 million to $6 million range we provided on our last earnings call.

As we indicated on our last call, results in the quarter were negatively affected by start up expenses at our Bonnie View fractionator, cost related to the establishment of public accounting reporting processes and the effects of the Gregory plant fire.

Now, we move to the current move which is decidedly better. First of all, the first quarter is behind us and we believe the second quarter will show significant improvement.

The issues that have negatively affected our business over the past few quarters, are either result, or at least having a greatly diminished effect on the business.

Southcross is in a far stronger position today than a few months ago.

Since our last earnings call, we completed a bank credit amendment and completed an agreement for the injection into the partnership of $40 million in additional equity capital.

We completed these capital activities over the span of about two weeks, well ahead of our promised schedule.

We believe we have the necessary capital for the continued organic growth of our business, and have the financial flexibility that will allow us to focus on operating and growing our business.

It is important to note that during this recent financing process, Charlesbank, or sponsor was supporting of a business. Both Charlesbank and our management team continue to believe strongly in our business and in our outlook.

Second, I’ll move on to our operating highlights. First and foremost, our assets are now largely up and running. During the first quarter, we completed the expansion of the Bonnie View fractionators. And in April, we resumed operations at our Gregory processing and NGL fractionation facility.

We are now consistently producing purity NGL products that meet customer specifications. And effective May 1, we began selling the major part of our propane butane and gasoline under new contracts with improved pricing.

As we mentioned in our last call, we’ve been expanding our downstream gas and NGL business with increased opportunities and new customers such as the new NGL contracts that started just last week.

We are optimistic about our NGL and residue gas business and believe we will see increased volumes and profitability this year.

The continued expansion and development of petrochemical facilities and growth of both NGL and natural gas export facilities in the Corpus Christi area should continue to create opportunities for well-positioned companies such as Southcross.

Next, I’d like to discuss our outlook on the business.

The Eagle Ford remains one of the most active place in the country as reiterated by many analysts and producers including recent comments made by many of them regarding their first quarter performance and outlook.

Final data from the Texas Railroad Commission for 2012 Eagle Ford gas productions, which is an important data point for us, indicated average daily gas production of 1.9 billion cubic feet per day, a 58% gain over the 2011 production of 1.2 billion cubic feet per day.

The pace of growth is amazing considering production was almost non-existent in 2009.

The value of midstream assets in the Eagle Ford has responded to this increase and continues to be validated by transactions such as the recent announcement by Atlas Pipeline Partners of the $1 billion acquisition of TEAK Midstream.

As we’ve said before, the Eagle Ford is, and will remain a focus play of choice in the United States because of its prolific relatively low cost reserves and strategic location near the Gulf Coast.

We believe that Southcross’ position has a strategic advantage that will result in growth for the partnership and value creation for our unit holders.

After solidifying our operating performance, one of our key focus areas is on adding liquid rich gas supply to fill our available processing and fractionation capacity.

We are seeing the benefit of this focus and the increasing overall gas and NGL production trend in the Eagle Ford.

We’re currently in final negotiations for additional packages of rich gas supply to improve our processing volumes in 2013 and margins in the downstream NGL space.

In conclusion, we remain focused on consistency of our operating performance and capturing new business to take advantage of our well-positioned assets and existing capacity.

I believe this will results in increasing profits and distributable cash flow.

Let me turn it back over to Michael for our financial review of the quarter. Michael?

Michael Anderson

All right, thanks, David. Now, I hope that you’ve all had a chance to read the press release that we issued earlier this morning. Let me add a few details on the performance.

As David mentioned, adjusted EBITDA was $4.5 million for the quarter, that was in line with the guidance range that we have provided during our last call.

Significant items that did impact adjusted EBITDA on the first quarter included an increase in cost as we completed the structure and processes around our public reporting accounting function, secondly, start up expenses at Bonnie View, and then lastly, the effects of the Gregory fire.

In total, G&A expenses during the quarter included about $1.2 million of consulting and other expenses as we established the public reporting processes and also the property insurance deductible related to the Gregory fire

We do not expect either of these two items to continue in any material way going forward.

David mentioned our operating and growth focus areas which we continue to believe will result in fourth quarter adjusted EBITDA between $14 million $17 million and that is consistent with our prior guidance.

The improved financial performance assumes steady processing and fractionation operational performance, and NGL price deck as forecasted by PIRA which is consistent with how we’ve done it before, incremental profitability, from our new NGL contracts that started May 1st and a modest increase in rich gas on to our system, which we believe is achievable based upon our existing connections and current forecasted production maps.

Maintenance capital expenditures were $700,000 for the quarter, that was slightly less than forecast. Growth capital additions to PP&E during the quarter were approximately $26 million.

Capital expenditures on the cash flow statement were $49 million which included growth and maintenance expenditures as well as cash that was paid for capital additions that were actually incurred in 2012.

Growth capital during the quarter was largely related to completion of the Bonnie View fractionation facility and the Bee Line pipeline. And consistent with our prior guidance, we continue to estimate that growth capital additions over the final three quarters of 2013 will be between $20 million and $25 million.

These investments will be focused on EBITDA enhancing projects, most of which are expected to be pipeline extensions from our existing system to gather incremental gas.

Interest expense during the quarter was $2 million and distributable cash flow for the quarter was $2 million. We had $246 million in debt outstanding under our revolving credit facility as of March 31.

We reduced this debt by 34.2 million with the equity capital raise on April 12 and expect to reduce that by another 5.8 million when we complete the final portion of the $40 million capital infusion on or around May 15. We currently expect that our debt balance on June 30th at the end of the second quarter will be approximately $235 million to $240 million.

As a reminder, we announced on April 30 the cash distribution of $0.40 per common unit for the three-month period ended March 31. And this corresponds to our minimum quarterly distribution of $0.40 per unit or $1.60 on an annualized basis.

We believe that our distributions over the course of 2013 will meet or exceed this minimum quarterly distribution of $0.40 per unit. And then lastly, we do expect to file our first quarter form 10-Q within the next day or two.

And with that, I will turn the call back over to David for closing comments before we open up the lines for questions, David.

David Biegler

Thank you, Michael. And I thank all of you for joining us today. We will be on a tour at the East Coast soon and hope to see some of you in those meetings. With that I would like to open the line for questions. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Edward Rowe with Raymond James. Please proceed with your question.

Edward Rowe – Raymond James

Hi, good morning.

Michael Anderson

Hi. Good morning, Edie.

Edward Rowe – Raymond James

With the Eagle Ford market gas processing in relative, in balance and with some additional gas processing coming online the back half of the year. Can you share what your thoughts are on the partnerships’ ability that really capture some incremental volumes, given a little bit of the slack in the market right now?

David Biegler

Hey, Edie. This is David. I’ll comment on that. I think in general or generically when the industry develops let’s call it a boom area such the Eagle Ford; you’re always going to have a lumpiness in supply-demand balance. And what we’ve seen is it might be a bit and we mentioned that last quarter that we thought was kind of the quarterly effect and it was.

I can only comment as it relates to our particular business because remembering that the Eagle Ford is several 100 miles in link. And a lot of your advantage or disadvantage in this Midstream business is geographic proximity. I can tell you that we continue to have a high interest from people in terms of different transactions to add volumes into the plant.

We’re not seeing anybody let’s say, dramatically changing their strategy in terms of contracting for capacity. People as the nature of the industry, you’re focused on several years out as you are in the next six months. And so, a lot of this is what you’re contracting philosophy going to be around now relative to securing your off take [ph] position as a producer in the future.

So it’s a long answer but the bottom line is we don’t get too exercised about this quarter’s processing plant or whatever. And the other thing you’re seeing is you’re starting to see that the long ago predicted bifurcation between O plants and reduced recoveries and efficiencies, and those and their competitiveness relative to the new plant.

So bottom line is we continue to see interest in our processing, and are contracting forth and continue to feel good about the future.

Edward Rowe – Raymond James

All right, very good. And going back to when you talked about the specification NGL. So that differential between Mont Belvieu going forward that is probably vanished by now. And we should model, spec gas and Mont Belvieu pricing going forward?

David Biegler

No, Edie, not really. What I was describing was the effect of the startup issues around our fractionator at Bonnie View and the creation of or the inability for a period of time during the quarter. And then forth and extended some into the first quarter to create on spec product, meaning quality specs such that it could be taken directly to the markets in the, let’s call it the regional market in the Corpus area.

That was a start up issue that created the differential that was transitory. That is now passed us as the fractionator have been working well for a period of time now. And we’re again, selling into the local market. I mean, basically when you create all spec products out of a fractionator, the only way to get rid of it is to send it to another fractionator so you double fractionating and paying extensive trucking cost.

So it’s not really at Belvieu to Corpus differential at all.

Edward Rowe – Raymond James

Okay.

David Biegler

On a go forward basis, we don’t see anything that’s changed the original thesis of that differential. And in fact we see it more and more the development of off take out of Corpus and export as well as you saw at Corpus area.

Edward Rowe – Raymond James

All right, very good. Last question for me, specifically in the industry we’re seeing a lot of focus move more toward the downstream infrastructure. And do you guys still see the potentially second Woodsboro or do you see more NGL storage or residue gas infrastructure for organic projects down the line?

David Biegler

Well, I actually very much appreciate the question because it lets me elaborate on the centers or to that and the script [ph]. We actually and I think we’ve alluded to it a bit last time. And I’ll tell we very much feel the same way. And that is our near-term focus right now in terms of the opportunity we see is predominantly downstream processing and fractionation.

And that’s residue gas as well as NGL disposition improving margins for NGLs downstream of fractionators, or transporting or whatever. That has a lot of our attention now. But at the same token, we have not by any means either abandoned or permanently deferred, the second processing plant.

In fact we’ve finished the engineering and the specification for it. And have it ready to proceed and to order whenever we feel comfortable with the wet gas supply profile that we see about the time the plant would come on. I mean, the good news is that the log time of ordering, processing plants et cetera, has changed significantly in the last 12 months.

So we’re not worried about lead time per say. But to emphasize it, a lot of it for us is in fact exactly what you’re saying in terms of the things we’re doing now. I mean, if you had to describe our management focus right now it’s first and foremost, it’s wet gas supply in order to fill up the available capacity. And the second is downstream margin improvement or volume growth of both gas and NGL.

Edward Rowe – Raymond James

Thank you.

David Biegler

Thank you, Ed.

Operator

(Operator instructions) Our next question comes from the line of Selman Akyol with Stifel. Please proceed with your question.

Selman Akyol – Stifel Nicolaus

Thank you. Good morning.

David Biegler

Good morning.

Selman Akyol – Stifel Nicolaus

Two quick questions here. First of all, you alluded to it a little bit, the $49 million on the cash flow versus the 26 million of capital additions in the quarter. Is there any more of that coming this year or is that completed for cash for capital expenses occurred in 2012?

Michael Anderson

What we’re seeing right now, Selman is we’re ramping down our growth capital. We probably have another $15 million over the course of the next quarter, or so in terms of it’s really what it is, it’s reduction of payables.

So we probably see that and then we’ll probably be at a steady level in terms of our working capital balances and growth capital spending.

Selman Akyol – Stifel Nicolaus

All right. And then...

David Biegler

Selman, just to add. One of the things you might focus on in maybe the k-link [ph] comes out, if you look, the accounts payable balance from 12-31 to 3-31 dropped by $35 million and that basically is a reflection of the change in cash versus non-cash investment for CapEx.

So we don’t see, given, as Michael said, the ramp down of CapEx, and at least the bare minimum, the more constant level of CapEx, we don’t see that affecting future quarter.

Selman Akyol – Stifel Nicolaus

Okay. I appreciate your comments on the distribution on the go-forward basis, but can you remind us again of sort of what your desired coverage ratio is with Eagle Ford?

Michael Anderson

Yes. We, I mean, have very consistently said about 1.2 times, is our target coverage ratio.

Selman Akyol – Stifel Nicolaus

All right. Thanks.

Operator

Our next question comes from the line of James Bardowski with Sidoti & Company. Please proceed with your question.

James Bardowski – Sidoti & Company

Good morning gentlemen. Thanks for taking my call.

Michael Anderson

Good morning, James.

James Bardowski – Sidoti & Company

I just have a few pretty quick ones here. But the first is aside from the 40 million convertible preferred units, equity infusion from the GP, is that in addition to the 10 million that was already announced?

Michael Anderson

No. The 10 million that we announced previously was really the first crunch of that 40. That 10 million is now, since come into the MLP proper. In total, the capital infusion if $40 million which if you break that down was actually $39.2 million of convertible preferred and $800,000 of GP contribution.

James Bardowski – Sidoti & Company

Okay. That makes sense. All right, thank you. I guess secondly, do you know what the main driver was behind the spike in the cost of natural gas and NGL sales?

I did see that the NGL prices that were realized year-over-year, but is this main catalyst? Or is there something else that I’m missing?

Michael Anderson

Well, James, on the gas price, it’s obviously really just the commodity price. I mean the margin that we get from natural gas is pretty steady regardless of what the commodity price is. And we’ve obviously seen an uptick in gas which we think is a good thing here over the course of the last couple of quarters.

With regard to NGLs, we had a higher realized price from an NGL standpoint, we move from about $0.70 in the fourth quarter to $0.84 this quarter. And a lot of that was actually, well there’s two factors, one was composition, so we’re actually today, selling less in ethane, and some of it is being rejected.

So we have more of the propane plus type stream, and then the other factor is we did do a little bit better, but we still have room to go with regard to selling of on-spec products. So we’ve taken some discount with regard to the product sales and that did affect what our margin was and obviously revenues and cost of sales with regard to NGLs.

David Biegler

And James, that price reflected what I was kind of qualitatively describing earlier of the discount, incremental discount on off-spec products going to market and taking a deeper discount because of it.

James Bardowski – Sidoti & Company

Okay. All right, so for the next question, regarding the maintenance CapEx. I know the new Bee Line and the Bonnie View facility, can we expect the 708,000 of maintenance, is that going to be relative to normal going forward?

Michael Anderson

That’s a little bit light. We’re looking at 1 million to 1.5 million a quarter of maintenance CapEx.

James Bardowski – Sidoti & Company

Okay. And finally, regarding operation and maintenance expense, clearly, I can assume that the 1.2 million associated with significant events is resulting from the public filing fees as you mentioned in the Bonnie View cost Gregory plant. How much of that 1.2 was the trouble at the Gregory plant and the delay in Bonnie View?

Michael Anderson

Yes, none of that actually. The $1.2 million that you just went through and we highlighted in the call, that was all in the SG&A account.

James Bardowski – Sidoti & Company

Okay.

Michael Anderson

So you know, the OpEx number that we have for the quarter is probably fairly reflective of what we’ll see going forward in kind of the $9.5 million or $10 million range.

And so a lot of the issues with regard to Bonnie View ended up really in the gross margin performance that we had as opposed to the OpEx line that we have, or gross margin because of those issues.

David Biegler

Let me elaborate just a bit because I know, just to make it clear to people because it becomes complex. The Gregory fire in essence has three buckets where it affect, and that’s why we talked about the effect of that fire.

For those who don’t remember, or weren’t on the call last time, it was projected to come back up and when it came back up at the end of January, we experienced a fire which delayed the coming back up two months.

The effect of that is reflected first, in some OpEx affect, the second is, it’s affected, as Michael said, there’s an SG&A effect because he insurance deductible is booked in SG&A, not an OpEx, so the insurance claim is filed, but the deductible is in SG&A.

But the other ones that is sometimes may, it has an effect not just on the expense side at Gregory, but also the margin side because during that down time, some gas was necessarily by passed, some gas was ridded [ph] to less efficient processing, et cetera. So there was some margin effect that affected that side. So there’s really three buckets affected by the fire itself.

James Bardowski – Sidoti & Company

Okay. That’s it. Thank you for the clarification. That’s all I have. Thanks again, gentlemen.

Operator

Thank you. At this time, we have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

David Biegler

This is David again. I just want to thank everybody again for participating. And I’d reiterate that Michael and I are start and beginning to get out and about, and on the next trip is on the east coast, so we hope to see some of you there and to elaborate on any more questions you may have. And thank you again for participating today.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time.

Thank you for your participation. And have a wonderful day.

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