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American Midstream Partners LP (NYSE:AMID)

Q1 2013 Earnings Call

May 14, 2013 10:00 am ET

Executives

Kyle Quackenbush

Stephen Bergstrom

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

Matthew W. Rowland - Managing Director

Analysts

Edward Rowe

Derek Walker - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 American Midstream Partners LP Earnings Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to hand the call over to Kyle Quackenbush. Please go ahead, sir.

Kyle Quackenbush

Thank you, Allison. Good morning, and welcome to the First Quarter 2013 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-Q was filed with the SEC this morning and is also available on our website. A replay of this call will be available later today until June 14.

Leading the call today are Steve Bergstrom, Executive Chairman of our Board; and Dan Campbell, Chief Financial Officer. Also on the call are Brian Bierbach, Chief Executive Officer; and Matt Rowland, Chief Operating Officer. Steve and Dan will be discussing our results for the first quarter ended March 31, 2013. 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, May 14, 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 complete 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 Steve.

Stephen Bergstrom

Thank you, Kyle, and good morning, everyone. Thank you for joining us for our first quarter financial results.

On the call today, I will share a few highlights of the recent developments at American Midstream before turning it over to Dan to review our financial results.

I'd like to begin by discussing our recently announced Midstream Development deal in the Eagle Ford. On May 8, we announced a long-term agreement with a large independent producer to provide midstream services for their Eagle Ford program in Gonzalez County, Texas. The program -- the project will be developed and funded by High Point Infrastructure Partners, our general partner, and will consist of a full well-streamed gathering, treating and processing system to gather and treat oil, natural gas and produce water. This is a highly strategic entry into the prolific window of the Eagle Ford. We anticipate that our general partner will offer these assets to American Midstream upon completion, bringing long-term growth and value to our unitholders. I will discuss the opportunity in more detail later on the call.

I also want to provide an update on the recent investment of ArcLight Capital Partners through their portfolio company, High Point Infrastructure Partners, as well as the accompanying acquisition of the High Point assets.

As mentioned on the last call, American Midstream is excited about this transaction, and we look forward to working with ArcLight and the High Point team in continuing to grow our business. The integration of the High Point assets is going very well. We're identifying synergies and cost savings that we plan to execute during the remainder of the fiscal year.

We are also pursuing growth opportunities around the High Point asset, which will increase cash flow, including acquisitions, expansions and volume additions. With that, I'll turn the call over to Dan.

Daniel C. Campbell

Thank you, Steve. My comments today will focus on an overview of our first quarter operating results, including our segment performance and the status of our commodity hedges, balance sheet and our capital expenditures.

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

We reported total gross margin of $12.9 million for the first quarter, which was essentially flat year-over-year. Gross margin was impacted in our Gathering and Processing segment by lower natural gas throughput volumes and realized NGL prices, which were down more than 30% from a year ago, but benefited from the addition of the Chatom system, which we acquired in the third quarter of 2012.

I'd like to spend some time discussing each of our 2 segments in a little more detail. Beginning with Gathering and Processing, average daily throughput volume in this segment decreased 33% for the quarter to 245 million cubic feet per day. This decrease was primarily due to our Quivira system, which continues to see a lower level of volumes from one of its producer customers.

Volumes on our other major systems were generally flat year-over-year. Our plant's NGL production was also roughly flat, as lower NGL production at Burns Point was offset by higher production at Bazor Ridge and incremental NGL production from the Chatom plant. Because our Chatom system gathers oil and natural gas from its producer customers via POP contracts, we have significantly increased our condensate production year-over-year, and we do this positively as oil prices continue to remain strong in the U.S.

Gross margin in our Gathering and Processing segment was $8.9 million, roughly the same as the prior year period. In our Transmission segment, we reported gross margins of $4 million for the first quarter compared to $4 million for the prior year period. This segment continues to be a consistent and stable driver of gross margin for our company. Throughput volumes in the Transmission segment averaged 443 million cubic feet per day compared to 393 million cubic feet per day for the prior year period, and the increase was primarily a result of new production on the offshore section of our Midla system.

Higher volumes did not lead to incremental gross margin in this segment as incremental interruptible [ph] revenues were offset by the anticipated expiration of a firm contract on our Midla system. It's also important to remember that throughput volume does not necessarily correlate to gross margin because the majority of the agreements in the transportation segment are firm transportation contracts.

Adjusted EBITDA for the first quarter was $5.2 million compared to $6.3 million in the prior year period, and the decrease in adjusted EBITDA was primarily attributable to the reasons for the decrease in gross margin that I mentioned and the incremental direct operating expenses associated with the Chatom acquisition.

Our distributable cash flow for the first quarter was $2.5 million, and we announced on April 6 the first quarter distribution of $0.4325 per unit, which represents a coverage ratio of 0.68x. As a reminder, when we executed the credit facility amendment last month, our general partner agreed to forgo a portion of its quarterly distribution for the balance of the year, and so our coverage ratio for the first quarter includes the benefit of the lower distributions to our general partner.

With respect to our commodity hedge program, as of March 31, approximately 2/3 of our expected exposure to commodity prices for propane through natural gasoline for the remainder of 2013 is hedged. Given the current low prices for ethane, we've had less than 40% of our expected exposure for the remainder of 2013.

And the details regarding our hedged transactions can be found in our quarterly filings. Looking forward, we continue to evaluate hedging opportunities that will provide additional cash flow security in 2013 and beyond amid volatile commodity markets.

Regarding capital expenditures, we incurred $8.1 million for the first quarter, including new development capital of $5.7 million, which was primarily related to the Midstream project we developed in East Texas. We also had expansion CapEx of $0.3 million, maintenance CapEx of $1.9 million, and reimbursable project expenditures of $0.2 million.

Turning to the balance sheet. As of March 31, we had $138 million borrowed on our revolving credit facility. Keep in mind this balance does not take into account approximately $12.5 million of borrowings that were repaid on April 15 when we closed the ArcLight transaction.

In conjunction with that transaction and the April 15 paydown, we entered into a fourth amendment to our credit agreement that, among other items, permitted the issuance of preferred units associated with the ArcLight transaction, modified the leverage ratio of covenants to provide us operating flexibility and permanently waived the leverage ratio of covenant for the quarters ended December 31, 2012, and March 31, 2013. For additional details regarding our credit facility and liquidity, please see our 10-Q.

Overall, our capital structure has improved significantly. And in conjunction with our general partner, we're in a strong position to pursue organic growth projects, development opportunities and acquisitions. And with that, I'll turn the call back to you, Steve.

Stephen Bergstrom

Thank you, Dan. I'd now like to discuss the Eagle Ford development opportunity, which was originated by the team at American Midstream.

This strategic project will include Midstream facilities that provide full well-streamed gathering, treating and processing services. The oil and natural gas will be treated and processed at a centralized facility, while the water will be gathered and separated by our system and delivered to disposal wells. The entire system will have a capacity of approximately 95,000 barrels a day and 15 million cubic feet of natural gas. The system will support the development program of a large independent producer. This producer has been active in the Eagle Ford, having accumulated a sizable acreage position in Gonzalez County, with a significant number of wells already producing oil and gas.

Our Midstream agreement includes a life-of-lease dedication of this acreage in Gonzalez County, Texas.

We're excited about this opportunity for several reasons. First, it provides a significant entry into one of the most prolific shale plays, offering geographic diversification into other growth basins; second, the long-term, fee-based arrangement will produce stable, ratable cash flow. In addition, the full well-streamed concept illustrates our ability to offer a wide range of Midstream services to benefit the growing needs of our customers.

Lastly, we believe this project is just the beginning of a long-term development initiative for American Midstream in the Eagle Ford, which will most likely include additional services and infrastructure around this initial asset.

As mentioned, our general partner will fund the project, with construction taking place in mid-2013 and initial operations starting in early 2014.

ArcLight, the majority owner of our general partner, has an extensive and successful track record investing in the midstream industry and specifically in development-oriented projects. The expertise and capital they bring to this Eagle Ford project is a prime example of the value American Midstream's affiliation with ArcLight.

We look forward to working with them in the long term to expand this Gonzalez County system and pursue not only additional Eagle Ford development, but acquisition and other development opportunities around the U.S.

Moving to other growth initiatives in the company, we see opportunities to expand the recently acquired High Point system through expansions, modifications and bolt-on acquisitions. In the near term, we're repurposing an underutilized pipeline on the system that will allow High Point's customers access to multiple residue markets. This line will allow our volumes to catch -- capture incremental margins through basis differentials at the respective plants, as well as open the door for further commercial upside on the High Point system. This project is underway and expected to be completed by the third quarter of this year.

In addition to creating value through development and expansion, we continue to focus on optimizing the commercial and operational performance of our assets. In particular, there is drilling activity around many of our key assets, including High Point, Gloria and Bazor Ridge. We are working with these producers to capture those volumes, provide access to additional end markets and otherwise enhance our midstream services.

Looking ahead, we're excited about the prospects at American Midstream and our partnership with ArcLight. Our corporate initiatives to grow and streamline the company will position us well to enhance our capital structure and create long-term value for our unitholders. We look forward to updating you on our progress throughout the year. Now we'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Please standby for your first question, which comes from the line of Edward Rowe from Raymond James.

Edward Rowe

In regards to the High Point assets, to get a better gauge of some of the growth opportunities or organic growth projects, can you quantify some of the synergies and cost savings from the High Point assets?

Matthew W. Rowland

Yes, this is Matt Rowland. I guess, what we have done immediately is coordinated the field employees to work directly with area supervision. We've already identified a number of cost savings just in local operations that we'll be able to capture immediately. And then in addition to that, what we've been saying along is that the Gloria systems have access to some very good industrial markets, and by combining our assets, which the High Point assets primarily feed into the Sonat System, which is a tier 1 type, a very liquid pool, but the industrial -- direct access to the industrial markets will allow us to offer our producers a premium over that -- over the traditional Sonat bases. So we are working right now to make sure the systems are interconnected to allow the producers that access.

Stephen Bergstrom

And as far as capital, it's minimal capital to do this stuff. It's just knitting some pipelines together with interconnects and things like that, so it's not a whole lot of capital to do this, just execution.

Edward Rowe

Okay, all right, very good. And just going, again, to High Point. In terms of the contracts, I know the $10 million to $12 million EBITDA range. Is there the ability for some margin expansion in terms of spot shipments that could be realized within that system?

Matthew W. Rowland

Yes, that's really the primary focus of the expansion that Steve Spoke about earlier, is by connecting the residue plants at the tailgate of Venus [ph] with our residue side at Toca, which feeds into the Sonat system, that's going to allow a lot of day-to-day trading. The basis -- basically, the spot basis on the tailgate of Venus [ph] is Tetco East L.A., Columbia Gulf, Gulf South. And that -- we're going to have access directly in the Sonat and eventually Tennessee 5 lakes. So there's going to be a lot of basis differential opportunities that the day-to-day drivers will be able to take advantage of.

Edward Rowe

All right, very good. And did you guys provide how much maintenance CapEx is around the High Point assets?

Matthew W. Rowland

Right now, we have budgeted fairly minimal. Historically, those assets -- we've spended anywhere from $300,000 to $500,000 a year in maintenance CapEx, and that's what we budgeted going forward. This year's number is going to be under that $500,000 level. We're projecting somewhere between $300,000 and $350,000.

Edward Rowe

Okay, that's helpful. And in terms of the Eagle Ford long-term agreement, can you guys have some of the scale and scope in terms of miles and inch-pipe that you guys are looking at and the total capital costs around that project?

Stephen Bergstrom

We haven't disclosed the capital costs yet. The producers asked us to stay confidential on a lot of that -- the details of the thing. They're still acquiring acreage and things in the area. And so they've -- on the capital side, we'll probably disclose that, I would guess, probably around our next second quarter once we get some things aligned out. It's roughly about 30 miles of mainline pipeline with associated gathering with it. So it's a reasonably significant project. I mean, you can infer from 95,000 barrels a day of liquid that it's a pretty substantial project.

Edward Rowe

Yes, that's fair. And then a couple of other questions. In terms of the ArcLight, are you guys naming -- making any headway on potential restructuring of the subordinating units?

Stephen Bergstrom

We've only been in the driver's seat for about 30 days, so stay tuned. We've made some progress, but I think we just -- it's a little too early yet, but we're working on it. We just haven't had time to -- we've had so many other things that we've been working on in the operating side of it that, that hasn't been at the top of the priority list yet. But we should resolve that in the not-so-distant future.

Edward Rowe

Okay, that's fair. And one last question, it's just a housekeeping. In terms of direct operating expenses, in terms of percentage of gross margin, it was a high percentage for 3Q and 4Q and in the G&P segment, in particular. I'm assuming that was mostly attributable to some of the hurricane, et cetera. Should we model going forward that this would normalize going forward?

Daniel C. Campbell

I think that's right, I think on the -- particularly on the American Midstream side. So when we bring in the High Point and you see that in the second quarter results, that's going to, again, probably shift your model a little bit. But you're right, the latter end of 2012 was really because of the change in the gross margin because of those items you mentioned.

Operator

[Operator Instructions] We'll go with our next question, which comes from the line of Derek Walker from Bank of America, Merrill Lynch.

Derek Walker - BofA Merrill Lynch, Research Division

Just a quick one with regards to potential dropdowns. I know you mentioned this Eagle Ford project, and it sounds like you're still working through as far as disclosing some of the capital costs there. But given sort of where your leverage is at and some of the waivers that you received, I guess, at what point do you think you're comfortable dropping down assets, or what leverage level are you comfortable at as far as putting assets into the MLP?

Daniel C. Campbell

Yes, Derek, I think there's a couple of answers to that question, and then from 2 different angles. The first would be from just an overall leverage perspective. I think what you'll see is us driving more towards a mid- to low-3s [ph] type of leverage over time, as we integrate the assets and the dropdowns that we're talking about. But I think that the question you're also asking, too, is how potentially we might do that, and I don't think that's been cited exactly as to what the timing might be or what other options or opportunities might be for dropdowns, and so we'll figure that out as we get to that point. But I think what you'll see is that we'll have -- over the course of the next 8, 10 quarters, we'll be in a leveraged position that's going to be more what you have called traditional or typical and be in a position to issue debt and equity on a more regular basis, the way MLPs normally do.

Derek Walker - BofA Merrill Lynch, Research Division

Right, right. Then I guess, with regards to the sort of the right-of-first offer. As the GP takes on additional sort of midstream and projected projects, is the idea that AMID would get additional right-of-first offers going forward?

Stephen Bergstrom

Well, this is Steve. There's no guarantee of that, but I will tell you that ArcLight didn't make this investment in the GP just to watch it grow. They're going to be integrally involved in everything we're doing. And I would suspect that we get a very good opportunity to view a lot of dropdown opportunities within the ArcLight portfolio.

Operator

We have no further questions queuing. I'd now like to turn the call over to Steve Bergstrom for closing remarks.

Stephen Bergstrom

Just want to thank everybody for joining today, and appreciate your interest in American Midstream. And we look forward to delivering better results and moving forward with this growth platform. Thanks, and have a good day.

Operator

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

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