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Summit Midstream Partners, LP (NYSE:SMLP)

Q2 2013 Earnings Conference Call

August 9, 2013 11:00 ET

Executives

Marc Stratton - Head, Investor Relations and Treasurer

Steve Newby - President and Chief Executive Officer

Matt Harrison - Chief Financial Officer

Analysts

Ethan Bellamy - Baird

Operator

Welcome to the Second Quarter 2013 Summit Midstream Partners LP Earnings Conference Call. My name is Cliff and I will be your operator today. 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 would now like to turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

Marc Stratton - Head, Investor Relations and Treasurer

Alright, thanks Cliff and good morning everyone. Thank you for joining us today as we discuss our financial and operating results for the second quarter 2013. If you don’t already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.summitmidstream.com, where you’ll find it on the homepage or in our news section.

With me today to discuss our quarterly earnings results are 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, business 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 of such expectations will prove to be correct. Please see our 2012 Annual Report on Form 10-K and our other SEC filings for listing factors that could cause our 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 have provided reconciliations to the most directly comparable GAAP measures in our second quarter earnings release.

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

Steve Newby - President and Chief Executive Officer

Thanks, Marc. Good morning everyone and thanks for joining the call. I am going to begin by discussing some second quarter highlights, our business operations, and then I am going to turn it over to Matt for more details on the financial results. I will then follow backup in the call with some additional comments on our second half outlook.

Yesterday, we announced our financial and operating results for the second quarter. It was an extremely active quarter with multiple transactions that positioned us for future success. First, on June 4, we completed our first dropdown transaction, Bison Midstream from our general partner for $250 million. Bison is an associated gas gathering system in the Bakken shale which is highly contracted over the next several years from several large producers. It gives us exposure to the Bakken shale one of the highest growth crude oil basins in North America. Our second quarter results due to pooled accounting, which Matt will go into further and include Bison results for the entire second quarter even though the transaction closed on June 4. Second on June 21, we completed the acquisition of Mountaineer Midstream from MarkWest for $210 million. Mountaineer is a high pressure gas gathering system in the heart of the liquids-rich area in the Marcellus shale, again, one of the highest growth production basins in North America. It’s also underpinned by long-term fee-based agreement with Antero, who is one of the largest producers in that area. Of note, our second quarter results only include 9 days of the Mountaineer results.

In support of both of these transactions, we issued 4.8 million units to our general partner for total proceeds of $150 million. We also increased availability on our revolving credit facility by $50 million to $600 million total and completed a senior notes offering for $300 million. So, all-in-all busy quarter, a very productive quarter and really positions Summit in two of the higher growth basins in the U.S. while further diversifying our business our business across crude oil and liquids-rich basins. We did this while increasing diversity of our capital sources, enhancing liquidity, and using the flexibility that we have with our well-capitalized general partner.

On the volume front, total throughput volume in the second quarter averaged 918 million cubic feet a day, which was basically flat to the second quarter of 2012. When comparing the second quarter of ‘13 and the second quarter of ‘12 the 19% increase in DFW volumes basically offset a 15% decline year-over-year in Grand River volumes. Recall that Grand River is a highly contracted system, so declining volumes do not necessarily translate the declining cash flow. In fact in most cases, they translate into higher MVC shortfall payments. In addition, the inclusion of Bison volumes also helped to offset Grand River declines, although Bison is an associated gas gathering system, so those volumes are fairly small. At DFW, total volumes for the second quarter averaged 395 cubic feet a day which was up 19% over the second quarter of ’12, but down 5.6% from the first quarter of ’13. If you recall the first quarter of ’13 was a record volume quarter for us at DFW and included some flush production from previously shut-in wells that were able to flow with the expansion of our compression.

For the second quarter, we connected one new pad, brought on 14 new wells. Offsetting, the new pad and the wells were drilling and completion activities by our customers on some of the largest and most productive pad sites on the system. Although this activity is good for the long-term higher drilling and completion activities, as we have mentioned in the past can have short-term negative impacts for our volumes as producers shut the pad down during those activities. We estimate these activities accounted for a reduction of about 10 million cubic feet a day in second quarter volumes.

A positive note is the continued ramp up of Beacon volumes during the quarter. Beacon is one of our private independent producers on the system and we continue to bring on additional pad sites related to the contract we executed last summer with them. In our press release last night, we also announced expansion of the gathering agreement with Beacon to connect five new pad sites and the expansion of our service offering at DFW with the addition of natural gas, CO2 trading for all of our customers. Total CapEx for these projects is about $20 million, most of that is expected to be incurred in the second half of this year, and the projects will come on in the first part of 2014. These are very attractive projects for DFW expected to build multiple of about four times EBITDA.

For Grand River, volumes decreased 6% over the first quarter of ’13 as we saw continued declines from customers where we provide high pressure transportation and compression services. The Piceance in general continues to be challenged in this gas price environment and with NGL prices depressed particularly ethane. At GRG we benefit from a very high level of contracted volumes that help to insulate our cash flows from volume fluctuations. To give you an example of this during the second quarter total revenue on GRG when adjusting for deferred revenue in MVC payments was basically flat with first quarter when you adjust for our seasonally high condensate revenue. So, normalized revenues was flat even the volumes declined 6%.

We now have two new areas to discuss and I will start with Bison first. Second quarter volumes on Bison averaged 16.8 million cubic feet which was flat over the first quarter. This was due to several factors including some operational improvements we made after purchasing this system, installation and new compression which temporarily affected volumes due to the downtime associated with the installations and continued active drilling and completion activity which like in DFW affects volumes as producers bring on pad sites when they do that.

We continue to see very active drilling in the area four rigs of one of our customers are currently drilling on the system and several other rigs are working in our service area. As we discussed at the time of the dropdown we will continue to add compression throughout ’13 and expect to expand the system to move up to 30 million cubic feet a day. We are doing this in response to customer activity and expected volume increases although I will caution you it could be lumpy given the installation of compression in the active drilling activity.

Activity remains very strong around Bison and we continue to work on several optimization and expansion projects. On Mountaineer again our high pressure system in the Marcellus second quarter volumes averaged to 133 million cubic feet a day. The volume ramp continues at the pace we expected. And we believe we will see volumes continue to increase over the next 18 months as MarkWest brings the plant to the full 800 million cubic feet a day of capacity of the Sherwood facility. And infrastructure in the area catches out to the high level drilling activity in the area. I will remind everyone that we only own this system for nine days in the second quarter, so financial results don’t really include the asset. I will speak to this a little bit later in my comments, but I will add that we are very, very encouraged by the organic growth opportunities surrounding the asset.

So, with that I’m going to turn it over to Matt for more commentary on our financial results.

Matt Harrison - Chief Financial Officer

Thanks Steve. I will cover the results of Summit Mission Partners LP or SMLP and Summit Mission Partners LLC or Summit Investments the predecessor of SMLP. SMLP completed its initial public offering on October 3, 2012. Results prior to our IPO refer to our predecessor and results subsequent to our IPO refer to SMLP. Also SMLP acquired Bison midstream from a subsidiary of Summit Investments on June 4, 2013. The transaction was considered an acquisition from a common controlled entity. Therefore, the Bison Midstream drop down acquisition has been accounted for on an as approved basis for all periods in which common control existed resulting in the combination of SMLP and Bison Midstream results beginning on February 16, 2013.

Adjusted EBITDA for the three-months ended June 30, 2013 was $33.5 million that compares to $26.7 million for the three months ended June 30, 2012 and an increase of approximately 26%. The $6.8 million increase in adjusted EBITDA was due to first the drop down acquisition of Bison Midstream on June 4, which contributed approximately $5 million of adjusted EBITDA in the second quarter of 2013. The acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $300,000 of adjusted EBTIDA over the 9 days the SMLP own Mountaineer Midstream in the second quarter of 2013.

And also higher volume throughput on our DFW midstream system which averaged $395 million a day in the second quarter of 2013 compared to $331 million a day in the second quarter of 2012. Also certain of SMLP’s gas gathering agreements on this Grand River system contain annual MVC and gathering rates that increase in that – I am sorry and these MVCs grew in the first quarter of ’13 compared to ’12 and also the rates in the first quarter of ’13 compared to ’12. These contractual volume and rate increases helped mitigate the 15% of volume throughput decrease on the Grand River system when compared to the second quarter of 2012. The increase in adjusted EBITDA of our second quarter of 2013 was also offset by $2.4 million of non-recurring transaction costs associated with the Bison Midstream and Mountaineer Midstream transactions. Adjusted EBITDA in the second quarter of 2013 included approximately $7.5 million related to MVC mechanisms from our gas gathering agreements.

This amount included $6.7 million of adjustments related to MVC shortfall payments of which $3.7 million was associated with net change in deferred revenue and $3 million was associated with quarterly adjustments related to future projected annual MVC shortfall payments. $800,000 of previously recognized deferred revenue related to the DFW midstream system was brought into gathering revenue on income statement because the customers time period to utilize the MVC shortfall payment had expired. We built $4.5 million of MVC shortfall payments in the second quarter of 2013 from our gas gathering agreement associated with Grand River and DFW. This $4.5 million of MVC shortfall payments was recognized as deferred revenue on our balance sheet. You can find additional tabular detail about our MVCs on our second quarter earnings release.

Adjusted distributable cash flow totaled $28.4 million in the second quarter of 2013. This implies a distribution coverage ratio of 1.20 times the second quarter distribution of $0.435 per limited partner unit to be paid on August 14, 2013. CapEx excluding acquisitions for the second quarter of 2013 were approximately $16.5 million of which approximately $3.8 million was classified as maintenance CapEx. We had $265.1 million of debt outstanding under our revolving credit facility at June 30, 2013. The borrowing capacity under our $600 million revolving credit facility is approximately $335 million. A subsidiary of SMLP issued $300 million of 7.5% senior notes due 2021 in the second quarter of 2013. Total leverage as of June 30, 2013 was 4.0 times.

With that I will turn the call back over to Steve.

Steve Newby - President and Chief Executive Officer

Thanks Matt. First some housekeeping. We are reaffirming our full year guidance that we revised in June with the acquisitions at $140 million to $150 million of adjusted EBITDA. We are also reaffirming our distribution growth of 18% to 22% and that’s over the $0.40 in QD. I will help folks out a little bit with the math. Our second quarter of ’13 distribution that we announced was $0.435 at 8.75% over the $0.40 in QD. So, you can see that we expect to ramp up our second half distributions given our guidance on full year growth. Hopefully this makes sense as we get the full impact of the cash flow and accretion of our acquired assets.

Now for our second half outlook and we will start with FW. During the quarter we have seen several of our producers pick up activity levels and pick up discussions with us about future activity levels. This partially manifested itself in the expanded deal we did with Beacon. Although this activity will make our volumes a little lumpy at DFW, we view these discussions to be very positive to supporting a continued high long-term utilization rate on the asset. I’ll also point out two things related to this. First, customer diversity matters and has helped us at DFW. We have eight customers on the system and they are a diverse group of large and small, public and private companies. Second, our area in the Barnett is in the core of the core. So, even in a challenging price environment activity levels have remained fairly stable and appear to be potentially increasing with certain customers.

In addition, we are now operating in two new areas and they happened to be two of the best growth basins in North America. The Bakken in the core of the Marcellus, activity at Bison, our Bakken asset remains high, for the balance of ’13 we are focused on increasing compression capacity and reliability, connecting production related to the significant drilling activity around the system and executing on several growth projects in and around the area. We are building a very scalable, highly skilled operating platform in the Bakken, which we believe – and we believe that capability will serve us, or customers and our unitholders well in the future.

In the Marcellus, although we only own the asset for a month I’ll tell you the opportunities for organic growth in the area are exceeding our expectations. This area in the Marcellus has not only some of the richest gas in the entire basin, but also some of the largest wells. That combination is supporting a very high level of drilling activity which is driving organic growth opportunities higher than we expected at the time in the acquisition. The volume ramp of Mountaineer is on track and we expect to see a nice bump in the second half of the year as new production comes online and begins to fill are already built out asset.

Finally, I feel like I should provide some color on GP, which remains our primary development vehicle for the Summit Enterprise and will be the source of significant growth for our MLP for the next several years. As we have previously discussed we are currently executing on approximately $250 million of organic CapEx at Summit Investments for 2013. We brought the initial phase of our crude oil and water gathering system in the Bakken in May. And we expect to continued ramp that system up throughout the balance of ‘13 and in ’14. We are building two processing plants in Colorado one in the liquids rich Mancos and other in the DJ basin and both of these facilities will be completed by the end of ‘13.

I’ll also had both of these facilities are covered under 10 year take or pay fee-based processing arrangements. So, all-in-all development for ’13 at the GP is on track, on budget and we’ll have numerous projects completed by the end of the year. In addition, we now have in excess of $250 million of additional growth projects on the board at the general partner which we believe will be successful in winning our fair share. Most involve further development of our crude, gas, and water transportation system in the Bakken.

As announced on June 25, we executed an agreement with the major Bakken producer to expand our crude and water gathering activity in Williams County. Activity level is robust in the basin, and as I mentioned earlier we’re building a very large operating platform to be able to deliver superior service for our customer base. Finally, on dropdown timing since I am sure I will get asked we have been consistent on this message and will remain so. We said in the first quarter, we believe the current assets at Summit Investments will be offered to the MLP over the next 18 months to 24 months and represented approximately $1 billion dollars of asset value.

We completed the first one in the second quarter $250 million and will remain confident the other assets will be offered now over the next 12 months to 18 months. Given the development commentary above there is potential on totals on an upside of total size of future asset drop down, but we will see how things develop over the balance of the year. As we complete these dropdowns Summit Midstream will become more diversified with increasing EBITDA contribution from crude oil, from liquids and water transportation services, while we will maintain a significant upside to increase natural gas production.

With that, we’re going to open it up for questions, so Cliff if you don’t mind.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Ethan Bellamy from Baird. You may go ahead.

Ethan Bellamy - Baird

Hi guys, Congrats on the solid quarter.

Steve Newby

Thanks Ethan.

Ethan Bellamy - Baird

Sure. With regards to the shut-in volumes in the DFW segment has that comeback online and do you expect any kind of incidents like that in the current quarter?

Steve Newby

We have seen some – Ethan this is Steve. We’ve seen some of comeback online now here in the third quarter as completion activities sort of move away as we finished the frac jobs. We do anticipate some of the assets that current and really its long-term positive I mean there is drilling and completion activity in the basin. So, what occurs is they – as you probably know that bring down the pad site and we do have large pad sites at DFW. Those pad sites are brought down, while producers are drilling on the pad and completion activities occur on the pad. So, we do – they will be somewhat lumpy, we anticipate that to continue as activity level remains pretty constant there.

Ethan Bellamy - Baird

Okay, any big new exciting Mancos wells worth talking about that you might get volumes from?

Steve Newby

No, I think we’ll have more to talk about towards the end of the year as we bring some – as we bring the facility on at the general partner. The processing facility because we do – we will be processing the liquids rich part of the Mancos there, so I suspect we will have more, nothing yet on that front.

Ethan Bellamy - Baird

Okay, and then last one, you talked about the sponsor and activity up there at the top. What does the balance sheet look like and is there fire power for additional acquisitions on top to rebuild the inventory. And then looking forward on the dropdowns are those going to be all cash deals or should be expect that the parent to take some equity at some point?

Matt Harrison

Yeah. So, again we have very supportive sponsor and ultimate sponsor as I think we’ve demonstrated over the past several years and this is Matt talking Ethan. We have a revolving credit facility $150 million revolver, up at the general partner that we utilize so that we’re not making capital calls for little deal. So, we do have actual the ability to have think that up at our GP. On the second piece you are talking about dropdowns, we have been pretty consistent. We intend to operate the MLP at 3 to 4 times debt to EBITDA type of environment. So, we would anticipate, I would necessarily say that every deal, we do we would have equity with it and that would line right up in there, but that’s the long-term would be that we would operate in that band.

Ethan Bellamy - Baird

I appreciate that nuanced answer. Thank you so much guys.

Operator

(Operator Instructions) And I’m showing we have no further questions at this time.

Steve Newby - Chief Executive Officer

Okay. Well, great. We appreciate everybody joining and obviously if you have follow up questions please don’t hesitate to give us a call. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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