American Midstream Partners, LP Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.14.13 | About: American Midstream (AMID)

American Midstream Partners, LP (NYSE:AMID)

Q3 2013 Earnings Call

November 14, 2013 10:00 am ET

Executives

Kyle Quackenbush

Stephen W. Bergstrom - Executive Chairman of American Midstream Gp Llc, Chief Executive Officer of American Midstream Gp Llc and President 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

Analysts

Edward Rowe

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

James Jampel

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter American Midstream Partners Conference Call. My name is Michelle, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Kyle Quackenbush. Please go ahead, sir.

Kyle Quackenbush

Thank you, Michelle. Good morning, and welcome to the third 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 yesterday, and will also be available on our website. A replay of this call will be available later today until December 14.

Leading the call today are Steve Bergstrom, Executive Chairman, President and Chief Executive Officer; and Dan Campbell, Chief Financial Officer. Matt Rowland, our Chief Operating Officer, is also on the call.

Steve and Dan will be discussing our results for the third quarter ended September 30, 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, November 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 W. Bergstrom

Thank you, Kyle, and welcome, everyone, and thank you for joining us for a discussion of our third quarter financial results. On the call today, I will share a few highlights of the recent developments in American Midstream before turning it over to Dan to review our financial performance. I will then conclude with a few comments, and we'll open the call for questions.

From a high-level perspective, we had a strong third quarter, with improvements in EBITDA and DCF, primarily due to improved performance in our Gathering and Processing segment and continued strong results from the High Point system. As anticipated, we increased our quarterly distribution by 4.6% due to improved financial performance and higher distribution coverage resulting from the equity restructuring transaction.

Our key priorities during the quarter included the completion of the integration of High Point into American Midstream, executing the equity restructuring and kickstarting our aggressive growth initiatives.

Regarding High Point, all aspects of the integration are complete, including the rollout of the new electronic bulletin board and commercial management system. We are excited to be working as one integrated team, and we are seeing the benefits of leveraging our collective expertise to further strengthen our commercial and operational capabilities, and position the company for consistent, long-term growth. In addition, we are making progress on the asset divestitures that we discussed the last quarter, and believe we will complete the first of the asset sales in the next several months.

Another significant accomplishment during the third quarter was the equity restructuring transaction. As part of the restructuring, the previous incentive distribution rights were combined into and restructured as a new class of incentive distribution rights. The restructuring eliminated our previously-outstanding subordinated units, saving American Midstream approximately $2 million per quarter in cash distributions. Following the equity restructuring, American Midstream received $12.5 million to pay down the company's revolver, which took place at the end of the third quarter. With the High Point integration and equity restructuring behind us, we have one singular goal, to aggressively grow the partnership in a sustainable manner that will drive long-term distribution growth for our unitholders.

Later in the call, I will give you an update on the progress of the development project in the Eagle Ford Shale, as well as other growth initiatives that we are working on. But now, let me turn the call over to Dan to review our financial results.

Daniel C. Campbell

Thank you, Steve. My comments today will focus on an overview of our third quarter operating results, including segment performance and the status of our derivative balance sheet and capital expenditures. As a reminder, our earnings release includes reconciliations of certain non-GAAP items that we'll discuss on today's call and 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 $18.6 million for the third quarter, and $47.8 million for the first 9 months of the year, which is an increase of greater than $5 million for the third quarter, and $11 million for the first 9 months, versus the same period last year. The increase in gross margin primarily came from our Transmission segment, as a result of the impact of the High Point System. Results in our Gathering and Processing segment were also higher during both the third quarter and the first 9 months of 2013, which I will take a minute to discuss in more detail.

In our Gathering and Processing segment, gross margin for the third quarter was $10.7 million, roughly flat compared to the third quarter of 2012. For the first 9 months of 2013, gross margin was $28.5 million, which was approximately 4% higher than 2012. The increase in gross margin in the third quarter was primarily the result of an increase in volume on our Quivira and Burns Point systems, as well as higher elective processing volumes on our Gloria system.

Gross margin for the 9 months was higher as a result of the Chatom plant, which we acquired in July 2012. And offsetting these increases were lower realized NGL prices that drove lower margins for our percent-of-proceeds in elective processing contracts. Average daily throughput volume in this segment increased 24% for the quarter, but decreased 15% for the first 9 months. The increase in volume for the quarter was primarily due to higher volumes on Quivira and Burns Point, as a result of the return of a customer's volume during the quarter. Throughout -- throughput for the first 9 months of 2013 was lower than 2012 because volumes from that same customer were higher for the first 6 months of 2012, versus this year.

Volumes on our Gloria and Lafitte systems were also higher in the third quarter as a result of system optimization projects that we completed in 2012 and early 2013. Our plant's NGL production was lower by approximately 6,000 gallons per day, versus the third quarter of last year due to lower NGL production at Bazor Ridge as a result of lower plant inlet volumes.

Plant's NGL production is roughly flat for the first 9 months of 2013 compared to the same period last year. Condensate production in the third quarter was slightly higher than last year due to the higher production at the Chatom plant, but was up significantly for the first 9 months, compared to last year because the Chatom plant was acquired in July 2012.

In our Transmission segment, we reported gross margin of $7.9 million for the third quarter, and $19.3 million for the first 9 months of 2013, and the increase was due to the acquisition of the High Point assets. Throughput volumes in the Transmission segment averaged 699 million cubic feet per day for the quarter, and 611 million cubic feet per day for the first 9 months, and the increase was primarily the result of the incremental volumes from High Point, as well as new production on the offshore section of our Midla system.

It's important to remember that throughput does not necessarily correlate to gross margin because the agreements in the Transmission segment are mostly firm transportation contracts.

Adjusted EBITDA for the third quarter was $7.1 million, compared to $4.1 million in the third quarter last year, and $18.1 million for the first 9 months, compared to $14.7 million in the same period last year. And the increase in the third quarter was primarily attributable to the reasons for the increases in gross margin that I mentioned, partially offset by the incremental direct operating expenses and SG&A associated with the Chatom and High Point systems. Our distributable cash flow for the third quarter was $3.1 million after cash distributions paid to the Series A convertible preferred units. In October 23, we announced our quarterly distribution of $0.4525 per unit, which was a 4.6% increase over our distribution last quarter. Our distribution coverage ratio for the quarter was 1.3x. As a reminder, this is the first distribution that we've paid since the equity restructuring, and it includes the payment to the holders of our new incentive distribution rights.

Before moving to our commodity hedge program, I want to discuss a change to our DCF reconciliation that we implemented in the third quarter, and as you may have noticed, in our press release. Historically, we incorporated an adjustment of average estimated cost for integrity management over the 7-year mandatory testing cycle in our calculation of distributable cash flow. And we recently reevaluated the integrity management program and determined that integrity management expenses will continue to be expensed as incurred, and reflected in direct operating expenses, but will not be normalized in the calculation of distributable cash flow, and that began this quarter, the third quarter of 2013.

With respect to our commodity hedge program, as of September 30, 2013, approximately 55% of our expected exposure to commodity prices for propane, through natural gasoline, and approximately 93% of our expected condensate production for the remainder of 2013 is hedged. And given the low -- current low prices for ethane, we're hedged at approximately 20% for the remainder of 2013. The details, of course, are found in our quarterly filings. We're currently evaluating our commodity exposure in 2014 and beyond, and plan to execute additional hedges to further mitigate our exposure to commodity prices sometime in the next few months.

Moving to capital expenditures. We incurred $4.3 million in the third quarter, including growth capital of $1.6 million and maintenance capital of $2.2 million. Year-to-date, we incurred approximately $16.8 million in total capital expenditures, including $10.5 million of growth capital, and $5.3 million of maintenance capital.

Turning to the balance sheet. As of September 30, the partnership had $123.7 million of total debt outstanding, which includes $2.6 million of letters of credit, and resulting in a leverage ratio of 4.5x, which is well within our current leverage covenant. Our available borrowing capacity at the end of the quarter was approximately $39 million.

As we disclosed in our press release, our 2013 guidance remains unchanged, and we expect adjusted EBITDA in the range of $24 million to $27 million, and DCF in the range of $9 million to $12 million. And each range reflects the benefit of the acquisition of the High Point assets from the closing of the acquisition on April 15 through the end of the year. The partnership forecasts 2013 growth capital expenditures of approximately $14 million, which as a reminder, does not include capital for maintenance, integrity management and capital associated with the Eagle Ford development project.

Going forward, we will update guidance on a quarterly basis, and we do plan to provide 2014 guidance by the end of the year. And with that, I'll turn the call back over to Steve.

Stephen W. Bergstrom

Thanks, Dan. As I mentioned at the beginning of the call, our primary focus right now is driving significant long-term sustainable growth. When I joined American Midstream 7 months ago, we developed the framework that shapes our overall growth strategy.

First, American Midstream needs to gain scale in order to realize the benefits of being a public MLP, and to leverage our commercial, operational, administrative infrastructure. To this end, we are looking at opportunities that will give the company scale quickly, including opportunities in complimentary areas of the midstream energy industry.

Second, we need to diversify our geographic footprint. Our assets in the Gulf Coast and Southeast will continue to be in an integral part of our midstream service offering, and we are looking at opportunities to further expand our presence in this area. Having said that, it is critical that we establish diversity in various regions of the United States. The Eagle Ford project being developed by our general partner is one example of how we are accomplishing this strategy, and we are engaged in discussions regarding additional projects that would further diversify the company.

Finally, at our current size, we need to leverage the energy expertise and financial resources of our sponsor. As a majority holder of the general partner, ArcLight provides a vehicle to develop deals that may be candidates to be dropped into the MLP, as with the Eagle Ford project. Given this framework, the growth of our company will come from 5 areas: Organic growth of existing assets, bolt-on acquisitions in our current footprint, acquisitions outside of our footprint, new asset development, and drop-downs from our sponsor. We are actively engaged in opportunities in each of these areas, several of which could be completed before the end of the first quarter of 2014.

Let me provide a few highlights of our success over the past few months. Since our last earnings call, our commercial team has increased organic growth on our base assets. One example is the conversion of an unutilized pipeline on the High Point system to residue delivery service, where our customers are now moving an incremental 100 million a day on the system. In addition, by actively engaging several customers, we successfully returned more than 45 million cubic feet a day to our Quivira and Chalmette system that was off the system for more than 12 months. We have also identified several organic growth opportunities to expand our existing assets to meet customer demands.

For 2014, we believe we'll have at least $15 million to $20 million of organic growth projects.

Turning to the Eagle Ford development project, High Point Infrastructure Partners or HPIP, which controls our general partner, is constructing a full-well stream, gathering and treating facility in Gonzalez County, Texas. HPIP selected and mobilized the EPC contractor, and all of the major services and equipment have been bid out or procured. The producer continues to improve production rates as it drills out the field. And we remain very optimistic about the long-term outlook for this project. As a result of changes to the customer's drilling plan and the addition of ancillary services like water treating, handling and disposal, the CapEx for the project will likely range between $90 million and $100 million. Moreover, we are pursuing additional projects in the region that would significantly increase our presence in the Eagle Ford Shale.

In conclusion, with another good quarter behind us, and the completion of our company integration initiatives, we are well poised to drive long-term sustainable growth in 2014 and beyond.

With that, I will open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Edward Rowe from Raymond James.

Edward Rowe

I'm trying to get a gauge on the potential ramp into 4Q and into 2014. Can you give us a sense on where you're seeing utilization increase, such as, maybe the Burns Point and Chatom or the Silver Oak or mostly from High Point integration and increase on efficiencies there?

Stephen W. Bergstrom

Yes, this is Steve. I mean, we're -- like the Burns Point stuff, where producer that had gone offline before we got here. And we just put a commercial team focused on getting those guys back online and processing that gas through that plant. I think, it's probably fair to say that the previous management team might have been a little distracted with other issues, and didn't focus on those kinds of things. And we -- believe me, we put a very strong focus on throughput and commercialization. We've got a nice asset position, but it needs managed actively, and it needs managed every day, every minute of every day. So I think that's really what it is, it's just a change in mindset more than anything, and a change of focus. The High Point assets, there's a lot of gas moving around the Gulf of Mexico, and there's -- and our guys have done a really good job of getting in front of producers and putting small little projects together that allow people to do -- move their gas through our system, provide market flexibility, and provide services to the producers that they like. And -- so, it's an everyday grind that we just continue to stay focused on and continue to drive throughput.

Edward Rowe

Okay, that's helpful. And last quarter, you discussed that you wanted to grow faster than wait for the Eagle Ford drop. And can you give us a sense on -- as you guys mentioned other growth opportunities surrounding your operating base, provide a little bit more color around that.

Stephen W. Bergstrom

Yes. I mean, what we've -- like I said, we've only been here 7 months, and really the first 2 or 3 months was just trying to kind of get our arms around everything and kind of get the assets, existing assets, going to where we needed them to be. But really the last 2 or 3 months, we've spent a great deal of time looking at our existing asset position, and what we found is, is that, there's some capital projects, there's some growth projects in and around our assets that have popped up that I think we can -- I mean, we're well on our way to executing some of those that will be -- not huge projects, but for this company, everything, it matters, because we're so small. And you're not talking about big huge projects, just $5 million here, $3 million there, $8 million there, that kind of stuff that are really customer- or producer-driven, who want us to do -- use our assets to help kind of propel what they're trying to get accomplished on their end of the pipe. And so, I don't think the previous management probably team probably focused a lot on that kind of stuff, but we are. We're trying to make these assets a lot more interesting, if you will, financially, and move more volume through our systems. We see a good -- nice opportunity for that -- that we've really discovered, really, over the last 30, 45 days.

Edward Rowe

Okay. Last and final question. And I apologize if I missed this. The increase in the CapEx for the Eagle Ford from $65 million to $75 million of the initial to $90 million to $100 million, what are -- what's the variance around that again?

Stephen W. Bergstrom

Well, the producers accelerated their drilling, which is a good thing. So they've got more rigs work than they originally said. So, our capital upfront will be more than we had originally thought, but that's a good thing. Plus, we've added some other ancillary services around water treating and handling for them that we're going to do, which is nice fee-based stuff. And we really like the returns associated with that and the risk associated with that, which is minimal. So it's a combination of the producer accelerating their drilling plan. They've had better success than what they -- what they had originally thought, and it's gone quicker. So this capital -- the capital number that you see now was originally intended to probably spread out over a 4- or 5-year period, and it's now closer upfront because of their drilling success in their drilling plan.

Operator

The next question we have comes from the line of Michael Bluhm from Wells Fargo.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

A couple of questions, I guess. First, just to clarify in terms of the growth comments, which were pretty interesting. So you laid those 5 ways you can grow. Is that in order of priority of preference or you just -- those are just the 5 different ways?

Stephen W. Bergstrom

No, that's no order. That's the 5 different ways. I mean, we don't really prioritize any of that kind of stuff, it's whatever one makes the most sense.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay, and then...

Stephen W. Bergstrom

But I think we're -- I think its fair to say that we're looking at all of them, actively looking at all of those areas, and have projects in every one of them.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And then you've kind of alluded to -- there's a few things that are -- maybe you could bring to the finish line in the first quarter of '14. Can you just, without getting to details of what they are, just kind of -- is there a way to quantify in any way, just kind of -- because everything went you're way, just how much capital that would represent or anything like that?

Stephen W. Bergstrom

Well, I can't really do that because there is nothing signed and nothing final yet at this point. We just see really good opportunities that we're advancing pretty far along with. I think, it's fair to say that everything is material with this company, the size that it is. So, whatever we're doing, we'll move the needle on it, and anything we do is going to be significant relative to the size of this company. And we're not looking that it as capital limited, because we have -- we've got ArcLight as a nice capital source. We've got the public equity and the private equity markets that'll avail us for any of these projects. So we want to grow. We want to get more liquidity out in the marketplace and get our shares, get more liquid so more people can buy them, and that's the plan.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And then, you often talked about pursuing potentially kind of, I think you said complementary midstream assets. Can you just expand on what you mean by that? Are you talking about getting into other commodities like crude or NGLs or is that like storage, like -- what are you thinking there?

Stephen W. Bergstrom

Yes, pretty much. Everything is on the table. We're -- this company has primarily, historically, been a NGL processing -- gathering and processing business. With High Point, we added more diversification, just on the Transmission side. The Eagle Ford project is oil gathering. So, I mean, we're looking a lot more in the oil liquids side of it from a transportation perspective. Also, looking at other areas in the midstream space as well, things that are complementary that help augment our existing business, but also derisk some of the commodity volatility we see in the NGL Gathering and Processing business.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. And then, just last question for me. I think in the press release you mentioned that you entered into these weather derivatives. Can you just talk about what the cost of those are, and how far out do they go, and is this something that you plan on maintaining kind of over the long term?

Daniel C. Campbell

Yes, Michael. We talked about this on the second quarter call as well, and we entered into that, I believe, on -- July 1 was the effective date or the end of June. And the premium is about $1 million, and it pays up to $10 million, depending on the type of -- or the category of storm that passes through the area. It's really just a risk mitigant like other insurance policies would be for named windstorm potential damage or business interruption. It's complementary to our existing windstorm or insurance coverage, and it's something that we'll probably look at each year.

Operator

[Operator Instructions] The next question we have comes from the line of Mac Nibak [ph] from HITE.

James Jampel

Actually, its James Jampel calling from HITE. A couple of questions. You said you were going to release guidance a little bit later this year. Will that be in the form of another conference call or a press release or -- and when should we expect that?

Daniel C. Campbell

James, we've not historically issued guidance until the last quarter. So, we don't have an exact timing for that. But we will likely issue a press release, and whether we're going to have a call, we have not decided, but if we don’t, we'd obviously be available for questions.

James Jampel

But you think sometime before the end of the calendar year?

Stephen W. Bergstrom

That's correct.

James Jampel

Okay. And given the additional CapEx being spent out in the Eagle Ford, does that change? When we should be thinking about when a drop-down of that might be appropriate? Or could it be done in stages?

Daniel C. Campbell

No, I don't think the timing really changes. I think what it does is just expand the offering for that particular producer/customer. We've talked about that asset potentially being dropped down some time mid-2014. I don’t think the timing really changes much.

Stephen W. Bergstrom

I think -- the point I would like to add to that is, is that the reason for that -- a biggest reason is the acceleration of their drilling program, which will drive volumes quicker than what we had thought, and create more near-term cash flow. So, it's likely that it will be -- you can drop it down in stages, but most likely because of that fact, you're going to want to drop it in as soon as you're comfortable that it's operating the way it needs to be because you're going to get a lot of near-term cash flow.

James Jampel

Okay. And lastly, we couldn't help notice the huge volume traded in early October that caused the price to go down quite a bit. And that it quickly rebounded, thank goodness. But any insight as to what was going on there or any insight as to who has been -- who wanted to exit?

Daniel C. Campbell

You know, we don't really have any insight into that any more than you probably would. We obviously sit and watched that happen as well, and it could be a bit frustrating. Obviously, we've recovered in the past few weeks. And so obviously, there's buyers as much as there are sellers, which we're grateful for that. I think the story is strong and investors see that story. But outside of that James, I don't -- unfortunately, we just -- we don't really know what was going on at that time.

James Jampel

It looks like your largest single holder is the Oppenheimer SteelPath MLP Income Fund, essentially like a passive holder. So perhaps it was redemptions from them or who knows what?

Daniel C. Campbell

I think, it's very hard to say. We know that firm fairly well, and interact with them on a fairly regular basis. As far as we know, they're fairly bullish on the story, but it could be. I don't think so, but that could be.

Stephen W. Bergstrom

We are getting a lot more questions on activity -- I think people are starting to see us a lot more active in lot of areas in the industry. And we're getting a lot more people asking about the story. So I think that, that kind of is creating a lot more awareness of the company and its capabilities too, as well.

James Jampel

Well, we would certainly appreciate the enhanced liquidity that would allow us to build our position.

Stephen W. Bergstrom

Stay tuned.

Operator

[Operator Instructions] There are no further questions. At this point, I would like now to turn the call over to Steve Bergstrom for closing remarks. Please go ahead.

Stephen W. Bergstrom

Thank you, operator. And I wanted to thank everyone for joining the call today. And look forward to talking to you next quarter as we continue to grow this business, and look forward to many exciting things in the future. Thanks for your time and attention.

Operator

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Please enjoy the rest of your day.

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