Access Midstream Partners, L.P., (NYSE:ACMP)
Wells Fargo MLP, Pipeline & Energy Conference
December 10, 2013 8:05 am ET
J. Michael Stice - Chief Executive Officer
Hi, good morning, everyone. We are going to get started here and kick things off this morning with Access Midstream. Very pleased to be able to have these guys here this morning. Access is a gathering and processing company with assets across many of the most active conventional basins in the country including the Eagle Ford, Marcellus and more recently the Utica.
With us this morning from the company, we have Mike Stice, CEO and Dave Shiels, CFO. It’s usually around this time of the year that the company is closing in on a big transaction. This year has been a little bit quite but we will see what’s in store.
J. Michael Stice
Thank you. Appreciate it. Good morning everyone.
Good morning everyone we are going to have some fun here okay, come on.
Anyway, I don’t know what it is like to be the first speaker in the morning, but I know that earlier, I mean literally five minutes ago, I was the only one in here. So I’m glad to see some of you showed up so I have someone to talk to.
So it is interesting that each and every year since I joined Chesapeake – Chesapeake Midstream now Access Midstream, at this time of the year normally I’m closing on a major transaction and my life is more difficult this year we are not, which is comforting our standpoint. But, we have an enormous amount of progress to report in 2013 because as you know, we bought all the assets from Chesapeake in the end of 2012 which basically cleared out the inventory. So you are going to see some numbers here that I will be sharing with you in the presentation that will ultimately show you that organic growth as it’s showing up through execution rather than through acquisition. So there should be no disappointment that we are not doing a deal, we did all other deals in December of 2012.
Most of the faces in here, I’m familiar with so I’m not going to spend too much time on our history but it is a relatively short history. Most people are aware that in 2009, we formed a joint venture partner with GIP for the few assets in the portfolio the Barnett, the Mid Con specifically. Subsequently, we went public in July of 2010 and specifically separated from Chesapeake in July of 2012. And then bought all the remaining midstream assets from Chesapeake in December 2012, which was probably the most significant transaction in midstream to-date to that point.
So one of the things that differentiate us; we have a very focused strategy at Access Midstream. We are particularly interested in the portion of the value chain highlighted here in green. So when you think about a lot of MLPs, you get some MLPs that are in the E&Ps, some MLPs that are in the interstate pipeline business, some MLPs that are in the unregulated gathering like ourselves and some that are kind of all things to all people.
I have a particularly important focus on this unregulated part of the value chain. I think there is a lot of reasons why this produces the best overall MLP results. When you are in this part of the business you are not in Washington DC; you are not surrounded by lawyers; you don’t have the burden of the interstate pipeline conversation. I personally did that for a number of years and although, I’m sure a lot of people here might enjoy Washington DC, I did not. So I’m focused specifically on the areas where the commercial terms and conditions that dictate our earnings come from a bilateral negotiation with the customer, with the producer. So we think that’s an important part of this.
When you think about our asset base, its one of our differentiating factors, we are diversified across all basins with the exception of Bakken. And why that’s important? When you think about all the macro drivers, I know the supporter within the audience and he speaks about this a lot, its important to recognize one of the fundamental drivers behind the producers. Even though our company has no direct commodity price risk, so we don’t have percentage of proceeds contracts, we don’t have that kinds of thing that would expose us to volatility associated with commodity prices. There is no doubt that the activity that the producer engaged in on the upstream side is dictated by the wellhead economics.
So it’s important when you look at your footprint that you find yourselves in both liquid rich areas driven by oil prices or dry gas areas driven by gas prices. What we like about our portfolio, if we are roughly 50:50, we are balanced, okay. So our Marcellus North for example, which is the dry gas play that’s basin advantage because the location relative to New York market. But, this gives us an opportunity to kind of go with the flow if you will, as market fundamentals change. So we like the portfolio. We think it’s much more diverse than many of our peers and as a result, we think will give us more stable long-term earnings.
You can see that we have spent about $8 billion in total assets just under 7000 miles of pipe in the ground. This volume number, I always like to comment, its 3.8 Bcf a day net. When you think in terms of all of our partnerships that we have across the organization my weekly report reads, 5.2 Bcf a day this morning, okay. So the gross volumes throughput going through our pipes are actually higher. However, the 3.8 net is enough to make us the largest gathering and processing MLP in the industry.
It is interesting to note that our number of employees have grown up significantly, it’s easy for me to think about when I joined Chesapeake Midstream in 2008, there were 250 employees. Now, we are 1350 employees, so that’s another little indicator of how big and how fast the business is growing.
Here is that number that evidence, I was referring to, you can see that 3.8 Bcf a day, we are the largest gathering and processing MLP in the space not by a small margin, who are the Exxon-Mobil of MLPs, what do you think?
When you think about low risk business model, I do believe this is a very powerful part of our story. We took particularly careful attention to how to manage all the risk factors and everybody in this room knows what the risk factors are, when you are in the midstream business, you do have commodity price risk, if you take on any of the commodity exposure with regard to liquid value or gas value.
If you are in this business, you have contractual term risk because a lot of the contracts that have been written are three and five years. If you are in this business, you have exposure to inflation and many of the contract don’t have escalators. In every case, we look at each of those risk factors and we contracted to mitigate that risk. In some cases we have cost of service agreement that protect us on capital and in inflation, we have escalators in our fixed fee contract with MBCs, minimum bond commitment. Whatever we felt the risk factor was that needed to be mitigated we specifically contracted for.
Now, when I comment to this and people say well, Mike, how come you are able to do that no one else is able to do it? The reality of it is, we are not geniuses, we are very fortunate to be young. So in 2008, when many of the MLP struggled and they had embraced some of these risks, they discovered that it was quite a challenge to survive the volatility of the impact filtering.
So we were negotiating our contracts from 2009, so we were able to vicariously learn through all those experiences and specifically make trade with our producer customer. And I want to make sure, I highlight that they were trades, these were – we gave up some of the upside and captured a mid teens return in order for this risk mitigation on the down side, okay. So this was a good deal for the producer and a good deal for us in our perspective. And you can see the results in our quarter after quarter earnings, our predictability, our ability to deliver on what we tell you. And it’s largely driven by the way we negotiated these contracts.
So you can see that from a volume and capital, I mentioned the MBC, I mentioned the rate redetermination aspect of cost of service and recontracting, our contracts are 10 to 20 years. They are all dedicated acreage, so we have our footprint established and already highlighted that we are a 100% fixed fee. Now, this is not hedged to get the fixed fee, this is the base contract, it’s a 100% fixed fee, no direct commodity price exposure.
We have added this slide to kind of explain some of the questions that we have had in the past. So the – let me just kind of ask the way it’s been asked to Bob, Dave and I. And that is, all right, Mike, so you are starting to see your largest plays in the capital cost in your organic growth starting to decline and you will see that in our guidance, if you haven’t studied it.
And I think with regards to that does that mean your EBITDA is also going to be declining, are you on a treadmill, do you have to do a deal? And the reality is, the way these contracts structures work, the primary structure being cost of service is that it’s got a built-in EBITDA growth. So just like the first FERC jurisdictional rate, you are looking to create a levelized yield – levelized fee. So when you get a volume forecast from the producer, you are going in there and you are establishing this fee that gives you a growing EBITDA, okay, so it built-in to the contractual mechanism.
So we are now referring to this as contractual growth, so we can explain it to you, is that you have contractual growth even though you can see the CapEx declining. So yes, upfront capital is put in place, large diameter infrastructure gets built, the compressor facilities and things that it takes to create the operational backbone gets built upfront. But the EBITDA does not decline, it actually increases over time. So this is important recognition, so when we talk about growth, we have contractual growth, we have organic growth and then of course, you have the growth through acquisition.
I think most people are familiar with Global Infrastructure Partners and with Williams our two sponsors, we feel very fortunate. These guys go well beyond just your typical financial sponsors. GIP, there is actually two components to GIP. One component is the commercial aspect which helped us kind of negotiate structure some of these deal from the beginning. But the parts that we work with more closely today, if it group that came from GE and I’d call them Six Sigma consultants -- Six Sigma or Lean techniques.
And we have a number of these consultants three or four, I think right now that are embedded in my business that are literally targeted at things that I can think I need to take an extra strong look at, okay. And so we benefit from this relationship with GIP well beyond just a financial support and financial sponsorship.
We also have Williams now as a part of our family and you could imagine here is the company that’s been in the midstream business for a 100 years and the way I look at it is, this could not have played out better. When you think about having partnered with Chesapeake during the deal capture stage, we were partnered with the fastest growing company in the country, who was capturing the heart of all these plays. So that allowed us to have the strategic relationship we needed to do the deal capture stage.
Now, we are in execution phase and we find that our partner Williams, who has been in the business for 100 years and we were able to leverage from that experience. So as we start as a very young company creating midstream engineering standard et cetera. We are able to work with our Williams friends to bring some of that stuff into our business. So it’s been an extremely powerful combination and we will be able to expand on the synergies associated with both GIP and Williams.
We have this slide kind of highlight what’s been going on in 2013, when you specifically look at the number of aspects of our year, you know, the one that I would highlight that’s probably not is prevalent on this page is, we completed separation. It’s one thing on December 28 of 2012, when we kind of closed our deal with Chesapeake that’s the commercial part of the deal, but most people don’t realize, we were connected with the back office of Chesapeake at every phase they were doing our accounting. They were doing our IT.
So this year was a year that we call transition and it involves separating our back office away from Chesapeake and rebuilding it in Access. This was not an easy undertaking, it’s been a very difficult, we had over 965 tasks that were pre-identified. We are 100% complete with all the critical tasks, which basically means Access Midstream is a complete standalone entity without any reliance whatsoever on Chesapeake, Williams or GIP, which has been quite an undertaking.
During this time, we obviously secured a new dedication with RKI in Niobrara that’s a very exciting deal. In the Converse County, you are probably aware there is five different zones that are very prolific up in the Niobrara. The two players were RKI and Chesapeake, the Chinese came in as well as the partner. We thought it would be best to have one entity that did development of the Midstream in the processing. So, we partnered with our RKI, who basically partnered with Crestwood, so now we have a 50:50 partnership in Niobrara with Crestwood to deliver on all the midstream services, the key to that deal is, we got the entire 300,000 acreage dedication. We are the midstream provider in the Niobrara, okay.
So that was an exciting deal. And probably our – I’ll get some more slides here to talk about it probably our most engaged development this year and it closed between UO and Eagle Ford but I have chosen UO to showcase here today, is the building out of the wet gas region of the Utica development. And that particular investment has already come online and we have got liquids flowing and it’s really an exciting part for the industry much less Access Midstream.
So in this year alone, we connected 485 wells, 2500 miles of new pipe in the ground, over $1.2 billion of new capital employed. This number of 92% is now updated, so if you’d have built from the end of third quarter, as of third quarter to-date to today that number is up 200%. So we are very excited about completing that transition of the back office.
On the EHS front, I’m equally excited, I will update this 40% improvement, last year our TRIR, total reportable incident rate was 0.63, those who aren’t familiar with that that’s an excellent rate. However, this year to-date, we are 0.23, okay. So, this is something that I take very personally as far as the safety and the environmental friendliness of the way we operate within all the basins and we really have stepped up our again here and I’m really excited about the improvement.
Our goal remains to be – have zero impact and have zero incidence, we just feel strong and that’s possible and that we should get there. But, to be honest, 0.23 is best-in-class. And so we are pretty proud of what we are already.
So, it’s all about execution and how does this show up in the numbers? I think you should be holding me accountable as we expect to be held accountable. Go and look and see at our performance, here we have our EBITDA performance versus the consensus. You can see first quarter, second quarter, third quarter, the story is constantly beating your expectations, I think that’s our goal. When you look at our performance relatively Alerian on our units, obviously we are outperforming the Alerians.
When you look at distribution growth relative to the gathering and processing MLPs and the peers that we have, we have exceeded the distribution growth. When you look at the balance sheet and our leverage, we have a much healthier balance sheet with 3.2x debt to EBITDA relative to gathering and processing sector which is more levered than we are.
Likewise, in our distribution coverage is very healthy, comfortable distribution coverage. So we are pretty excited about the way our business has come along, you probably saw that in the third quarter, we had a nickel step up in our distribution. We are rewarding our unitholders that whole intent was to get back on that 15% distribution growth at our growth profile going forward.
When you look at the distribution growth amongst all of the peers and you look at third quarter year-on-year and third quarter quarter-on-quarter and then year-to-date regardless how you look at it. ACMP has been outperforming the competition. And it’s an exciting part of our story. It was part of a plan. And this is us delivering of what we have been telling you these predictable cash flows are better generated by these contract structures and its growth.
Final score card, you can see the 57% annual growth since the fourth quarter of 2010, not too shabby. You can see, what I like about this slide, you can see that when we bought the rest of the assets from Chesapeake, prior to that we are buying relatively mature assets. Barnett was mature asset, some of the Mid Continent portfolio that we put in the portfolio in 2009 was a mature asset. You didn’t have the same growth profile. When we did the deal in December 2012, we told everybody that we are buying these assets from Chesapeake all at once. But, we are buying assets that have a tremendous growth trajectory. And you can see it here, 184, 207, 227 throughout 2013 and this continues, okay.
So we have a great growth trajectory. Then when you go and -- you see the step-up in distributions that I commented to earlier, you see our growing enterprise value now almost $13 billion and then our coverage ratio. And so all in all, a very, very good story, a very strong business-scape.
Kind of reaffirming our guidance, you can see 800 to 850. We continue to tell you that we are going to deliver on these ranges throughout the three year plan, $1 billion to $1.1 billion in 2014, $1.2 billion to $1.3 billion in 2015. You do get to see the trajectory of our growth capital as it declined but remember that under the cost of service methodology that doesn’t translate to a declining EBITDA.
And we have always feel very good about the way we have approached maintenance capital. And you find that there is a whole host of different answers out there. We think we have taken the conservative approach and so we are adequately accounting for our requirements under maintenance capital.
So here is what I want to showcase here today and when you think about the Utica. It’s a relatively complex arrangement, so we have the way to think about the Utica, we have three different relationships. The first relationship is in the gathering and compression and dehydration. So we have a company called Cardinal Gas Gathering, its shown here in CGS. And the green area the dark green is the acreage dedication under Cardinal. Now, we are 66% owner and operator of Cardinal and Total is in there at 25%. And EnerVest has got the remaining interest. They received the interest as a result of being the producer at one point and it is translated into integration.
I think it’s publicly known that Total is out there marketing their 25% interest and I will just address that right now because I think it’s important. We have no specific seller restrictions there. They are welcome to -- they can sell their 25% as can EnerVest, obviously, their commercial terms and conditions that benefits our Access Midstream to continue to operate that asset but as far as selling the non-operated interest they are free to do so.
Outside of Cardinal, we have Utica Gas Services and that’s a 100% owned Access Midstream asset and the acreage dedication shown here in blue and most people don’t appreciate, this is going to be a very prolific play. The only reason why this has not been drilled is because the Marcellus North dry gas with infrastructure already in place has been the focus of the Appalachian dry gas development. This is going to be that the results from the wells in this area are outstanding. So this will be your next phase of dry gas development that’s kind of basin advantaged.
And so we have a 100% acreage dedication from Chesapeake in the blue area. And then not shown here but I will share with you some of the details we have integrated in the Utica wet area and we have done so through a partnership with Momentum. And that we call that our Utica East Ohio partnership, we are the largest owner in that partnership, we are 49%. And our partner operates. So Momentum M3 owns 30% and then again, the remaining interest is EnerVest.
So this is an exciting part of what’s going on today in the marketplace, you can see CGS put 145 miles of pipeline in this year alone, modest amount of pipeline in the dry gas as I mentioned earlier it hasn’t developed yet its kind of awake and waiting. So these are cost of service agreements. You can see the ownership.
When you get into a little more detail, the UO asset that I referred to, this is world’s scale facility. To get the opportunity to go to Utica, you’re going want to try to get a tour, glad to offer that to you, you don’t want to see this because been in business all my life and rarely to get the opportunity to build something this massive. So when you think about these complexes up to the north in Kensington, we roughly had 600 million a day of gas processing in this one plant site.
And then we have NGL and gas pipeline that connects the location to the Harrison Hub and the Harrison Hub is impressive not so much because of the fractionators and the towers but because we have an enormous distribution center. Here we have storage, we have rail facility. I mean this is an incredible site. The Governor Kasich came down and we had a kind of a valve turning ceremony. And I must admit, I think he was even surprised what all have been developed in one very short year and I have some pictures to share with you as well.
The contract structure is that the fixed fee with some CapEx protection for us. The ownership I have already mentioned. The storage numbers, this is all about ground storage which offer some visual appeal when you are there, obviously, the 135,000 barrels-per-day fractionators.
So, I think Kensington with the cryogenic process which reduces the liquid out of the gas stream and then get transported to down to Harrison that you can see in this triangular spot, if I can do a pointer, if I can do this or not. So there is Harrison and there is Kensington. So the processing is here comes down to pipeline into here we fractionate into the purity product. So here is where you can actually recover the ethane, if you want to put it in a pipeline to Gulf Coast or you can do propane, butane put it in the different rail cars and distribute it from there.
And then, we have another plant that’s currently just in development phase at Leesville, so we’re talking 600 million a day here, 200 million a day here and everybody is out competing for the next phase, next tranche, which we’re expecting to produce in the order of 400 million to 600 million a day.
So here is some of the construction, you can see Kensington Phase I, it came online on time and on budget something that also differentiate us from the competition. Most interestingly, I’m very proud to having Frank Tsuru as my partner. He executed very well in this plant.
I think one of the things that we’ve always been pretty good at is, understanding when you got scope of work we had. The idea of trying to take it all along is Access Midstream would have been challenging. We had this enormous footprint, we had to build in the field. And so a part of the reason for bringing on a partner in this phase is to recognize that we needed an additional organizational capability in order to deliver on producers’ expectation. And we did this intentionally and it worked out great.
So we’ve got the facility up and running, we got Phase II coming online at 45,000 barrels a day, Kensington Phase II at 200 million a day. So when you think about it, Phase I is up and running. January 1, we’re going to have second plant up and running, April 1, we’ll have the third plant up and running and that’s when we will bring on a second phase of Harrison on a fractionator and then soon thereafter we have the third phase of – so we are going to end up with 135,000 barrels a day at Harrison.
Pretty exciting deal, I will highlight some pictures, think about this, this is what it looked like in November 2012, you can tell, we did a little bit of dirt work by then but there was nothing there. And now today, look at it. You have the (emit) metering and liquid handling facilities, you have got the processing trains, one, two and three. We got the future location already identified for train 4, condensate stabilized residue compressors are in and train one is up and running and making liquids.
You can see what we’re doing here in Harrison. There is the November 2012 picture. Here is today. And if you are an engineer like me, this is really cool stuff. Okay. You get excited about how this has come along.
So I’ll close just by telling you that I’m proud of the execution, I’m proud of the financial results. I’m proud that we’ve been able deliver for on all the expectations that each of you’ve had. But I’m most proud of how we went about doing this. We’ve got an excellent track record with regarding to environmental spills, with regard to way we expect our communities in which we work and obviously both with our contractor TRIRs and our employee TRIRs.
We do have one blemish. We have 33 motor vehicle accidents this year. I’m not proud of that went up from 23 from last year. Good news is they are all minor, the bad news is I got to teach some people how to drive and so that’s the only blemish that I think I would report on our 2013.
So with that, I’d like to open it up for questions and I do want you to let (Al) get you a microphone. This is webcast and so it’s going to be important that your questions be answered. I’ll be put on the microphone, so people can hear it at home. So raise your hand and we’ll get you a microphone. Answer all your questions, it’s the fun part.
At the beginning, you mentioned the regions you were in like you said you weren’t in the Bakken, I was just wondering why that’s the first question, the second question is, how much of your concentration amongst the producers, are you in Chesapeake and do you have the desire to be investing grade at some point?
J. Michael Stice
You bet. Three questions, so I will answer them all relatively quickly. So I’ll do in the reverse order. 75% of our revenue comes from Chesapeake specifically, I’m targeting 50%. And yes, I’m very much want to achieve investment grade. I think if I achieved 50% and my goal is around into 2015, I’ll be able to convince the rating agencies that I have enough diversification in my supplier portfolio that would warrant investment grade. That has been the last hurdle frankly that they put out in front of us. We’ve achieved the scale, we achieved the predictability, everything about our business is performing but they don't like the concentration risk. So we will work on that.
There is a variety of strategies that we are deploying to do there. One of them, it’s kind of a tailwind. We’ve got Chesapeake having to divest their assets to meet their own cash flow needs and as a result we end up in adding some new customers. Our concentration at one point, remember we came from Chesapeake that’s all we sold, our concentration one point was 100% then 82%, then now 74, it’s the latest number. But, we’re trying to bring it down, we’re going to have to do some deals in order to make that happen and I think that’s an important part of the portfolio.
In the Bakken and think about how we came to be, we believe that we should follow the customer in the basins where our services are needed. We found that every time you had to buy your way into a basin that came in a pretty price premium and we didn’t feel that we needed to pay that premium.
No, I’m not suggesting that I would never be in the Bakken, but the way I’d like to enter the Bakken would be at a fair value or fair price and I think everybody in this room would admit that some of those acquisitions when people are sitting on the outside, they’re trying to get into a basin it becomes pretty expensive. So we’ve been pretty disciplined about not doing that and the primary answer to your question, we’re not in the Bakken because Chesapeake was in the Bakken. Any others?
Right here, in the left.
Just a question about your 15% distribution growth and the 1.5% coverage and clearly that formula has worked for you given your valuation and stock price performance. When you look out two, three, four years, is that kind of a long-term, is that the math that you’re trying to produce long-term to maintain the performance of the stock?
J. Michael Stice
Yes, to the distribution growth. So we like the idea. We think that 15% distribution just become boring, it’s the way to be. And so that is our long-term objective. On the coverage ratio that would come up and go -- that will come up and down. We’ve always said that the coverage ratio, we think is appropriate to this industry is 1.1 to 1.15. That’s how we mark into the business. Frankly, the reason is 1.5 that the business is performing, okay, even outperforming our original expectation.
So we’re executing well that’s resulting in a little higher coverage ratio today. Lots of things can happen kind of moderate that, we could find the deal to do with bolt-on strategy that could use some of that excess cash. But as it stands right now, we like it because it’s helping us fund this capital program, okay. So, it’s actually benefiting us by having this coverage ratio, but I don't think that is a long-term situation from a coverage ratio. Distribution increased, yes.
Out of time, someone is trying to cut me off, all right. Thank you all. Have a great day.
(Sharon), you did not ask any questions.
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