Southcross Energy Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 5.14 | About: Southcross Energy (SXE)

Southcross Energy Partners, L.P. (NYSE:SXE)

Q4 2013 Earnings Conference Call

March 05, 2014 11:00 AM ET

Executives

David W. Biegler – Chairman and Chief Executive Officer

J. Michael Anderson – Senior Vice President and Chief Financial Officer

Analysts

Jerren A. Holder – Goldman Sachs & Co.

Michael J. Blum – Wells Fargo Securities LLC

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Justin J. Agnew – Robert W. Baird & Co. Equity Capital Markets

Operator

Good morning and welcome to Southcross Energy Partners’ Fourth Quarter and Full Year 2013 Financial and Operating Results Call. As a reminder today’s call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation.

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

J. Michael Anderson

Okay, thank you very much and good morning. We appreciate you joining us for the Southcross fourth quarter and full year 2013 financial and operating results call. With me today is David Biegler, our Chairman and Chief Executive Officer.

Before we begin, I would like to remind all participants that our comments today may include forward-looking statements. It should be noted that a variety of factors could cause the partnership’s actual results to differ materially from the anticipated results and expectations expressed in these forward-looking statements. For a complete discussion of these risks, we encourage you to read the partnership’s earning release and our documents on file with the SEC.

Today’s call will contain certain non-GAAP financial measures. You can refer to the press release we issued this morning for important disclosures regarding such non-GAAP measures and also the reconciliation of these measures to their most directly comparable GAAP measures. You can obtain a copy of our press release in the Investors tab on our website at southcrossenergy.com.

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

David W. Biegler

Thank you, Michael. We are pleased today to report solid performance for the fourth quarter which comes to me only after a successful follow-on offering and our announcement of a major pipeline expansion, our Webb Pipeline. We are pleased with our momentum and remain enthusiastic about the future.

I’ll start the call this morning as our normal chronology with some overall comments on 2013, then discuss highlights for the fourth quarter and then move finally to our outlook for the business.

2013 was a year of development for Southcross Energy Partners. At the start of the year, we faced some challenges that impacted our financial and operating performance. In the second quarter, we completed our work, put those challenges behind us and reinvigorated our focus on growing our company.

In the fourth quarter, we achieved the operating results and financial performance that we had forecasted to investors earlier in the year. Early in 2013, we completed a major expansion of our pipeline capacity into the prolific central area, the Eagle Ford shale with our 56 model large capacity Bee Line pipeline.

Over the course of the year, we also added several smaller lateral pipelines to add new gas sources. We completed the expansion of our Bonnie View Fractionation facility and are consistently producing quality, products for sale directly to our customers and the Corpus Christi at lower Gulf Coast market area.

In May, we began selling NGL products under new long-term contracts, further improving our profitability. Throughout the year, we increased our processed gas volumes and NGL production such that fourth quarter 2013 NGL sales were 48% over volume sold in the same period of 2012.

Processed gas volumes in Q4 were 25% higher than volumes in the same period of 2012. In addition, towards the end of the year, we initiated construction for our 94 model Webb Pipeline, a significant expansion into the western Eagle Ford shale gas condensate area, which we believe will accelerate future growth for us and for our unitholders.

We completed a significant follow-on equity offering last month that will finance our near-term growth. The equity offering will also enable us to reduce our borrowing cost and expand the availability of our existing credit facility.

I hope when you hear this report on 2013, you share with us the enthusiasm we now have for 2014 and for the new stage of growth for Southcross.

Now on to the fourth quarter; our fourth quarter adjusted EBITDA was $14 million, which was in line with our guidance and reflects another significant incremental quarterly increase. Today’s financial results reflect the better and stronger integrated business in the midstream that we started building in 2009 and we believe it positions us well for competing in the Eagle Ford shale region.

Our plants continue to run well with strong recoveries and consistent production up here at NGL products. During the fourth quarter, our gas processing volumes increased by 13% and NGL volumes increased by 28% over third quarter levels. These NGL production numbers reflect reduced ethane recovery during the fourth quarter due to its limited frac spread value at ethane market prices.

Focusing on production of just propane plus NGLs that production during the quarter increase by 18% over third quarter levels. We continue to attract new business on our growing platform and during the quarter, we processed an average of approximately 32,000 MMBtus per day of volumes above our third quarter volumes.

Southcross has an excellent strategic position in the Eagle Ford and we believe our close proximity in connection to the lower Gulf Coast petrochemical and industrial infrastructure provide us a competitive advantage in obtaining new gas supply and securing new business.

Production from the Eagle Ford Shale continues to grow while the more conventional part of the Eagle Ford play continues to outperform. We are encouraged by what our customers are seeing from their new Eagle Ford wells in the western area and the prospects we are drilling on reduce spacing.

Our business focus is simply to provide value and high service levels for our gas supply customers and add gas volumes across the Southcross platform. We do believe our integrated midstream business will top lines in some – into some of the best rich gas producing areas in the country connected to and having direct access to end use markets for both natural gas and NGLs, positions us well to compete for new gas supplies.

We anticipate adding incremental gas supply volumes over the course of the year and finalizing contracts that will add the volumes for our new western Eagle Ford pipeline. The Webb Pipeline is expected to have initial uncompressed free flow capacity of approximately 300 million cubic feet of gas per day and beyond line in the fourth quarter of 2014. It will gather rich gas volumes from Webb, LaSalle, McMullen and Dimmit counties and connect to our processing and fractionation complex near Corpus Christi.

We have awarded construction management services for this new client pipeline, completed the detailed route selection and commenced right-of-way purchases but now has specific pipe delivery days. We have the detailed route available on our website for investors and producers if you care to refer to it.

While we have secured our anchor shipper for the Webb Pipeline, our commercial team continues to focus on at adding additional gas volumes. While we are aiming for additional large volumes that we can attract with the new Webb Pipeline we expect that many of these negotiations will stretch end of the year.

We expect that process gas volumes coming on for our system at the time the Webb Pipeline is completed, will exceed our current minimum volume commitment of 40,000 MMBtus per day.

In the meantime, we continue to add smaller and interruptible volumes elsewhere on the system that we can accommodate during the course of the year while not impairing our ability to process committed volumes associated with the new pipeline when it comes online.

Turning to downstream markets, we are focused on building our business to leverage the growth we see rapidly building in the Gulf Coast area broadly and in Corpus Christi specifically.

We’re already selling all of our butane product and most of our propane for export. We believe that growing Gulf Coast NGL exports will continue to be a theme in the industry through 2014 and then Southcross will benefit as we are well positioned to transport additional gas and NGL volumes to these export facilities.

Turning to management comment, earlier this week we announced the addition John Bonn to our management team, where he will serve as President and Chief Operating Officer. John oversees both our commercial activity and our operations. He brings a wealth of experience from his prior positions including as President at NiSource Midstream Services and more than 30 years of experience in the midstream industry including commercial and operations positions with Enterprise Products Partners, Gulfterra Energy Partners, El Paso Field Services and Delhi Gas Pipeline. I am truly excited to have John with us as part of the team as we enter into a new phase of growth for Southcross.

I now want to address first quarter experience and expectations. In the first quarter, we are seeing lower processed gas volumes than in the fourth quarter due to some fluctuations under interruptible contracts. While we have a strong base of gas supply with about 90% of contracts under minimum volume commitment acreage dedications, our capital gas arrangements, we do have about 10% of our processed gas volumes under interruptible contracts.

Until we form our prior volumes upon completion of our Webb Pipeline, we expect to see some fluctuations in gas volumes at the margin. We expect that the impact of an adjustment in a contract transporting interruptible volumes to us, we will reduce processed gas volumes in the first quarter by approximately $20 million cubic feet a day from fourth quarter levels and we estimate our first quarter adjusted EBITDA to be about $12 million.

We expect to have these volumes back on system before the end of March along with modestly higher volumes during the second quarter from other sources. As a result, we expect second quarter processed gas volumes to be similar to fourth quarter levels and second quarter profitability to be likewise similar with adjusted EBITDA in the range of $13 million to $15 million.

We believe the first quarter disruptions are temporary and we are tracking well to grow processed gas volumes over the course of 2014 and add new contracted volumes associated with the Webb Pipeline during the fourth quarter. We will be providing an update on second quarter financial guidance in our next earnings report in early May.

Looking forward, as we mentioned during our equity offering process, we expect greater than $3 million quarter increase resulting from the already contracted gas volumes on the Webb Pipeline and we believe we will be adding to this gas volume before the end of the year. With our existence processing and fractionation capacity, the existing Southcross system has the potential for $20 million or more in quarterly adjusted EBITDA through filling currently available processing space.

With the expectation of building gas volumes for the Webb Pipeline, we are examining alternatives for expansion of our processing capacity and furthering growth of our adjusted EBITDA and distributable cash flow.

For 2014, we remain focused on continuing our strong overall operating performance and on capturing new gas supply, which are the principal near-term drivers for increasing profits and distributable cash flow.

We continue to believe we have tremendous opportunities and the progress we’ve made in building our integrated business will benefit our customers, our business, and our unitholders.

With that, I’ll turn the call back over to Michael for a financial review of the quarter. Michael?

J. Michael Anderson

Thanks David. I’m sure that you’ve all had a chance to read the press release that we issued earlier this morning on our earnings.

As David mentioned the adjusted EBITDA for the quarter was $14 million and that was in line with our financial guidance that we had provided earlier. Gross operating margin of $28.2 million for the quarter was up about 12% over third quarter. Operating expenses were $10.2 million for the quarter and G&A expense was $4.9 million for the quarter; those were both slight decreases from third quarter levels.

Maintenance capital expenditures were $1.3 million and cash interest expense was $3.4 million for the quarter. Distributable cash flow of $9.3 million was up from the $5.6 million in distributable cash flow that we had in the third quarter.

Our coverage of cash distribution on units outstanding during the quarter was 0.93 times and that does exclude distributions paid on the new units that we issued in early February in conjunction with our public equity offering.

As a reminder, on February 14, we paid a cash distribution of $0.40 per common unit for the three months period ended December 31; that’s equivalent of course to $1.60 on an annualized basis.

Growth capital additions to plant, property and equipment during the fourth quarter were approximately $6.4 million. We anticipate that for 2014, growth capital expenditures will be between $130 million and $150 million with $125 million and that being spent and related to the Webb Pipeline.

The growth projects outside Webb currently slated for 2014 are mainly smaller capacity enhancements for our pipelines and our facilities. We expect that on the maintenance capital front, we expect to spend between $5 million and $6 million for the year 2014.

I think as you all know on February 5, we completed the issuance of $9.2 million common units which resulted in proceeds to the partnership of approximately $148.5 million, which included our General Partner contribution.

Debt as of December 31, 2013 was $267 million and we were in compliance with all of our debt covenants as of that date December 31. Net debt after the equity issuance and the distribution payment that was made on February the 14th was $119 million.

And so with that, I will conclude my comments and hand it back to David for closing remarks before we open the lines for questions.

David W. Biegler

Thanks Michael. During 2013, we did accomplish a great many things for our unitholders. During 2014, we are committed to accomplishing even more. We’ve made a great strategy with financial results and flexibility and we do know that the improvement needs to continue. Our assets are operating well and we are adding new customers and new profitable contracts. We’ve completed new pipeline extensions and initiated a major expansion that will provide growth for Southcross for years to come.

We anticipate solid near-term opportunities and continue to position ourselves for long-term growth. Together, we expect these factors will provide accretive earnings growth for Southcross unitholders.

With that, I would like to open the line for questions. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from Jerren Holder of Goldman Sachs. Please go ahead with your question.

Jerren A. Holder – Goldman Sachs & Co.

Hi good morning.

David W. Biegler

Good morning Jerren.

Jerren A. Holder – Goldman Sachs & Co.

Hi. Just wanted to, I guess get sense of I guess the confidence that you guys have that you will renew this contract, interruptible volumes, I guess by the start of the second quarter, what gives you I guess that sense?

David W. Biegler

Well, the quick answer is, we are confident that we will be renewing the transportation agreement and opening it back up. The confidence is really based on the negotiations and the discussions really broadly that we’ve had not just of the transportation provider, but also with some other producers who have basically interruptible volumes becoming available. Many of you know, there was a processing plant outage in the lower Gulf Coast that created the need for a lot of people to move volumes around.

So there has been a lot of shifting of transportation and processing that's occurred really since the late fourth quarter and our confidence is really based upon the outcome of that event, the negotiation discussions and really what we see is our position relative to the ability to capitalize on those volumes.

Jerren A. Holder – Goldman Sachs & Co.

Okay, thanks. And as we look I guess to your second quarter guidance of $13 million to $15 million, I guess what’s like the differentials between the top-end of that range, to bottom that range, I guess taken the consideration that maybe, the re-contracting is a bit delayed or doesn’t occur?

David W. Biegler

I would say, I think you said it well, tough is, variable to pin down all the time is exact timing and at the margin, because basically all of this generally flows directly in the margin and into EBITDA. The timing really has a significant effect on the margin of bottom line EBITDA.

So we end up, it may seem like the fourth quarter, we had it pin down, but the reality is that you just said it, it’s not just that volume but other incremental volume that we are seeing in and out of the system, that has a big effect, not so much kind of weather it happens is timing in our judgment of where we sit on most of them and then obviously the second is, most of those because of the variability, it’s heavily dependent upon the exact volume level that comes on immediately.

I would say the second variable is really just product prices and we base our forecast on [indiscernible] forecast and that does have an effect on things. Those have an effect as much as anything else on the range of guidance.

Jerren A. Holder – Goldman Sachs & Co.

Okay, thanks. And lastly I guess switching across to the Webb Pipeline and just contracting for incremental minimum volume commitments. I guess you are setting your mark that you expect negotiations that are going to go through later into the year. Just wanted to get a sense of what’s the incentive for producers at this point to sign-up for I guess minimum volume commitments at this point given that essentially the pipeline is going to have versus just I guess signed-up for smart volumes?

David W. Biegler

Yes, I’d say it sounds like obvious [ph] question because I think elaboration is not just merited, but healthy. I mean one of the things to be clear is we like very much reporting actual contract signings and not just as we reach verbal agreements or whatever and then we report volume commitments, not the potential for the ramp volumes in the future when they become actualized. So just to make sure you understand that’s what we are discussing.

The second thing is, we have been working on the Webb Pipeline for really a year and a half before we ever kicked it off; those discussions are a mixture of some who really wanted us to do it and understood they needed to put in an anchored volume to enable what to happen and we are very much committed to be part of that and that's really kind of that contract.

To remember others who said look, we really like what you are doing, we just want to make sure, before we kind of commit and put our eggs in your basket that your basket is going to be there in essence to extend the medical and really the point of that is that we see the position relative to those discussions being improved than it has been improved once people saw that it was announced even more so those who see us commencing right away purchase and it’s even more so when we commence construction.

I think the perspective always is, people is I understand, I did this game a long time. I understand quarter-to-quarter fluctuation that I understand the need to quarter-to-quarter loops. The reality is the producers need to accept are really viewing this as their 2015, 2016, and 2017 off-take.

I mean you guys know the upstream as much as any others and to an upstream producer, their first and foremost need is off-take and they would like as many different options as possible. So they are already working on their contract explorations and rollover, planning that occur in this call again in late 2015 and then they are also working on what their projected ramp of production is going to be in that same time period.

So to the point, we are not discussing – most of our discussions are really focused on longer term firm commitments not what I would call incremental just spot contract. Everybody including on the upstream side is still wanting for some element of firm off-take guarantee. So that is I think gives you more color on those discussions, the reference to shorter term volumes we have not just abandoned everything else, we have continued to have discussions with producers regarding the Central Eagle Ford, all our gathering systems in and around Corpus, even again our system extends up to Houston.

So while most of our discussion and questions will get around the Webb line, there is a whole lot happening in the Gulf Coast is not just in with Webb and LaSalle counties. So some of those become shorter term and we are very aware of the need to plan our business such that we balance those two and I actually appreciate that opportunity to add a little more color on the comments.

Jerren A. Holder – Goldman Sachs & Co.

Great, thank you. That’s it for me.

Operator

Our next question comes from the line of Michael Blum of Wells Fargo. Please go ahead with your question.

Michael J. Blum – Wells Fargo Securities LLC

Perhaps this is covered, but I just wanted to confirm firstly offering that, are you back to your original credit agreement and pricing grid?

J. Michael Anderson

Hey, Michael, it’s Michael Anderson here, in some of that question, basically we have the ability based on fourth quarter numbers to make that election, so now with the filing of the K come up here, we’ll be able to do that with the banker.

Michael J. Blum – Wells Fargo Securities LLC

Great, thank you very much.

Operator

(Operator Instructions) The next question is in the line of Selman Akyol with Stifel. Please go ahead with your question.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Thank you. First of all, just a reminder that the picks like start paying cash at the end of the third quarter?

J. Michael Anderson

No, that’s likely to be the first part of 2015.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Okay.

J. Michael Anderson

It was at least one year pick.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Okay. And then just going back to the Webb Pipeline, and I appreciate the additional color, how quickly do you expect that then to fill? Do you think you’d have all your contracts in place and everything by the end of 2015?

David W. Biegler

Well, let me make sure I get the definition down. As it relates to filling the current processing capacity which really becomes the bottom line, I mean the limiting factor, not the capacity of the pipeline. So our variable is not filling the pipeline, it’s filling processing, it’s our expectation that we will be filling processing, the existing processing capacity much closer centered in the end of 2015, or maybe end of 2015, but our view is that, we need to begin focusing on the capacity we’re going to have for processing because we are going to be approaching that being fully utilizing all the available capacity more like late 2014, early 2015 timeframe.

J. Michael Anderson

And Selman, just to put some numbers on it, I think you know these, but just as a quick reminder for everybody, if you add in the volumes that we’ve got in terms of our anchored tenant for the Webb kind of pipeline at the end of 2014, with our existing volumes, we’d still have 100 million cubic feet a day of capacity left in processing. The pipeline is 300 million a day, so basically you fill up that first 100 million or so, you have a processing capacity that next 200 on the pipe are coming from elsewhere, we’d obviously need to find another home for processing and that’s really kind of the next stage in growth that we are beginning to focus on now.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

So then just to follow that, then you’d also be then be looking at expanding your processing capabilities as well?

David W. Biegler

Certainly expanding processing capacity, potentially fractionation capacity is a big thing on our agenda right now.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

All right. Thank you so much.

David W. Biegler

You bet.

Operator

Our next question is from the line of Justin Agnew with Robert W. Baird. Please go ahead with your question.

Justin J. Agnew – Robert W. Baird & Co. Equity Capital Markets

Hi, good morning. So we’ve seen some pretty poor quarters, some kind of reduced expectations, out of some of the Eagle Ford guys like SM and Forest and Swift, so I was wondering I mean have you guys seen that on your asset footprint and then kind of attention to that is that kind of lowered your expectations for volume metric growth here in the 2014?

David W. Biegler

Quick answer is no. We follow the producer, obviously you are talking to a lot of the producers constantly in terms of customer relations. We also follow all of the narratives. I always remind people and I don’t know if anyone knows it, but the Eagle Ford is whatever 250 miles in length.

So while we think of it is one play area region, it’s actually a lot of different geographic contingencies, I mean contiguous areas and the point for that is some eight producers comment regarding even if it’s occurring contractive producer for us like Swift relative to one area, they don’t have any effect on anything we are doing in another area.

We are happy and satisfied relative to the conversations we are having in terms of the commitments that producers for wanting to talk about for the 2015, 2016 and forward timeframe that the ongoing future projections haven’t really changed in fact all-in-all, they are whole lot better than what we anticipate.

So we don’t see anything out of the Eagle Ford that's been a surprise other than quite frankly, in some places it’s been surprisingly better than we thought. So I think it goes back to the Eagle Ford as a play is going to take five to 10 years to fully develop and quarter-to-quarter fluctuations are not really heavily on our mind right now as much as keeping our eye on the long-term potential play.

Justin J. Agnew – Robert W. Baird & Co. Equity Capital Markets

Got it, helpful, that's it for me.

Operator

Thank you. At this time, we have reached the end of our question-and-answer session for today. I will turn the floor back over to Mr. Biegler for any closing comments.

David W. Biegler

All right, I know we’ll provide a lot of detail in these, but I don’t want to lose side of the overarching message that I hope you’ve got and which is, we feel very good about our current position about the management team additions we are making. We feel really good about the momentum we’ve got, which includes the potential of a number of growth projects that we are working on today that would have an effect in 2014 and 2015.

So I don’t want to lose sight of the upper level view that we see a lot of good momentum and a lot of good things happening for Southcross. Thank you all for your time today and we are always available for questions. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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