Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Summit Midstream Partners (NYSE:SMLP)

Q4 2013 Earnings Conference Call

March 11, 2014, 10:00 AM ET

Executives

Marc Stratton - Vice President and Treasurer

Steve Newby - President and Chief Executive Officer

Matt Harrison - Chief Financial Officer

Analysts

Jerren Holder - Goldman Sachs

Ethan Bellamy - Robert W. Baird

Helen Ryoo - Barclays

Operator

Welcome to the Fourth Quarter 2013 Summit Midstream Partners, LP Earnings Conference Call. My name is Sylvia, and I'd be your operator for 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 turn the call over to Mr. Marc Stratton. Mr. Stratton, you may begin.

Marc Stratton

All right. Thanks, Sylvia. Good morning, everyone, and thank you for joining us today for the Summit Midstream Partners' fourth quarter and full year 2013 earnings call. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at summitmidstream.com, where you'll find it on the homepage or in the News section.

With me today to discuss our earnings as well as our Red Rock dropdown announcement are Steve Newby, President and Chief Executive Officer; and Matt Harrison, 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 that such expectations will prove to be correct.

Please see our 2013 Annual Report on Form 10-K, which was also posted last night and our other SEC filings for a listing of factors that could the cause actual results to differ materially from expected results. Please also note that on this call, we'll 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 earnings release.

Finally, yesterday, we launched the public equity offering. We will not be commenting on this offering and we will not be answering any questions regarding this offering during this call.

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

Steve Newby

Thanks, Marc. Good morning, everyone, and thanks for joining the call. I'm going to briefly review the fourth quarter and I'll turn it over to Matt to review our financial performance in more detail. I'll end the call with a discussion around our Red Rock dropdown, our revised 2014 guidance and our outlook for the Summit [enterprise] [ph].

Yesterday we made three major announcements. First, we announced the dropdown of Red Rock Gathering from our general partner, Summit Investments to the MLP for $305 million. Second, we announced our financial and operating results for the fourth quarter and full year 2013. And then finally, we announced the launch of a primary equity offering to help finance the Red Rock dropdown. During the call, we're going to discuss our earnings results and the Red Rock dropdown. But as you guys probably know, we cannot discuss the equity deal, given we're in the market today.

First on our financial results. For the quarter, we reported adjusted EBITDA of $39.1 million and adjusted distributable cash flow of $28.5 million. These were up 37% and 15% respectively over the fourth quarter of 2012. The year-over-year increase was due primarily to the benefit of having Bison and Mountaineer in our 2013 results. Our fourth quarter results were affected by severe winter weather across the vast majority of our operating areas and our Bison operating issues.

On January 23rd, we announced our fourth quarter distribution of $0.48 per unit, which was a 4.35% increase over the third quarter. For the fiscal year '13, our adjusted EBITDA was $145.5 million, which was just above the midpoint of our annual guidance, and we delivered 20% total distribution growth per unit over our $0.40 MQD. We delivered this growth while covering our distribution of 1.19 times for the year. Needless to say of the strong 2013, we also delivered significant distribution growth and value creation to our unitholders.

On the volume front, total throughput volume in the fourth quarter averaged 1.1 Bcf a day, which was another record for Summit Midstream and represented 14% growth in volumes year-over-year and 4% growth in quarter-over-quarter. Growth in the Mountaineer system is exceeding expectations as we averaged close to 200 million cubic feet a day for the fourth quarter, up 46% to the third quarter of '13. The Mountaineer system is ramping ahead of our acquisition case, and we plan on beginning construction on the Zinnia Loop project in the second quarter of 2014 with a completion date in the third quarter.

This project will nearly double capacity on the Mountaineer system from 550 million cubic feet a day to over 1 Bcf a day. The growth in Mountaineer has helped us offset weaker volumes at DFW, Grand River and Bison for the quarter.

At DFW total volumes for the fourth quarter averaged 370 million cubic feet a day, which is down 3% over the third quarter. We estimate that weather impacted volumes by approximately 10 million cubic feet a day on the system during the fourth quarter. In addition, Chesapeake, our largest customer, continues to have minimal activity in the area and this has led to their volumes declining. While we expect this to continue over the near term, we're fortunate to have customer diversity at DFW and we expect that these declines will be partially offset in '14 by continued drilling activity in our area from Beacon, Vantage and XTO. These three were active in the fourth quarter and continue to be active in 2014.

Please keep in mind, drilling activity in this area can lead to volatile throughput as producers tend to bring down pads for that activity. We estimate pad level drilling affected volumes by an additional 12 million cubic feet a day in the fourth quarter. As an update, we did commission the [inaudible] treating facility in the first quarter of this year at DFW and it's running at full capacity.

For Grand River, volumes averaged 483 million cubic feet a day in the fourth quarter, which was down 1% from the third quarter. The big news on Grand River was the decision in December of '13 by Encana to pause their 2014 Piceance drilling under their partnership with Nucor, the largest steel manufacturer. We'll discuss the impact of that decision later in the call when we review '14 guidance and the Red Rock dropdown announcement. I will remind everyone that at Grand River, Summit benefits from a very high level of long-term contracted volumes that help inflate our cash flows from significant volume fluctuations.

On Bison, we announced on the third quarter call that we were performing operational enhancements to the system that help solve some hydrate issues that were affecting our volumes. These improvements continued into the fourth quarter and were completed during this current quarter. Volumes for the fourth quarter averaged 14 million cubic feet a day versus the 17 million cubic feet a day in the third quarter.

In addition to these improvements, the various producer operational issues you must likely have heard about in the fourth quarter call are due to severe winter weather. Just as a data point, the average temperate in December in our Bison operational area was zero degrees. That was the average. It was the coldest December on record in that area in the last 30 years. So that kind of weather affects both us and our customers.

So before I turn it over to Matt to summarize the quarter, we continue to see substantial volume growth for Mountaineer, which is offsetting volume decline at DFW and Grand River from our anchor customers. Bison, as we expected, was a choppy quarter due to our operational improvements. And severe winter weather across our system had a negative impact on the quarter.

So now I'll turn it over to Matt.

Matt Harrison

Thanks, Steve. I will cover the results at Summit Midstream Partners, LP or SMLP. Adjusted EBITDA for the three months ended December 31, 2013, was $39.1 million compared to $28.6 million for the three months ended December 31, 2012, an increase of approximately 37%. The $10.5 million increase in adjusted EBITDA was primarily due to the dropdown acquisition of Bison Midstream on June 4, 2013, which contributed $4.5 million of adjusted EBITDA in the fourth quarter of '13; and the acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $3.3 million of adjusted EBITDA in the fourth quarter of '13.

In addition, certain of SMLP's gas gathering contracts on its Grand River system contain annual MVC or minimum volume commitments and gathering rate that increased in the beginning of 2013. These contractual volume and rate increases helped mitigate [12%] [ph] volume throughput decrease on the Grand River system compared to fourth quarter of 2012.

Adjusted EBITDA in the fourth quarter of 2013 included approximately $10.4 million related to MVC mechanisms from our gas gathering agreement. This amount included $14.1 million of minimum shortfall payment that are recognized as revenue and negative $10.8 million associated with quarterly adjustments related to future projected annual MVC shortfall payment and $7.1 million associated with the increase in deferred revenue related to MVC shortfall payment billings on our Grand River system. This $7.1 million of MVC shortfall payment was recognized as deferred revenue on our balance sheet. Additional tabular detail regarding MVC is included in the fourth quarter earnings release.

Adjusted distributable cash flow totaled $28.5 million in the fourth quarter of '13. This implies the distribution coverage ratio of 1.08x for the fourth quarter distribution of $0.48 per LP unit paid on February 14, 2014.

CapEx for the fourth quarter of '13 was approximately $19.6 million, of which approximately $2.7 million was specified as maintenance CapEx. We had $286 million of debt outstanding under our revolving credit facility at December 31, 2013. The borrowing capacity under our $700 million revolving credit facility is approximately $414 million. A subsidiary of SMLP issued $300 million of 7.5% senior notes due 2021 in June of 2013. Total leverage as of year-end was 3.7x.

Last night, SMLP announced that it is executing an agreement to acquire Red Rock Gathering from a subsidiary of Summit Midstream Partners, LLC, the owner of our general partner for $305 million in cash. The dropdown transaction is expected to close before March 31, 2014. SMLP revised its 2014 adjusted EBITDA guidance from the original range of $170 million to $180 million to a new range of $190 million to $210 million. This upper adjustments reflects the impact of the Red Rock transaction, partially offset by approximately $5 million of adjusted EBITDA that's attributable to lower than expected volume throughput on the Grand River systems coming from Encana's December 2013 announcement to suspend natural gas drilling in the Piceance Basin in 2014.

In response to Encana announcement, SMLP also lowered its 2014 maintenance CapEx guidance, which is expected to offset the $5 million reduction in 2014 adjusted EBITDA, resulting in a minimal impact to SMLP 2014 adjusted distributable cash flow. It's important to note that SMLP is acquiring Red Rock from an affiliate of our general partner. The transaction will be considered an acquisition from an entity under common control. Therefore, the Red Rock dropdown acquisition will be accounted for on an as a full basis for all periods in which common control existed, resulting in the combination of SMLP and Red Rock financial results beginning on October 23, 2012, therefore adjusted EBITDA guidance for 2014 through the full year of Red Rock's results.

Also in conjunction with the Red Rock transaction, SMLP revised distribution growth outlook from 10% to 12% and now expected to pay distribution per unit for the fourth quarter of 2014 that is 15% to 20% over the $0.48 per LP unit paid for the fourth quarter of 2013.

And with that, I'll now turn the call back over to Steve.

Steve Newby

Thanks, Matt. First, let's discuss the Red Rock dropdown and the revised guidance for '14. As Matt said, yesterday we announced that SMLP and the Grand River subsidiary specifically will purchase the $305 million Red Rock Gathering system from Summit Investments. The transaction has been approved by all parties and will be completed by end of the first quarter.

The transaction multiple is 8.7 times the expected next 12 months of EBITDA contribution, which includes $19 million of additional CapEx during that period. The transaction will be immediately accretive to distributable cash flow per unit. It will also provide nice growth in the next several years as we continue to ramp up volumes from the ongoing gathering system build-out for WPX, our largest customer, and from our newly commissioned gas processing plant for Black Hills. Both of those projects are under long-term minimum volume commitment contracts.

Overall, Red Rock will add 570 Bcf of new volume commitments to our current 3.6 Tcf of MVCs over 10-plus years. Furthermore, I think the transaction highlights the value proposition for SMLP unitholders with Summit's ability to acquire and develop assets at our general partner and then offer those assets to the MLP without substantial development risk. This allows the transaction to have immediate accretion, while also allowing the MLP to control its capital structure much more effectively.

As Matthew said with the dropdown, we're revising our fiscal year '14 guidance to $190 million to $210 million of adjusted EBITDA, which we expect will lead to 15% to 20% distribution growth over our $0.48 paid in the fourth quarter of this year. Of this amount, we expect Red Rock to contribute $30 million of adjusted EBITDA for fiscal year '14. This includes 10 months of the new DeBeque processing facility for Black Hills, which was commissioned this month. We also expect WPX volumes to continue to ramp up throughout the year.

The positive effect of Red Rock will be partially offset by the $5 million impact to 2014 adjusted EBITDA that we believe will occur as a result of the suspension of drilling by Encana at GRG. We believe that impact will begin to show itself in the back half of 2014 from the pause in drilling in areas that we are either over our MVCs in Grand River or do not have MVCs. Encana has focused their efforts on production operations to limit declines, but we believe it's too early to tell just how those efforts will play out.

Interestingly, the drilling pause will lead to a lower maintenance CapEx expenditure at the SMLP in this area, as we reduce our well connection CapEx by approximately $5 million. So on balance, although negative to adjusted EBITDA, the pause in drilling will actually be neutral to distributable cash flow due to lower maintenance CapEx.

As we have in the past, I feel like we should provide some color on the GP, which remains the primary development and growth vehicle for the Summit Enterprise. In December, we announced that Summit Investments had reached an agreement to purchase Gulfport Energy's interest in Ohio Gathering. Ohio Gathering is the MarkWest, EMG company that is executing the gas gathering in condensate stabilization build-out in the Southern core of the Utica Shale. The interest, which we closed on in January, includes the option to buy up to 40% of Ohio Gathering at an invested capital.

Our GP fully intends to exercise this option in the second quarter of 2014. This is the largest transaction to date for Summit Investments, as we plan with MarkWest EMG to invest approximately $3 billion in Utica Shale over the next several years in gathering and condensate infrastructure. The Utica is one of the top growth basins in the US and we believe Ohio Gathering is well positioned in the Southern core area for wet gas, dry gas and condensate.

We are also excited on enhancing our relationship with MarkWest that we believe is the premier developer and operator of midstream infrastructure in the Northeast. Our two teams are already working closely together and I believe the combination will form a leading midstream company in the Utica.

In addition to the Utica, our other big growth area for Summit Investments is the Bakken Shale. Our development of crude oil gathering and water gathering services in the Bakken continues to be robust. We have announced two expansions of the crude oil systems to date and we're seeing multiple opportunities for further expansion. We are planning to spend more than $250 million in the Bakken around our crude oil systems over the next 12 months.

Summit Investments now has approximately $1.7 billion of investment ongoing, including the Utica, Bakken and DJ Niobrara regions. The investments span across crude oil, water, wet gas, condensate, dry gas and processes. Of the $1.7 billion amount, approximately $1 billion of CapEx will be spent in 2014. We now expect, given our activity level at the GP, to be able to offer on average $300 million to $500 million of dropdown annually to SMLP over the next several years including 2014.

In addition, because we are minimizing the development in cash flow timing risk to the MLP, we expect the transactions to be immediately accretive to distributions per unit and we'll able to control our capital structure at the MLP much more effectively.

So as we look back on 2013, we're proud of our first year as a public company. We delivered 20% distribution per unit growth and our unit price has almost doubled. We have also transformed the business from just 18 months ago when we went public. We are now in four of the top 10 growth basins in the country with leading positions in two of those, the Bakken and the Utica. So the future is bright for SMLP.

And with that, I'll open it up for questions. Sylvia, you want to open up the lines?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jerren Holder from Goldman Sachs.

Jerren Holder - Goldman Sachs

Just want to start, I guess, on the dropdown strategy. I appreciate the extra color around the outlook over the next few years. But just going back to I guess the original expectations of, I guess, all of your assets or at least the original ones to be dropped into 2014, is that still the case? Or given the extra growth CapEx opportunities you see in the GP level, is that essentially being pushed out? How should we think about that?

Steve Newby

Yeah, I would think about it, Jerren, the other big piece of the original strategy was our crude oil system. And I think what we're seeing around our crude oil system is significant opportunity to expand that system. So we're trying to delineate how far out to the right that pushes the opportunity to drop the system down and do we look at dropping it down in pieces or certain pieces of it. So I think we're more comfortable now looking at it over a longer period of time, given the development activity at the GP. That makes sense?

Jerren Holder - Goldman Sachs

Yeah.

Steve Newby

And the significantly larger amount over the next three to five years.

Jerren Holder - Goldman Sachs

Got it. And on that $300 million to $500 million annual number, is that just based on the current Niobrara, Bakken and potential Utica assets or does that include future acquisitions or developments that the GP could make?

Steve Newby

Yeah, so the $1.7 billion amount currently being invested in the GP is what we have today at the GP. That doesn't include any forward-looking or future activity or future development. It's what's within our grasp today at the GP. It's a very important point, because it's obviously we're still seeing opportunities for additional development. And we think those will come to fruition as we move in more into '14 and will update that $1.7 billion as we get it.

Jerren Holder - Goldman Sachs

Got it. And I guess lastly if you could probably comment a little bit on those opportunities including additional acquisitions like where, what regions, what type of assets, I guess, most likely what those incremental opportunities, not including the $1.7 billion likely be?

Steve Newby

Yeah. Our top two growth regions are the Bakken and the Utica. And what we're seeing is the ability to invest significantly around our core areas in those two basins to expand our systems. And so that's really the large majority of the $1.7 billion is going to be spent in the Bakken and the Utica.

Operator

And our next question comes from Ethan Bellamy from Robert W. Baird.

Ethan Bellamy - Robert W. Baird

What's the maintenance CapEx on the acquisition?

Steve Newby

Yeah, so our maintenance CapEx on our revised guidance is $15 million to $20 million. So it's the same as previous and the reason is we're taking out maintenance CapEx from Grand River of about $5 million. And so maintenance CapEx on Red Rock is approximately about $5 million also. Again, that's an annual number, not the nine month number. It's an annual number.

Ethan Bellamy - Robert W. Baird

Any lumpiness there or can we just pro rate that through the year?

Steve Newby

There's not a lot of lumpiness. It'll be spent sort of consistently throughout the year. Nothing major going on in that area in one quarter or the next.

Ethan Bellamy - Robert W. Baird

And then outside of the 80% fixed fee, what do those other contracts look like and what kind of commodity exposure do we have?

Steve Newby

Yeah, we have some condensate sales. And then I'd say mostly the balance is probably some POP from our processing operations. We have two processing plants at Red Rock, one is the [Beck Oil] [ph] which is all fixed fee, and then we have Harley Dome which includes some POP contracts.

Ethan Bellamy - Robert W. Baird

Are you going to hedge that?

Steve Newby

It's probably not enough to hedge to be candid with you. It's not significant enough of the EBITDA contribution to really hedge.

Ethan Bellamy - Robert W. Baird

And just a couple of more questions about the GP and probably more specific than you’ll you want to answer. With respect to the general partner, will you be full on development opportunities in Ohio or would you look at M3 when that becomes available? And then how far afield can we expect the GP to look in terms of other assets like, for example, the Ho-Ho pipeline or the crude oil pipeline, that kind of thing?

Steve Newby

I'll try to answer that probably not as specific as talking about specific assets. But our GP looks at lot of things. Our MLP looks at a lots of things. So both of them do. I would say right now, we're focused on executing on the $1.7 billion and we think that will grow of opportunities at the general partner. Will we look at other areas? Absolutely, particularly if customers want us to look at other areas to provide service to them. But I think right now, we have a lot going on in the Bakken and the Utica.

Operator

And we have Helen Ryoo from Barclays.

Helen Ryoo - Barclays

A couple of questions. Just starting with your Utica, the option that you will be exercising in the second quarter at the parent level, how much do you need to pay at the parent to exercise that option?

Steve Newby

Yeah, we're not going to disclose that, because I think MarkWest and ourselves have decided not to disclose that for a variety of reasons. But the nature of the payment will be to catch up CapEx at book value for what MarkWest EMG is already invested. And then obviously we'll also put in some dollars for the next couple of months of CapEx as well too. So it will be significant. The $1 billion of CapEx at the GP includes obviously that catch-up payment.

Helen Ryoo - Barclays

And then there is also the condensate gathering projects up there. Can you maybe talk about the size and the contracts and when this asset will likely come down?

Steve Newby

I think, to clarify, Helen, you said on the condensate?

Helen Ryoo - Barclays

Yes. So you have two things going on. One is the Utica gathering JV and then the other one is a condensate project which is, I guess, the outside of the $3 billion opportunity you talked about, so maybe a little more color on that.

Steve Newby

Yeah, let me clarify that. So the $3 billion of CapEx includes gas gathering, so wet and dry gas gathering, and then also the JV includes anything on the condensate side as well too. The initial asset being developed in Ohio Gathering is the condensate stabilization facility. And that's included in the $3 billion of CapEx. What's not included is any kind of condensate pipeline operation to gather condensate. And the real reason is I don't think us or MarkWest are really [knowing] [ph] up right now to know how exactly that's going to play out and if it's going to be needed. So the stabilization facility's volumes will be trucked there initially. And there definitely could be potential going forward to put in some condensate gathering as well too. And our JV does contemplate that that would be in Ohio Gathering facility.

Helen Ryoo - Barclays

Moving on to your MVC on Grand River, how far does that contract roll out at this point, given current payment or offsetting some future fees? Could you maybe update us with how to think about the Grand River MVC?

Steve Newby

The Grand River, the largest customer is Encana. They're obviously in the largest MVC component is Encana. So their MVCs go out to 2026. And important to note, I want to make sure to clarify, they don't have a credit mechanism. So they can't use MVC payment today to offset gathering fees in the future. So it's obviously 12 years left on from a volume standpoint on those contracts.

Helen Ryoo - Barclays

Okay. So you have 12 years left on the Grand River MVC?

Steve Newby

On the Encana portion of the Grand River MVC, yes. In our overall portfolio of MVC, the average is about 10.3 years total on our 4.3 Tcf of commitments.

Helen Ryoo - Barclays

Right. And that includes some MVCs you have in Barnett, which you're not really benefiting from?

Steve Newby

That's right. For the most part, we're above our MVC with Barnett. It depends on by customer, but that's right for the most part.

Helen Ryoo - Barclays

And then just lastly on the Red Rock deal, could you maybe talk about the volume growth profile on that asset, the richness of gas, drilling activity?

Steve Newby

Yeah, I'd love to. So a couple of things going on. That asset, when we purchased it from Energy Transfer really got us into what we thought was the liquids part of the Mancos, Niobrara. Our plan for Black Hills is processing Mancos, Niobrara liquids-rich gas. We're processing roughly 18 million or so today on the 20 million in that plant. It's 1,200 Btu-plus gas, 4 GPM to 5 GPM. So it's pretty rich gas. So that's going to provide growth going forward.

And then the other growth aspect is the WPX contract. So there is originally 12.5-year contract with WPX. There's well over 10 years left on it. We're building out a pretty substantial gathering system for WPX, we'll connect hundreds of wells over the next several years. So overall, we actually expect volume growth at Grand River, which now includes Red Rock, to be very attractive here over the next few years, as we increase both WPX and Black Hills volumes.

Operator

And we have no further questions at this moment.

Steve Newby

Well, thank you, everybody, for joining us this morning. And please follow up if you have additional questions. Thanks.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Summit Midstream Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts