Summit Midstream Partners' (SMLP) CEO Steve Newby on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Summit Midstream (SMLP)

Summit Midstream Partners LP (NYSE:SMLP)

Q1 2014 Results Earnings Conference Call

May 07, 2014, 10:00 am ET

Executives

Marc Stratton - Vice President and Treasurer

Steve Newby - President, Chief Executive Officer, Director of the General Partner

Matt Harrison - Chief Financial Officer, Senior Vice President of the General Partner

Analysts

Jerren Holder - Goldman Sachs

Justin Agnew - Robert Baird

Darrick Walker - Bank of America Merrill Lynch

Operator

Welcome to the Q1 2014 Summit Midstream Partners, LP earnings conference call. My name is Dawn and I will be the operator for today's call. 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 will now turn the call over to Marc Stratton. Mr. Stratton, you may begin.

Marc Stratton

Thanks, Dawn, and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the first quarter of 2014. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.summitmidstream.com, where you will find it on the homepage or in the News section. With me today to discuss our quarterly earnings are Steve Newby, our President and Chief Executive Officer and Matt Harrison, our Chief Financial Officer.

Before we start, I would 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 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 will use the terms EBITDA, adjusted EBITDA, distributable cash flow and adjusted distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures in our most earnings release.

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

Steve Newby

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call this morning. I will begin by discussing our first quarter highlights and then I will turn it over to Matt for more details on our financial results. I will then end the call with some additional comments on our 2014 guidance and outlook.

Yesterday, we announced our financial and operating results for the first quarter of 2014. The quarter highlighted our diversified operations as Summit achieved record volumes during the first quarter of 1.3 Bcf a day, which was up 20% year-over-year and 7% quarter-over-quarter. These strong results were achieved even as severe winter weather continued across our asset base and a slowdown in our Barnett Shale area was offset by strength in our Marcellus and Western Colorado operations.

The big news during the first quarter was the drop down of Red Rock Gathering from our general partner which we completed in March for $305 million. In conjunction with the drop down, we also completed our first follow-on equity offering which totaled $400 million and was split 50-50 between primary and secondary units. We expect that this drop down will help drive growth across SMLP's Western Colorado assets for years to come, particularly as we diversify our exposure to some of most active producers in the pool ons including WPX, Black Hills and Ursa.

As we discuss our operating and financial results today, it's important to note that the result of Red Rock, because it is considered to be an entity under common control, are pooled and retrospectively included in our current period and prior period operating and financial results. For the quarter we reported adjusted EBITDA of $46.6 million, which included approximately $500,000 of transaction cost associated with the Red Rock drop down. We also reported adjusted distributable cash flow of $28 million. Adjusted EBITDA was up 26.5% year-over-year and adjusted distributable cash flow was up 5.8% year-over-year. The year-over-year increase was due primarily to the benefit of having a full quarter of operating and financial results for Bison and Mountaineer in 2014.

On April 24, we announced our first quarter distribution of $0.50 a unit which was a 4.2% increase over the fourth quarter of 2013 and a 19% increase over the first quarter of 2013. Our coverage ratio for the first quarter was 1.13 times, right line with our 1.1 to 1.2 times guidance for the full year.

On the volume throughput front, as I mentioned earlier, our total average throughput was 1.3 Bcf for the quarter, up 20% year-over-year and 7% quarter-over-quarter. The growth over the fourth quarter was due to the continued ramp up of volumes on Mountaineer and growing volumes our newly acquired Red Rock Gathering assets.

At DFW, total volumes for the first quarter averaged 348 million cubic feet a day which was down 6% from the fourth quarter of 2013. We saw weakness in the first quarter from some of our largest customers in addition to a delay in some well connections during the quarter. We connected 13 new wells during the first quarter. However most of those occurred late in the quarter, in late March and did not have a material impact on our average daily throughput for the quarter. We have already seen some bounce back in the second quarter and we continue to have active drilling in the area with two rigs working at the end of the first quarter.

In addition, we commissioned our large natural gas treator during the first quarter and it is running at full capacity. The benefits of that project should be fully realized in the second quarter and beyond.

For Grand River, which now includes our Red Rock Gathering assets, volumes averaged 665 million cubic feet a day in the first quarter which is up 3% over the fourth quarter of 2013. Red Rock volumes were up over 10%, while legacy Grand River volumes were about 1.5%. The increase in Red Rock volumes is significant because those are higher margin volumes for us versus our legacy Grand River volumes.

During the quarter, we benefited from strong drilling activity under our long-term deal with WPX and the commissioning of our new 20 million a day DeBeque Processing Plant. The plant came on in March. So we should see the full impact and benefit of the facilities during the second quarter and beyond. We are excited about the potential growth around the DeBeque facility and will keep you updated as they grow throughout the rest of 2014. I will remind everyone again, that at Grand River, we benefit from a very high level of contracted volumes that help inflate our cash flows from volume fluctuations as our contract portfolio has step ups in rate and volume commitments.

First quarter volumes at our Bison gathering system in the Bakken averaged approximately 12 million cubic feet a day which was down from 14 million cubic feet a day in the fourth quarter of 2013. This was related to the unseasonally cold-weather in North Dakota, which affected both our operations and our customers' ability to complete wells and consistently flow gas. We continue to see significant drilling around our system and there is currently a high level of completion activity which we expect to see the benefits of throughout the rest of 2014.

Switching over to Mountaineer. This asset continues to outperform our initial projections at the time of the acquisition last June. We averaged 285 million cubic feet a day for the first quarter which was up 44% from the fourth quarter level. We are also under construction on our Zinnia loop project and we continue to anticipate having that project in service in third quarter of this year.

As a reminder, that project is further underpinned by commitment from Antero. So when we purchased Mountaineer, we were targeting volume levels in the fourth quarter of this year of approximately 375 to 400 million cubic feet a day. Today with Zinnia loop, we are contracted for effectively 385 million cubic feet a day and we expect the system to be well ahead of those levels by the fourth quarter of this year.

So before I turn it over to Matt, to summarize the quarter, our diversified asset base really showed in the first quarter as weakness at DFW and severe weather at Bison were overcome by strength at Grand River and Mountaineer. We continue to benefit from a high level of contractual MVCs throughout company. Our total portfolio is 4 Tcf and that portfolio has an average life of over 10 years. Over the next five years, we have 1.2 Bcf a day under minimum volume commitments. In addition to this underpinning, we have strong growth from our existing MLP asset base, which we expect to deliver 15% to 20% distribution per unit growth in 2014.

So that, I will turn it over to Matt to review the financial results in more detail.

Matt Harrison

Great. Thanks, Steve. I will cover the results of Summit Midstream Partners LP or SMLP. SMLP acquired Bison Midstream and Red Rock Gathering from a subsidiary of Summit Investments on June 4, 2013 and March 18, 2014. The transactions were considered an acquisition from an entity under common control, therefore the Bison and Red Rock drop down acquisitions have been accounted for on an as if pooled basis for all periods in which common control existed.

So Bison Midstream financial and operating results are combined with SMLP beginning on February 16, 2013 for the rest the first quarter and of 2013 and all the first quarter of 2014. Red Rock Gathering results are in the first quarter of 2013 and in the first quarter 2014.

Adjusted EBITDA for the three months ended March 31, 2014 was $46.6 million compared to $36.9 million for the three months ended March 31, 2013, an increase of approximately 26%. The $9.7 million increase in adjusted EBITDA was primarily due to the acquisition of Mountaineer Midstream on June 21, 2013 which contributed approximately $4 million of adjusted EBITDA in the first quarter of 2014, the drop down acquisition of Bison Midstream, which contributed approximately $2.3 million of incremental adjusted EBITDA in the first quarter of 2014 compared to 2013, proportionate contribution of higher margin throughput volumes from certain customers on the Grand River System and a decrease in operating expenses on our Grand River System.

These increases in adjusted EBITDA were offset by a decrease at DFW Midstream as a result of lower volume throughput in the first quarter of 2014 compared to 2013. In addition, certain of SMLP's gas gathering agreements on its Grand River System contain annual minimum volume commitments or MVCs and gathering rates that increased in the beginning of 2014.

Adjusted EBITDA in the first quarter of 2014 included approximately $13.4 million related to MVC mechanisms from our gas gathering agreements. This amount included $1.4 million of minimum shortfall payments that are recognized as revenue, $8.2 million associated with quarterly adjustments related to future projected annual MVC shortfall payments and $3.8 million associated with increase in deferred revenue related to MVC shortfall payment billings. Additional tabular detail regarding MVCs is included in the first quarter earnings release.

Adjusted distributable cash flow totaled $34.3 million in the first quarter of 2014. This implies a distribution coverage ratio of 1.13 times the first quarter distribution of $0.50 per limited partner unit to be paid on May 15, 2014. CapEx for the first quarter of 2014 was approximately $40.1 million of which approximately $5.1 million was classified as maintenance CapEx.

We had $391 million of debt outstanding under our revolving credit facility at March 31, 2014. The borrowing capacity under our $700 million revolving credit facility is approximately $309 million. A subsidiary of SMLP issued $300 million of 7.5% senior notes due 2021 in June 2013. Total leverage as of March 31, 2014 was 3.9 times. SMLP reaffirmed its 2014 adjusted EBITDA guidance of $190 million to $210 million and distribution per unit growth of 15% to 20%.

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

Steve Newby

Thanks, Matt. First, to reiterate what Matt said, we are reaffirming our full year 2014 adjusted EBTIDA guidance of $190 million to $210 million and distribution per unit growth of 15% to 20% over our fourth quarter distribution of $0.48. The first quarter of this year was good start for Summit in delivering us full 2014 results. Our CapEx guidance for SMLP also remains the same at $100 million to $115 million of total CapEx and $15 million to $20 million maintenance CapEx. Important to note, as we always do, this guidance does not including any additional drop down activity or acquisition activity for 2014.

We have previously disclosed that our general partner, Summit Investments has approximately $1.7 billion of capital expenditures over the next few years. Of this amount, we expect to spend close to $1 billion this year with 70% of that occurring in the Utica and 30% in the Bakken. We continue to see a high degree of activity around our Bakken and Marcellus and Utica footprints as producers ramp up drilling activities in these area and these area remains infrastructure constrained. I fully anticipate us to add to the current CapEx inventory at the general partner throughout the remainder of this year.

In the Bakken, we continue to ramp up our crude oil and water systems in Williams and Divide counties and we expect 2014 to be a critical year, particularly on the crude oil side as we complete our large gathering buildout, add additional customers and enhance our system by diversifying our downstream connections. We are also seeing a large number of opportunities to further expand our system in this area and are confident that we will be able to discuss further expansion over the next few quarters.

Finally, in the Utica, we are progressing on our buy-in of our 40% interest in Ohio gathering which will occur by the end of the second quarter. The activity level at Ohio gathering remains strong as the JV continues building out infrastructure for its existing customers and continues to be involved in multiple growth projects in and around its growing footprint. These projects are across the wet gas, dry gas and condensate windows of the play.

We expect to see a pretty significant ramp up in 2014 for Ohio gathering as producers increase activity across the three production windows and the JV continues the infrastructure buildout. We remain very excited about this new area for Summit and we believe the JV is in a core area of the Utica and from that we will see additional growth opportunities above and beyond our base case. So the development activity at the GP remains strong and I would expect us to continue to add to the inventory of growth CapEx at Summit Investments throughout the course of 2014.

One thing I would like to note, as I mentioned earlier, we completed the drop down of Red Rock in March for $305 million of proceeds and with that the GP sold an additional $200 million of secondary units. All of these proceeds, over $500 million, are being reinvested in our business at Summit Investments in order to fund our large organic growth platform. So we continue to have a very supportive and well-capitalized general partner that will help drive our growth and asset diversification over the next few years.

Finally, on drop down timing, with the drop down of Red Rock and our buy-in of Ohio gathering, we revised our views on drop down to an average of $300 million to $500 million per year for the next several years. We remain comfortable with that guidance and as we relayed, we evaluate assets at our GP as they develop, as we derisk them, and as they exhibit a level cash flow stability suitable for SMLP. We expect this level drop down activity to help us achieve double-digit distribution per unit growth over at least the next several years.

So with that, we will open it up for questions. Dawn?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jerren Holder from Goldman Sachs. Please go ahead.

Jerren Holder - Goldman Sachs

Good morning.

Steve Newby

Hi, Jerren.

Jerren Holder - Goldman Sachs

Just wanted to start off, I guess with, obviously there is a lot of organic opportunities going on at both MLP as well as the general partner level, but how are you guys looking at it from an additional acquisitions of assets, whether it is in the Bakken, Utica or other regions? What is the outlook there? What type of opportunities are you seeing and your general appetite for incremental opportunities?

Steve Newby

Yes. Thanks, Jerren. This is Steve. I think in both areas, our two big growth areas, the Bakken and the Utica, my view is we will see a couple of opportunities in both areas as folks, either be it producers or others, sell assets or assets are consolidated. I think we remain interested in those two areas, if it's complementary to our strategy in those areas. So I don’t think we are completely focused. We obviously will remain active in those two areas, but completely closed off to third party acquisitions. We will definitely review them and I suspect there will be several opportunities here over the next 12 months in those areas. But we reveal them as they become available.

Jerren Holder - Goldman Sachs

Okay, and speaking with the Bakken there, we are currently doing gathering, but is expanding into processing in that region, often hear that you guys would be willing to enter, obviously there is a lot of flaring going on in the region, you still need a lot of infrastructure, so is that an area you guys think you would be open to?

Steve Newby

We have reviewed it in the past, and I think we will continue to review it. Last August we did a transaction with a Aux Sable, effectively creating what we call a paper plant, where we have capacity in their Chicago processing facility. That deal is expandable by us as well. Then there is other opportunities in plants surrounding us where we can do something similar. So to the extent we have those types of opportunities and we feel like there is enough processing capacity where we can access it, I think that’s probably our preferred route, but we will continue to evaluate on our own processing need, if we feel like we need to do that as well too. We definitely have the experience within the company to execute on those and actually within that region as well too.

Jerren Holder - Goldman Sachs

And I guess lastly, in the Bakken at the parent level, the assets are essentially in-service but can you comment a bit on where they are in terms of being derisked and just general timing that they will be MLP ready?

Steve Newby

Yes. That’s a good question. I think I wouldn’t say it’s a science by any stretch. Our crude oil system, which is Polar and Divide, in 2014 they will throughout the balance continue to see a pretty significant ramp up. Of the two areas, I would say Polar is probably more mature, although it's still -- we added and expanded that system, started in the fall last year and that expansion is just coming online now. So we will still see the benefits of that throughout the next quarter or two. But of the two areas, that’s probably the more developed area. But we are still seeing a pretty high level of connection activity in both of those areas and will probably for the next several quarters. And we are still seeing, I would say, and I mentioned in my prepared remarks, a very robust, commercial activity around the system as well too.

Jerren Holder - Goldman Sachs

Okay. Thank you. That’s it for me.

Steve Newby

Thank you.

Operator

Thank you. Our next question comes from Justin Agnew from Robert Baird. Please go ahead.

Justin Agnew - Robert Baird

Hi. Good morning, guys.

Steve Newby

Hi. Good morning.

Justin Agnew - Robert Baird

Just with respect to some of the Colorado ballot initiatives on fracing and potential setback rules, does anything like that exempt any the producers from their MVCs or are those contracts pretty rock solid?

Steve Newby

No, I don’t think they would. Most of that activity, the ballot activity, let me put it this way, is not occurring in the Western part of the state on the local level. So it's not having an effect out there anyways. It's really not having an affect yet on anywhere there is any kind of hydrocarbon production in the state anyway. But no, our MVC contracts would be wouldn’t be affected by that activity.

Justin Agnew - Robert Baird

Got it, and then could you guys maybe just quantify the bounce back you guys are expecting in the second quarter in DFW from those well connects that came on late in the quarter?

Steve Newby

Yes, we have got to be careful on that. We are in the middle of second quarter. I think we connected 13 wells. Those 13 wells came on really in March. So really at the end of the quarter. You can probably do your own math on the type-curves and the IPs of those wells, but we will see a bounce back in 2Q at DFW and I would tell you, we still have a couple of rigs working in that area too. So there still is a pretty decent level of developed drilling. Our volumes were impacted, I think, in the first quarter, both by colder than normal weather, but also we expected some of that completion activities occur a month or two earlier than it did.

Justin Agnew - Robert Baird

Got it. Thanks for the color. That’s it for me.

Operator

(Operator Instructions). We have a question from Darrick Walker from Bank of America Merrill Lynch. Please go ahead.

Darrick Walker - Bank of America Merrill Lynch

Hi. Good morning, guys.

Steve Newby

Hi, Darrick.

Darrick Walker - Bank of America Merrill Lynch

Just a couple ones for me. I believe in your formal remarks you mentioned that the legacy Grand River decreased 1.5% and I believe looking guidance is $5 million impact to Grand River on the legacy side. I know you guys have changed guidance, but is that still on track as far as that impact goes? How are you guys seeing Grand River at this point throughout the remaining of the year?

Steve Newby

Well, let me clarify to first, what we saw in the first quarter at Grand River on the legacy Grand River volumes, which is impacted by the Encana, the core JV, was actually those volumes grew about 1.5% over the quarter. So and partly that’s mainly due to, there was inventory of wells to be completed at Grand River by Encana and part of those came on there in the fourth quarter. So that’s probably why we saw that growth.

The second part of your question on it affects us throughout the remainder of the year, you are right. On our last conference call, we basically said it was going to have a negative $5 million impact. I think we are still monitoring that. We won't much more update information. It's going to be in the back half of this year and mainly we are looking at probably a fourth quarter type impact, because as you get through this inventory well, I think they still got a few more left in inventory to complete and bring on. Again that slowdown or stoppage of the JV drilling really won't have an impact till probably the back half or last quarter. So there is no change. The long winded answer to saying this is there is really no change in our thought process on Grand River. We have accounted for that obviously in our guidance for the year.

Darrick Walker - Bank of America Merrill Lynch

Got it, I appreciate the color there. Just switching over to Mountaineer and the Loop project you have. Just trying to get a better sense on timing of your project and MarkWest project and what your expectations are potential ramp up volumes there? Sounds like your project is coming just a little bit ahead of MarkWest expansion of the processing facility, I guess going to early 2015. How should we think about those volume ramping up?

Steve Newby

Yes, your question. The sequence is, MarkWest. So our project will increase capacity of the high pressure system to little over Bcf a day. MarkWest is actually increasing their plant and announced the increase of the plant to two Bcf a day and then just I think yesterday or the day before, announced they were going to further increase it to 1.2 Bcf a day, the Sherwood Complex. I think that’s probably about latter half of 2015, that last train. Second quarter of 2015, that last train comes on.

So that’s the staging. We continue to see, this asset continues to outperform our projections. We fully expect it to continue to ramp throughout the course of 2014. I would say we expect the use the Zinnia Loop by the end of 2014. So it adds another 0.5 Bcf a day. I don’t think we will fully utilize it but I think we will utilize a portion of that capacity by the end of 2014.

Then I think beyond there, Antero has still guided the market, they are going to have a very large inventory of wells drilled and a very active drilling program in Doddridge. So I would suspect we will continue to see growth there from them, as it is one of their core areas. But it continues outperform, I would say, our original projections.

Darrick Walker - Bank of America Merrill Lynch

Okay. Great, and then the last one I have is just around Red Rock's actual contribution for the (inaudible) pool in method. I believe in the annual guidance, you guys actually do have $30 million of EBITDA contribution. I am sure there is a little bit of a ramp there, but if you were just to assume when you guys actually close that transaction, is it fair to say that contribution of Red Rock is around say, $5 million-ish? I know you guys reported $47 million on the pool in method, butt just wanted to get a sense of what the legacy business was?

Steve Newby

Yes. I will let Matt take that.

Matt Harrison

Yes. So, Darrick, as you mentioned, we had talked about Red Rock contributing about $30 million in EBITDA. As you know, we brought back processing plant on in March 2014. So that EBITDA would not be radical. So if you divide 30 by 4, it would 7.5 a quarter. So it's obviously less than 7.5 in the first quarter and your numbers aren’t too far off.

Darrick Walker - Bank of America Merrill Lynch

Okay. That’s all. I appreciate the time, guys.

Steve Newby

Yes. Thank you.

Operator

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

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