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American Midstream Partners (NYSE:AMID)

Q1 2014 Results Earnings Conference Call

May 13, 2014, 10:00 a.m. ET

Executives

Kyle Quackenbush - Investor Relations

Steve Bergstrom, Executive Chairman, President and CEO

Dan Campbell - CFO

Analysts

Edward Rowe - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 American Midstream Partners earnings conference call. [Operator instructions.] I’d like to now turn the call over to Mr. Kyle Quackenbush, AME’s director finance. Please proceed, sir.

Kyle Quackenbush

Thank you, operator. Good morning, and welcome to the first quarter 2014 investor call for American Midstream Partners. Before we start, I'd like to mention that our earnings release can be accessed on the Investor Relations’ page of our website. Our 10-Q was filed yesterday with the SEC and is also available on our website. Finally, a replay of this call will be available later today until June 12.

Leading the call today are Steve Bergstrom, executive chairman, president, and chief executive officer; and Dan Campbell, chief financial officer. Matt Rowland, our chief operating officer, is also on the call. Steve and Dan will be discussing our results for the first quarter ended March 31, 2014. Afterwards, we will open up the call for your questions.

We would like to remind you to take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to statements made in today's conference call.

This call will contain time-sensitive information, as well as forward-looking statements, which are only accurate as of today, May 13, 2014. American Midstream Partners expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date, except as required by applicable law.

For a complete list of the risks and uncertainties that may affect future performance, please refer to the company's periodic filings with the SEC. With that, I'll turn the call over to Steve.

Steve Bergstrom

Thank you, Kyle. Welcome, everyone, and thank you for joining us for a discussion of our first quarter financial results. On the call today, I will share a few highlights of the recent developments at American Midstream before turn it over to Dan to review our financial performance. I will then conclude with a few comments on the progress of our company’s 2014 growth strategy and we’ll open up the call for questions.

We began 2014 with a solid quarter due to strong performance at the newly acquired Lavaca Systems, high condensate volumes from increased throughput, and lower operating costs in the quarter.

We did not see significant volume reductions or negative financial impacts from the unusually cold weather in the Gulf Coast during the first quarter. In fact, we were able to provide incremental interruptible services to certain customers on our transmission assets when their primary supply pipeline was unable to deliver. We expect to see incremental new firm contracts on our system next winter as a result of our performance.

We increased the quarterly distribution for the first quarter by 2%, as we had previously announced in conjunction with the Blackwater acquisition. This represents the second distribution increase for the company since the ArcLight investment a year ago.

As you know, we also plan to recommend a distribution increase of approximately 2% to our board of directors for the third quarter distribution as was outlined with the closing of the Lavaca system acquisition in January.

Our Lavaca System, which is included in our financial results as of February 1, is performing above expectations as production levels and condensate volumes for the quarter were significantly higher than we anticipated, and from our perspective, PVA continues to have tremendous success in their drilling program.

The system extensions to PVA’s producing [acreage] are under construction and will be coming online throughout the year, with the first extension coming online in the next several months. We are also in very active discussions with several producers in the area to bring incremental production onto our system, acquire existing assets, construct new infrastructure, and add additional services. We anticipate that this region will be a primary focus and source of growth for our company over the next several years.

Blackwater, the terminal business that we acquired at the end of 2013, is providing stable and consistent fee-based cash flow in line with our expectations. The Blackwater management team recently executed two storage agreements at Blackwater’s flagship Westwego, Louisiana facility with two large multinational chemical and agricultural companies.

With the addition of these new contracts, the Westwego facility will be operating at capacity in the third quarter. With Westwego operating at capacity, growth at Blackwater will come from the development of our Harvey site.

Even before we have started operating at Harvey, we have generated significant interest from new customers that want capacity at the site. Last month, we received local government approval for our Harvey development plan, and we expect to receive our permit to operate in the next several weeks.

We plan to begin construction of a deepwater ship dock in the second quarter, which we expect will be fully operational by the end of the year, but should start commercial operations with our initial customers in the third quarter. Harvey has the potential to be a significant asset for Blackwater, with sufficient property to allow us to construct approximately 2 million barrels of storage, almost twice the amount of storage than at the Westwego site.

Furthermore, because Harvey is a brownfield site, we can customize our facility buildout to meet the individual needs of our customers. Blackwater has been a strong addition to American Midstream, particularly given the steady take or pay revenue stream the company generates, and we are very optimistic about the growth potential in this segment.

In summary, we are off to a great start in 2014, with the Lavaca acquisition and the associated equity offering, as well as the small bolt-on acquisition of the lateral from Williams that was connected to our [High Point] system, and we are just getting started.

Now, Dan will discuss our first quarter financial results in more detail, after which I will give an update on the progress that we’re making on the execution of our growth strategy.

Dan Campbell

Thank you, Steve. My comments today will focus on an overview of our first quarter operating results, including the status of our balance sheet, capital expenditure, and derivatives. And as a reminder, our earnings release and the related 8-K include reconciliations of certain non-GAAP items that we’ll discuss on today’s call and their GAAP equivalent. We remind you to refer to these reconciliations and additional details regarding our results that are contained in our quarterly filings.

As Steve mentioned, we had another strong quarter, with coverage above 1x, even with only two months of benefit from the Lavaca acquisition. Our debt to EBITDA ratio also decreased significantly over the last several quarters to approximately 3.1x, though we expect leverage will start to increase over the next couple of quarters as we fund our capital projects.

We reaffirmed our 2014 guidance in our press release yesterday, and expect EBITDA to be in a range of $41 million to $44 million, and DCF in a range of $21 million to $24 million. We continue to expect distribution coverage for the year of approximately 1x, as we expect higher operating costs in the spring and summer months related to our normal integrity management work and our scheduled plant turnarounds.

EBITDA for the first quarter was approximately 100% higher than the first quarter of 2013, and DCF increased by more than 150% during the same period. The increases in EBITDA and DCF was primarily due to the acquisitions of the High Point assets, Blackwater, and the Lavaca System over the past 12 months.

Distribution coverage improved significantly from the first quarter of 2013 to the first quarter of 2014, as a result of the increase in DCF, but also due to the elimination of our subordinated units, which were combined and consolidated into the new IDRs in August of last year as part of the equity restructuring.

As Steve mentioned, Blackwater and Lavaca have been strong additions to our midstream portfolio. Both assets are performing in line with, or exceeding, our acquisition expectations and both have promising opportunities for additional potential business. Moreover, these acquisitions have increased our fee-based gross margin to nearly 75% for the first quarter, which further decreases our exposure to fluctuations in commodity prices.

We’re beginning to ramp up our expansion programs at both Lavaca and Blackwater, and our [growth] capital expenditures will increase for the balance of the year. As a result of the incremental units that we issued to fund these two acquisitions, the average number of American Midstream units that are traded on a daily basis has more than tripled since the third quarter of 2013, and we will continue to focus on increasing the liquidity of our units as we finance our growth.

In the fourth quarter, we spent approximately $4 million on maintenance and growth capital expenditures. Our capital spending is generally lower in the first quarter as a result of our limited ability to complete projects due to wet winter weather near our assets, and we expect our capital cost to increase significantly in the second and third quarters.

Turning to our hedge program, we added additional oil-based hedges for our condensate production in the first quarter, and now our total condensate is hedged at approximately 33% for the balance of 2014. And we remain hedged at approximately 13% for our NGL volume exposure, but keep in mind this level increases to 21% when we exclude ethane production. We continue to opportunistically add incremental hedges to our existing positions and expect to start adding hedges into 2015 in the next couple of quarters.

We’re very pleased with our quarterly results, the improvements to our balance sheet and distribution coverage, and the progress we’re making on our growth initiatives. And with that, I’ll turn the call back to Steve.

Steve Bergstrom

Thank you, Dan. We are making progress on all fronts of our growth strategy in 2014. As we have articulated before, we plan to grow the company through a multipronged approach that includes new asset development, third-party and bolt-on acquisitions, organic growth on our existing assets, and dropdowns from our general partner.

Our development efforts have ramped up significantly since the beginning of the year, as we build the Lavaca system extension in the Eagle Ford and construct the Harvey terminal site and deepwater ship dock.

In addition, our general partner is building the Gonzalez County full well stream gathering system. Furthermore, we are looking at several new asset development opportunities near our Eagle Ford assets. New asset development is an ideal way for American Midstream to increase EBITDA and DCF at attractive multiples and gain access to new basins. This will be an important element of our success.

Based on conversations we are having with producers in Lavaca and Gonzalez Counties and the surrounding areas, we believe there are considerable opportunities for growth, including acquisitions that come with growth projects as well as greenfield opportunities. The opportunity set includes all facets of midstream, including gathering, processing, treating, possible fractionation, as well as short term storage and transportation for both oil and natural gas.

Our general partner continues to make progress on the construction of the Gonzalez County pull well stream gathering system. As we said on our last call, there have been modest delays in our timeline due primarily to right of way issues. We expect construction to commence in the next few weeks and phase one of the system should be operational in the fourth quarter of this year, with the full system expected to be operational in the first quarter of 2015.

We remain excited about the economics and the potential of this project. We view the recently announced merger between Sabine Oil and Gas and Forest Oil as a positive development, and we believe the Gonzalez County project will be a solid long term asset for American Midstream.

The industry has seen a significant amount of third-party acquisition activity this year, and we too are looking at potential acquisitions ranging from small opportunities to very large opportunities in areas where we currently operate, as well as new potential regions for American Midstream.

With the quantity and quality of opportunities that we are evaluating, I feel confident we will make meaningful additions to our company in 2014 and 2015. We continue to find attractively priced bolt-on opportunities near our existing assets, like the Williams Lateral that we acquired on our High Point system earlier this year, and we are evaluating several potential assets that would put well into our portfolio.

We are optimistic about the potential for us to find more accretive bolt-on acquisitions this year. As we have discussed on our previous calls, we don’t believe that organic growth around our legacy assets will be our primary growth driver, but will always be an area of focus for our company as we try to optimize our systems.

We are starting to get traction with potential industrial end users on our High Point system that want access to high pressure residue quality gas in the onshore production zone. Our system is uniquely positioned to offer our customers supply from several different market zones, allowing them to take advantage of regional pricing differentials. We also see opportunities to increase supply to our current customers and start serving new markets on our AlaTenn system as we continue to exploit our cheaper cost of supply into markets in northern Alabama.

ArcLight continues to be very supportive of the growth of American Midstream, through assistance in our acquisition and development efforts, sourcing of new opportunities, and their portfolio of companies. We are looking at potential dropdown opportunities from within ArcLight’s portfolio, which we see as an important avenue of growth for the company.

We are fully engaged in creating long term, sustainable distribution growth for American Midstream, and I am pleased with the activity that we have generated and the opportunities in front of us so far this year.

In conclusion, we are continuing to build upon the successful changes that we instituted last year, and are off to a strong start in 2014. With that, I will open up the call for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And your first question comes from the line of Edward Rowe of Raymond James.

Edward Rowe - Raymond James

In regard to the Lavaca system, you talked about ramping production. Can you share with us some of the opportunities around the system that you kind of alluded to, but a little more color around the potential projects associated with it, maybe water, crude, or more pointed toward condensate? Some more details would be helpful there.

Steve Bergstrom

The opportunity that we see, PVA is a pretty large operator in the area, and I think what a lot of people were doing was just kind of waiting to see what they did with their gas system, and then as you probably know, they’ve been talking to people including us about doing an oil system for them as well.

But what we see is that people in the surrounding areas, around PVA’s acreage, have been waiting for PVA to actually decide what they want to do, and then they’re coming to us now, asking us to hook up gas to our system.

If you just kind of take the acreage around PVA, there’s several producers around there that have fairly significant, I’m talking 15,000, 20,000, 25,000 acre positions, that are too small in and of themselves to do anything from a midstream perspective. But now that we’re in there with the PVA system, there’s an avenue for them to get their gas to market.

I think there’s always a little hesitation from producers to kind of connect their producer gas into some other producer-owned system. Once it becomes owned by somebody who’s really a third party aggregator, if you will, then I think that kind of makes that next step a lot easier. And we’re starting to see that. We’re hooking up new wells for producers that traditionally would not have come into a PVA-owned system.

Edward Rowe - Raymond James

In regard to the transmission segment, and you kind of alluded to it, given the cold winter, there was a lot more interruptible transportation demand and given storage inventories in the Gulf Coast being low, that’s going to support some higher gas prices down the road. Can you share with us a little bit about how customers are approaching you for more transportation contracts?

Matt Rowland

Basically, coming off the tail of the cold winter that we had, a lot of the customers on our transmission systems sort of realized that they would be potentially undersubscribed to cover their peak day requirements, and they’ve approached us about taking out additional firm capacity, really starting for this winter. First normal winter we’ve had in quite some time, and so I think a lot of our end users were actually somewhat surprised at the level of growth they saw in the peak day.

Edward Rowe - Raymond James

With the new set of assets that you guys have, are we still going to see some of that seasonality in terms of cash flows in Q2 and Q3? Or are we going to, with the increased volumes, see less of that seasonality going forward?

Steve Bergstrom

You’ll see the seasonality, because the rates structures are still set up for Q1/Q4 hired in Q2/Q3. I think we’re going to have to add some more assets to the portfolio, like Lavaca, add to that down the road before that seasonality gets kind of blended out of there. But based on the portfolio that we have today, as we exist, you’re going to have that kind of U-shaped seasonality.

Edward Rowe - Raymond James

Given the attractive assets at ArcLight, a lot of people are curious on the potential dropdowns of other assets that they hold. Can you guys provide some color or details around that?

Steve Bergstrom

As I’ve said before, they own the GP, so they have tremendous financial incentive to be able to, when they exit their assets, drop them into American Midstream. If you look at their portfolio, there’s several assets that would fit nicely with us. They own them with partners, so we’d like to take 100% of the assets in, not a portion of them. And so you’ve got partner issues that you’ve got to deal with.

And we’ve been pretty busy the last three or four months, with two equity offerings and two acquisitions and kind of putting all this stuff together and integrating it. And so we’re as much trying to control the pace of the dropdown activity as much as ArcLight is as well, just to try to make sure that we integrate this stuff.

Because it’s one thing to acquire assets, it’s another thing to be able to integrate them and operate them commercially. And I think we’ve done a really good job of that, and I don’t know want to go too far too fast without making sure that we can pull all this stuff in together and integrate it and operate it appropriately.

And so I think those will come, but we’ve been pretty busy the last three or four months with two large acquisitions for this company size, and two equity offerings.

Edward Rowe - Raymond James

As the debt leverage metrics kind of tick up a little bit, heading into Q4, and then the potential dropdown of the Eagle Ford assets, when you guys look at increasing liquidity on the stock, do you guys look at maybe over-equitizing the Eagle Ford dropdown in order to give you guys some dry powder as well as increase the float?

Steve Bergstrom

We’ve done that in the first two acquisitions, and I think we’re probably going to be looking along those lines as well, to do exactly as you described. I mean, our float still isn’t real big. It’s better than what it was, but three times virtually zero is still not enough. And so we have a definite interest in doing that, for sure, because we’re going to have continued capital needs and we’re definitely going to look at doing that, like we’ve done in the first two.

Operator

We have no more questions, so I’d now like to hand the call over to Steve Bergstrom for the closing remarks.

Steve Bergstrom

Okay, thank you, and thanks everyone for joining us on the call this morning, and we look forward to talking to you in the next quarter about the other exciting things going on at American Midstream. Thank you very much.

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