American Midstream Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: American Midstream (AMID)
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American Midstream Partners, LP (NYSE:AMID) Q4 2013 Results Earnings Conference Call March 11, 2014 10:00 AM ET


Kyle Quackenbush - Investor Relations

Steve Bergstrom, Executive Chairman, President and CEO

Dan Campbell - CFO


James Jampel - HITE

Bob Nicholson - Pine Cobble Capital

Eric Shiu from Wells Fargo


Good day, ladies and gentlemen, and welcome to the Q4 2013 American Midstream Partners LP Earnings Conference Call. My name is Darren, and I’ll be the operator for today. (Operator instructions) As a reminder, this call is being recorded for replay purposes.

I’d like to now turn the call over to Mr. Kyle Quackenbush. Please go ahead.

Kyle Quackenbush

Thank you, Darren. Good morning, and welcome to the fourth quarter and fiscal 2013 investor call for American Midstream Partners.

Before we start, I'd like to mention that our earnings release can be accessed at the Investor Relations’ page of our website. Our 10-K was filed with the SEC this morning, and is also available on our website. A replay of this call will be available later today until April 10th.

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 fourth quarter and full year ended December 31, 2013. 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, March 11, 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, and good morning everyone. Thank you for joining us for a discussion of our fourth quarter and full year financial results.

On the call today, I will share a few highlights of the recent developments in American Midstream before turning it over to Dan to review our financial performance. I will then conclude with a few comments on our company’s 2014 growth strategy, and we'll open the call for questions.

We close 2013 in strong form as we posted our highest EBITDA and distributable cash flow in company history for both the fourth quarter and the full year. And we closed our first dropdown from ArcLight with the Blackwater acquisition in December.

Blackwater is a strong addition to our Midstream portfolio as it expands the services that we can offer our customers, increases our firm demand and fee-based revenue streams and adds revenue sources that are not directly correlated to the price of oil, natural gas or NGLs.

Moreover, we have a first-class management team with a track record of building successful terminal shortage businesses and they have a backlog of attractive organic and brownfield projects that will drive growth in the terminal segment in 2014 and beyond.

We’re excited to have Blackwater team on-board and look forward to their contributions. Our strong fourth quarter was the result of transformative events that we kicked off in mid-2013, beginning with the strategic investment in our general partner ArcLight Capital and the associated acquisition of the High Point assets.

In August, our general partner completed the equity restructuring that decreased our distribution obligations and increased distribution coverage. We finished the year with the Blackwater transaction which we financed with our first equity offer since our IPO in 2011.

During the year, we also made meaningful improvements for existing operations through the implementation of upgraded gas control, SCADA, electronic bulletin board, contract management, and gas accounting systems that made progress in the divested share of some of our non-core assets.

Finally, in conjunction with the August equity restructuring, we increased our distribution by nearly 5%, which was the company’s first distribution increase since late 2011 and we announced our intent to increase the distribution related to the Blackwater deal beginning with the distribution for the first quarter 2014.

I think it’s safe to say that 2013 was a turnaround year for American Midstream and we’re now positioned to drive meaningful growth going forward.

As you know we’re off to great start in 2014 with the acquisition of Penn Virginia’s Lavaca County, Eagle Ford gathering system that we announced in January. The 100-mile Lavaca system gives us a foothold in a very productive portion of the Eagle Ford with significant growth in the next several years and provides an opportunity to offer gathering services to nearby third parties.

The acquisition also increases our fee-based gross margin to more than two-thirds of our total gross margin on a pro forma basis.

In addition, we announced our intent to increase our distribution for the third quarter of 2014. It’s important to note that this transaction demonstrates our ability to source and close third-party acquisition.

While dropdowns will be one component of our growth strategy, third-party acquisitions will also play a key role in our long-term growth. To finance the Lavaca acquisition, we completed a second equity offering and when combined with the December equity offering, we have increased our public units outstanding by more than 100% which has more than tripled our average daily trading volume.

Moreover, with the equity we used to finance these acquisitions, we have significantly lowered the company’s debt-to-EBITDA ratio to approximately 3.7 times at the end of the year.

In addition to the Lavaca acquisition, we recently signed a purchase and sale agreement for the acquisition of the small pipeline lateral from Williams that connects to our High Point system for $6.5 million. The 15-mile pipeline will become part of a non-jurisdictional gathering portion of a High Point system and is expected to close later this month.

The acquisition is small, but attractively accretive and represents one of the bolt-on opportunities that we see around our current assets.

In 2014, we have a singular focus of significantly growing American Midstream and the company’s distributions which I will address later on this call.

Now, Dan will discuss our fourth quarter and full year 2013 financial results in more detail.

Dan Campbell

Thank you, Steve. My comments today will focus on an overview of our fourth quarter and full year results including the status of our balance sheet, capital expenditures, and derivatives. And just as a reminder our earnings release includes reconciliation of certain non-GAAP items that we’ll discuss on today’s call and their GAAP equivalent. And we remind you to refer to these reconciliations and additional details regarding our results that are contained in our quarterly filings.

Before I jump in into results, let me remind everyone that as a result of the GAAP pool regarding common control, our financial results for the fourth quarter and full year 2013 reflect the benefit of Blackwater from April 15th, 2013 to the end of the year as though we owned Blackwater from the date that ArcLight became the majority owner of our general partner.

And going forward, assets that are dropdown to American Midstream from ArcLight will also accounted for under common control and therefore reflected in our results back to April 15th, 2013, the date that ArcLight acquired the controlling interest in our GP.

As Steve mentioned, our financial results for the fourth quarter were very strong. Adjusted EBITDA of $10.5 million for the fourth quarter was more than 200% higher than the same period last year and nearly 20% higher than third quarter results when adjusted for Blackwater.

Distributable cash flow and distribution coverage were also meaningfully higher than last year and we ended the year with distribution coverage of approximately 1.2 times for the quarter.

The increases in the EBITDA and distributable cash flow are primarily the result of High Point and Blackwater acquisition which also accounts for increases in our operating expense and SG&A as you would expect.

In addition, during the fourth quarter we received notice from the FERC confirming our cost of service allocation as originally filed by High Point in November of 2012, which resulted in a one-time positive impact in the fourth quarter and will continue to benefit us going forward.

Distribution coverage increased meaningfully in the latter half of the year as a result of the two acquisitions as well as the elimination of our subordinated units which were combined and consolidated into our new IDRs in August as part of the equity restructuring.

Turning to the balance sheet, our primary goals in 2013 were to reduce leverage and increase the number of public units outstanding and these objectives drove the way in which we financed the Blackwater and Lavaca acquisitions.

Our leverage at year end was 3.7 times which is significantly below the current covenant and nearly a full turn lower than the third quarter. And on a net basis, we did not utilize any debt for the combined Blackwater and Lavaca acquisitions.

In addition as a result of the two recent acquisitions, the number of publicly-traded units has increased by more than 100% and it’s important that we continue to improve liquidity in our units as we utilized equity as a source of financing growth going forward and this will continue to be an area of focus for us in 2014.

We did not incur significant capital expenditures in the fourth quarter and what we did spend was predominantly for growth capital to repurpose one of our under-utilized High Point pipeline, extension work at the Blackwater terminal site, and cost associated with the construction and implementation of our new back office systems.

The balance of our capital costs were for maintenance capital projects. And as we outlined in our guidance for 2014, we expect to have significantly higher CapEx than we did in 2013 as we expand Lavaca system and construct new tanks at Blackwater.

Turning to our hedge program, we’ve hedged approximately 17% of our 2014 NGL and condensate exposure by volume. And when we exclude ethane, which we expect will continue to track with natural gas and we do not plan to hedge in 2014, our hedged percentages increased to approximately 24%.

Throughout the year we anticipate adding incremental hedge positions, however, the percentage of our gross margin that is directly exposed to commodity prices has decreased significantly. So, we do not have the same sensitivity to commodity prices that we did in 2012 and early 2013.

That being said, we’ll continue to actively manage our hedging program to protect our distributable cash flow.

We reaffirmed our 2014 guidance in our press release yesterday and expect 2014 EBITDA to be in a range of $41 million to $44 million, and DCF in the range of $21 million to $24 million. It’s important to note that due to the ramp in EBITDA, associated with Lavaca system, combined with a number of units used to finance the acquisition, our distribution coverage for the year is expected to approximately one times and coverage for the first and second quarter is expected to be below one times as the Lavaca systems ramps up with coverage higher than one times in the latter half of the year.

Before concluding, let me mention a couple of addition items. First, we have discussed in the past few calls that we’re working on the divestiture of small non-core assets, and we sold two small gathering and processing assets at the end of the year for nominal proceeds.

As is the case with the majority of the assets we’re looking to sell. The assets we sold in December were neutral from an EBITDA contribution perspective, so there really is no impact to our financial results.

In addition, we’re close to selling another set of assets in the gathering and processing segment that resulted in a non-cash impairment of $3 million, which we recorded in the fourth quarter.

In conclusion, our strong fourth quarter completes a transformative year for American Midstream and we’re very encouraged by the progress that we have made since April. Not only have we increased EBITDA, DCF, and distribution coverage, we’ve also significantly decreased leverage and decreased our company’s relative exposure to the volatility of commodity prices.

Our team also successfully completed two acquisitions and two public equity offerings within approximately 45 days of each other. Frankly, we’re very different company than we were at this time last year and we’re looking forward to a promising and productive 2014.

And with that I’ll turn the call back over to Steve.

Steve Bergstrom

Thank you, Dan. I want to begin by talking about how we executed on our growth strategy in 2013 and early 2014. As we discussed on previous calls, American Midstream will source growth opportunities from ArcLight’s portfolio of Midstream assets as well as from opportunities generated within American Midstream whether acquisitions or development.

With the dropdown of Blackwater and the acquisitions of the Lavaca gathering system and the William’s lateral, as well as organic growth projects that are currently underway, we’ve demonstrated our ability to execute on this plan.

Since the closing of the Blackwater acquisition in mid-December, Blackwater has performed in line with our expectations with strong ancillary service revenue this winter due to cold temperatures.

We also made significant progress with several customers to secure [burn] (ph) shortage contract for the two available 50,000 barrel tanks at our Westwego site. We expect to receive our permit to commence operations at the Harvey brownfield site in the coming months, at which point we will begin construction of a deepwater ship dock that will allow Harvey to receive shipments from 700-foot vessels, significantly increasing the marketability of the site.

As we look ahead, we plan to set our sights on potential assets outside of Blackwater’s existing facilities to grow our terminal segment.

The Lavaca gathering system that we acquired from Penn Virginia is also performing in line with our acquisition expectation and volumes are ramping up as we had expected. We’re securing rights away for the extension of the system and will commence construction in the coming months.

We’re encouraged by the traction that we’re gaining with potential third parties in the area and we believe there are attractive bolt-on projects that will expand our position in the region, including opportunities for gas gathering and processing, oil gathering and treating, water gathering and disposal.

As we’ve said before, we believe that site is a solid foundation upon which we can build on in the Eagle Ford and our experience today has validated our assumptions. We plan to significantly increase our presence in our Eagle Ford in 2014 and we will provide additional detail as these opportunities progress.

Our general partner continues to make progress on the development of the full well stream gathering system in the Gonzalez County in the Eagle Ford. The project has experienced minor delays primarily related to the acquisition of rights away which has taken longer than expected to finalize.

As a result, we now expect the project will be completed towards the end of 2014 at which point our general partner has stated its intent to offer the assets in a dropdown transaction. In 2014, we will continue with our multi-facet growth plan as we execute on new asset acquisitions, develop new assets around our existing positions, work with ArcLight on potential dropdown, and execute on organic growth opportunities on our existing assets.

Let me discuss each of these in more detail. In order to advance our acquisition efforts, we strengthened our business in corporate development groups with additional resources. The acquisition market is currently very active. In the past several months, we have looked at about a dozen potential acquisitions, the majority of which we sourced internally.

We also continue to see attractive bolt-on acquisition opportunities around our existing asset base like the William's lateral that we mentioned earlier. These acquisitions can provide accretive sources of growth for our company and will continue to remain an important part of our growth strategy. We are confident that we will have opportunities to purchase new assets in 2014.

Regarding the development of new assets, our primary efforts will be focused on the position that we're building the Eagle Ford shale around our Lavaca system on our general partners Gonzalez system as well as the development of the Harvey Brownfield site. However, we also believe there are opportunities to develop midstream infrastructure in new high growth areas which we are also pursuing this year.

Organic growth will always be an area of focus for our company. In 2013, we successfully executed on several organic growth projects on our legacy assets, including the conversion of one of our underutilized pipes on the High Point system for service as a reasonable hetero-system and supply source for industrials and the installation of additional tankage and pumps that are Chatom fractionation to enable us to increase throughput volumes.

We have several potential organic growth projects lined up for 2014, the largest of which is the construction of the new pipeline to an additional natural gas supply source for one of our large industrial customers, and new tank construction at our Westwego terminal.

Our commercial management team has focused on new opportunities and new projects for our existing customer base, and is continually finding new accretive projects for us to pursue. That being said, the primary driver of our growth will come from acquisitions, dropdowns and development projects.

2013 was a very successful year for American Midstream. I am proud of our teams in the field as well as Denver and Huston for the way they executed on our strategy and how they have reinvigorated this company. Honestly, we are about six to 12 months ahead of where I thought we would be when I began working with the company last year.

Furthermore, the partnership with our client has been as important to our success as we believed it would be if not more. I don't believe we could have a more supportive sponsor that is willing to help us drive long-term sustainable growth for our unit holders.

2013 was a great year for our company, but now we are in 2014 and we are entirely focused on making this year great success as we drive towards significantly increasing the size and scale of American Midstream while diversifying geographically in some of the rapidly growing basins in the U.S.

With that I'll open up the call for questions.

Question-and-Answer Session


Thank you. (Operator Instructions) First question is from the line of James Jampel from the company HITE. Please go ahead.

James Jampel - HITE

Yes. It's James Jampel from HITE. Could you comment a little bit on what you are seeing in the acquisition market, in particular, multiples that you might expect to be paying and any competitive advantages that AMID might have in pursuing those acquisitions?

Steve Bergstrom

Yeah. Well, sort of. It just varies on what part of a system or what part of the country you're looking at. I mean, obviously, if you're going to go in to the shale areas like the Lavaca deal, you're going to pay a pretty good multiple, but with a lot of growth in it. But if you got areas like the bolt-ons like we talked about with William's lateral where the multiples are sub-five, and so it just depends on the parts of the country you're talking about.

But they range -- quite a broad range of multiples, but there's a lot of people in the industry that are private companies that are in the $20 million, $30 million, $40 million EBITDA range that are too small to be public and need capital to grow. And I think there's a lot of opportunities there in that space too as well that are looking to attach themselves to a public vehicle. And I think that's a nice opportunity for us as well because we're nice sized, we're something like that.

James Jampel - HITE

Are you most excited about the bolt-on type or acquisitions that would expand your footprint?

Steve Bergstrom

Probably acquisitions that would expand our footprint, I'd say. I mean I'm excited about both. The bolt-on stuff is usually good return, good economics, its relatively small, but its good blocking and tackling type stuff. But the stuff like what we're seeing in the Eagle Ford, I mean that kind of footprint brings new deals alongside and we're really excited on the third-party stuff. There is a lot more capital, not lot more deals to be done in and around our assets than we originally thought.

And so, we're -- and it leads me to believe that there's got to be other opportunities in other regions of the country similar to that. I think a lot of the midstream players, the big guys are focused on large infrastructure takeaway projects. And I don't think there's been a whole lot of focus on kind of what I call the upstream, kind of gathering, processing, treating of the commodity itself.

Most of the producers have done a lot of that over the last few years, and they are all wanting to get out of the business and where midstream player handle that more of that. I feel lot of opportunities to do growth projects on top of existing footprint.

James Jampel - HITE

So if you are to look ahead over the next year, about what percent of the increase in EBITDA from acquisitions would you think would come from dropdowns and what would come from acquisitions?

Steve Bergstrom

Yeah. I mean I can't give you a projection because those things are -- you don't know, they are unpredictable. But we plan to pursue both of them aggressively and plan to grow aggressively with both of those options.

James Jampel - HITE

And the timing of the next dropdown, could you set our expectations a range?

Steve Bergstrom

I mean, I don't have any timing that I can give you on that because there's a lot of things in the air and we're looking at a lot of deals right now. And you don't know which one of those is going to work and not work, so it's hard to give you any timing short of -- they get lot of deals later in the -- towards the end of the year.

James Jampel - HITE

Okay. Thank you.

Steve Bergstrom



Thank you. And next question is from the line of Bob Nicholson from Pine Cobble Capital. Please go ahead.

Bob Nicholson - Pine Cobble Capital

Great. Thanks Steve. I guess a quick question following on the last caller. Your partner PBA has been out publicly talking about them looking for a partner for an oil gathering system within their Eagle Ford footprint.

And I was curious, if you could share any thoughts on the timing of that RFP and whether you guys received any rights of first refusal or any other advantages that you think might position you for that project.

Steve Bergstrom

Timing I think is -- they're supposedly coming out with something here in the next two or three weeks on that. They have been real public about that. They are running a process, as you said. We don't have any contractual rights of first offer or first refusal. What we do have is we have right ways to every well head because of the gas system that we own. And we have operations and infrastructure there.

As we speak, we're building a couple of tanks to handle the liquids from the picking operations that we're going to run towards the end of this month as an example. So, we've already got sites, we've got lay down yards for construction. We're already in the field constructing expansions and all that. So we -- they ran a process for the gas line too as well.

And we were successful in that and so we think we're going to be pretty competitive in the crude thing and actually have a little better competitive position there on the crude side than we did on the gas side, so that should all shake out here in the next two or three months.

Bob Nicholson - Pine Cobble Capital

Okay. Great. And do you have a sense of the scale of the opportunity?

Steve Bergstrom

It's probably going to be in the order of $130 million to $200 million depending on how expensive they want to go as far as capital.

Bob Nicholson - Pine Cobble Capital


Steve Bergstrom

So it's big.

Bob Nicholson - Pine Cobble Capital

Okay, great. That's very helpful. Thanks and good luck, guys.

Steve Bergstrom

Thank you.


Thank you. Next question is from the line of Eric Shiu from Wells Fargo. Please go ahead.

Eric Shiu from Wells Fargo

Hi. Good morning, guys.

Steve Bergstrom

Hi, Eric.

Eric Shiu from Wells Fargo

I was wondering if you could provide an approximate EBITDA multiple for the William's lateral that was announced this morning.

Dan Campbell

Less than five.

Eric Shiu from Wells Fargo

Okay. Great. And then I have read some articles recently regarding the Midla pipeline system and its customer base and wanted to get your take on what's going on there.

Dan Campbell

Yes. The Midla system for those of you, it's a pipeline that runs -- it's an interstate pipeline that runs from the Monroe field which was discovered in 1920s down to the Baton Rouge -- Exxon's Baton Rouge refinery which is why it was built back in the '20s.

It was a -- it's a old drafter coupling pipeline which I thought until I took over American Midstream, I thought most of that pipe was taken out of service in this industry. I worked for companies that have had it before and it was taken out in the '80s and '90s. I was kind of taken back and surprised that it still existed in a pipeline like this.

But this pipe was constructed in 1926 and when we started looking at it we had -- there's so many leaks. You cannot use modern techniques today to provide a protection to and detect leaks. You literally just have to walk the line and look and hear for leaks. And we had two welding crews for full time just repairing, patching leaks on it.

And so, when I took it over, I said this is not sustainable. We're going to redo this thing and take this pipeline out of service. We worked for about nine months since last May to work with the customers to try to do a read, reconstruct it, take the system out of service and rebuild the portion of the Midla system to serve the customer base, the largest customer on it is Atmos who serves the City of Natchez, Mississippi abruptly.

And in November we were working pretty closely with Atmos and the customers and abruptly in November they decided to break off negotiations with it. At which time then we decided to go out for an open season to test the customers' willingness to sign up for anything to allow us to finance a new pipeline.

We got no response to that open season in December, no customer signed up. So we started down the path of abandoning the facility which we will file here probably in the next couple of weeks with the FBRC to abandon the pipeline.

We're not comfortable in continuing to operate the pipeline in its current condition and it's probably 30 years past its useful life and needs to be taken out of service. I think it's important to note here that there's modest impact to EBITDA. This pipeline system's costs are roughly equivalent to its revenues. So there's no really EBITDA impact here.

But I want to point out and make a point. This is not an issue of cost or revenue. This is an interest of safety and being able to operate a pipeline safely and prudently. Because if it was just a matter of cost and the pipeline was a safe, sound pipeline, we can always go back into the FBRC and file another rate case and get a true cost of service and regulated pipeline and improve the revenue side of it. But that's not the issue here. The issue is really about safety and the ability to operate a pipeline system safely which we're not willing to continue to do.

So come April 1, we have notified the customers that we're going to begin the orderly shutdown of that pipeline system. So you will see some things in the press with politicians and customers and things that are getting in the press about us on this deal. But just rest assured that we're doing the right things relative to operating in a safe environment. And that's what our number one goal is.

Eric Shiu from Wells Fargo

Okay. No, it's very helpful. And then last one from me, just assuming you complete the Eagle Ford dropdown from your sponsor in Q4, do you think we could expect an additional distribution increase in that quarter, or do you think that would probably more of a Q1 '15 event?

Dan Campbell

Probably in that specific one probably more likely a Q1 '15 event because it will probably towards the later part of the year so we won't probably have enough cash flow distribution to do something fourth quarter or probably towards more like '15.

Eric Shiu from Wells Fargo

Okay. Great. That's all for me, and thank you.

Dan Campbell

Thanks Eric.

Steve Bergstrom

Thank you.


Thank you. (Operator Instructions)

Steve Bergstrom

Operator is there any more or is that it?


No, I have no further questions on the telephone.

Steve Bergstrom



I'd now like to turn the call over to Steve Bergstrom for closing remarks.

Steve Bergstrom

Thank you. Appreciate your time and attendance today. And we look forward to talking to you next quarter. Thank you and have a good day.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a very good day.

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