Summit Midstream Partners, LP
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Welcome to the Fourth Quarter 2015 Summit Midstream Partners, LP Earnings Conference Call. My name is Paulette, and I'll be your 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'll now turn it over to Marc Stratton, Senior Vice President and Treasurer. Please go ahead.

[Marc Stratton:]

Okay. Thanks, operator, and good morning everyone. Thank you for joining us today as we discuss our financial and operating results for the fourth quarter of 2015, as well as our drop down announcement of all operating assets from Summit Investments, SMLP, which is included in our fourth quarter 2015 earnings release. If you don't already have a copy of our earnings release, please visit our Web site at summitmidstream.com, where you’ll find it on the Homepage or in the News section. We've also posted a slide presentation on our Web site Homepage entitled 2016 Drop Down of Summit Investments Operating Assets, which outlines the drop down transaction in greater detail. We will refer to certain slides in this presentation during the call. With me today to discuss our earnings and the drop down transaction is Steve Newby, our President and Chief Executive Officer; and Matt Harrison, our Chief Financial Officer. Before we start, I'd like to remind you that our discussion today may contain certain 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 Please see our 2014 Annual Report on Form 10-K as updated and superseded by our current report on Form 8-K which was filed with the SEC on September 11, 2015, as well as our other SEC filings for a listing of factors that could 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've provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release. And with that, I'll turn the turn the call over to Steve Newby.

[Steve Newby:]

Thanks, Marc. Good morning everyone, and thanks for joining us today on the call. We have a lot to cover today, so we’ll jump right in. First, I’m going to make a few comments on the fourth quarter’s performance, and then I will turn it over to Matt, before I finish the call by reviewing yesterday’s major announcement regarding the accelerated drop down of all of our operating assets from Summit Investments to SMLP. To prepare for that discussion I’ll refer you to our Web site at summitmidstream.com, where we have posted slides outlining the transaction. So first, related to our fourth quarter performance, despite a continuation of the challenging commodity price backdrop, we are pleased with our quarterly results, which were in line with our expectations and our guidance. For the quarter we generated 53.3 million of adjusted EBITDA, and for the year we generated 210.4 million of adjusted EBITDA. Our fourth quarter distribution of $0.575 per unit was flat with the distribution paid for the third quarter of 2015, and up 2.7% over the distribution paid for the fourth quarter of 2014. Our distribution coverage ratio was 0.94 times for the fourth quarter, and for 2015 it was 0.98 times. Operationally, our fourth quarter was highlighted by our Bakken liquids volumes of approximately 66,000 barrels a day, which is up 28% sequentially over the third quarter of 2015. Our liquids volumes were primarily driven by our Polar & Divide customers that commissioned over 30 new wells at the end of the third quarter, and into the fourth quarter. Coupled with our ongoing war to capture existing crude, and produce water volumes that were previously being gathered by trucks. Production in the Williston Basin as a whole has been declining since December of 2014, compared to a 40% increase in volumes on our liquids gathering systems over that same period. While we remain cautious about ongoing rig and completion activity in a sustained $30-a-barrel price environment, we remain bullish about our footprint in the core production areas of Williams and Divide counties. Since I’m sure we will get multiple questions on counterparties during this call, we’ll hit the issue head-on. Our main customers in the Bakken are EOG, Whiting, Zavanna, Oasis, and SM. Three of our liquids customers, Whiting, Zavanna, and SM were actively drilling in our service area during the fourth quarter, and collectively, they maintained an inventory of over 40 drilled but uncompleted wells or DUCs in our area that we anticipate will positively impact our Williston liquids volumes in the first half of 2016. We are aware of recent announcements from our core customers about reduced activity levels, and that has been built into our guidance for the year. Earlier this month, we announced the commissioning of the Stampede Lateral in the Bakken, which has enabled Global Partners to source crude oil off of our gathering system for rail delivery to East Coast refineries. In addition, we are finalizing the connection of our crude gathering system in the Enbridge’s North Dakota Pipeline System, which we expect will be completed in the next few weeks. These new delivery points provide our customers with optionality when flowing crude oil in our system enable them to move barrels from one point to another in order to maximize their netbacks. Both the Stampede Lateral and the Little Muddy project are expected to drive cash flow growth in 2016 relative to the financial results in 2015. Our financial results in the fourth quarter were also highlighted by the December 1 commissioning of a 10-well pad site on our DFW Midstream system. These wells came on strong, increasing average throughput to 356 million cubic feet a day in December, compared to an average of approximately 300 million cubic feet a day in October. For the quarter, DFW averaged 325 million cubic feet a day, which was flat compared to the third quarter of 2015. These 10 new wells continue to produce at high levels, and are expected to lead to increased average volume growth in the system in the first quarter of ’16 compared to the fourth quarter of ’15. Looking forward at DFW, we continue to expect a new 11-well pad site to begin flowing early in the second quarter of ’16. This same customer is also drilling six new wells on another pad site that is already connected to our system, which we believe will be a nice growth catalyst in the second-half of 2016, with no incremental CapEx required from us. In the Barnett, our largest customer is Chesapeake Energy. Chesapeake’s operated production accounts were approximately 30% of our total volumes on the DFW Midstream system, but less than 5% of our expected total gross margin for SMLP in 2016. Unlike in other areas or other contracts that Chesapeake has, they are not paying us any shortfall payments, and we don’t expect them to given their current production. We maintain a very healthy relationship with Chesapeake, as we do with all of our customers. I will also remind folks that the area we service in the Barnett is not only the core of the core, but is also under the city of Arlington. To say we have a competitive advantage here would be a dramatic understatement. Volume throughput on the Mountaineer Midstream system averaged 366 million cubic feet a day in the fourth quarter, down approximately 20% from the fourth quarter of 2014. The decreased volume throughput in the fourth quarter of ‘15 was primarily due to the volume curtailments from Antero due to low realized prices in the Northeast at the end of the year. As many of you already know, natural gas netbacks in the Northeast were particularly challenged during the fourth quarter amidst an unusually warm start to the winter season. These curtailments have largely been lifted as Antero announced the commissioning of new third-party regional takeaway pipeline, which according to them is projected to significantly increase their netbacks in 2106. Future volumes on the Mountaineer system will primarily be dependent on Antero’s pace of completion activities related to 50 previously identified DUCs. We have identified 32 of these DUCs that will flow on the Mountaineer system, from interconnection with both, Antero, Midstream, and Crestwood. We expect that we will receive incremental volumes from their completion activities related to a minimum of 10 of these DUCs in 2016. Our Piceance gathering system also continues to perform well primarily as a result of the high level of contractual MVCs underpinning this acreage. While volumes continue to decline as a result of general inactivity, primarily from Encana, our MVC shortfall payments continue to provide SMLP with a stable source of cash flow. Customers such as Ursa and WPX continue to remain active in the area. And we are encouraged by the recent announcement by WPX to sell their Piceance acreage to Terra Energy Partners. We have received a number of questions about this acreage sale. And what we can say is that our gathering contracts will be assigned from WPX to Terra. Also, in our experience, whenever acreage trades hands it is generally positive for future drilling activity and volume growth. And that the acquirer is able to re-price the acreage based on current strip prices. We’re excited to gain Terra as a customer, and we look forward to working with them in the future. In addition to our operational performance, we are continuously focusing on cost controls, both operating cost and G&A. We measure and manage this on a per MCF basis given our continued growth. For 2015, our controllable operating cost for all of Summit were down 5% over ’14, while our G&A costs were down 6.5%. The net here is that we’re laser-focused on this. We have the capability to monitor it and manage it, and we do that continuously. Finally, I mentioned this in yesterday’s earnings release, but I think it is worth repeating. Over the last several months, we have received a great deal of enquiry, as have most in our industry, regarding our counterparty exposure. While we believe that we have a strong and high-quality contract portfolio, our role as a third-party gatherer and our position in the midstream value chain is the best mitigant to any counterparty exposure we have. The vast majority of our gathering assets are directly connected to our customers’ wellheads and pass sites. Our gathering systems are typically the first third-party infrastructure through which our customers’ commodities flow, and in many cases the only way for our customers to get their products to market. As a result we believe that we are a critical service provider that cannot be easily substituted. We also expect that our customers will continue to perform as we continue to perform pursuant to our long-term contracts. With that, I’ll turn it over to Matt to review the quarter in more detail, and the deferred payment structure in more detail.

[Matt Harrison:]

Thanks, Steve. Adjusted EBITDA for the fourth quarter of 2015 was 53.3 million, compared to 54.1 million for the fourth quarter of 2014. The $800,000 decrease in just the EBITDA was primarily due to a 12% decrease in volume throughput in our natural gas, mostly offset by a 40% increase in volume throughput in liquids. 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 2015. Adjusted EBITDA in the fourth quarter of 2015 included approximately 14.5 million related to MVC mechanisms from our natural gas gathering agreements. This amount included 28.4 million of minimum shortfall payments that were recognized as gathering revenue, 13.2 million associated with a net increase in deferred revenue related to MVC shortfall payments, offset by 27 million associated with quarterly adjustments related to future projected annual MVC shortfall payment. Additional tabular detail regarding MVCs is included in the fourth quarter earnings release. SMLP reported net loss of 220.5 million for the three months ended December 31, 2015 compared to a net loss of 34.1 million in the fourth quarter of 2014. SMLP reported a net loss of 186.8 million for the year ended December 31, 2015 compared to a net of 14.7 million for the year ended December 31, 2014. Net loss for the three months and the year ended December 31, 2015 included 250.5 million of non-cash charges recorded in the fourth quarter of 2015, including goodwill impairment charges of 203.4 million related to the Polar and Divide system and 45.5 million related to Grand River. Recall that SMLP paid approximately 290 million for the Polar and Divide system and it dropped transaction in May 2015. Given the nuisances of accounting for entities under common control, SMLP financial statements were recast to include Polar and Divide Summit Investments carrying value with approximated 415 million at May 2015. Adjusted distributable cash flow totaled 38.3 million in the fourth quarter of 2015. This implies a distribution coverage ratio of 0.94 times relative to the fourth quarter 2015 distribution, a $0.575 per limited partner unit paid on February 12, 2016. CapEx for the fourth quarter of 2015 were approximately 28.8 million, of which approximately 2.8 million was classified as maintenance CapEx. We had 344 million of debt outstanding under our revolving credit facility on December 31, 2015, and 356 million of available borrowing capacity. Total leverage as of December 31, 2015 was 4.2 times. Yesterday, SMLP announced $1.2 billion dropdown transaction to acquire all the operating assets from Summit Investments. In conjunction with the close of this transaction, SLMP will make an initial payment of $360 million. A deferred payment, which is clearly estimated between 800 million and 900 million, will be paid no later than December 31, 2020. A deferred payment, which is outlined in detail on the Slide 6 of the presentation, will be equal first 6.5 times the actual average adjusted EBITDA of the drop down assets for 2018 and 2019. Second, less all CapEx incurred for drop down assets between the initial close and through the deferral period. Third, plus cumulative adjusted EBITDA of the drop down assets from initial close and through the deferral period; and finally less the $360 million payment. At the discretion of SMLP, the deferred payment can be made in either cash, SLMP common units, or a combination thereof. In conjunction with the closing of the drop down transaction, SMLP has received binding commitments to increase the capacity of revolving credit facility from 700 million to 1.25 billion. SMLP will use borrowings under upsize revolving credit facility to fund the $360 million initial payment. Pro forma for this initial payment, borrowing capacity under the $1.25 billion revolving credit facility will exceed $500 million. Pro forma for the dropdown transaction, SMLP provided guidance for 2016 with adjusted EBITDA expected to range from 260 million to 290 million. This includes approximately 75 million to 85 million of adjusted EBITDA from the dropdown assets. Given the challenging commodity price backdrop coupled with the current volatility in debt and equity capital markets, SMLP will take a measured approach regarding distribution per unit growth in 2016. In the near-term, SMLP intend to focus on building distribution coverage and strengthening its balance sheet. We expect SMLP distribution coverage ratio for 2016 to range from 1.1 to 1.2 times. That ends my remarks, and I’ll turn it back over to Steve.

[Steve Newby:]

Thanks, Matt. Needless to say, we are very excited about this transformational dropdown as it enhances SMLP’s growth profile and operating scale while diversifying us into the Utica Shale and DJ Basin, and expanding our existing operating footprint in the Bakken. To give you a bit of a context, we have been working on in refining this particular transaction for many months as part of energy capital partners previously disclosed strategic options review. There were three primary adjectives behind the transaction. First, we wanted to create significant financial strength at SMLP to combat this commodity cycle which we believe will last for longer than any of us want. We accomplish that as our 2016 distribution coverage will be 1.1 to 1.2X and will grow significantly over the next several years. In addition, the transaction is leverage neutral to SMLP for 2016, while we expect leverage to decrease over the next several years as EBITDA increases from Drop Down assets and we utilize the excess cash coverage we have to fund our capital expenditures. Second, we wanted to remove any and all capital markets risk from SMLP for at the extent of the commodity price cycle because right now for energy companies those two are linked. We’ve done that. And in fact, we’ve basically removed all capital markets risk as even as deferred payment can be settled with a unit issuance to Summit Investments. Third, we wanted the transactions to create real, tangible, long-term value to our LP unit holders by transferring our high growth Utica gathering assets to SMLP in an accretive manner. The financial structure with the deferral is very positive to the MLP, but the real long-term value for investors is the fact that we’re dropping down close to 1 million dedicated acreage position in the high growth Utica play or 6.5x the average trailing 2018 and 2019 adjusted EBITDA. If you turn to Page 3 of the slide deck, we highlight most of these points. The transaction as structured will drop down all of Summit Investments’ operating assets to the MLP, will pay an initial purchase price of $360 million, which represents a 4.25x multiple of our expected 2016 adjusted EBITDA. 2016 adjusted EBITDA for the drop down assets is $75 to $85 million. We will then defer the remaining purchase price until 2020. Very important, however, is that the payment made in 2020 will be based on the actual performance, both EBITDA and CapEX of the drop down assets. So to repeat again, the MLP is buying these assets at 6.5x the average trailing 2018 and 2019 actual EBITDA. In connection with the dropdown transaction, we also may need an increase to our bank facility from $700 million to $1.25 billion. This increase will provide us with very robust liquidity to execute the continued build out of the drop down assets and eliminate all financing market risk with our CapEx program. Estimates of the expected CapEx program and our liquidity can be found on page 7 of the presentation. While on that topic, I would like to take the opportunity to thank our banks who again stepped up for us in what I would consider a very difficult financing market. So, the net effect is that for 2016, we expect our distribution per unit coverage to be 1.1 to 1.2X, but important to note is that over the next couple of years, we expect that coverage to be well in excess of 1.2 times while our leverage will be approximately four times. We will also set ourselves up to resume distribution growth when the market rationalizes. So if you turn to page 4 and 5 of the presentation, I’ll review the assets included in today’s drop down announcement. First is Ohio Gathering, in which we own a 40% interest along with MPLX and EMG. Ohio Gathering is natural gas gathering system spanning the condensate, wet gas, and dry gas windows in the Utica Shale with Gulfport as our anchor customer. Ohio Gathering represents one of the largest gathering and processing footprints in the quarterly Utica Shale with over 800,000 dedicated acres from our producer customers operating in Belmont, Monroe, Harrison, Guernsey, and Noble counties. Important to note is our position is only in the gathering assets of Ohio Gathering. We also own 40% in Ohio Condensate Company, which is a 23,000 barrel a day stabilization complex servicing both the Utica and Marcellus shales. Second asset is our 100% percent owned and operated system, Summit Midstream Utica, which is being developed for XTO in the dry gas window of the Utica Shale. We commissioned the system in the third quarter of 2015, and XTO is very actively drilling this acreage. We expect high growth over the course of 2016 in this system. Collectively with Ohio Gathering, the Utica assets represent over 20% of SMLP's expected 2016 adjusted EBITDA. Furthermore, we expect these Utica assets to represent over 40% of SMLP's adjusted EBITDA in 2019. The next asset is Tioga Midstream a 100% owned and operated crude oil produced water and associated natural gas gathering system that we developed for Hess in Williams County in the Bakken Shale. With Tioga, we have a dedication of approximately 20% of Hess' Bakken acreage to that system. We completed the build out for Hess in the fourth quarter of '15, and like some of our gathering agreements in the Bakken, this agreement has a rate re-determination feature that protects our downside. Finally, we dropped down Meadowlark Midstream, a 100% owned entity that is composed of a gas gathering and processing system in the DJ Basin with EOG as the primary customer. We call that our Niobrara gathering and processing system, and a crude oil and produced water system in the Bakken Shale will help in as the primary customer that we call our Blacktail gathering system. In the Niobrara, we own a 20 million cubic feet per day processing facility that processes both the Niobrara and Codell associated gas or EOG. All of the drop down assets are covered by fee based contracts and represents some of the best and fastest growing assets in our portfolio. As Matt mentioned yesterday, we also provided financial guidance for 2016, which includes the impact of today's drop down announcement. That guidance is outlined on Page 8 of the slides. Pro forma for the drop down, our 2016 guidance adjusted EBITDA of $260 million to $290 million, including approximately $75 million to $85 million from the drop down Assets. I will note that consistent with prior drop downs this guidance incorporates the expected result of the drop down assets on an as-if pooled basis as if the transaction closed on January 1. The 2016 financial guidance is based up on an assumed average natural gas price of $2.30 per MMBtu and an average crude oil price of $41 per barrel. Although commodity pricing has very little direct impact on our projections, given our high level of fee based revenues, they do influence our assumptions on producer activity, which impacts our volume throughput expectations. Given the challenging commodity price environment coupled with the current volatility in the capital markets, SMLP will take a measured approach regarding the pace of its distribution per unit in 2016. In the near-term, we intend to focus on building distribution coverage and strengthening its balance sheet, which we think is prudent given the challenging backdrop. DPU growth will be a quarter-by-quarter analysis in the near-term again with coverage and leverage taking priority. As I previously mentioned, pro forma for the 2016 drop down, we expect coverage to be 1.1 to 1.2 times. We do expect that over the next several years, coverage will be higher than 1.2 times, while long-term coverage after accounting for the deferred payment to be 1.1 times or higher. Important to note is that the transaction is highly accretable to distributable cash flow, increasing DCF by 30% in 2016 over the fourth quarter 2015 run rate. With respect to financial performance across the entire Summit family, including Summit Investments, the fourth quarter of 2015 was the strongest quarter we've ever had, primarily due to the significant ramping up of volumes across our Utica gathering system. Drilling activity continued to be strong across our Utica service area with three rigs currently running behind our OGC system and one currently running behind our Utica system. Much of the growth that we've seen on our higher gathering and some at Utica has been due to recent commissioning of dry gas wells. Today's drop down announcement marks a pivotal moment in Summit's history and a real turning point in our evolution. We are in the process of reshaping the scale, diversification credit and growth profile of SMLP from the drop down story into an organic growth story with a concentration in the Utica Shale. In 2016 as I mentioned, we expect that 20% of SMLP's cash flow will be generated from Utica, while this number will grow to more than 40% by 2019. By 2019, we expect 50%; almost half of our total adjusted EBITDA to originate from the Northeast. We also like that this drop down diversifies our customer base by enhancing our exposure to existing customers such as EOG and XTO, and adding several new strong and well-capitalized counterparties into the SMLP customer portfolio, including Gulfport and Hess. Together, these customers represent over 70% of the volume throughput associated with the drop down assets. Finally, the dropdown and the financial strengths created by it will allow SMLP to operate from a position of strength in this uncertain market, and afford us the chance to be opportunistic on future investment opportunities. Although we have gotten a lot of comments over the past six months -- or really over the past year on the commitment level of our sponsor, I would hope that last night’s announcement puts those doubts to bed. Not only has ECP shown unprecedented support with this transaction, they are also currently executing on the substantial buyback program, as this helps support our unit price. I’d also like to note that they continue to retain additional capital in meaningful quantities to support both, SMLP or Summit Investments. We believe attractive investment opportunities will be available over the next several years for those with financial strength, capital access, and a proven management team to integrate and grow the business. With that, I’ll turn it over to the operator for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Kristina Kazarian from Deutsche Bank. Please go ahead.

[Kristina Kazarian:]

Hey, guys. Nice job on the transaction today. A couple of quick questions for you, can you help me walk through the rationale on the structure of the deferral payment, and help me think about how I should be assuming the incremental CapEx [drive] [ph] EBITDA, like what development multiple I should be thinking about that, and then the EBITDA ramp associated with the CapEx spend?

[Steve Newby:]

Hey, Kristina, it’s Steve. I’ll take the first part. Matt can take a little bit on the CapEx. The rationale behind it, as we said on my comments, we’ve been working on it for months, was really to bring the high-growth Utica assets down to the MLP, but have the GP retain both the development risk, performance of the assets, and also the capital expenditure risk as well too, and reflect that and ultimately what the MLP pays for the assets. And so that’s the rationalization behind the deferred payment. And the mechanism behind it is, is really what you have is those assets coming down, the MLP getting the benefit of those assets coming down. But really the risk -- a lot of the development risk being retained by the general partner. On the CapEx, I’ll start it off. Let Matt -- he can footnote me. On the CapEx, our CapEx spend is $150 million to $200 million roughly on average over the deferral period. Just to give some context of what’s going on up there over the last couple of years. I think we’ve spent probably $1.4 billion or so up at our GP over the last three years probably. So the CapEx spend is coming way down. A lot of that’s because the development cycle of these assets is –- the completion stage is getting pretty close. And so the CapEx being spent going forward is going to be pretty incremental because you’re getting -- or a lot of [truck] [ph] line systems have already been put in place. So I would guide you to we believe the dropdown assets are going to double the MLP from where we were at the end of 2015, by the end of 2019 on an EBITDA basis.

[Kristina Kazarian:]

Sounds great.

[Matt Harrison:]

I’ll just add to it that the structure then provides - it’s 6.5 regardless of the spend over the next four years.

[Kristina Kazarian:]

Great, and then can you guys just help talk a little bit as well about counterparty risk? I know you touched on this in some of the -- your prepared comments, but what I’m -- I know you mentioned XTO, Gulfport, Hess, EOG, but can you also talk about -- I think you guys have some Ascent on some of these assets? And just what you’re thinking there, and then the follow-on to that is, update on conversation with the rating agency since the transaction was announced?

[Matt Harrison:]

Okay.

[Steve Newby:]

Yes, I’ll let Matt…

[Matt Harrison:]

I can take that. So there was a bunch in there. So if I didn’t get them all…

[Kristina Kazarian:]

Yes, there were two. Sorry.

[Matt Harrison:]

Ask them again. So, first -- let me go through this high level on our customers, right? So we did some analysis. About a third of our customers, from a margin standpoint are investment-grade or better. About half are double-B or better, and about 85% are single-B or better, from a margin standpoint. And this is pro forma for the dropdown. And then if I talk about Ascent, so, Ascent is in two spots on the dropdown asset. They’re an OGC customer. At OGC they represent about -- I would say about 10% of our combined margin. And then they are a non-op in Summit, Utica. And so XTO is the operator in the Utica. Now if you just kind of extrapolate the revenue or percent there, it would be about another 8% of our margin. But again, XTO operates that area. And then from a rating agency standpoint -- we've talked to the rating agencies. And we would expect this to be a neutral type of event for them.

[Kristina Kazarian:]

Perfect. Thanks, guys. That’s it for me. Nice job there.

[Steve Newby:]

Yes, and let me add on the counterparty exposure too on the -- just the - the significant portion of our minimum volume commitments that people actually pay us are higher-grade volume commitments. And Encana is by far our largest minimum volume commitment. I think we’ve told the market that pretty consistently. So in honesty they’re triple-B to I think [indiscernible] has them at BA1. So that’s another important feature when you look at counterparty risk is what –- what customers are actually paying you MVCs, and what’s the credit look like from those customers.

[Kristina Kazarian:]

Got it. Thank you.

[Steve Newby:]

Thanks, Kristina.

[Operator:]

And our next question comes from Gabe Moreen from Bank of America Merrill Lynch. Please go ahead.

[Gabe Moreen:]

Hi, good morning guys.

[Steve Newby:]

Hi, Gabe.

[Gabe Moreen:]

A question for me on the ability to buy back debt as part of the modified and upsized revolver, is that part of the game plan here? Are there any limitations on doing it from an agency or rating perspective? And is any of that assumed in your leverage -- projected leverage ratio going out a couple of years?

[Steve Newby:]

So I’ll take it Gabe, and let Matt footnote. First, it’s not assumed in our leverage calculation that we buyback debt. It is allowable under our bank facility. It’ll allowable I’ll just say in a significant amount if we choose to do it. And I would say that the rating agencies really haven’t opined on it relative to buying it back. But it’s definitely something that we’ll be analyzing.

[Matt Harrison:]

Yes, and you’ll see the amendment drop. We have a 100 million -- well this adds a $100 million basket to buy back our bonds.

[Gabe Moreen:]

And I guess as a follow-up and maybe you’d choose to punt this, so is there any reason you wouldn’t buy back some bonds considering where some of them are trading today?

[Steve Newby:]

I mean that is –- again, that’s going to be a financial type of strategy that we’re going to continue to look at and review. Certainly the banks are okay with that.

[Gabe Moreen:]

Okay, I’ll let that drop, got it. And then I guess in terms of the CapEx spend, look, if leverage goes lower, balance sheet improves. Can you kind of help think about sort of what upside the growth CapEx would be here beyond the build-out of the systems? I gather that a whole lot of that is dependent on the macro environment and what not. But can you talk about kind of upsides where you might see at some of these systems if you feel you can kind of go back to playing more offense.

[Steve Newby:]

Yes, so I’ll first say, the CapEx that we have in the –- the pace that we have in the slide deck that we released this morning, and the CapEx forward-look, assumes no additional growth projects -- relates. It’s everything that we have under contract today. Our CapEx is fairly scalable given what we do. It’s a lot of well-connect CapEx. So it’s fairly scalable based upon activity levels. And it tends to -- it can flow down with activity levels down, and go up with activity levels up. Look, we think there’s still additional build-out that’s needed in the Utica. As the play develops, I’d say we’re probably in the -- maybe the third inning or fourth inning in the Utica relative to other plays, and particularly relative to the Marcellus next door. We think there’s going to be significant build-out related to the Utica as it extends from an aerial extent standpoint, into West Virginia. That’s the dry gas part of the Utica. So we think our position is very strong today. Allows us, affords us the opportunity to compete favorably for business. And one thing I want to touch on that I touched on in my comments is, our sponsor retains significant financial wherewithal to support our development activities.

[Gabe Moreen:]

Got. All right, sounds good, Steve. Thanks very much.

[Operator:]

And our next question comes from Heejung Ryoo from Barclays. Please go ahead.

[Steve Newby:]

Hi, Heejung.

[Heejung Ryoo:]

Hi, how are you?

[Steve Newby:]

Good.

[Heejung Ryoo:]

Yes, just some clarification on the CapEx side. And apologies if I missed this, but you put out a number for acquired assets. But at this point, I mean, what are you thinking in terms of the legacy assets, given this environment, would one assume if this continues it would be pretty minimal there?

[Matt Harrison:]

Yes, I would say, of the CapEx for ’16, about 20% or so is related to the legacy assets.

[Heejung Ryoo:]

Okay.

[Matt Harrison:]

So it’s fairly minimal in this commodity price environment. In several of those systems, a bit like DFW, we filled out all the pads. So the incremental drilling we announced today that we expect is -- basically comes to us without any capital expenditure.

[Heejung Ryoo:]

Got it. And then in your guidance for ’16, what percentage of the guided EBITDA do you expect to get from the MVC payment? Would it be similar to sort of what you’re getting this year or -

[Steve Newby:]

Yes, so I would say from a dollar standpoint, Heejung, it would be very similar to what we’re getting this year. And then that number would be divided over a larger number. So call it 20-ish percent.

[Heejung Ryoo:]

Okay, got it. And then with the MVCs, these contracts you have. I mean, they carry out -- and then please remind me about the term. I think Piceance, that area. It’s kind of probably declined a bit after 2020 in terms of how that MVC is set up. Could you maybe provide a little bit clarification on how long these MVCs go out? And if one of those decline -- how steep should the decline rate be there?

[Matt Harrison:]

Yes, our largest MVC payment in the Piceance by far is with Encana. It has 10 years left on that contract then for MVCs. Our other -- one of our other large ones is Mountaineer, with Antero, and that has about 10 years left as well to -- And that one’s fairly flat, and it [indiscernible] fairly flat here over the next several years as well.

[Steve Newby:]

And we provided that in account of our investor decks on the [indiscernible]. So, average about eight-and-a-half, nine years on average, about nine in the Piceance, about four in the Barnett, and almost six in the Williston Basin.

[Heejung Ryoo:]

Got it. And then lastly, you touched upon this a little bit, but the –- I think you said vast majority of your gathering lines are connected to wellhead. Is that sort of consistent across your legacy asset versus what’s coming down? Maybe if you could provide a little bit more color?

[Steve Newby:]

Yes, I think everything coming down is effectively wellhead gathering, either in the Bakken, Niobrara, or obviously the largest piece of that by far is the Utica. So it’s all wellhead. And then the vast majority of our existing business is wellhead. I’d venture to say more than 90% of our business is wellhead gathering.

[Heejung Ryoo:]

Okay, that’s very helpful. Thank you very much.

[Steve Newby:]

Okay, thanks Heejung.

[Operator:]

And our next question comes from Tristan Richardson from SunTrust. Please go ahead.

[Tristan Richardson:]

Hi, good morning guys. Just curious, previously you talked about asset development upstairs being somewhere closer to 600 million to 700 million over the time period. I’m curious sort of the difference between that number and what you guys have talked about this morning. Is it mostly market conditions or just an idea there, the change?

[Matt Harrison:]

Are you talking about kind of the investment versus the 360, is that kind of the question, Tristan?

[Tristan Richardson:]

No, sorry. Matt, I think in previous slides, you guys have said, from 2016 to 2019 the Summit Investments’ CapEx would be somewhere around 600 to 700, versus today, saying 400 to 500.

[Matt Harrison:]

Yes, I think part of that is due to the commodity price cycle, Tristan, and development getting pushed out to the right. The other thing that’s going on in the Utica, specifically, is our compression CapEx is coming down significantly, and getting pushed to the right significantly. Because these wells just don’t need compression for up to 18 months. And so it’s pushing everything to the right there as well too. But I would tell you that’s mainly due to development cycle and related to commodity prices. Sort of fits with my comment before, that lower activity levels, our CapEx is somewhat scalable.

[Tristan Richardson:]

Got you.

[Matt Harrison:]

We spent, and just to give you an example in ’15 overall Summit -- the overall Summit, we spent about $200 million less than we were projecting to spend in ’15 as activity levels came down. So it is scalable.

[Tristan Richardson:]

Got you, okay. And then Steve, just to clarify a comment in your prepared, you said 20% of the pro forma Summit EBITDA would come from -- in ’16 would come from Utica. Was that OGC and Summit Utica or was that specifically Summit Utica.

[Steve Newby:]

That’s both.

[Tristan Richardson:]

Okay, that’s helpful.

[Matt Harrison:]

And OGC is ramping significantly, Tristan. I mean, it didn’t come on until the third quarter of -- we didn’t commission the system till the third quarter of ’15, Summit Utica.

[Tristan Richardson:]

Okay, that makes sense.

[Matt Harrison:]

When Steve talks about Utica, it’s those two assets. And then we talked about the Northeast, we’re adding our Mountaineer asset to it.

[Tristan Richardson:]

Okay, perfect. And then lastly, just to go back to your comment about the sponsors prepared to be more supportive going forward, et cetera. I mean, are there other mechanisms that you guys are considering now that the assets are down below, beyond forbearance or accepting units in lieu of cash distribution. I mean are there other mechanisms that -- your leverage, you can pull, if need be.

[Matt Harrison:]

I’d say, yes. I mean, we’ve had a lot of folks talk to us about creative capital raising activities, as you’ve seen some folks -- some of our peers do that in the market. I think those mechanisms are available to us. I think our general view is we’ve eliminated all capital markets risk with this transaction for years. And so any view from us to use things like that would be from an aggressive posture, versus using them to pay down debt or so forth. We’ve eliminated any capital markets risk related to our current plan. So it would be used, I think, primarily in us doing something from a growth standpoint. Further growth than what we have.

[Tristan Richardson:]

That’s helpful. Thanks a lot guys.

[Steve Newby:]

Okay. Thanks Tristan.

[Operator:]

And our next question comes from Jeff Birnbaum from Wunderlich. Please go ahead.

[Jeff Birnbaum:]

Yes, morning guys. I just wanted to actually follow-up one quick question on that last comment. So just to understand correctly, you think you’ve eliminated capital markets risk for years, meaning as you sort of evaluate the pace of CapEx this year -- and I’m sorry, I haven’t been able to get the slides off the Web site yet to see what you had in there, but you don’t think you need to tap the public markets in 2017 either, it sounds like. Is that correct?

[Matt Harrison:]

Yes, we don’t believe we have to tap the public markets at all related to this transaction, given the ability to issue units to our -- to Summit Investments to satisfy the deferred payment.

[Steve Newby:]

So, Jeff, we expect to have over 500 million of liquidity closing on the initial purchase. And then with that $1.25 billion facility that we’re putting in place, we don’t expect, and given just this transaction, to have less than $300 million of revolver liquidity throughout that entire deferral period.

[Jeff Birnbaum:]

And is there sort of a, call it depending on commodity prices and developments and things like that, an upper boundary, which you’re comfortable taking your leverage up to?

[Steve Newby:]

Again, so this is -- it's relatively leveraged neutral for 2016. And then with all of the -- with all of kind of the coverage that we anticipate during the deferral period, it actually –- well we’ll be brining in leverage kind of in ’17 and forward. So, yes, we’re still kind of a four-times leveraged kind of longer-term outlook company over the longer term.

[Jeff Birnbaum:]

Okay. And just -- so at the GP, can you give us a quick update there, I guess about post-deal liquidity and I guess borrowings there just as you are talking about sort of their ability to continue to be supportive?

[Matt Harrison:]

Yes, so the GP Summit Investments will have remaining its ownership, its IDR ownership obviously is 30 million units as well to it won’t have any leverage to GP. So, there is no debt up there pro forma post close of the transaction. And then, we go further up, our sponsor as I mentioned still retains capital available to us to support us in fairly meaningful amounts as well too. So that option is still available to us as well to participate in growth projects be it development, organic growth, or M&A.

[Steve Newby:]

So that $360 million will all be used to pay down debt? There will likely zero distributions relative to maybe $5 million to $10 million, but basically zero distributions relative to 360.

[Jeff Birnbaum:]

Got it. Thanks. And just one last from me; I apologize, Steve, you mentioned the price deck going to obviously free your portfolio, influence your assumptions volumes much more than top realizations or something like that, but I mean I know it’s an exact science, but I guess just sort of given the different price decks that different customers are using for their own guidance, kind of how did you arrive this deck and sort of the internal volume assumptions you have in there to get to your 2016 guidance as well as sort in many ways some multiyear CapEx and EBITDA it seems from the drop down assets?

[Steve Newby:]

Yes. So, a multiyear -- I’ll take it backwards, Jeff, a multiyear, a large part of CapEx is related to Summit Utica as we still build out for XTO. I think we have good -- very good line of sight in that and very good communications with XTO related to that development. So, we feel real good about that. How we develop them? It’s challenging because of our customers’ CapEx budgets have been challenging. I’ll make one big note related because I know a lot of folks are focused on the Bakken and our customers there. Our 2016 guidance assumes the recent announcements by some of our anchor customers namely Whiting and their activities there. We’ve known about that for a period of time and that’s been built in to our -- that activity level or lack thereof has been built into our ‘16 guidance as I would say a pretty low activity level overall as you would imagine in this commodity price environment. And so for ‘16, we did a pretty good given we are connected to the wellhead and a lot of times that includes us having developed and build to the wellhead for certain areas or for certain customers. We get -- pretty get line of sight I think on ‘16. Now that can obviously change and has changed here over the last couple of months. And to extent we know about that that we’ve built it into our guidance. Hope that helps some?

[Jeff Birnbaum:]

Yes. Thanks for the answers.

[Operator:]

And our next question comes from James Carreker from U.S. Capital Advisors. Please go ahead.

[James Carreker:]

Good morning. I was wondering if you guys could talk about the thought behind that deferral payment including the cumulative CapEX or excuse me the cumulative EBITDA of the systems between now and 2019?

[Matt Harrison:]

Yes. So when you think through the deferral, what basically you have is you have the MLP gain, the benefit, the burden of the CapEx spend over that period of time, and the benefit of the cash generated by the asset over that period of time. So those effectively come close to pretty equaling each other out. Actually, EBITDA spread a little bit higher in our base case assumptions. And so, an easy way to I think to think about it to try to simplify a little bit, if the MLP was going to purchase these assets at the end of ‘19 for 1.2 billion, which is the estimate today of the deferred payment plus the upfront price, based upon our estimate of 2019 EBITDA will be right at 6.5 times. So that’s another way to sort of simplify this. The price paid that we are anticipating to be paid is right on ‘19 - ‘18 and ‘19s average EBITDA.

[James Carreker:]

But in that scenario, the SMLP would not be responsible for the interim CapEx, correct?

[Matt Harrison:]

That’s right. And we would not get the benefit of the interim EBITDA either.

[James Carreker:]

I guess that’s kind of my question. Is there really the interim EBITDA? If it all goes back to the balloon payment, I guess kind of how do you think about that benefit if it gets tagged on the principal to, so to speak?

[Matt Harrison:]

Right. You’re basically getting reimbursed for the CapEx spend to the extent that it exceeds EBITDA.

[James Carreker:]

Okay. I see what you are saying. And so, given kind of the EBITDA and the interim periods kind of gets tagged on to this deferred payment, so do you kind of balance that with a level of distributions that you makes in the interim period given that it -- all that increased EBITDA kind of increases the size of that future payment?

[Matt Harrison:]

Absolutely. So if you think about coverage and leverage and the thought of high coverage and lower leverage and that’s exactly what we are using that cash flow in the interim, it allows to us to basically pay for our CapEx program without using the equity of the debt capital markets.

[Steve Newby:]

Yes. I would give you a little more color. I mean we try to give you color in comments too. We expect coverage to grow significantly over the next several years. And the balance -- are going to balance distribution growth knowing we have a deferred payment and we want to come out after that deferred payment to still be 1.1x or higher, and 4x or so levered. And so, that’s how we balance it.

[James Carreker:]

And so, you think with a deferral payment you target -- when you are balancing maybe cash versus unit issuance, you are trying to target maybe a four times leverage ratio?

[Matt Harrison:]

That’s right. After the deferral payment, we anticipate to -- still to be 1.1x or higher and around 4x levered.

[James Carreker:]

Okay. And then, can you guys talk about the -- what type of assumptions go into the deferral payment currently estimated at $800 to $900 million in terms of what do you need to see out of your producer customers in terms of either rigs or other activity that kind of gets you that bogie in 2020?

[Steve Newby:]

Yes. I think it’s mostly -- most of the growth here is Utica. As we mentioned, it’s going to be ramping up significantly. Our assumptions on that payment are based upon the current commodity price environment and strip prices and the level of activity that we are seeing today and not much of an increase in activity going forward. I want to remind everybody in the Utica interesting because we are just on the gathering side right, so the shift -- the big shift to dry gas Utica that’s a very advantageous to us. And so, I think we are four rigs combined

[James Carreker:]

Thank you for the color. That’s all from me.

[Steve Newby:]

Yes. Thanks. I think we have got time for one more question.

[Operator:]

And our last question comes from Andy Gupta from HITE Hedge. Please go ahead.

[Steve Newby:]

Hey, Andy.

[Matt Niblack:]

Hi. This is actually Matt for HITE. Thanks for taking the question. So when we think about the growth, is it safe to assume that the growth will -- for the pro forma company after the drop down, is overwhelming coming from the Utica in your projections and that you are largely assuming the rest of the operations are fairly flat?

[Steve Newby:]

Yes. I think in today’s commodity price environment projected out to ‘19 and ‘20 or 2020, I think that that assumption is correct of where sort of the growth is balanced. It would be the Northeast.

[Matt Niblack:]

Right. And so, you are saying that northeast being enough of a driver of growth that you can move from the 275 or so this year up to some number above 400 even in the current commodity strip projected forward?

[Steve Newby:]

That’s correct.

[Matt Niblack:]

And so that would be -- again within that, that would be overwhelmingly XTO, right? It would be perhaps Antero and others, but XTO would be the key driver of that, right?

[Matt Harrison:]

Yes. I think Gulfport as well too. We gathered Gulfport’s gas across all three windows including dry gas as well too. In fact most of the growth in our fourth quarter volumes on OGC were actually dry gas volumes coming online, so, both of those into this.

[Matt Niblack:]

But your talks with predominantly I guess two entities but also the others across the system, you don’t feel that you need to strip to move up. The strip isn’t [indiscernible] going into the commodity. So, it implies spot price will move up over time. But you don’t need to strip in natural gas or in crude oil to move up to hit those targets based on the conversations you have had with your customers?

[Matt Harrison:]

Yes. Our assumptions are -- the best way to answer that is our assumptions are based upon the current commodity price environment and the reflection that they are giving us or comments they are giving us on their activity levels in that environment. So, yes, I think there is a -- one of the reasons we are in the current commodity price environment is because of Utica. So, they go little bit hand in hand.

[Matt Niblack:]

Got it. And then, last clarification at the end of call here. When you said the pro forma for the deferred payment, you expect the distribution coverage to be at least 1.1, safe to assume that’s on the current distribution, or is that on an expected growth in the distribution over time?

[Matt Harrison:]

Yes. There is some implied growth between now and the deferred payment in that from a good distribution standpoint.

[Matt Niblack:]

Okay, great. Thank you, and again, congratulations on getting the deal executed.

[Matt Harrison:]

Yes, thanks, Matt.

[Steve Newby:]

Thanks. And if we didn’t get to your questions, please feel free to follow-up with us offline, and we will be happy to work with you. And we appreciate everybody’s attendance. Thanks.

[Operator:]

Thank you. And I’ll now turn the call back over to Steve Newby for closing comments. Thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating, and you may now disconnect.