Summit Midstream Partners, LP
Q2 2014 Earnings Call Transcript

Published: 8 Aug 2014

[Operator:]

Welcome to the second quarter 2014 Summit Midstream Partners, LP earnings conference call. My name is Christine and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Marc Stratton. You may begin.

[Marc Stratton:]

Okay. Thanks, Christine, and good morning, everyone. Thank you for joining us today as we discuss our financial and operating results for the second quarter of 2014. If you don't already have a copy of the earnings release that was issued yesterday afternoon, please visit our website at www.summitmidstream.com, where you will find it on the homepage or in the News section. With me today to discuss our quarterly earnings are Steve Newby, our President and Chief Executive Officer and Matt Harrison, our Chief Financial Officer. Before we start, I would like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see our 2013 Annual Report on Form 10-K as updated and superseded by our current report on Form 8-K filed up at SEC on July 3, 2014 as well as our other SEC filings for a listing of factors that could cause actual results to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 have provided reconciliations to the most directly comparable GAAP measures in our earnings release. With that, I will turn the call over to Steve Newby.

[Steve Newby:]

Thanks, Marc. Good morning, everyone, and thanks for joining us on the call this morning. I will begin by discussing our second quarter highlights and then I will turn it over to Matt for more details on our financial results. I will then end the call with some additional comments on our outlook for the second half of 2014. Yesterday, we announced our financial and operating results for the second quarter. We continued our trend of reporting sequential quarterly volume growth within other record of 1.4 Bcf a day for the second quarter. This was up approximately 7% over first quarter volumes and 32% over the second quarter of 2013. More important is that each of our assets had sequential quarterly volume growth. The growth was due to several factors including better weather as we came out of the severe winter effects over the past two quarters. We continued high activity level and growth in the areas around our systems and the great job our operational team has done to keep our assets running at a very high reliability level. On the growth front we announced in early June $300 million of New Bakken projects at our General Partners Summit Investments, which effectively replaced the asset value of the $305 million Red Rock drop down In March of 2014. Included in these projects is our first agreement to gather gas, crude and water in the Bakken for Hess in their North Goliath field. So we continue to increase the growth visibility of the MLP with approximately $2 billion of asset development at our General Partner, which will fuel future drop downs to the MLP. For the quarter we reported adjusted EBITDA of $48 million, which was up 3% year-over-year and 3% quarter-over-quarter. Adjusted distributable cash flow totaled $34.7 million, which was up 14% year-over-year and 1.4% quarter-over-quarter. The increase in adjusted EBITDA was due to the increased volume that were previously mentioned driven primary by Mountaineer Midstream, which was acquired in second quarter of 2013. Also in the first quarter we completed the drop down of our Red Rock Gathering asset. Red Rock has been growing substantially over the last four quarters and is currently outperforming even our drop down assumptions from back in the first quarter. On July 24th, we announced our second quarter distribution of $0.52 a unit, which was a 4% increase over the first quarter and a 19.5% increase over the second quarter of 2013. We achieved this growth with a coverage ratio for the first half of 1.11 times. On the volume throughput front, as I mentioned earlier, our total average throughput was 1.4 Bcf a day for the second quarter, which was up 32% year-over-year and 7.2% quarter-over-quarter. While these assets all increases quarter-over-quarter, the largest driver of our volume increase was our Mountaineer asset. The volume ramp at Mountaineer continues to outpace our expectations. The volumes are 28% quarter-over-quarter to an average of 366 million cubic feet for the second quarter. Through July, we continued to see volume growth in Mountaineer and we now expect our Zinnia loop project to be complete and in service by the end of August. As a reminder, the Zinnia loop project will add 500 million cubic feet of additional throughput capacity and our expectation is that we’ll utilize a portion of this incremental capacity by the end of August, as Antero continues to be very active in drilling and completions of the area. At DFW, total volumes for the second quarter averaged 350 million cubic feet a day, which was up slightly from the first quarter. As we have mentioned in the last few calls, we have been battling declines from our anchor producer on the system with any growth here is a positive sign. Furthermore, we believe volumes have bottomed out at DFW in the first half of this year and we expect to see growth throughout the balance of ’14. Our positive outlook is supported by several factors. First, we announced last night in our press release the pending $11 million bulge on acquisition of Texas Energy Midstream. We expect the transaction to close this month. For us this transaction unlocks acreage adjacent to our existing footprint by adding three new pad sites, two with a new customer and one with our existing customer, Beacon. Area that this covers is very acreage and in close proximity to acreage in our existing system where some of the Barnett’s largest wells have been drilled. It also gives us some additional compression capacity alternatives in the area. We also recently executed a letter of intent with one of our existing customers, Vantage to expand our pipeline capacity to their pad site to accommodate a significant increase in drilling activity planned by them over the next several years. Vantage has some of the best acreage in our system and in the Barnett, a big customer for us last few years. So we’re very pleased to partner with them on enhancing the system to meet their expected volume growth. So we feel very good about that outlook on DFW for the balance of ’14 and in the ’15. These two events give us confidence that will not only offset declines and adjust the peak production, but they will actually see nice growth in DFW volumes to the balance of ’14. For Grand River, which now includes our Red Rock assets, volumes averaged 662 million cubic feet a day in the second quarter, which was up 1.4% over the first quarter. The declining volumes from Encana’s reduced drilling activity is being offset by growth from several other customers including Ursa and WPX. Similar to DFW, we expect to see increased activity around Grand River in the second half of ’14, which will help offset most of the Encana declines. As I mentioned earlier, the Red Rock asset which we dropped down in the first quarter of this year continues to perform well and is exceeding the expectations we had at the time of the drop down. A good day [ph] to point here is that quarter-over-quarter volume growth at Red Rock was up 18%. First quarter volumes at our Bison Gathering System in the Bakken averaged approximately 15.4 million cubic feet a day, which was up from 12.2 million cubic feet a day in the first quarter. Our system enhancements helped drive the volume increase along with warming weather. These factors allowed us and our customer to restore some gas to our system. Importantly, we saw building volumes throughout the quarter at Bison and we ended the quarter with June volumes averaging 19 million cubic feet a day. We see these increases continue into July and early August as well. We are currently executing on four separate compression expansion projects at Bison including two new stations to support expected producer volume increases from the continued active drilling around our system. These expansions will take our compression capacity up to 32 million cubic feet a day by the end of the first quarter of ’15. So before I turn it over to Matt to summarize the financial results in the quarter, we experienced volume growth throughout the quarter across our entire asset base. Producer activity is strong across all four of our assets and we expect to see increased volumes across each of our operating areas for the balance of ’14. In addition to this growth, we continue to benefit from a high level of contractual minimum volume commitments throughout the company. Our total portfolio is 4 Tcf with an average life of over 10 years and over the next five years, we have 1.2 Bcf a day under minimum volume commitments. So that, I will turn it over to Matt.

[Matt Harrison:]

Thanks, Steve. I will cover the results of Summit Midstream Partners LP or SMLP. SMLP acquired Bison Midstream and Red Rock Gathering from a subsidiary of Summit Investments on June 4, 2013 and March 18, 2014. The transactions were considered acquisitions from an entity under common control, therefore the Bison and the Red Rock drop down acquisitions have been accounted for on an as if pooled basis for all periods in which common control existed. Therefore Bison Midstream financial results are combined with SMLP beginning on February 16, 2013 and Red Rock Gathering beginning on October 23, 2012. Adjusted EBITDA for the three months ended June 30, 2014 was $48 million compared to $36.8 million for the three months ended June 30, 2013, an increase of approximately 30%. The $11.2 million increase in adjusted EBITDA was primarily due to the acquisition of Mountaineer Midstream on June 21, 2013, which contributed approximately $3.5 million of incremental adjusted EBITDA in the second quarter of 2014 compared to 2013., the proportionate contribution of higher margin throughput volumes from certain customers on the Grand River System, the start-up in March 2014 of our DeBeque Plant at Grand River and a decrease in OpEx on our Grand River System. These increases in adjusted EBITDA were offset by a decrease at DFW Midstream as a result of lower throughput volume in the second quarter of 2014 compared to 2013. Also 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 start of 2014. Adjusted EBITDA in the second quarter of 2014 included approximately $12.9 million related to MVC mechanisms from our gas gathering contracts. This amount included $2.3 million of minimum shortfall payments that are recognized as revenue, $5.8 million associated with quarterly adjustments related to future projected annual MVC shortfall payments and $4.8 million associated with the increase in deferred revenue related to MVC shortfall payment billings. $4.8 million of MVC shortfall payments was recognized as deferred on our balance sheet. Additional tabular detail regarding MVCs is included in the first quarter earnings release. Adjusted distributable cash flow totaled $34.7 million in the second quarter of 2014. This implies a distribution coverage ratio of 1.09 times for the second quarter distribution of $0.52 per limited partner unit to be paid on August 14, 2014. CapEx for the first quarter of 2014 was approximately $23.2 million of which approximately $4.8 million was classified as maintenance CapEx. We had $426 million of debt outstanding under our revolving credit facility at June 30, 2014. The borrowing capacity under our $700 million revolving credit facility was approximately $274 million at June 30. A subsidiary of SMLP issued $300 million of 5.5% notes due 2022 in June 2014. The $295 million of net proceeds were used to repay a portion of the revolving credit facility. Total leverage as of June 30, 2014 was 3.9 times. SMLP reaffirmed its 2014 adjusted EBITDA guidance of $190 million to $210 million and distribution per unit growth of 15% to 20%. With that, I will turn the call back over to Steve.

[Steve Newby:]

Thanks, Matt. First, to reiterate what Matt said, we are reaffirming our full year 2014 adjusted EBTIDA guidance of $190 million to $210 million and distribution per unit growth of 15% to 20% over our fourth quarter ’13 distribution of $0.48 per unit. We are revising our growth CapEx upward given the acquisition of them in the additional compression expansion projects of Bison. Our revised CapEx guidance is $125 million to $135 million with maintenance CapEx still expected to be between $15 million to $20 million for the year. Important to note, as we always do, this guidance does not including any additional drop downs or acquisition activity. In June, we announced an additional $300 million of organic capital spent by our general partner, Summit Investments. All of these CapEx is focused around our existing crude water and now gas gathering systems in Williams and Divide counties. Each project spent multiple customers in various services include our first exposure to crude oil storage, enhancement of our gathering system by adding additional rail and pipeline interconnects and the first what we call tri factor of natural gas, crude oil and water deal for one customer, Hess. The Hess transaction is a new thing for us as it will be a multi-year buildout across three commodities for one of the largest producers in the Bakken through credit to both our commercial and operating teams to finalize the deal with Hess in our core North American operating area. In the Utica, we closed on our buy-in of our 40% interest of Ohio Gathering in late May. We expect to continue to spend a large amount of capital, approximately $1.2 billion in total over the next three to five years as the JV buildout infrastructure for its customer based in its fast growing basin. To put the size and scale of our Ohio Gathering interest into perspective, we believe that in the next three to four year our 40% interest in Ohio Gathering is expected to be larger than the current size of our MLP. We also believe that Summit has a unique advantage to be able to execute this development at our General Partner and insulate the MLP from associated development, capital structure and volume ramp up risk. Although we are very focused on the current organic projects at the General Partner, we continue to see a fairly robust level of additional growth opportunities around our footprint and particularly in the Bakken and Utica. In June, we completed a transaction that will add another potential capital source for funding at our General Partner. We converted approximately 6.5% ownership interest of Summit Investments into a preferred security. So Energy Capital Partner now is 100% of class A membership interest in Summit Investments. In conjunction with exchange transaction, we structured the ability for the General Partner to access additional funds under the same preferred structure. This new preferred structure together with our continued access to sponsor equity, bank debt and operating cash flow give our General Partner very strong capital access to continue to pursue large scale organic development. Finally, on drop downs, with the drop down of Red Rock Gathering for $305 million and our buy-in of Ohio Gathering, we revised our views on drop down to an average of $300 million to $500 million per year for the next several years. We remain confident now that we have this level of drop downs for the next several years. Our crude oil assets in our Polar and Divide areas of the Bakken continue to ramp up nicely and we believe that ramp up will continue through the rest of this year. We believe that visibility and consistency of cash flow of these assets become much clear in the first half of 2015. I also remind everyone that we anticipate these assets will come down to the MLP with continued growth prospects and associated CapEx. With that, I will open it up to questions. Christine?

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Jerren Holder from Goldman Sachs. Please go ahead.

[Jerren Holder:]

Good morning.

[Steve Newby:]

Hi, Jerren.

[Jerren Holder:]

Hi. I just want to start off with the Marcellus assets. You guys highlighted that MarkWest continues expanded Sherwood Processing Complex 1.4 Bcf in a name plate stated right now your expansion is going to be about 1 Bcf. Can you talk about the potential to continue to expand your cost Mountaineer system? How much can you go in terms of capacity at a low cost call it [ph] level before you need to start adding newer lines?

[Steve Newby:]

Yeah. I think, Jerren, as far as additional looping project, there’s probably some availability on the northern part of the system as Zinnia loop was more on the southern part of the system and naturally woods getting used the most and where large percentage of the volumes coming from. So we still have availability to do some expansion projects in the northern end of the Mountaineer system, but I think Zinnia pretty well was half out the field and there’s probably a few things we could do. We also have the ability to add additional compression for the system as well too. So it’s not all just pipeline capacity as well. And I think for the quarter we probably delivered over 70%, I think, 74% -- of the actual volumes into the Sherwood facility, so came through Mountaineer.

[Jerren Holder:]

Got it. Thank you. And I guess switching over to the Utica, we have seen, I guess, recently this week joint venture start up maybe taken away some of those gathering opportunities upside. Potentially, I think you guys highlighted your Analyst Day outside of our gathering focus. Can you talk a bit about kind of the opportunities you guys are still seeing out there outside of your, call it, Ohio Gathering Focus?

[Steve Newby:]

Yeah. I think you mentioned the regency on JV what I think -- I would say there is multiple other opportunities and there will be even additional opportunities in the years to come around the basin further south of our AMI, to east of our AMI, to the west of our AMI. So that will be the only project being done I would say from – And that was more of a trump line for dry gas. It’s been on the board for a while. It’s been on the board actually with PVR before Regency purchased them. So we’re still seeing a pretty active level. We’ll put it that way of opportunities around the footprint. And I would say a very active level of opportunities for expansion within the JV as well too. So --

[Jerren Holder:]

Okay, thanks.

[Steve Newby:]

We feel good that that $1.2 billion will grow over the next several years.

[Jerren Holder:]

Got it. Thanks. And one more, are you seeing any changes I guess in customer behaviour? We’re starting to see, I guess, some of your customers think about forming their own MLPs, maybe a little bit more serious about that than they have been in the past. Are you seeing maybe that they may be more likely to build some of their projects themselves versus say you think the services of other midstream providers like yourself? Are you seeing some of that behaviour changing?

[Steve Newby:]

Not really. Not from what has been over the last several years anyway. I think some of our customers that have midstream opportunities entirely would be a good one. Have had them for a while now and have had the focus on doing their own gathering in that instance, yet we’re still doing other things [indiscernible] their own [indiscernible] they are, I would say, our big customer in the Marcellus. So I don’t know that we’re seeing any kind of change there, see change of guys wanting to go out and do their own midstreams. It does require a fair amount of skill set and talent and people to build actually something or skill [indiscernible].

[Jerren Holder:]

Alright. Thank you.

[Steve Newby:]

In fact I’ll tell you Jerren to that the other way. We just experienced deal with Hess and obviously they have a fairly large footprint in the Bakken of their own midstream, I think so.

[Jerren Holder:]

Got it. Thanks.

[Operator:]

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

[Justin Agnew:]

Hi, good morning guys

[Steve Newby:]

Hi, Justin.

[Justin Agnew:]

Can you talk a little bit about the tightening of flaring rules up in the Bakken and then you can take us just to see on the Bison system really if at all? And then maybe to piggyback on that, any impacts from the Kodiak Whiting deal and any consolidation you see up there?

[Steve Newby:]

Yeah. Thanks, Justin. Let’s take the flaring first. I think everyone is keeping a close eye including us and operators and producers as well too. I would tell you overall it’s probably been so far it’s early but so far a positive for us and probably other folks and other of our peers. Mainly the benefit we’d seen so far is additional planning by producers and multi-year planning by producers as far as looking now in having to determine how they’re going to capture gas as they apply for drilling permission. So anytime we can get our customers to help or be with us on multi-year planning. That’s beneficial for us as you would imagine. So that’s been the primary benefit. I think we need to see how it plays out really over the next 12 months or so and it is fairly new and things are getting more defined as we get into it, but so far that’s been a positive. On Kodiak Whiting, second part of your question, we think it’s a positive. I think Whiting was pretty clear on the call announcing the acquisitions that they are going to increase rigs, Kodiak rigs from 7 to 12. We are going to add 5 rigs to the basin or to the Kodiak acreage. We think we’ll get some of those obviously in the Polar area. And then we had already previously announced the pretty large expansion that’s part of $300 million in capital with Kodiak anyway and so they’re ramping up in that area anyway. So we view it as a positive. I do think we’re starting to see acreage consolidation in and around our system. The SM transaction of them buying the Texas acreage I think in general positive essence of the customer [indiscernible] on the divide system already and they’re consolidating acreage up there and I think you’ll see more of that obviously in-- Look I think we’re well positioned to be service providers to those guys as they grow.

[Justin Agnew:]

Got it. Thanks. And then, there's been some talks about Denton County banning fracking. And I know none of your assets are directly in that County, but do you see any risk of any spillover or any NIMBYism to any of the DFW assets?

[Matt Harrison:]

We know Denton has got a history of -- This is not a new event for that area and so we think it’s fairly isolated in that area and we don’t see any spill-over. In fact as I mentioned in my comments couple of our customers, Vantage being the biggest one, is ramping up pretty significantly. So we don’t is the answer. I think we feel pretty good about that area and how the community interacts with the producers.

[Justin Agnew:]

Got it. Thanks, Matt. And then staying on DFW, I know there's expectations to grow volumes here in the back-half of the year. Can you maybe ballpark that for us, if you are comfortable doing that?

[Steve Newby:]

Yeah. I think as we’ve said before and pretty consistently our goal will really stay between the 350 million to 400 million range of DFW and we think we bottomed out at 350 really close to 350 million a day average for the first half of the year. So we think we’re going to see an increase in that still in that range through the second half of year. So that’s pretty incremental thoughts as you would imagine.

[Justin Agnew:]

Got it. Thanks. That’s it for me.

[Steve Newby:]

Next question.

[Operator:]

Thank you. (Operator Instructions). We have a question from Elvira Scotto from RBC Capital Markets. Please go ahead.

[Elvira Scotto:]

Hi. Can you provide a little more detail on this acquisition I think you’ve mentioned in here that the current throughput is about 30 million cubic feet a day? What’s the capacity and how do you expect this to grow alongside your DFW setting?

[Steve Newby:]

Yeah. The current capacity of Midstream is 30 million cubic feet really limited by compression capacity on a system. Today, there are two producers, one of which is Beacon. We expect them to be pretty active on this area into next year and so we do expect to see some volume growth around the system. The other thing that gets us is the potential into our existing system through pipe connections and give us some optionality potential on compression capacity as well too. That area can be expanded from a compression capacity standpoint pending things like afore-mentioned things like that. So it’s really for us a pretty, I would say, attractive, accretive build-on just south of our wide pad on our existing system for that are familiar with our math, I think, within a couple of miles of that pad site. So hopefully that gives you enough color to about 1000 acres, I believe, is what being added.

[Elvira Scotto:]

Got it. Great. Are you willing to share kind of a multiple that you paid for this?

[Steve Newby:]

You know it’s small, but it’s probably in the neighborhood of about 6 times or so.

[Elvira Scotto:]

Okay.

[Steve Newby:]

That’s probably a mix affordable on what’s currently planned for drilling.

[Elvira Scotto:]

Okay, great. And when you talked about the DFW system kind of in that range of 350 to 354 kind of grown in the back half, does that include this acquisition?

[Steve Newby:]

It does. This acquisition is not going to close until this month. So we’ll get a couple of months’ worth of that volume, but yes it does improve debt over.

[Elvira Scotto:]

Okay, great. And then just my final question, on the Zinnia loop how do you expect that to ramp over time?

[Steve Newby:]

Yes. It’s a good question. I think we’ve been wrong mostly on Mountaineer ramp but wrong in a good way. It’s been probably above our expectations, but we do believe there is gas ready and waiting to come on once MarkWest finishes their next train at Sherwood and I think that’s coming on toward the end of this month. I think it’s what they’re planning there. So they’re going to bring on another 200 million at a train. We think there is a fair amount of volumes waiting and we think we’ll get a good portion of those volumes through our system. So we’ll see a – again we think here at the end of the third quarter and we actually think Zinnia will get used here by the end of the third quarter as well too, which is quite honestly above our expectations. When we initiated the project we thought it actually would be utilized more towards the end of ’14 initially. So --

[Elvira Scotto:]

Okay, great. Thank you very much.

[Steve Newby:]

Yeah, thank you, great.

[Operator:]

Thank you. We have no further questions at this time. I would like to turn the call back to our speaker for closing comments.

[Steve Newby:]

Thanks, everybody for joining us. I hope everybody has great weekend and get through earning season lot and we’ll talk to you soon.

[Operator:]

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