Summit Midstream Partners, LP
Q4 2014 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Welcome to the First Quarter 2015 Summit Midstream Partners, LP Earnings Conference Call. My name is Christine, and I'll 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'll now turn the call over to Marc Stratton, you may begin.

[Marc Stratton:]

Thanks operator and good morning everyone. Thank you for joining us today as we discuss our financial and operating results for the first quarter of 2015 as well as our Polar & Divide drop down announcement which was included in our first quarter 2015 earnings release.. If you don't already have a copy of the first quarter earnings release, please visit our website at www.summitmidstream.com you’ll find it on the homepage or in the News section. With me today to discuss our quarterly earnings and the drop down transaction are 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 which was filed with SEC on March 2, 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 on the call this morning. I’ll begin today by discussing our first quarter highlights including some high level details on the recently announced drop down of our Polar & Divide gathering systems in the Williston Basin. Then I’ll turn it over to Matt for additional details on our first quarter financial results. I’ll then end the call with additional comments on the drop down announcement and importantly the impact it will have on our 2015 financial guidance. So to begin, last night we made three major announcements, first we announced the drop down of certain of our crude oil and produced water gathering assets in the Bakken from Summit Investments for $255 million. The transaction also includes an option held by held by SMLP to purchase the Stampede Lateral project, a crude transmission line that is currently in development. We expect the option to be exercised by SMLP before the end of the third quarter of 2015. All-in cost of the drop down transaction including the additional $35 million option and approximately $75 million of growth CapEx that we expect to incur through the end of 2016 will be executed at a 7.8 times multiple of 2016 projected EBITDA. We expect the transaction will be immediately accretive to SMLP’s distributable cash flow on a per unit basis. Further we expect significant accretion to accretion to DCF per unit in 2016 and beyond, given the cash flow ramp profile of the assets that are being acquired. Second announcement, we announced our financial and operating results for the first quarter of 2015 which were in line with our internal expectations including our 2015 financial guidance from our fourth quarter 2014 earnings call in late February. And then finally, we announced the launch of a primary equity offering of 6.5 million units to finance a portion of the Polar & Divide drop down as well as future expected growth CapEx that will accompany this transaction. During today’s call, we will discuss our earnings results and the asset drop down in greater detail but as you probably know we cannot discuss the equity deal given we are currently in the market. First on our first quarter financial results, for the quarter we reported adjusted EBITDA of $50 million which was up 7.3% over the first quarter of 2014 and up 2.2% over the fourth quarter of 2014. Adjusted DCF for the first quarter totalled $36 million which was up 6.8% over the first quarter of 2014 and up 2.4% over the fourth quarter of 2014. On April 23, we announced our first quarter distribution of $0.565 per unit, which represented a 13% increase over the first quarter of 2014 and a 0.9% increase over the fourth quarter of 2014. This was our tenth consecutive quarterly increase in our distribution since going public and since in September of 2012. Our distribution coverage ratio for the quarter was 1.01 times. Our strong quarterly financial performance was underpinned by record volume throughput which averaged 1.6 Bcf a day. SMLP’s total volumes increased almost 21% versus the first quarter of 2014 and were up 6.2% sequentially over the fourth quarter of 2014. Volume growth was led by our Marcellus asset, Mountaineer, and our Barnett asset DFW Midstream. As expected, Mountaineer volumes continue to grow throughout the first quarter 2015 and average 547 million cubic feet a day for the quarter, an increase of 19% over the fourth quarter. As drilling activity in a newly commissioned compressor station of our gathering system created new sources of gas for Mountaineer. While quarterly volume growth was strong, we continue to expect volume growth to begin to moderate in the second quarter of this year and a decline throughout the second half of the year. Overall we still expect Mountaineer to show strong annual volume growth when comparing 2015 to 2014. Quarterly volume growth was also strong at DFW where average daily throughput was 403 million cubic feet a day in the first quarter. This throughput was 15.6% higher than the first quarter of 2014 and was up 8.2% over the fourth quarter. DFW volume growth was driven by number of new well connections that occurred in late fourth quarter of 2014 which help boost first quarter volumes over 400 million cubic feet, the highest volume quarter for DFW since the first quarter of 2013. Additional drilling took place during the first quarter of 2015 and associated completion activity is expected over the next several months which we expect will serve as a catalyst for future volume growth beginning in the third quarter of 2015. Strong volume growth at DFW and Mountaineer help offset volume declines at our Bison and Grand River systems. Bison volumes averaged 18 million cubic feet for the quarter, which was in line with our previous release guidance. Drilling activity in the Bison system, particularly from Oasis, slowed during the quarter. We also commissioned our Middle Cottonwood compressor station in early April, which led to some downtime in late March, which had a negative impact on quarterly volumes. On Grand River, volumes averaged 615 million cubic feet a day in the first quarter which was down 7.5% from the first quarter of 2014 and down 3.5% sequentially over the fourth quarter of 2014. Volume declines were primarily associated with Encana's continued lack of drilling activity in the area. As we have noted in the past, we are highly contracted on Grand River and volume declines should not necessarily affect our cash flow from the area. In fact, the MVC shortfall adjustment from our anchor customer on the Grand River system increased from $4.3 million in the fourth quarter of 2014 to $5.5 million in the first quarter of 2015 underscoring the importance of our MVC protection embedded in our gathering agreements in this area. Our guidance for 2015 includes no additional activity for Encana in the area and we are also cautious on additional activity with our other customers including Ursa and WPX given current commodity prices. So with that, I’ll turn it over to Matt to review the quarterly financial results in more detail before I conclude our formal remarks.

[Matt Harrison:]

Thanks Steve. I will cover the results of Summit Midstream Partners, LP or SMLP. Adjusted EBITDA for the three months ended March 31 2015 was $50 million compared to $46.6 million for the three months ended March 31 2014. An increase of approximately 7%. The $3.4 million increase in adjusted EBITDA was primarily due to the increase in volumes throughput on the Mountaineer Midstream and DFW Midstream systems. Also adjusted EBITDA for the first quarter of 2014 included $500,000 of transaction cost related to the Red Rock drop down transaction. Adjusted EBITDA in the first quarter of 2015 included approximately $13.6 million related to MVC mechanisms from our gas gathering contracts. This amount included $1.3 million of minimum shortfall payments that are recognized as gathering revenue, $3.7 million associated with a net increase in deferred revenue related to MVC shortfall payments. And $8.6 million associated with quarterly adjustments related to future projected annual MVC shortfall payments. Additional gathered detail regarding MVC is included in our first quarter earnings release. SMLP reported net income of $1.7 million for the three months ended March 31, 2015 compared to net income of $6.4 million in the first quarter of 2014. Adjusted distributable cash flow totalled $36 million in the first quarter of 2015. This implies a distribution coverage ratio of 1.01 times relative to the first quarter distribution of $0.565 per limited partner unit to be paid on May 15, 2015. CapEx for the first quarter of 2015 was approximately $11.9 million of which approximately $2.5 million was classified as maintenance CapEx. With $196 million drawn on our revolving credit facility at March 31, 2015 the borrowing capacity under our $700 million revolving credit facility was approximately $504 million at March 31, 2015. Total leverage as of March 31, 2015 was 3.9 times. Last night, SMLP announced that it has executed an agreement to acquire the Polar & Divide system from a subsidiary of Summit Investments, the owner of our general partner for $255 million. The drop down transaction is expected to close before May 31, 2015. SMLP revised its 2015 adjusted EBITDA guidance from a previous range of $195 million to $210 million to a new range of $210 million to $225 million. It is important to note that SMLP is acquiring the Polar & Divide system from affiliate of our general partner, this transaction will be considered an acquisition from an entity under common control. Therefore, the Polar & Divide drop down acquisition will be accounted for on an asset pool basis for all the periods in which common control existed resulting in a combination of SMLP and the Polar & Divide results beginning on February 15, 2013. Therefore revised adjusted EBITDA guidance for 2015 reflects a full year of Polar & Divide’s results including approximately $5 million of adjusted EBITDA in the first quarter of 2015. After that, I'll turn the call back over to Steve.

[Steve Newby:]

Thanks Matt. Yesterday we announced a $255 million drop down transaction of certain crude oil, and produced water gathering assets and crude oil transmission pipeline is comprising the vast majority of our Polar & Divide assets in the Williston Basin. The assets include 295 miles of crude oil and produced water pipelines and by year end 2015 will include 95,000 barrels of crude oil storage and five truck unloading stations. In addition, the dropdown includes an option for SMLP to purchase the Stampede Lateral project for an additional $35 million, when certain development milestones are met. The assets being dropped down which we referred to as our Polar & Divide system include a large portion of our developed North Dakota crude oil and produced water assets. The drop down excludes our Blacktail crude oil and produced water gathering assets and our Togo crude oil produced water and associated gas gathering assets, both of which are located in Williams County, North Dakota and are still in earlier stages of development. Over the past two years, Summit Investments has built up Polar & Divide system which sits in the core of the Bakken Shale in Williams County and extends north to Divide County where it is servicing SM Energy's Gooseneck acreage, which is targeting the Three Forks production zone. Also in Divide, we are finalized our development of truck unloading and crude oil storage station which we believe will attract barrels that are currently being gathered by truck and reduced road traffic and expense for producers in this part of the Williston Basin. Contractually, the Polar & Divide system is underpinned by three producers including Whiting Petroleum in Savannah in the core Williams County and SM Energy in Divide County. We tend to get a lot of questions about Divide County and SM’s development activities there but I'll encourage everyone to review SM's public disclosures on that area, which they refer to as their Gooseneck acreage. As the gatherer of that area, I'll tell you that we are seeing them having a very good success rate in drilling Three Forks wells in Divide County and they remain very active in the area. All three of our anchored customers are under the long-term fee based gathering arrangements with several containing contractual protections in the form of look-back rate redetermination mechanisms. Basically if the produce does not ship a minimum amount of volumes during a certain period, our rate adjusts upward on future volumes to protect SMLP from the revenue standpoint. On the Stampede Lateral project, our anchored customer is Global Partners who is executing a long-term contract on that pipeline with minimum volume commitments. Stampede Lateral will be a 46-mile crude oil transmission pipeline extending from our Divide Pump Station to the Stampede rail terminal. Global will use the Divide Pump Station and the Stampede Lateral to source and transport barrels to the rail terminal in order to procure crude oil supply for their refinery customers on the East Coast. The Stampede Lateral has a total throughput capacity of 50,000 barrels a day. We expect the MLP to exercise the option by the end of the third quarter and then for the pipeline to be fully constructed and operational by fiscal year end 2015. We expect to close the drop down transaction by the end of May and as I mentioned the options will be exercised and closed by SMLP by the end of August. The transaction will be financed with a $6.5 million unit primary equity offerings that we launched last night and drawn our $700 million revolver. In conjunction with the transaction, we are revising our 2015 guidance to $210 million to $225 million of adjusted EBITDA. As previously discussed on our last call, we anticipate distribution growth of 7% to 8% for 2015 assuming the lower end of our $400 million to $800 million drop down guidance. So you can infer that this transaction gives us most of the way to that target. I'd also like to add or reiterate a point that we have made in the past which is we’d like to market to view our drop down strategy over the course of the next three years versus how the timing lays out in anyone calendar year. In other words, we feel very confident on an average of $400 million to $800 million of drop downs in the next three years but things maybe lumpy as it relates to calendar years especially during this commodity environment which tends to slow the pace of development, also the 7% to 8% is distribution growth this fourth quarter of 2014 to fourth quarter of 2015 growth. When you look at total distribution growth year-over-year from 2014 to 2015 we would expect that to be 9.5% to 10.5%. The transaction continues our strategy of developing assets at our GP and then dropping down those assets to SMLP, when the assets reach a certain point in their development lifecycle and the associated cash flows are sufficiently de-risked. It also continued to display the support our general partner provides our MLP. The transaction multiple for this deal is approximately 7.8 times expected 2016 EBITDA and the deal is immediately accretive to SMLP even though we still have some further development to execute on during 2015 and cash flow is still ramping up. Overall, I would like to highlight the fact that in the past two years we have dropped down nearly $815 million of assets from Summit Investments to SMLP. The drop down multiples of our last three transactions have ranged from 7.8 to 9.3 times. We also continue to maintain a portfolio of approximately $2 billion of additional development which will be dropped down over the next several years. This development capital includes our large scale development which are ongoing in the Utica Shale. So our strategic plan of significantly expanding and diversifying our MLP continues to be executed even during a difficult commodity price environment. We believe this transaction is very attractive to long-term growth profile of SMLP and this profile will be further enhanced with the addition of our large scale developments in the Utica when those are ready to be offered to the MLP. As you look forward and beginning to include the impact of our large Utica developments in our profile, we will go from 0% of our cash flow today coming from the Utica to an expected 40% by 2019. The growth in this area and the growth overall that will come from our general partner will lead to what we believe is very attractive distribution growth for our unitholders. With that I will open it for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have the question from Derek Walker from Bank of America. Please go ahead.

[Derek Walker:]

Hey good morning guys.

[Steve Newby:]

Hey Derek.

[Derek Walker:]

I appreciate the color. Congrats on the drop down. I just wanted to sort of reconcile the guidance here from what you guys had previously. I think it was, correct me if I'm wrong, it was $195 million to $210 million then excluded dropdowns. And now you have this I think $210 million to $225 million. So I guess just backing out the drop down, what's really looks like the kind of comparable guidance as we see if there is any change in that sort of base business?

[Steve Newby:]

Yes hi Derek, it’s Steve. So let me try to bridge and walk you through. So if you look at that you’re right, $195 million to $210 million was previous guidance, we’re still within that range probably in the lower part of that range with base business and then we would expect the drop down that contributes somewhere around $20 million this year and that is calendar 2015 and then it’s ramping up pretty significantly and you probably can do the math on your own on the 7.8 times 2016. So that should, I think that will bridge.

[Matt Harrison:]

And then also Derek, I just want to be clear that we expect when we pool the assets for the first quarter, that approximately $5 million will come from these assets.

[Derek Walker:]

Got it. So that $20 million you mentioned that includes that pooling of $5 million?

[Matt Harrison:]

You got it.

[Derek Walker:]

Got it. Okay, well that is helpful. And then Steve, sorry, I kind of missed the remarks around the distribution growth, can you just kind of reiterate those? I think you said it was…

[Steve Newby:]

Yes we were 3% to 4% without dropdowns, 7% to 8% on the lower end of our $400 million to $800 million drop down guidance that is what we previously disclosed. That is staying the same, I think what you can refer from this transaction is we get, we get most of the way there on the 7% to 8% and we’re still comfortable with our $400 million to $800 million average per year, what the commentary I made as we like for that to be viewed a little bit longer than just any calendar year really over the next couple of years just because of a lumpiness of the development assets and when they come down to the MLP. So but no change in previously released distribution guidance.

[Derek Walker:]

Okay great. And then that is how you go to the next drop down, but I guess have you guys thought about what the next sort of asset would be in the line-up?

[Steve Newby:]

Yes I mean I think our normal rhythm is sort of where they are on development cycle, and I would anticipate probably the next things that become ready is some of our Utica development.

[Derek Walker:]

Okay. Got it. And then the last one from me is just on the look-back rate adjustments. I guess are those - how often are those is that annually, semi-annually, I guess how does those actually work? And then…

[Steve Newby:]

I will give you little bit of color…

[Derek Walker:]

Without any restrictions almost the rate increase would be - go ahead.

[Steve Newby:]

Yes I’ll try to give you a little bit color without giving too much of confidential contractual information away, but they typically are after - a one-time look back after separated time, and that typically encompasses development and ramp of the area that you build now gathering to. And so that's usually how variance measured on a sort of total delivered barrel type mechanism. And then usually how it’s done is a three set for the licensing contract and it can only go - it really only moves up.

[Derek Walker:]

Okay. Okay, I appreciate it. Thanks guys.

[Steve Newby:]

Yes no worries, thank you.

[Matt Harrison:]

Thanks Derek.

[Operator:]

[Operator Instructions] We have no further questions. At this time, I will now turn the call back over to Steve Newby for closing comments.

[Steve Newby:]

We appreciate everybody joining this morning and obviously if you have follow-up questions reach out to our team. Have a good day, thanks.

[Operator:]

Thank you. And thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.