Summit Midstream Partners, LP Reports Second Quarter 2016 Financial Results

THE WOODLANDS, Texas, Aug. 4, 2016 /PRNewswire/ -- Summit Midstream Partners, LP (NYSE: SMLP) announced today its financial and operating results for the three and six months ended June 30, 2016.  SMLP reported a net loss of $50.6 million for the second quarter of 2016 compared to a net loss of $2.4 million for the prior year period, primarily due to (i) a loss from equity method investees of $34.5 million related to a $37.8 million impairment charge, net to SMLP, associated with Ohio Gathering's 23 thousand barrel per day ("Mbbl/d") condensate stabilization facility, and (ii) $17.5 million of non-cash accretion expense related to the deferred purchase price obligation associated with the 2016 Drop Down transaction.  Net cash provided by operations totaled $64.7 million in the second quarter of 2016, compared to $57.3 million in the prior year period.  Adjusted EBITDA totaled $72.4 million and adjusted distributable cash flow totaled $51.1 million for the second quarter of 2016 compared to $61.9 million and $45.7 million, respectively, for the prior year period. 

Natural gas volume throughput averaged 1,512 million cubic feet per day ("MMcf/d") in the second quarter of 2016, a decrease of 2.5% compared to 1,550 MMcf/d in the prior year period, and a decrease of 0.7% compared to 1,523 MMcf/d in the first quarter of 2016.  Crude oil and produced water volume throughput in the second quarter of 2016 averaged 86.0 Mbbl/d, an increase of 36.7% compared to 62.9 Mbbl/d in the prior year period, and a decrease of 9.5% compared to 95.0 Mbbl/d in the first quarter of 2016.  All volume throughput metrics exclude SMLP's proportionate share of volume throughput from Ohio Gathering.

Steve Newby, President and Chief Executive Officer, commented, "SMLP reported another quarter of strong financial and operating results which were largely driven by sequential quarterly volume throughput growth across our Utica Shale gathering systems, together with continued progress on reducing expenses across each of our operating platforms.  Volume throughput on our wholly owned Summit Utica system increased by 26.5% over the first quarter of 2016 due to volume tailwinds from eight wells that were completed in the middle of the first quarter of 2016, and two new wells that were connected and began flowing late in the second quarter.  As expected, we saw flattening sequential quarterly volume growth on the Ohio Gathering system which increased by 5.5% over the first quarter of 2016.  Given our exposure to a vast acreage position spanning the condensate, liquids-rich, and dry gas windows of the Utica Shale, we continue to be optimistic about our prospects for continued volume and segment adjusted EBITDA growth from these assets. Overall, the assets included in the 2016 Drop Down transaction, which include our Utica, DJ, and additional Williston gathering systems, continue to perform in-line with the expectations we laid out at the time of the drop down.

Our Piceance, Barnett, Williston, and Marcellus assets are performing ahead of our prior expectations in the current commodity price environment and are benefiting from our fixed-fee business model and high level of long-term contractual underpinning in the form of minimum volume commitments.  These minimum volume commitments are performing as designed, providing SMLP with a high degree of cash flow stability during a period when challenging commodity prices are resulting in lower drilling activity and causing volumes from certain of our customers to decline or growth to slow. 

Given the year-to-date operating and financial performance of our assets, which are performing in-line with our expectations, we are increasing the midpoint of our 2016 adjusted EBITDA guidance by 2% to $280.0 million.  Our strong financial performance has also resulted in a distribution coverage ratio of 1.25x for the second quarter of 2016; for the first six months of 2016, our distribution coverage ratio was 1.27x.  As a result, we now expect our 2016 distribution coverage ratio will range from 1.15x to 1.25x in 2016 compared to prior guidance of 1.10x to 1.20x."

SMLP reported a net loss of $54.2 million for the first six months of 2016 compared to a net loss of $4.9 million for the prior year period.  Net cash provided by operations totaled $131.5 million in the first six months of 2016, compared to $105.0 million in the prior year period.   SMLP reported adjusted EBITDA of $142.4 million and adjusted distributable cash flow of $103.8 million compared to $123.5 million and $88.7 million, respectively, for the prior year period.  Natural gas volume throughput averaged 1,518 MMcf/d for the first six months of 2016 compared to 1,577 MMcf/d in the prior year period.  Crude oil and produced water volume throughput averaged 90.5 Mbbl/d in the first six months of 2016 compared to 58.1 Mbbl/d in the prior year period.

SMLP's financial results for the six months ended June 30, 2016 and 2015 and the three months ended June 30, 2015 include the historical financial results from (i) its May 2015 acquisition from Summit Investments of the Polar and Divide system (the "Polar and Divide Drop Down"), and (ii) its March 2016 acquisition from Summit Investments of substantially all of (a) Summit Utica, Meadowlark Midstream and Tioga Midstream, and (b) Summit Investments' 40.0% ownership interest in each of Ohio Gathering and Ohio Condensate (collectively, "Ohio Gathering") (the "2016 Drop Down").  Because of the common control aspects of the acquired assets, the Polar and Divide Drop Down and the 2016 Drop Down were each deemed a transaction between entities under common control and, as such, have been accounted for on an "as-if pooled" basis for all periods in which common control existed. 

Second Quarter 2016 Segment Results

Utica Shale

The Utica Shale reportable segment includes our ownership interest in Ohio Gathering, a natural gas gathering system in service and under development spanning the condensate, liquids-rich and dry gas windows of the Utica Shale in Harrison, Guernsey, Noble, Belmont and Monroe counties in southeastern Ohio.  Ohio Gathering also includes our ownership interest in Ohio Condensate, a 23 Mbbl/d condensate stabilization facility located in Harrison County, Ohio.  Segment adjusted EBITDA for the Utica Shale includes our proportional share of adjusted EBITDA from Ohio Gathering, based on a one-month lag.

The Utica Shale reportable segment also includes Summit Utica, our wholly owned natural gas gathering system currently in service and under development in Belmont and Monroe counties in southeastern Ohio.  Summit Utica gathers and delivers dry natural gas to interconnections with a third-party intrastate pipeline. 

Segment adjusted EBITDA for the second quarter of 2016 totaled $17.5 million, up 172% from $6.4 million in the prior year period, primarily due to higher volume throughput across the Ohio Gathering and Summit Utica systems.  Volume throughput on the Ohio Gathering system averaged 937 MMcf/d in the second quarter of 2016 compared to 526 MMcf/d in the prior year period and 888 MMcf/d in the first quarter of 2016.  Volume throughput on the Summit Utica system averaged 167 MMcf/d in the second quarter of 2016 compared to 16 MMcf/d in the prior year period and 132 MMcf/d in the first quarter of 2016.  Volume throughput for the second quarter of 2016 increased due to our continued buildout of the Summit Utica gathering system and our connection of eight new wells midway through the first quarter of 2016 and two new wells late in the second quarter of 2016.  SMLP expects to complete the third dehydration station on the Summit Utica system in the third quarter of 2016, and we expect to see an immediate increase in volumes related to this facility.  We also expect to add compression capacity to these dehydration stations, as needed, over the next several years, offering our customers an incremental service, with associated fees.

Williston Basin

The Bison Midstream, Polar and Divide, and Tioga Midstream systems provide our midstream services for the Williston Basin reportable segment.  Bison Midstream gathers associated natural gas from pad sites located in Mountrail and Burke counties in North Dakota and delivers to third-party pipelines serving a third-party processing plant in Channahon, Illinois.  The Polar and Divide system gathers crude oil from pad sites located in Williams and Divide counties in North Dakota and delivers to the COLT and Basin Transload rail terminals, as well as third-party pipeline infrastructure.  SMLP is evaluating additional projects to enhance the interconnectivity of our Polar and Divide crude oil gathering system by adding new delivery points with new long-haul pipelines serving the basin.  The Polar and Divide system also gathers and delivers produced water to various third-party disposal wells in the region.  Tioga Midstream is a crude oil, produced water, and associated natural gas gathering system in Williams County, North Dakota.  All crude oil and natural gas gathered on the Tioga Midstream system is delivered to third-party pipelines, and all produced water is delivered to third-party disposal wells.

Segment adjusted EBITDA for the Williston Basin segment totaled $19.2 million for the second quarter of 2016, up 52.0% from the prior year period, primarily due to higher liquids and natural gas volumes, together with the commencement of the Stampede Lateral which was placed into service in the first half of 2016. 

Liquids volumes averaged 86.0 Mbbl/d in the second quarter of 2016, an increase of 36.7% over the prior year period and a decrease of 9.5% compared to the first quarter of 2016.  Liquids volumes were positively impacted by producers completing new drilled but uncompleted ("DUC") wells across our gathering footprint in late 2015 and into 2016, together with the connection of pad sites that were previously served by third-party trucks.  Volume declines in the second quarter of 2016, relative to the first quarter of 2016, were impacted by customers shutting in existing production from nearby pad sites while completion activities occurred on more than 20 DUCs behind our gathering system.  We expect our customers to turn these DUCs to sales in the second half of 2016 and to continue their ongoing completion of DUCs in our area throughout the balance of 2016.

Compared to the second quarter of 2015, associated natural gas volumes increased 4.3% to 24 MMcf/d in the second quarter of 2016, which was driven by increased volumes associated with the development of the Tioga Midstream system throughout 2015 and into the first half of 2016.  Segment adjusted EBITDA growth in the second quarter of 2016, relative to the prior year period, was partially offset by lower margins associated with a percent-of-proceeds contract on the Bison Midstream system.   

Piceance/DJ Basins

The Grand River and the Niobrara G&P systems provide our midstream services for the Piceance/DJ Basins reportable segment.  These systems provide natural gas gathering and processing services for producers operating in the Piceance Basin located in western Colorado and eastern Utah and in the Denver-Julesburg ("DJ") Basin located in northeastern Colorado. 

Segment adjusted EBITDA totaled $26.2 million for the second quarter of 2016, down 7.0% from the prior year period.  Second quarter 2016 volume throughput averaged 564 MMcf/d, a decrease of 8.0% from 613 MMcf/d in the prior year period and a decrease of 1.4% from the first quarter of 2016, primarily as a result of our anchor customer's continued suspension of drilling activities in the basin and the resulting natural declines from existing production.  The impact of these volume declines was partially offset by higher minimum volume commitment ("MVC") shortfall payment adjustments associated with certain of our customers' gas gathering agreements.  Lower commodity prices in the second quarter of 2016, compared to the prior year period, also negatively impacted the margins we earned from our Grand River percent-of-proceeds contracts and condensate revenue. 

New customers have recently acquired acreage positions in the Piceance and DJ basins.  We have already begun to see, and we expect to continue to see, these new customers, who are well capitalized and focused exclusively on these basins, increase drilling activity in the near term, relative to the last twelve months.

Barnett Shale

The DFW Midstream system provides our midstream services for the Barnett Shale reportable segment.  This system gathers and delivers low-pressure natural gas received from pad sites, primarily located in southeastern Tarrant County, Texas, to downstream intrastate pipelines serving various natural gas hubs in the region. 

Segment adjusted EBITDA for the Barnett Shale segment totaled $13.9 million for the second quarter of 2016, down 10.5% from the prior year period primarily due to 4.2% lower volume throughput.  Volume throughput of 341 MMcf/d in the second quarter of 2016 was flat with the first quarter of 2016 due to the commissioning of an 11-well pad site during the quarter which offset the natural declines from existing production across the system.  A customer on the DFW Midstream system has another six recently drilled wells on an existing pad site in our service area, which we expect to begin producing in the fourth quarter of 2016.

Marcellus Shale

The Mountaineer Midstream system provides our midstream services for the Marcellus Shale reportable segment. This system gathers high-pressure natural gas received from upstream pipeline interconnections with Antero Midstream Partners, LP and Crestwood Equity Partners LP.  Natural gas on the Mountaineer Midstream system is delivered to the Sherwood Processing Complex located in Doddridge County, West Virginia. 

Segment adjusted EBITDA for the Marcellus Shale segment totaled $4.8 million for the second quarter of 2016, down 22.0% from the prior year period.  Volume throughput for this segment averaged 416 MMcf/d in the second quarter of 2016, a 23.2% decrease from 542 MMcf/d in the prior year period and an 8.2% decrease from 453 MMcf/d in the first quarter of 2016.  Lower volumes in the second quarter of 2016 resulted from our customer's decision to defer the completion of an estimated 50 Marcellus wells (32 identified behind the Mountaineer Midstream system) since 2015.  We expect our customer will continue to defer the completion of approximately 22 of the 32 identified wells until 2017.  Volume throughput during the second quarter of 2016 was also impacted by approximately 20 MMcf/d due to operational downtime at the Sherwood Processing Complex which limited the amount of natural gas we could deliver for a period of time during the quarter.  The facility was fully operational in early July 2016 and volume throughput on the Mountaineer system resumed flowing at levels commensurate with levels we experienced prior to the downtime.   

The following table presents average daily throughput by reportable segment:

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MVC Shortfall Payments

SMLP billed its customers $5.4 million in the second quarter of 2016 because those customers did not meet their MVCs.  For those customers that do not have credit banking mechanisms in their gathering agreements, or have no ability to use MVC shortfall payments as credits, the MVC shortfall payments from these customers are accounted for as gathering revenue in the period that they are earned. 

For the second quarter of 2016, SMLP recognized $4.9 million of gathering revenue associated with MVC shortfall payments from certain customers in the Marcellus Shale, Piceance/DJ Basins, and Barnett Shale reportable segments.  MVC shortfall payment adjustments in the second quarter of 2016 totaled $11.1 million and included $0.6 million of deferred revenue related to MVC shortfall payments and $10.6 million related to MVC shortfall payment adjustments from certain customers in the Piceance/DJ Basins, Williston Basin, and Barnett Shale reportable segments.

The net impact of SMLP's MVC shortfall payment mechanisms increased adjusted EBITDA by $16.0 million in the second quarter of 2016.

 

 

Capital Expenditures

SMLP recorded total capital expenditures of $30.0 million in the second quarter of 2016, including approximately $5.3 million of maintenance capital expenditures.  Development activities during the second quarter of 2016 were primarily related to the ongoing expansion of our wholly owned Summit Utica natural gas gathering system as well as the continued development of certain pipeline and compression expansion projects in the Williston and Piceance/DJ basins.  

Capital & Liquidity

As of June 30, 2016, SMLP had $529.0 million of available borrowing capacity under its $1.25 billion revolving credit facility, subject to covenant limits.  Based upon the terms of SMLP's revolving credit facility and total outstanding debt of $1.32 billion, total leverage (as defined in the credit agreement) as of June 30, 2016 was 4.50 to 1.0.

Through December 31, 2016, the upper limit of SMLP's total leverage ratio is 5.50 to 1.0.  The total leverage ratio upper limit can be permanently increased from 5.00 to 1.0 to 5.50 to 1.0 any time, at SMLP's option, subject to the inclusion of a senior secured leverage ratio (as defined in the credit agreement) upper limit of 3.75x. 

Deferred Purchase Price Obligation

The consideration for the 2016 Drop Down consisted of (i) an initial $360.0 million cash payment (the "Initial Payment") which was funded on March 3, 2016 with borrowings under SMLP's revolving credit facility and (ii) a deferred payment which will be paid no later than December 31, 2020 (the "Deferred Purchase Price Obligation" or the "Deferred Payment," as defined below).  At the discretion of the board of directors of SMLP's general partner, the Deferred Payment can be made in either cash or SMLP common units, or a combination thereof.

The Deferred Payment will be equal to: (a) six-and-one-half (6.5) multiplied by the average adjusted EBITDA of the 2016 Drop Down Assets for 2018 and 2019; less (b) the Initial Payment; less (c) all capital expenditures incurred for the 2016 Drop Down Assets between March 1, 2016 and December 31, 2019; plus (d) all adjusted EBITDA from the 2016 Drop Down Assets between March 1, 2016 and December 31, 2019.  SMLP currently estimates that the Deferred Payment will be approximately $800.0 million to $900.0 million.

2016 SMLP Financial Guidance

SMLP revised its 2016 adjusted EBITDA guidance from a previous range of $260.0 million to $290.0 million to a new range of $270.0 million to $290.0 million.  SMLP is reaffirming its capex guidance of $150.0 million to $200.0 million, including maintenance capex of $15.0 million to $20.0 million.  SMLP's 2016 capex guidance also reflects the inclusion of our contributions to equity method investees.  SMLP expects to report an average full year 2016 distribution coverage ratio of 1.15x to 1.25x.

Quarterly Distribution

On July 21, 2016, the board of directors of SMLP's general partner declared a quarterly cash distribution of $0.575 per unit on all of its outstanding common units, or $2.30 per unit on an annualized basis, for the quarter ended June 30, 2016.  This distribution will be paid on August 12, 2016, to unitholders of record as of the close of business on August 5, 2016. This distribution represents an increase of $0.005 per unit, or 0.9%, over the distribution paid in respect of the second quarter of 2015 and is flat to the $0.575 per unit distribution paid in respect of the first quarter of 2016.

Second Quarter 2016 Earnings Call Information

SMLP will host a conference call at 10:00 a.m. Eastern on Friday, August 5, 2016, to discuss its quarterly operating and financial results.  Interested parties may participate in the call by dialing 847-585-4405 or toll-free 888-771-4371 and entering the passcode 43028964.  The conference call will also be webcast live and can be accessed through the Investors section of SMLP's website at www.summitmidstream.com.

A replay of the conference call will be available until August 19, 2016, at 11:59 p.m. Eastern and can be accessed by dialing 888-843-7419 and entering the replay passcode 43028964#.  An archive of the conference call will also be available on SMLP's website.

Upcoming Investor Conference

Members of SMLP's senior management team will participate in the 2016 Citi One-on-One MLP/Midstream Infrastructure Conference being held in Las Vegas, Nevada on August 17, 2016 and August 18, 2016.  The presentation materials associated with this event will be accessible through the Investors section of SMLP's website at www.summitmidstream.com prior to the beginning of the conference.

Use of Non-GAAP Financial Measures

We report financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). We also present EBITDA, adjusted EBITDA, distributable cash flow and adjusted distributable cash flow. We define EBITDA as net income or loss, plus interest expense, income tax expense, and depreciation and amortization, less interest income and income tax benefit.  We define adjusted EBITDA as EBITDA plus our proportional adjusted EBITDA for equity method investees, adjustments related to MVC shortfall payments, deferred purchase price obligation expense, impairments and other noncash expenses or losses, less income (loss) from equity method investees and other noncash income or gains.  We define distributable cash flow as adjusted EBITDA plus cash interest received and cash taxes received, less cash interest paid, senior notes interest adjustment, cash taxes paid and maintenance capital expenditures. Our definitions of these non-GAAP financial measures may differ from the definitions of similar measures used by other companies.  Management uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our financial performance. Furthermore, management believes that these non-GAAP financial measures may provide users with additional meaningful comparisons between current results and results of prior periods as they are expected to be reflective of our core ongoing business. These measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.  Reconciliations of GAAP to non-GAAP financial measures are attached to this release.

Comparability Related to Drop Down Transactions

With respect to drop down transactions, SMLP's historical results of operations may not be comparable to its future results of operations.  In March 2016, SMLP acquired substantially all of the issued and outstanding membership interests of Summit Utica, Meadowlark Midstream and Tioga Midstream from Summit Investments, as well as substantially all of Summit Investments' 40% equity interest in each of Ohio Gathering and Ohio Condensate. In May 2015, SMLP acquired the assets comprising the Polar and Divide system from two subsidiaries of Summit Investments.  SMLP accounted for the 2016 Drop Down and the Polar and Divide Drop Down on an "as-if pooled" basis because these transactions were executed by entities under common control.  As such, SMLP's consolidated financial statements reflect Summit Investments' fair value purchase accounting, historical cost of construction, and the results of operations of (i) Summit Utica since December 2014, (ii) Meadowlark Midstream (which includes Niobrara G&P and certain crude oil and produced water pipelines reported as part of Polar & Divide) since February 2013, (iii) Tioga Midstream since April 2014, (iv) Ohio Gathering and Ohio Condensate since January 2014, and (v) Polar and Divide since February 2013, as if SMLP had owned and operated these assets during the common control period.

About Summit Midstream Partners, LP

SMLP is a growth-oriented limited partnership focused on developing, owning and operating midstream energy infrastructure assets that are strategically located in the core producing areas of unconventional resource basins, primarily shale formations, in the continental United States. SMLP provides natural gas, crude oil and produced water gathering services pursuant to primarily long-term and fee-based gathering and processing agreements with customers and counterparties in five unconventional resource basins: (i) the Appalachian Basin, which includes the Marcellus and Utica shale formations in West Virginia and Ohio; (ii) the Williston Basin, which includes the Bakken and Three Forks shale formations in North Dakota; (iii) the Fort Worth Basin, which includes the Barnett Shale formation in Texas; (iv) the Piceance Basin, which includes the Mesaverde formation as well as the Mancos and Niobrara shale formations in Colorado and Utah; and (v) the Denver-Julesburg Basin, which includes the Niobrara and Codell shale formations in Colorado.  SMLP also owns substantially all of a 40% ownership interest in Ohio Gathering, which is developing natural gas gathering and condensate stabilization infrastructure in the Utica Shale in Ohio.  SMLP is headquartered in The Woodlands, Texas, with regional corporate offices in Denver, Colorado and Atlanta, Georgia.

About Summit Midstream Partners, LLC

As of June 30, 2016, Summit Midstream Partners, LLC ("Summit Investments") beneficially owned a 44.8% limited partner interest in SMLP and indirectly owns and controls the general partner of SMLP, Summit Midstream GP, LLC, which has sole responsibility for conducting the business and managing the operations of SMLP. Summit Investments is a privately held company controlled by Energy Capital Partners II, LLC, and certain of its affiliates.  As of June 30, 2016, an affiliate of Energy Capital Partners II, LLC directly owned an 8.9% limited partner interest in SMLP.

Forward-Looking Statements

This press release includes certain statements concerning expectations for the future that are forward-looking within the meaning of the federal securities laws. Forward-looking statements contain known and unknown risks and uncertainties (many of which are difficult to predict and beyond management's control) that may cause SMLP's actual results in future periods to differ materially from anticipated or projected results.  An extensive list of specific material risks and uncertainties affecting SMLP is contained in its 2015 Annual Report on Form 10-K as updated and superseded by the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2016, and as amended and updated from time to time. Any forward-looking statements in this press release are made as of the date of this press release and SMLP undertakes no obligation to update or revise any forward-looking statements to reflect new information or events.

 

 

 

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SOURCE Summit Midstream Partners, LP