Summit Midstream Partners LP (NYSE:SMLP)
Q3 2020 Earnings Call
Nov 6, 2020, 10:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Welcome to the Q3 2020 Summit Midstream Partners, LP Earnings Conference Call. My name is John and I'll be your operator for today's call. [Operator Instructions]
And now, I'll turn the call over to Ross Wong, Senior Director of Corporate Development and Finance.
Ross Wong -- Senior Director, Corporate Development & Finance
Thanks, operator, and good morning, everyone. If you don't already have a copy of our earnings release that was issued earlier this morning, please visit our website at www.summitmidstream.com where you will find it on the homepage, Events & Presentations section or Quarterly Results section.
With me today to discuss our third quarter 2020 financial and operating results is Heath Deneke, our President, Chief Executive Officer and Chairman; Marc Stratton, our Chief Financial Officer; along with other members of our senior management team.
Before we start, I'd 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 2019 annual report on Form 10-K, which was filed with the SEC on March 9, 2020 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 use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release.
And with that, I will turn the call over to Heath. Great. Hey, thanks. Thank you, Ross, and good morning, everyone. Thanks for joining us on Summit's third quarter 2020 earnings call. So this morning, Summit reported third quarter 2020 adjusted EBITDA of $59.8 million and distributable cash flow of $38 million, which was slightly better than our expectations from earnings call that we had in early August. Approximately, 74% of our segment adjusted EBITDA originated from our assets where producer activity is driven by improving natural gas pricing, which highlights, we think, the benefits of our diversified gas weighted assets. SMLP generated $22.4 million of free cash flow in the third quarter, which was based on $41.4 million of cash from operations in the quarter, which was offset by $19.1 million of capital expenditures with those expenditures including roughly $11.2 million that SMLP used to fund the Double E project. Year-to-date, Summit has generated more than $100 million of free cash flow from its primarily fixed fee-based revenue streams and very modest capital expenditures that are required to support our, both our legacy and core systems, which by the way, have largely been built out over the past several years. So earlier in the year, as a reminder, we made the decision to suspend approximately $76 million of aggregate annual common and preferred equity distributions. And we reallocated our free cash flow to pursue a series of liability management activities that were designed to accelerate delevering and simplifying the balance sheet, reducing our fixed capital obligations and generating long-term equity value for our unitholders. Throughout the quarter, we continued to make significant progress on this front by completing and announcing several, several transactions. Since closing of the GP Buy-In Transaction in May, we have repurchased nearly $307 million of face value of our aggregate senior notes and reduced net indebtedness by more than $150 million relative to that at the end of 2019. This represents an approximate 10% reduction in net indebtedness since year-end 2019 or more than a half a turn reduction in leverage based on SMLP's latest 12-months adjusted EBITDA as of September 30th. Additionally, in July we exchanged approximately 62.8000[Phonetic] Series A Preferred Units for 12.3 million SMLP common units in a cashless exchange. Now this resulted in our ability to reduce the face value of SMLP aggregate Series A Preferred Units by approximately $62.8 million, which implies roughly an 84% discount based on the common unit trading price at the time of closing. On September 29th, after several months of negotiations, we were also able to announce a transaction support agreement to retire the $155.2 million non-recourse Term Loan at SMP Holdings. Now this was done through a consensual out of court restructuring, which also enabled us to fully settle the $181 million deferred purchase price obligation. So in connection with the closing of the Term Loan Restructuring, we plan to make a $26.5 million payment to SMP Holdings, which again, will represent and be utilized to fully settle and retire the $181.1 million DPPO. So SMP Holdings will use this cash together with the 34.6 million SMLP common units that are pledged as collateral for this loan as consideration provided to the Term Loan lenders. In exchange, the entire $155.2 million Term Loan will be forgiven and the non-economic General Partnership interest will be released from the associated collateral package. So the Term Loan Restructuring has garnered the consent from 100% of the lenders and we do expect the deal to close in the fourth quarter and of course at closing, both the DPPO as well as the Term Loan will cease to exist. So together with the Series A Preferred Equity Exchange, the senior note repurchases and the full settlement of the DPPO through the Term Loan Restructuring, the -- Summit has been able to eliminate more than $550 million of its fixed capital obligations since closing the GP Buy-In Transaction in May. These liability management transactions are highly accretive to SMLP's equity valuation given the substantial discounts that we've been able to capture really across the capital structure. And I believe that the company has substantially improved dispositioning for long term success as a result of these liability management initiatives. As we look forward, we will continue to look for opportunities to capture further value for our stakeholders through the liability management program, but we will also begin turning our attention to extending the remaining $234 million balance of our 5.5% senior notes, which mature in August of 2022 as well as our revolving credit facility that matures in May of 2022. Extending these maturities, we'll provide more runway for us to continue to generate significant amount of free cash flow that we'll use to further reduce our outstanding indebtedness and improve our overall credit metrics. We also continue to make excellent progress advancing the Double E projects, while able to -- being able to lock in significant savings relative to the original development budget. Despite the broader industry downturn, the Double E pipeline continues to be a critical natural gas infrastructure project that we believe is necessary to provide incremental takeaway capacity to help eliminate flaring and support further development of the northern Delaware Basin, which by the way, still remains one of the most economic regions for oil and gas production, really in the world. Though, a few months later than originally expected, we were pleased that FERC issued the 7(c) certificate, which authorize the project on October 15th. Now this approval is a key milestone for the development of the project and as importantly, enables us to begin advancing our plans to secure a third-party financing, which we expect will be sufficient to fund virtually all of our remaining Double E capital expenditures once it's in place. Now we expect to be in a position to close on our financing plans concurrently with the receipt of FERC's notice to proceed with construction, which we now expect to be obtained in the first quarter of 2021. So look, also since the last quarter, our Double E team, as I mentioned, has been very successful in locking down incremental capital savings relative to our original development budget. As it stands today, the total project cost is now expected to be less than $430 million, that's on a day's basis and in which -- at that level that represents an approximate 15% reduction in costs relative to our original budget that we had at FID. And by the way, that's an incremental reduction of roughly $20 million of cost savings or $20 million of additional savings relative to the estimate that we will tune it back in our -- during our second quarter earnings call back in August. So look, as a result, SMLP's 70% share of the development capital is now estimated to be approximately $300 million, of which, about $175 million remains to be spent as of the end of the third quarter. So look, we're very excited with the progress the team's making toward executing the project and we very much look forward to bringing Double E online toward the end of 2021. And so, with that update, I'd like to turn it over to Marc to discuss more of our details around some of our financial and segment results. Marc?
Marc Stratton -- Executive Vice President and Chief Financial Officer
Great. Thanks, Heath, and good morning, everyone. SMLP reported third quarter 2020 net income of $25.6 million, adjusted EBITDA of $59.8 million and distributable cash flow of $38 million.
Net income was positively impacted by a $24.7 million gain on early extinguishment of debt as a result of debt repurchases that we closed during the quarter. Capital expenditures totaled $7.9 million during the quarter, a decrease of 10.8% compared to the second quarter of 2020 and included maintenance capital expenditures of $3.5 million. We continue to maintain financial discipline and we'll work to minimize our capex going forward.
Due to receiving our FERC 7(c) approval later than expected in 2020 and based on our expectation that we won't receive our notice to proceed with construction until the first quarter of 2021, we now expect that SMLP will directly fund a total of $20 million to $30 million in Double E development capital in 2020. This is the primary reason for increasing our full-year 2020 capital expenditure guidance to a new range of $55 million to $65 million. Operated natural gas volumes averaged nearly 1.4 Bcf a day during the quarter, which was relatively flat compared to the second quarter of 2020.
The largest volume changes came from our Marcellus, DJ and Utica Shale reportable segment. Our Marcellus and DJ volumes increased by 64 million cubic feet a day in the aggregate. But those volumes were offset by a 64 million a day decrease on our Utica segment, primarily due to a five-well pad site representing more than 150 million cubic feet a day, which was shut-down from mid-June through mid-August.
Quarterly liquids volumes decreased by 9.2% from the second quarter of 2020, primarily due to natural declines and limited activity from customers in our Williston Basin segment. In general, our operating and financial results across most of our assets improved steadily throughout the third quarter as customers returned previously shut-in production to service and new wells driven largely by strengthening natural gas prices were turned-in-line.
Given that most of the temporary production shut-ins that impacted our financial results in the second and third quarters have been restored or are in the process of being restored, we continue to expect full-year 2020 adjusted EBITDA to be within our $250 million to $260 million guidance range.
Now, touching on the segments that comprised our core focus areas. The Utica Shale segment averaged 352 million cubic feet a day in the third quarter and segment adjusted EBITDA totaled $7.5 million, which was down by 30% or $3.2 million from the second quarter of 2020. As I just mentioned, this decrease was primarily due to the shut-in of a 150 million a day, five-well pad site through mid-August. Producers behind our SMU system completed 10 new wells during the third quarter, seven of which were turned-in-line upstream of the TPL-7 Connector pipeline.
However, the majority of these new wells came online in September, so only the tail-end of the quarter benefited from this incremental production. We don't expect any new wells for the remainder of the year, however, we do expect four new wells in the first half of 2021 due to our previously announced gathering agreement amendment with one of our largest customers to incentivize accelerated drilling. We expect this amendment will increase drilling and completion activities over the next several years on this system.
On our Ohio Gathering segment, adjusted EBITDA totaled $7.1 million for the quarter, which represented a 5.1% decrease from the second quarter of 2020, primarily due to a 5.2% lower volume throughput, which was driven by approximately 139 million cubic feet a day of gross volumes shut-in for the quarter and natural production declines.
As of September 30th, SMLP's interest in Ohio Gathering was 38.2%, so shut-in volumes impacted SMLP by approximately 53 million cubic feet per day on a net basis. As I mentioned during last quarter's earnings call, we expect these shut-in volumes will remain offline until late in the fourth quarter. Of the 15 new wells turned-in-line behind OGC during the quarter, 10 were connected in September and had no impact on our third quarter financial and operating results due to the one-month lag in our reporting for Ohio Gathering.
Now, moving to our Williston Basin segment. Adjusted EBITDA of $11.7 million was down by $1 million relative to the second quarter of 2020, primarily due to a 9.2% decrease in liquids volumes, which was mainly due to natural production decline and approximately 5,000 barrels per day of production shut-in. Williston adjusted EBITDA was also modestly impacted by two amended gathering contracts with marginally lower gathering rates that became effective in September upon our customers' emergence from bankruptcy proceeding.
In exchange for these amendments, we protected our prepetition claims, extended our acreage dedication terms and strengthened many other contractual terms.
At the end of the third quarter, our customers had six DUCs in inventory and eight wells that were recently completed. Just recently, four of those eight completed wells were turned-in-line and this customer has indicated that the remaining four wells will be turned-in-line by year-end.
DJ Basin segment adjusted EBITDA totaled $4.8 million in the third quarter, a 9.8% increase from the second quarter of 2020, largely due to a 35% increase in natural gas throughput to 27 million cubic feet per day. This volume increase was primarily driven by the return of production that was shut-in during the second quarter as well as nine new wells that were connected during the quarter.
Looking forward, we've had four new wells connected in October and we expect another six wells in the coming weeks. We continue to monitor the Colorado regulatory environment, particularly considering recent momentum for our 2,000 foot setback rule, which could limit activity in more populated areas. We do not expect adverse implications to our DJ segment if this new regulatory setback rule is approved, since the acreage dedicated to our system is located in the rural areas in Weld County and in Laramie County, Wyoming.
Permian Basin segment adjusted EBITDA totaled $900,000 for the quarter, a decrease of approximately $900,000 relative to the second quarter of 2020, primarily due to decreased margins on natural gas and NGL sales, a change in customer volume mix and higher operating expenses. Lower margins on our marketing activities were primarily driven by higher cost of natural gas and NGLs. And although volume was up by 6.3% relative to the second quarter, the increase was primarily due to more volumes from a customer with lower rate.
We also had approximately $250,000 of higher expenses during the quarter from compressor-related maintenance and property taxes. At quarter-end, our customers had two DUCs in inventory, which we do not expect to come online until 2021.
On the commercial front, we amended a gathering contract with one of our customers to increase dedicated acreage, providing more exposure to potential drilling activities and locations going forward. Our legacy areas, which include the Piceance, Barnett and Marcellus segment generated $34.7 million of combined segment adjusted EBITDA in the third quarter and produced unlevered free cash flow of $33.4 million based on $1.3 million of combined quarterly capex.
Our legacy areas continued to provide predictable and reliable cash flow, highlighting the benefits of our diversified asset business model. Our legacy area had nine new well connections during the quarter and they were preliminary indications that there will be as many as 15 new wells behind these legacy areas in 2021 compared to nine expected in all of 2020.
Our anchor customer in the Marcellus connected nine wells in July, which was the primary driver of that segment's 17% volume increase and 23% increase in segment adjusted EBITDA relative to the second quarter of 2020. At quarter-end, there were nine DUCs in inventory behind our Marcellus system and we expect those to be turned-in-line in the first half of 2021. We have also received early indications from multiple Barnett customers of new potential drilling and completion activity in 2021, which will be the first new upstream activity behind our Barnett system since late 2019.
Now, turning back to the partnership. We had nearly $809 million of outstanding debt under our $1.25 billion revolving credit facility at September 30, 2020 and approximately $172 million of available borrowing capacity. At the end of the third quarter, we also had over $50 million of cash on hand and a total leverage ratio of 4.87 times and the senior secured leverage ratio of 2.74 times. As Heath mentioned earlier in his remarks, our liability management actions have made a significant impact on our balance sheet in short order. Despite offsetting draws on our revolving credit facility to acquire our privately held GP in May for $35 million and subsequently repay the $35 million of ECP loans in August, year-to-date, we have reduced net debt by approximately $151 million, which represents a 10% reduction in our debt balance as of the end of 2019.
I would encourage you to review the table on Page 3 of our third quarter earnings press release for a detailed summary of our liability management transactions that we've closed or are pending. We will remain focused on our liability management strategy and we continue to expect leverage at year-end to be highly dependent on the results of those ongoing initiatives. However, now that the majority of our planned liability management initiatives have been successfully executed, we're well positioned to address our 2022 maturities over the coming quarters.
Now turning to Double E. During the third quarter, SMLP made cash investment totaling $11.2 million with respect to a 70% interest in Double E, and as of September 30th, we have invested approximately $125 million, inception to-date, of which, approximately $80 million was funded with the redeemable preferred equity from TPG. Due to the approximate 15% reduction in overall estimated cost to complete the project, SMLP is responsible for approximately $300 million of Double E's development costs with an estimated $175 million remaining to be funded at the end of the third quarter.
Now that the FERC 7(c) certificate has been received, the next major milestone for the project is obtaining a notice to proceed with construction, which is not expected until the first quarter of 2021. We've been working closely with the third-party to finalize financing for Double E, which would fund all of SMLP's remaining development costs and is expected to be in place upon receiving FERC's notice to proceed with construction.
Finally, last Friday, we announced a 1-for-15 reverse unit stock split, in which our common unitholders of record at the close of business on November 9, 2020, will receive one new common unit for every 15 unit count. This reverse split is important because it enables SMLP to regain compliance with the New York Stock Exchange's listing standards.
As a result of the reverse unit split, SMLP's current outstanding common unit count will be reduced to approximately 3.8 million units. The 34.6 million common units that are pledged to SMP Holdings' Term Loan will also be converted at the same 1-for-15 ratio before they are released to the term home -- Term Loan lenders, which pro forma for the closing of the Term Loan Restructuring will add an incremental 2.3 million common units to SMLP's outstanding unit count for a total of approximately 6.1 million common units outstanding.
Now with that, I will turn the call back over to Heath for closing remarks.
J. Heath Deneke -- President, Chief Executive Officer and Chairman of the Board
Great. All right, thanks, Marc. Look, I'd like to close by thanking all of our employees for the hard work and focus that has been demonstrated really across the company despite the very challenging business and frankly personal conditions that have been brought on by the pandemic in 2020.
Look, as evidenced by our continued strong safety record, our operating results, the successful advancement of the Double E project to the FERC approval process and the tremendous success that we've had in executing the liability management program, and improving the balance sheet to-date, we remain committed and highly capable as a team to successfully operate and control our cost and execute on the strategic initiatives that we set forth despite the tough environment that we're in.
Looking forward, while we remain hopeful for an accelerated recovery of oil and gas fundamentals in 2021, we are committed to remain laser-focused on controlling what we can control to further position Summit to successfully navigate through what could be another very challenging year for the industry. Our plan is to continue to maximize free cash flow and liquidity by further reducing our cost, optimizing our capital expenditures, obtaining third-party financing for the Double E project and continuing to execute on our liability management program, which will continue to allocate capital to further reduce our debt, extend our 2022 maturities and create long-term value for our unitholders.
By achieving these objectives, we're confident that we'll continue to enhance Summit's ability to persevere through the near-term challenges of the environment ahead, and while generating tremendous upside for our unitholders as industry fundamentals improve out into the future.
So with that, operator, I would like to open the call up for questions.
Questions and Answers:
Thank you. [Operator Instructions] [Operator Closing Remarks]
Duration: 27 minutes
Ross Wong -- Senior Director, Corporate Development & Finance
Marc Stratton -- Executive Vice President and Chief Financial Officer
J. Heath Deneke -- President, Chief Executive Officer and Chairman of the Board