SUMMIT MIDSTREAM PARTNERS, LP
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to inform the reader about matters affecting the
financial condition and results of operations of the Partnership and its
subsidiaries for the periods since December 31, 2022 . As a result, the following
discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in this report and
the MD&A and the audited consolidated financial statements and related notes
that are included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 2022 (the "2022 Annual Report"). Among other things, those
financial statements and the related notes include more detailed information
regarding the basis of presentation for the following information. This
discussion contains forward-looking statements that constitute our plans,
estimates and beliefs. These forward-looking statements involve numerous risks
and uncertainties, including, but not limited to, those discussed in
Forward-Looking Statements. Actual results may differ materially from those
contained in any forward-looking statements.
Overview
We are a value-driven limited partnership focused on developing, owning and
operating midstream energy infrastructure assets that are strategically located
in unconventional resource basins, primarily shale formations, in the
continental
Our financial results are driven primarily by volume throughput across our gathering systems and by expense management. We generate the majority of our revenues from the gathering, compression, treating and processing services that we provide to our customers. A majority of the volumes that we gather, compress, treat and/or process have a fixed-fee rate structure which enhances the stability of our cash flows by providing a revenue stream that is not subject to direct commodity price risk. We also earn a portion of our revenues from the following activities that directly expose us to fluctuations in commodity prices: (i) the sale of physical natural gas and/or NGLs purchased under percentage-of-proceeds or other processing arrangements with certain of our customers in the Rockies and Piceance segments, (ii) the sale of natural gas we retain from certain Barnett segment customers, (iii) the sale of condensate we retain from our gathering services in the Piceance segment and (iv) additional gathering fees that are tied to the performance of certain commodity price indexes which are then added to the fixed gathering rates. We also have indirect exposure to changes in commodity prices such that persistently low commodity prices may cause our customers to delay and/or cancel drilling and/or completion activities or temporarily shut-in production, which would reduce the volumes of natural gas and crude oil (and associated volumes of produced water) that we gather. If certain of our customers cancel or delay drilling and/or completion activities or temporarily shut-in production, the associated MVCs, if any, ensure that we will earn a minimum amount of revenue. Commodity prices have increased and remain at higher levels primarily due to recent production cuts by OPEC+ andRussia's invasion ofUkraine which began inFebruary 2022 , which mitigates the risk of cancelled or delayed drilling and/or completion activities. 22
--------------------------------------------------------------------------------
Table of Contents
The following table presents certain consolidated and reportable segment financial data. For additional information on our reportable segments, see the "Segment Overview for the Three Months EndedMarch 31, 2023 and 2022" section included herein. Three Months Ended March 31, 2023 2022 (In thousands) Net loss$ (14,163) $ (5) Reportable segment adjusted EBITDA Northeast$ 17,854 $ 20,068 Rockies 23,130 15,830 Permian 5,073 4,149 Piceance 13,983 15,768 Barnett 7,027 9,286 Net cash provided by operating activities$ 49,695 $ 46,046 Capital expenditures (1) 16,438 8,703 Investment in Double E equity method investee 3,500 8,444 Repayments on ABL Facility (13,000) (34,000) Repayments on Permian Transmission Term Loan (2,519) (1,095) ________
(1)See "Liquidity and Capital Resources" herein to the unaudited condensed consolidated financial statements for additional information on capital expenditures.
Trends and Outlook
Our business has been, and we expect our future business to continue to be, affected by the following key trends:
•Ongoing impact of the current
•Natural gas, NGL and crude oil supply and demand dynamics;
•Production from
•Capital markets availability and cost of capital; and
•Inflation and shifts in operating costs.
Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results. For additional information, see the "Trends and Outlook" section of MD&A included in the 2022 Annual Report. Strategic DJ Acquisitions. OnDecember 1, 2022 , we completed the 2022 DJ Acquisitions for total cash consideration of$305.0 million , subject to post-closing adjustments. As a result of the 2022 DJ Acquisitions, we acquired natural gas gathering and processing systems, a crude oil gathering system, freshwater rights, and a subsurface freshwater delivery system in theDJ Basin . The acquired assets of Outrigger DJ and Sterling DJ are located inWeld ,Morgan , andLogan Counties,Colorado andCheyenne County, Nebraska . In 2023, we will spend time and resources integrating the 2022 DJ Acquisitions into our existingDJ Basin assets and expect to attain capital and operating synergies in the future. Cost structure optimization and portfolio management. The Partnership intends to improve its capital structure in the future by reducing its indebtedness with free cash flow, and when appropriate, it may pursue opportunistic transactions with the objective of increasing long term unitholder value. This may include opportunistic acquisitions (such as the 2022 DJ Acquisitions), divestitures (such as the disposition of the Lane G&P System and of Bison Midstream), re-allocation of capital to new or existing areas, and development of joint ventures involving our existing midstream assets or new investment opportunities. We believe that our internally generated cash flow, our ABL Facility, the Permian Term Loan Facility, and access to debt (such as the Additional 2026 Secured Notes) or equity will be adequate to finance our strategic initiatives. To attain our overall 23
--------------------------------------------------------------------------------
Table of Contents
corporate strategic objectives, we may conduct an asset divestiture, or divestitures, at a transaction valuation that is less than the net book value of the divested asset.
Ongoing impact of the currentRussia -Ukraine conflict and the international sanctions againstRussia on commodity prices. Although the Partnership does not operate inUkraine ,Russia or other parts ofEurope , there are certain impacts arising fromRussia's invasion ofUkraine that could have a potential effect on the Partnership, including, but not limited to, volatility in currencies and commodity prices, higher inflation, cost and supply chain pressures and availability and disruptions in banking systems and capital markets. As of the date of filing, there have been no material impacts on the Partnership. Based on recently updated production forecasts and 2023 development plans from our customers, we currently expect that 2023 activity will be higher than 2022 and be at an activity level near our historical periods prior to COVID-19. Impact of recent increases in interest rates. Increases in interest rates could adversely affect our future ability to obtain financing or materially increase the cost of existing and any additional financing. SinceMarch 2022 , theFederal Reserve has raised its target range for the federal funds rate ten times, to a current target range of 5.00-5.25%. TheFederal Reserve may pause such rate hikes or increase its target range further. As ofMarch 31, 2023 , we had approximately$1.0 billion principal of fixed-rate debt,$317.0 million outstanding under our variable rate ABL Facility and$152.8 million outstanding under the variable rate Permian Transmission Term Loan (see Note 8 - Debt). As ofMarch 31, 2023 , we had$137.6 million of interest rate exposure hedged to offset the impact of changes in interest rates on our Permian Transmission Term Loan. The Inflation Reduction Act of 2022 could accelerate the transition to a low carbon economy and will impose new costs on our operations. OnAugust 16, 2022 , the Inflation Reduction Act of 2022 ("IRA 2022") was signed into law pursuant to the budget reconciliation process. The IRA 2022 contains hundreds of billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles and supporting infrastructure and carbon capture and sequestration, among other provisions. These incentives could further accelerate the transition of theU.S. economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for the oil and gas and consequently materially and adversely affect our business and results of operations. We do not currently believe this legislation will have a material impact on our consolidated financial statements.
How We Evaluate Our Operations
We conduct and report our operations in the midstream energy industry through five reportable segments: Northeast, Rockies, Permian, Piceance and Barnett. Each of our reportable segments provides midstream services in a specific geographic area and our reportable segments reflect the way in which we internally report the financial information used to make decisions and allocate resources in connection with our operations. For additional information see Note 15 - Segment Information. Our management uses a variety of financial and operational metrics to analyze our consolidated and segment performance. We view these metrics as important factors in evaluating our profitability. These metrics include:
•throughput volume;
•revenues;
•operation and maintenance expenses;
•capital expenditures; and
•segment adjusted EBITDA.
We review these metrics on a regular basis for consistency and trend analysis.
There have been no changes in the composition or characteristics of these
metrics during the three months ended
Additional Information. For additional information, see the "Results of
Operations" section herein and the notes to the unaudited condensed consolidated
financial statements. For additional information on how these metrics help us
manage our business, see the "How We Evaluate Our Operations" section of MD&A
included in the 2022 Annual Report. For information on impending accounting
changes that are expected to materially impact our financial results reported in
future periods, see Note 2 - Summary of Significant Accounting Policies and
Recently Issued Accounting Standards Applicable to the Partnership.
24--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Consolidated Overview for the Three Months Ended
The following table presents certain consolidated financial and operating data.
Three Months Ended March 31,
2023 2022
(In thousands)
Revenues:
Gathering services and related fees $ 57,371 $ 64,020
Natural gas, NGLs and condensate sales 49,163 22,458
Other revenues 5,965 9,648
Total revenues 112,499 96,126
Costs and expenses:
Cost of natural gas and NGLs 30,882 22,251
Operation and maintenance 23,972 17,062
General and administrative 9,987 12,960
Depreciation and amortization 29,824 30,445
Transaction costs 302 246
Acquisition integration costs 1,502 -
(Gain) loss on asset sales, net (68) 3
Long-lived asset impairment - 14
Total costs and expenses 96,401 82,981
Other income (expense), net 56 -
Gain (loss) on interest rate swaps (1,273) 7,028
Gain on sale of business 18 -
Interest expense (34,223) (24,163)
Loss before income taxes and equity method investment income (19,324)
(3,990)
Income tax (expense) benefit 252 (50)
Income from equity method investees 4,909 4,035
Net loss $ (14,163) $ (5)
Volume throughput (1):
Aggregate average daily throughput - natural gas (MMcf/d) 1,185 1,306
Aggregate average daily throughput - liquids (Mbbl/d) 74 65
________
(1)Excludes volume throughput for Ohio Gathering and Double E . For additional
information, see the Northeast and Permian sections herein under the caption
"Segment Overview for the Three Months Ended March 31, 2023 and 2022".
25--------------------------------------------------------------------------------
Table of Contents
Volumes - Gas. Natural gas throughput volumes decreased 121 MMcf/d for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 , primarily reflecting:
•a volume throughput decrease of 150 MMcf/d for the Northeast segment.
•a volume throughput decrease of 25 MMcf/d for the Piceance segment.
•a volume throughput decrease of 27 MMcf/d for the Permian segment.
•a volume throughput increase of 79 MMcf/d for the Rockies segment.
•a volume throughput increase of 2 MMcf/d for the Barnett segment.
Volumes - Liquids. Crude oil and produced water throughput volumes at the Rockies segment increased for the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 , primarily as a result of 53 new well connections that came online subsequent toMarch 31, 2022 , offset by natural production declines and weather related downtime.
For additional information on volumes, see the "Segment Overview for the Three
Months Ended
Revenues. Total revenues increased$16.4 million during the three months endedMarch 31, 2023 compared to the prior year period, comprised of a$26.7 million increase in natural gas, NGLs and condensate sales, offset by a$6.6 million decrease in gathering services and related fees and a$3.7 million decrease in Other Revenue.
Gathering Services and Related Fees. Gathering services and related fees
decreased
•a
•a
•a
Natural Gas, NGLs and Condensate Sales. Natural gas, NGLs and condensate
revenues increased
•a
•a
Costs and Expenses. Total costs and expenses increased$13.4 million during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 .
Cost of Natural Gas and NGLs. Cost of natural gas and NGLs increased
Operation and Maintenance. Operation and maintenance expense increased$6.9 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily as a result of the acquisitions of Sterling DJ and Outrigger DJ inDecember 2022 , partially offset by the 2022 dispositions of the Lane G&P System inJune 2022 and Bison Midstream inSeptember 2022 . General and Administrative. General and administrative expense decreased$3.0 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to$2.4 million of employee severance costs incurred during the three months endedMarch 31, 2022 . Acquisition Integration Costs. Acquisition integration costs increased$1.5 million for the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 as a result of ourDecember 2022 acquisitions of Sterling DJ and Outrigger DJ. Depreciation and Amortization. Depreciation and amortization expense decreased$0.6 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . Interest Expense. The increase in interest expense for the three month period endedMarch 31, 2023 , compared to three months endedMarch 31, 2022 , primarily resulted from higher interest costs from the issuance of the additional principal amounts of the 2026 Secured Notes, borrowings on the Permian Transmission Term Loan, higher amortization expense of debt issuance costs 26
--------------------------------------------------------------------------------
Table of Contents
and an increase of 50 basis points on the interest rate of our 2026 Secured Notes. Interest expense does not include the impact of gains or losses from our interest rate swaps entered into for the Permian Transmission Credit Facility.
27--------------------------------------------------------------------------------
Table of Contents
Segment Overview for the Three Months Ended
Northeast.
Volume throughput for the Northeast reportable segment follows.
Northeast
Three Months Ended March 31,
Percentage
2023 2022 Change
Average daily throughput (MMcf/d) 591 741 (20)%
Average daily throughput (MMcf/d) (Ohio Gathering) 636 598 6%
Volume throughput for the Northeast, excluding Ohio Gathering, decreased 20%
compared to the three months ended March 31, 2022 , primarily due to natural
production declines as well as frac-protect activities during the three months
ended March 31, 2023 which decreased average daily throughput by approximately
20 MMcf/d for the three months ended March 31, 2023 , partially offset by 18 well
connections that came online subsequent to March 31, 2022 .
Volume throughput for the Ohio Gathering system increased 6% compared to the
three months ended March 31, 2022 , primarily as a result of 38 new well
connections that came online subsequent to March 31, 2022 , partially offset by
natural production declines and approximately 50 MMcf/d of volume shut-in for
frac-protect activities.
Financial data for our Northeast reportable segment follows.
Northeast
Three Months Ended March 31,
Percentage
2023 2022 Change
(In thousands)
Revenues:
Gathering services and related fees $ 12,755 $ 14,636 (13)%
Total revenues 12,755 14,636 (13)%
Costs and expenses:
Operation and maintenance 2,085 1,647 27%
General and administrative 210 183 15%
Depreciation and amortization 4,453 4,300 4%
Gain on asset sales, net - (10) *
Total costs and expenses 6,748 6,120 10%
Add:
Depreciation and amortization 4,453
4,300
Adjustments related to capital reimbursement activity (20) (20) Gain on asset sales, net - (10) Proportional adjusted EBITDA for Ohio Gathering 7,414 7,276 2% Other - 6 Segment adjusted EBITDA$ 17,854 $ 20,068 (11)% * Not considered meaningful Three months endedMarch 31, 2023 . Segment adjusted EBITDA decreased$2.2 million , compared to the three months endedMarch 31, 2022 primarily as a result of a$1.9 million decrease in revenue from gathering services and related fees as a result of lower volume throughput discussed above. 28
--------------------------------------------------------------------------------
Table of Contents
Rockies.
Volume throughput for our Rockies reportable segment follows.
Rockies
Three Months Ended March 31,
Percentage
2023 2022 Change
Aggregate average daily throughput - natural gas
(MMcf/d) 108 29 272%
Aggregate average daily throughput - liquids (Mbbl/d) 74
65 14%
Natural gas. Natural gas volume throughput increased 272% compared to the three
months ended March 31, 2022 , primarily reflecting the 2022 DJ Acquisitions in
December 2022 and 35 new well connections that came online subsequent to
March 31, 2022 , partially offset by the sale of Bison Midstream in September
2022 . Aggregate average daily throughput for the three months ended March 31,
2022 includes 11 MMcf/d related to Bison Midstream assets, which have been sold.
Liquids. Liquids volume throughput increased 14% compared to the three months
ended March 31, 2022 , primarily associated with 53 new well connections that
came online subsequent to March 31, 2022 , including 23 which came online in the
three months ended March 31, 2023 .
Financial data for our Rockies reportable segment follows.
Rockies
Three Months Ended March 31,
Percentage
2023 2022 Change
(In thousands)
Revenues:
Gathering services and related fees $ 15,303 $ 17,789 (14)%
Natural gas, NGLs and condensate sales 47,329 13,659 247%
Other revenues 2,619 5,157 (49)%
Total revenues 65,251 36,605 78%
Costs and expenses:
Cost of natural gas and NGLs 29,808 13,422 122%
Operation and maintenance 12,069 6,212 94%
General and administrative 673 684 (2%)
Depreciation and amortization 8,378 7,448 12%
Integration costs 411 - *
(Gain) loss on asset sales, net (57) 14 *
Long-lived asset impairment - 13 *
Total costs and expenses 51,282 27,793 85%
Add:
Depreciation and amortization 8,378
7,448
Integration costs 411
-
Adjustments related to capital reimbursement activity 404
(478)
(Gain) loss on asset sales, net (57) 14 Long-lived asset impairment - 13 Other 25 - 21 Segment adjusted EBITDA$ 23,130 $ 15,830 46% * Not considered meaningful 29
--------------------------------------------------------------------------------
Table of Contents
Three months endedMarch 31, 2023 . Segment adjusted EBITDA increased$7.3 million , compared to the three months endedMarch 31, 2022 primarily due to the 2022 DJ Acquisitions inDecember 2022 , partially offset by the sale of Bison Midstream inSeptember 2022 . 30
--------------------------------------------------------------------------------
Table of Contents Permian.
Volume throughput for our Permian reportable segment follows.
Permian
Three Months Ended March 31,
Percentage
2023 2022 Change
Average daily throughput (MMcf/d) n/a 27 n/a
Average daily throughput (MMcf/d) (Double E) 264 187 41%
On
Volume throughput for
The following table presents the MVC quantities thatDouble E's shippers have contracted to with firm transportation service agreements and related negotiated rate agreements. Weighted average MVC quantities (Amounts in MMBTU/day)
for the year ended
2023 831,096
2024 986,803
2025 1,000,000
2026 1,000,000
2027 1,000,000
2028 1,000,000
2029 1,000,000
2030 1,000,000
2031 879,452
31--------------------------------------------------------------------------------
Table of Contents
Financial data for our Permian reportable segment follows.
Permian
Three Months Ended March 31,
Percentage
2023 2022 Change
(In thousands)
Revenues:
Gathering services and related fees $ - $ 1,847 *
Natural gas, NGLs and condensate sales - 6,867 *
Other revenues 893 1,019 (12%)
Total revenues 893 9,733 (91)%
Costs and expenses:
Cost of natural gas and NGLs - 7,092 *
Operation and maintenance - 1,304 *
General and administrative 44 363 (88)%
Depreciation and amortization - 1,497 *
Total costs and expenses 44 10,256 *
Add:
Depreciation and amortization - 1,497
Proportional adjusted EBITDA for Double E 4,224 3,175 33% Segment adjusted EBITDA$ 5,073 $ 4,149 22% *Not considered meaningful
Three months ended
32--------------------------------------------------------------------------------
Table of Contents
Piceance.
Volume throughput for our Piceance reportable segment follows.
Piceance
Three Months Ended March 31,
Percentage
2023 2022 Change
Aggregate average daily throughput (MMcf/d) 287 312 (8%)
Volume throughput decreased 8% compared to the three months ended
Financial data for our Piceance reportable segment follows.
Piceance
Three Months Ended March 31,
Percentage
2023 2022 Change
(In thousands)
Revenues:
Gathering services and related fees $ 19,119 $ 20,071 (5%)
Natural gas, NGLs and condensate sales 1,641 1,895 (13)%
Other revenues 1,426 1,275 12%
Total revenues 22,186 23,241 (5%)
Costs and expenses:
Cost of natural gas and NGLs 1,074 1,108 (3)%
Operation and maintenance 5,749 5,273 9%
General and administrative 239 328 (27)%
Depreciation and amortization 12,881 12,780 1%
Gain on asset sales, net (4) - *
Total costs and expenses 19,939 19,489 2%
Add:
Depreciation and amortization 12,881 12,780
Adjustments related to capital reimbursement activity (1,245)
(899)
Gain on asset sales, net (4) -
Other 104 135
Segment adjusted EBITDA $ 13,983 $ 15,768 (11%) ________ *Not considered meaningful Three months endedMarch 31, 2023 . Segment adjusted EBITDA decreased$1.8 million , compared to the three months endedMarch 31, 2022 , primarily reflecting a decrease in volume throughput as a result of natural production declines and reduction in a certain customer's minimum volume commitment that expired in 2022, partially offset by 8 new well connections that came online inMarch 2023 . 33
--------------------------------------------------------------------------------
Table of Contents
Barnett.
Volume throughput for our Barnett reportable segment follows.
Barnett
Three Months Ended March 31,
Percentage
2023 2022 Change
Average daily throughput (MMcf/d) 199 197 1%
Volume throughput increased 1% compared to the three months endedMarch 31, 2022 , primarily as a result of 12 wells that came online subsequent toMarch 31, 2022 , partially offset by natural production declines and approximately 6 MMcf/d of volume shut-in for frac-protect activities.
Financial data for our Barnett reportable segment follows.
Barnett
Three Months Ended March 31,
Percentage
2023 2022 Change
(In thousands)
Revenues:
Gathering services and related fees $ 10,194 $ 9,677 5%
Natural gas, NGLs and condensate sales 193 - *
Other revenues (1) 1,064 2,063 (48%)
Total revenues 11,451 11,740 (2%)
Costs and expenses:
Operation and maintenance 4,069 2,124 92%
General and administrative 265 242 10%
Depreciation and amortization 3,805 3,792 -
Total costs and expenses 8,139 6,158 32%
Add:
Depreciation and amortization 4,039 4,026
Adjustments related to capital reimbursement activity (324) (327) Other - 5 Segment adjusted EBITDA$ 7,027 $ 9,286 (24)% ________ *Not considered meaningful
(1)Includes the amortization expense associated with our favorable gas gathering contracts as reported in Other revenues.
Three months endedMarch 31, 2023 . Segment adjusted EBITDA decreased$2.3 million , compared to the three months endedMarch 31, 2022 , primarily as a result of$1.7 million of commercial settlements that benefited the segment's financial results in the first quarter of 2022 and did not occur for the remainder of 2022 or during the three months endedMarch 31, 2023 . 34
--------------------------------------------------------------------------------
Table of Contents
Corporate and Other Overview for the Three Months Ended
Corporate and Other represents those results that are not specifically attributable to a reportable segment or that have not been allocated to our reportable segments, including certain general and administrative expense items, transaction costs and interest expense.
Corporate and Other
Three Months Ended March 31,
Percentage
2023 2022 Change
(In thousands)
Costs and expenses:
Operation and maintenance $ - $ 502 *
General and administrative 8,556 11,157 (23)% Transaction costs 302 246 * Interest expense 34,223 24,163 42% ________
* Not considered meaningful
General and Administrative. General and administrative expense decreased by$2.6 million , compared to the three months endedMarch 31, 2022 , primarily related to$2.4 million of employee severance costs incurred during the three months endedMarch 31, 2022 . Interest Expense. The increase in interest expense for the three months endedMarch 31, 2023 , compared to three months endedMarch 31, 2022 , primarily resulted from higher interest costs from the issuance of the additional principal amounts of the 2026 Secured Notes and borrowings on the Permian Transmission Term Loan, higher amortization expense of debt issuance costs and an increase of 50 basis points on the interest rate of our 2026 Secured Notes. Interest expense does not include the impact of gains or losses from our interest rate swaps entered into for the Permian Transmission Credit Facility.
Liquidity and Capital Resources
We rely primarily on internally generated cash flows as well as external financing sources, including our ABL Facility, and the issuance of debt, equity and preferred equity securities, and proceeds from potential asset divestitures to fund our capital expenditures. We believe that our ABL Facility and Permian Transmission Credit Facility, together with internally generated cash flows and access to debt or equity capital markets, will be adequate to finance our operations for the next twelve months without adversely impacting our liquidity. We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As ofMarch 31, 2023 , our material off-balance sheet arrangements and transactions include (i) letters of credit outstanding against our ABL Facility aggregating to$4.3 million , and (ii) letters of credit outstanding against our Permian Transmission Credit Facility aggregating to$10.5 million . There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. 35
--------------------------------------------------------------------------------
Table of Contents
Indebtedness Compliance as ofMarch 31, 2023 . As ofMarch 31, 2023 , we were in compliance with all covenants contained in the Senior Notes, the ABL Facility and the Permian Transmission Credit Facility. The ABL Facility requires thatSummit Holdings not permit (i) the First Lien Net Leverage Ratio (as defined in the ABL Agreement) as of the last day of any fiscal quarter to be greater than 2.50:1.00, or (ii) the Interest Coverage Ratio (as defined in the ABL Agreement) as of the last day of any fiscal quarter to be less than 2.00:1.00. As ofMarch 31, 2023 , the First Lien Net Leverage Ratio and Interest Coverage Ratio was 1.24:1.00 and 2.37:1.00, respectively.
Credit Agreements and Financing Activities
ABL Facility. As ofMarch 31, 2023 , we had a$400.0 million revolving ABL Facility with a maturity date ofMay 1, 2026 . As ofMarch 31, 2023 , the outstanding balance of the ABL Facility was$317.0 million and the available borrowing capacity totaled$78.7 million after giving effect to the issuance thereunder of$4.3 million of outstanding but undrawn irrevocable standby letters of credit. 2025 Senior Notes. InFebruary 2017 , the Co-Issuers co-issued$500.0 million of 5.75% senior unsecured notes maturingApril 15, 2025 (the "2025 Senior Notes"). As ofMarch 31, 2023 , the outstanding balance of the 2025 Senior Notes was$259.5 million . The 2025 Senior Notes are senior, unsecured obligations and rank equally in right of payment with all of our existing and future senior obligations. The 2025 Senior Notes are effectively subordinated in right of payment to all of our secured indebtedness, to the extent of the collateral securing such indebtedness. As ofMarch 31, 2023 , the Co-Issuers could redeem all or part of the 2025 Senior Notes at a redemption price of 101.438% (and such redemption price has subsequently declined to 100.000% onApril 15, 2023 ), plus accrued and unpaid interest, if any, to, but not including, the redemption date. 2026 Secured Notes. InNovember 2021 , we issued$700.0 million of the 2026 Secured Notes, at a price of 98.5% of face value. Additionally, inNovember 2022 , in connection with the 2022 DJ Acquisitions, we issued an additional$85.0 million of 2026 Secured Notes at a price of 99.26% of their face value. The Co-Issuers pay interest on the 2026 Secured Notes semi-annually onApril 15 andOctober 15 of each year, and the 2026 Secured Notes are jointly and severally guaranteed, on a senior second-priority secured basis (subject to permitted liens), by us and each of our restricted subsidiaries that is an obligor under the ABL Facility, or under the 2025 Senior Notes on the issue date of the 2026 Secured Notes. As ofMarch 31, 2023 , the outstanding balance of the 2026 Secured Notes was$785.0 million . The 2026 Secured Notes will mature onOctober 15, 2026 ; provided that, if the outstanding amount of the 2025 Senior Notes (or any refinancing indebtedness in respect thereof that has a final maturity on or prior to the date that is 91 days after the Initial Maturity Date (as defined in the 2026 Secured Notes Indenture)) is greater than or equal to$50.0 million onJanuary 14, 2025 , which is 91 days prior to the scheduled maturity date of the 2025 Senior Notes, then the 2026 Secured Notes will mature onJanuary 14, 2025 . Starting in the first quarter of 2023 with respect to the fiscal year ended 2022, and continuing annually through the fiscal year ended 2025, we are required under the terms of the 2026 Secured Notes Indenture to, if it has Excess Cash Flow (as defined in the 2026 Secured Notes Indenture), and subject to its ability to make such an offer under the ABL Facility, offer to purchase an amount of the 2026 Secured Notes, at 100% of the principal amount plus accrued and unpaid interest, equal to 100% of the Excess Cash Flow generated in the prior year. Generally, if we do not offer to purchase designated annual amounts of its 2026 Secured Notes or reduce its first lien capacity under the 2026 Secured Notes Indenture per annum from 2023 through 2025, the interest rate on the 2026 Secured Notes is subject to certain rate escalations. Per the terms of the 2026 Secured Notes Indenture, the designated amounts are$50.0 million aggregate principal amount of the 2026 Secured Notes byApril 1, 2023 , otherwise the interest rate shall automatically increase by 50 basis points per annum;$100.0 million aggregate principal amount of the 2026 Secured Notes byApril 1, 2024 , otherwise the interest rate shall automatically increase by 100 basis points per annum (minus any amount previously increased); and$200.0 million aggregate principal amount of the 2026 Secured Notes byApril 1, 2025 , otherwise the interest rate shall automatically increase by 200 basis points per annum (minus any amount previously increased). To the extent we make an offer to purchase, and the offer is not fully accepted by the holders of the 2026 Secured Notes, we may use any remaining amount not accepted for any purpose not prohibited by the 2026 Secured Notes Indenture, or the ABL Facility. Based on the amount of our Excess Cash Flow for the fiscal year ended 2022, we were not able to make offers to purchase in the designated amount for the fiscal year ended 2022; as a result, the interest rate on the 2026 Secured Notes increased 50 basis points to 9.00% effective with the first payment onApril 1, 2023 , resulting in increased annual interest expense of approximately$3.9 million . We may in the future use a combination of cash, secured or unsecured borrowings and issuances of our common units or other securities and the proceeds from asset sales to retire or refinance our outstanding debt or Series A Preferred Units through privately negotiated transactions, open market repurchases, redemptions, exchange offers, tender offers or otherwise, but we are under no obligation to do so. 36
--------------------------------------------------------------------------------
Table of Contents
Cash Flows
The components of the net change in cash and cash equivalents were as follows:
Three Months Ended March 31,
2023 2022
(In thousands)
Net cash provided by operating activities $ 49,695 $ 46,046
Net cash used in investing activities (22,549) (15,297)
Net cash used in financing activities (17,394) (37,841)
Net change in cash, cash equivalents and restricted cash $ 9,752
Operating activities.
Cash flows provided by operating activities for the three months ended
•a loss of
•a
Cash flows provided by operating activities for the three months ended
•a
•positive adjustments of
Investing activities.
Cash flows used in investing activities during the three months ended
•$16.4 million of cash outflows for capital expenditures; and
•$3.5 million of cash investments in the
Cash flows used in investing activities during the three months ended
•$8.4 million for cash investments in the
•$8.7 million of cash outflows for capital expenditures; offset by
•$1.9 million of cash proceeds from the sale of compressors.
Financing activities.
Cash flows used in financing activities during the three months ended
•$13.0 million of cash outflow for repayments on the ABL Facility,
•$2.5 million of cash outflow for repayments on the Permian Transmission Term Loan.
Cash flows used in financing activities during the three months ended
•$34.0 million of cash outflow for repayments on the ABL Facility.
Capital Requirements
Overall.
Our business is capital intensive, requiring significant investment for the maintenance of existing gathering systems and the acquisition or construction and development of new gathering systems and other midstream assets and facilities. Our Partnership agreement requires that we categorize our capital expenditures as either:
•maintenance capital expenditures, which are cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets or for the acquisition of existing, or the construction or development of, new capital assets) made to maintain our long-term operating income or operating capacity; or
•expansion capital expenditures, which are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term.
37--------------------------------------------------------------------------------
Table of Contents
For the three months ended
We rely primarily on internally generated cash flows as well as external financing sources, including commercial bank borrowings and the issuance of debt, equity and preferred equity securities, and proceeds from potential asset divestitures to fund our capital expenditures. We believe that our internally generated cash flows, our ABL Facility and the Permian Transmission Credit Facility, and access to debt or equity capital markets, will be adequate to finance our operations for the next twelve months without adversely impacting our liquidity.
We estimate that our 2023 capital program will range from
There are a number of risks and uncertainties that could cause our current expectations to change, including, but not limited to, (i) the ability to reach agreements with third parties; (ii) prevailing conditions and outlook in the natural gas, crude oil and NGLs and markets, and (iii) our ability to obtain financing from commercial banks, the capital markets, or other financing sources.
Excess Cash Flow Offers to Purchase.
Starting in the first quarter of 2023 with respect to the fiscal year ended 2022, and continuing annually through the fiscal year 2025, we are required under the terms of the 2026 Secured Notes Indenture to, if it has Excess Cash Flow (as defined in the 2026 Secured Notes Indenture), and subject to its ability to make such an offer under the ABL Facility, offer to purchase an amount of the 2026 Secured Notes, at 100% of the principal amount plus accrued and unpaid interest, equal to 100% of the Excess Cash Flow generated in the prior year. Excess Cash Flow is generally defined as consolidated cash flow minus the sum of capital expenditures and cash payments in respect of permitted investments and permitted restricted payments. Generally, if we do not offer to purchase designated annual amounts of its 2026 Secured Notes or reduce its first lien capacity under the 2026 Secured Notes Indenture per annum from 2023 through 2025, the interest rate on the 2026 Secured Notes is subject to certain rate escalations. Per the terms of the 2026 Secured Notes Indenture, the designated amounts are to offer to purchase$50.0 million aggregate principal amount of the 2026 Secured Notes byApril 1, 2023 , otherwise the interest rate shall automatically increase by 50 basis points per annum;$100.0 million aggregate principal amount of the 2026 Secured Notes byApril 1, 2024 , otherwise the interest rate shall automatically increase by 100 basis points per annum (minus any amount previously increased); and$200.0 million aggregate principal amount of the 2026 Secured Notes byApril 1, 2025 , otherwise the interest rate shall automatically increase by 200 basis points per annum (minus any amount previously increased). Based on the amount of our Excess Cash Flow for the fiscal year ended 2022, we did not make offers to purchase the designated amount for the fiscal year ended 2022; and as a result, the interest rate on the 2026 Secured Notes increased 50 basis points to 9.00% effective with the first payment onApril 1, 2023 , resulting in increased annual interest expense of approximately$3.9 million . To the extent we makes an offer to purchase, and the offer is not fully accepted by the holders of the 2026 Secured Notes, we may use any remaining amount not accepted for any purpose not prohibited by the 2026 Secured Notes Indenture or the ABL Facility.
Credit and Counterparty Concentration Risks
We examine the creditworthiness of counterparties to whom we extend credit and
manage our exposure to credit risk through credit analysis, credit approval,
credit limits and monitoring procedures, and for certain transactions, we may
request letters of credit, prepayments or guarantees.
Certain of our customers may be temporarily unable to meet their current
obligations. While this may cause disruption to cash flows, we believe that we
are properly positioned to deal with the potential disruption because the vast
majority of our gathering assets are strategically positioned at the beginning
of the midstream value chain. The majority of our infrastructure is connected
directly to our customers' wellheads and pad sites, which means our gathering
systems are typically the first third-party infrastructure through which our
customers' commodities flow and, in many cases, the only way for our customers
to get their production to market.
We have exposure due to nonperformance under our MVC contracts whereby a
potential customer, may not have the wherewithal to make its MVC shortfall
payments when they become due. We typically receive payment for all prior-year
MVC shortfall billings in the quarter immediately following billing. Therefore,
our exposure to risk of nonperformance is limited to and accumulates during the
current year-to-date contracted measurement period.
38--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
During the three months ended
Summarized Financial Information
The supplemental summarized financial information below reflects SMLP's separate accounts, the combined accounts ofSummit Holdings andFinance Corp. (together, the "Co-Issuers") and its guarantor subsidiaries (the "Guarantor Subsidiaries" and together with the Co-Issuers, the "Obligor Group ") for the dates and periods indicated. The financial information of theObligor Group is presented on a combined basis and intercompany balances and transactions between the Co-Issuers and Guarantor Subsidiaries have been eliminated. There were no reportable transactions between theCo-Issuers and Obligor Group and the subsidiaries that were not issuers or guarantors of the Senior Notes. Payments to holders of the Senior Notes are affected by the composition of and relationships among the Co-Issuers, the Guarantor Subsidiaries and PermianHoldco and Summit Permian Transmission, both of which are unrestricted subsidiaries of SMLP and are not issuers or guarantors of the Senior Notes. The assets of our unrestricted subsidiaries are not available to satisfy the demands of the holders of the Senior Notes. In addition, our unrestricted subsidiaries are subject to certain contractual restrictions related to the payment of dividends, and other rights in favor of their non-affiliated stakeholders, that limit their ability to satisfy the demands of the holders of the Senior Notes. OnJune 30, 2022 , we completed the sale of all the equity interests in Summit Permian and Permian Finance to a third party. Additionally, onSeptember 19, 2022 , we completed the sale of Bison Midstream to a third party. In connection with these dispositions, the status of Bison Midstream, Summit Permian and Permian Finance as guarantor subsidiaries, was modified prior to the occurrence of each respective disposition. OnDecember 1, 2022 , we completed the acquisition of Outrigger DJ for cash consideration of$165.0 million , subject to post-closing adjustments, and Sterling DJ for cash consideration of$140.0 million , subject to post-closing adjustments. In connection with the acquisitions, Summit DJ -O, LLC (formerlyOutrigger DJ Midstream, LLC ), Summit DJ -O Operating, LLC (formerlyOutrigger DJ Operating, LLC ), Summit DJ -S, LLC (formerlySterling Energy Investments, LLC ),Grasslands Energy Marketing, LLC andCentennial Water Pipelines, LLC became newly acquired entities. With the exception ofCentennial Water Pipeline, LLC , all acquired entities guarantee our obligations under the 2025 Senior Notes and 2026 Secured Notes. The summarized financial information below presents the activities and balances of Bison Midstream, Summit Permian and Summit Finance as guarantor subsidiaries for all summarized income statement periods and balance sheet dates presented in which they were owned by the Partnership. Bison Midstream, Summit Permian and Permian Finance were not included in the Partnership's balance sheet as ofDecember 31, 2022 . A list of each of SMLP's subsidiaries that is a guarantor, issuer or co-issuer of our registered securities subject to the reporting requirements in Release 33-10762 is filed as Exhibit 22.1 to this report. 39
--------------------------------------------------------------------------------
Table of Contents
Summarized Balance Sheet Information. Summarized balance sheet information as of
March 31, 2023
SMLP Obligor Group
(In thousands)
Assets
Current assets $ 3,523 $ 85,033
Noncurrent assets 8,943 2,118,019
Liabilities
Current liabilities $ 8,347 $ 100,571
Noncurrent liabilities 2,147 1,400,180
December 31, 2022
SMLP Obligor Group
(In thousands)
Assets
Current assets $ 2,553 $ 86,443
Noncurrent assets 8,274 2,130,052
Liabilities
Current liabilities $ 16,345 $ 79,841
Noncurrent liabilities 2,172 1,410,370
Summarized Statements of Operations Information. For the purposes of the
following summarized statements of operations, we allocate a portion of general
and administrative expenses recognized at the SMLP parent to the Obligor Group
to reflect what those entities' results would have been had they operated on a
stand-alone basis. Summarized statements of operations for the three months
ended March 31, 2023 and for the year ended December 31, 2022 follow.
Three Months Ended
March 31, 2023
SMLP Obligor Group
(In thousands)
Total revenues $ - $ 112,480
Total costs and expenses 597 94,101Loss before income taxes and income from equity method investees
(597) (12,926)
Income from equity method investees - 3,191
Net loss $ (345) $ (9,735)
Year Ended December 31, 2022
SMLP Obligor Group
(In thousands)
Total revenues $ - $ 369,592
Total costs and expenses 10,505 411,640
Loss before income taxes and income from equity method investees
(10,505) (136,912)
Income from equity method investees - 13,358
Net loss $ (10,827) $ (123,554) Critical Accounting Estimates
We prepare our financial statements in accordance with GAAP. These principles are established by the FASB. We employ methods, estimates and assumptions based on currently available information when recording transactions resulting from business operations. There have been no significant changes to our critical accounting estimates from those disclosed on Form 10-K for the fiscal year endedDecember 31, 2022 . 40
--------------------------------------------------------------------------------
Table of Contents
Forward-Looking Statements
Investors are cautioned that certain statements contained in this report as well as in periodic press releases and certain oral statements made by our officers and employees during our presentations are "forward-looking" statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements and may contain the words "expect," "intend," "plan," "anticipate," "estimate," "believe," "will be," "will continue," "will likely result," and similar expressions, or future conditional verbs such as "may," "will," "should," "would," and "could." In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries are also forward-looking statements. These forward-looking statements involve various risks and uncertainties, including, but not limited to, those described in Part II. Item 1A. Risk Factors included in this report. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond the control of our management team. All forward-looking statements in this report and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements in this paragraph. These risks and uncertainties include, among others:
•our decision whether to pay, or our ability to grow, our cash distributions;
•fluctuations in natural gas, NGLs and crude oil prices, including as a result
of political or economic measures taken by various countries or
•the extent and success of our customers' drilling and completion efforts, as well as the quantity of natural gas, crude oil, fresh water deliveries, and produced water volumes produced within proximity of our assets;
•the current and potential future impact of the COVID-19 pandemic on our business, results of operations, financial position or cash flows;
•failure or delays by our customers in achieving expected production in their natural gas, crude oil and produced water projects;
•competitive conditions in our industry and their impact on our ability to connect hydrocarbon supplies to our gathering and processing assets or systems;
•actions or inactions taken or nonperformance by third parties, including suppliers, contractors, operators, processors, transporters and customers, including the inability or failure of our shipper customers to meet their financial obligations under our gathering agreements and our ability to enforce the terms and conditions of certain of our gathering agreements in the event of a bankruptcy of one or more of our customers; •our ability to divest of certain of our assets to third parties on attractive terms, which is subject to a number of factors, including prevailing conditions and outlook in the natural gas, NGL and crude oil industries and markets;
•the ability to attract and retain key management personnel;
•commercial bank and capital market conditions and the potential impact of changes or disruptions in the credit and/or capital markets;
•changes in the availability and cost of capital and the results of our financing efforts, including availability of funds in the credit and/or capital markets;
•restrictions placed on us by the agreements governing our debt and preferred equity instruments;
•the availability, terms and cost of downstream transportation and processing services;
•natural disasters, accidents, weather-related delays, casualty losses and other matters beyond our control;
•operational risks and hazards inherent in the gathering, compression, treating and/or processing of natural gas, crude oil and produced water;
•our ability to comply with the terms of the agreements comprising the Global Settlement;
•weather conditions and terrain in certain areas in which we operate;
•physical and financial risks associated with climate change;
•any other issues that can result in deficiencies in the design, installation or
operation of our gathering, compression, treating, processing and freshwater
facilities;
41--------------------------------------------------------------------------------
Table of Contents
•timely receipt of necessary government approvals and permits, our ability to control the costs of construction, including costs of materials, labor and rights-of-way and other factors that may impact our ability to complete projects within budget and on schedule;
•our ability to finance our obligations related to capital expenditures, including through opportunistic asset divestitures or joint ventures and the impact any such divestitures or joint ventures could have on our results;
•the effects of existing and future laws and governmental regulations, including environmental, safety and climate change requirements and federal, state and local restrictions or requirements applicable to oil and/or gas drilling, production or transportation;
•changes in tax status;
•the effects of litigation;
•interest rates;
•changes in general economic conditions; and
•certain factors discussed elsewhere in this report.
Developments in any of these areas could cause actual results to differ materially from those anticipated or projected or cause a significant reduction in the market price of our common units, preferred units and senior notes.
The foregoing list of risks and uncertainties may not contain all of the risks and uncertainties that could affect us. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this document may not in fact occur. Accordingly, undue reliance should not be placed on these statements. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as otherwise required by law.
Information About Us
Investors should note that we make available, free of charge on our website at www.summitmidstream.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC . We also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent news releases. We may use the Investors section of our website to communicate with investors. It is possible that the financial and other information posted there could be deemed to be material information. Documents and information on our website are not incorporated by reference herein.
The
42--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
