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, 2021 . 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, 2021 (the "2021 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, Piceance, and Permian 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 toRussia's invasion ofUkraine beginning inFebruary 2022 , which mitigates the risk of cancelled or delayed drilling and/or completion activities. 20
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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, 2022 and 2021" section included herein. Three Months Ended March 31, 2022 2021 (In thousands) Net income (loss) $ (5)$ 8,988 Reportable segment adjusted EBITDA Northeast$ 20,068 $ 20,193 Rockies 15,830 16,152 Permian 4,149 1,250 Piceance 15,768 21,034 Barnett 9,286 8,016 Net cash provided by operating activities$ 46,046 $ 51,430 Capital expenditures (1) 8,703 2,610 Investment in Double E equity method investee (2) 8,444 5,619 Repayments on Revolving Credit Facility - (55,000) Repayments on Permian Transmission Term Loan (1,095) - Borrowings under Permian Transmission Credit Facility - 17,500 Repayments on ABL Facility (34,000) - ________
(1)See "Liquidity and Capital Resources" herein to the unaudited condensed consolidated financial statements for additional information on capital expenditures.
(2)Inclusive of$1.0 million of capitalized interest for the three months endedMarch 31, 2021 . There was no capitalized interest recorded for the three months endedMarch 31, 2022 . 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 COVID-19 pandemic and fluctuations in demand for oil and natural gas;
•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 2021
Annual Report.
Ongoing impact of the COVID-19 pandemic and fluctuations in demand for oil and
natural gas. We continue to closely monitor the impact of the COVID-19 pandemic,
including its variants, on all aspects of our business, including how it has
impacted and will impact our customers, employees, supply chain and distribution
network. We are unable to predict the broader implications of and the ultimate
impact that COVID-19, its variants and related factors may have on our business,
future results of operations, financial position or cash flows. Given the
dynamic nature of the COVID-19 pandemic and related market conditions, we cannot
reasonably estimate the period of time that these events will persist or the
full extent of the impact they will have on our business. The extent to which
our operations continue to be impacted by the COVID-19 pandemic will
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depend largely on future developments, which remain highly uncertain and cannot be accurately predicted, including changes in the severity of the pandemic, countermeasures taken by governments, businesses and individuals to slow the spread of the pandemic, and the development and availability of treatments and the extent to which these treatments and vaccines may remain effective as potential new strains of the coronavirus emerge. We have collaborated extensively with our customer base regarding impacts to their drilling and completion activities in light of the COVID-19 pandemic. Based on recently updated production forecasts and 2022 development plans from our customers, we currently expect that 2022 activity will be lower than historical periods prior to COVID-19, notwithstanding the recent increase in commodity prices primarily driven byRussia's invasion ofUkraine inFebruary 2022 . Ongoing impact of the currentRussia -Ukraine conflict and the international sanctions againstRussia on commodity prices. In February of 2022,Russia invadedUkraine and is still engaged in active armed conflict against the country. As a result, governments in theEuropean Union ,the United States and other countries have enacted additional sanctions againstRussia , certain of its citizens and Russian interests. 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. Cost structure optimization and portfolio management. The Partnership intends to optimize 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, divestitures, 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 or equity will be adequate to finance our strategic initiatives. To attain our overall 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.
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 14 - 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 2021 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.
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Results of Operations
Consolidated Overview for the Three Months Ended
The following table presents certain consolidated financial and operating data.
Three Months Ended
2022 2021
(In thousands)
Revenues:
Gathering services and related fees $ 64,020 $ 70,348
Natural gas, NGLs and condensate sales 22,458 20,763
Other revenues 9,648 8,207
Total revenues 96,126 99,318
Costs and expenses:
Cost of natural gas and NGLs 22,251 20,476
Operation and maintenance 17,062 16,593
General and administrative 12,960 10,344
Depreciation and amortization 30,445 28,511
Transaction costs 246 -
(Gain) loss on asset sales, net 3 (136)
Long-lived asset impairment 14 1,492
Total costs and expenses 82,981 77,280
Other income, net - 55
Gain (loss) on interest rate swaps 7,028 (6)
Loss on ECP Warrants - (1,475)
Interest expense (24,163) (13,953)
Income (loss) before income taxes and equity method investment income
(3,990) 6,659
Income tax (expense) benefit (50) 14
Income from equity method investees 4,035 2,315
Net income (loss) $ (5) $ 8,988
Volume throughput (1):
Aggregate average daily throughput - natural gas (MMcf/d) 1,306 1,346
Aggregate average daily throughput - liquids (Mbbl/d) 65 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, 2022 and 2021".
Volumes - Gas.
Natural gas throughput volumes decreased 40 MMcf/d for the three months
ended
•a volume throughput increase of 2 MMcf/d for the Barnett segment.
•a volume throughput decrease of 6 MMcf/d for the Northeast segment.
•a volume throughput decrease of 28 MMcf/d for the Piceance segment.
•a volume throughput decrease of 2 MMcf/d for the Permian segment.
•a volume throughput decrease of 6 MMcf/d for the Rockies segment.
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Volumes - Liquids.
Crude oil and produced water throughput volumes at the Rockies segment remained flat for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily as a result of 31 new well connections that came online subsequent toMarch 31, 2021 , 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 decreased$3.2 million during the three months endedMarch 31, 2022 compared to the prior year period, comprised of a$1.7 million increase in natural gas, NGLs and condensate sales, a$1.4 million increase in Other Revenue; offset by a$6.3 million decrease in gathering services and related fees.
Gathering Services and Related Fees. Gathering services and related fees
decreased
•a
•a$1.1 million decrease in gathering services and related fees in the Rockies, primarily as a result of a decrease in natural gas volume throughput as well as the expiration of a customer's minimum volume commitment contract in the DJ basin.
Natural Gas, NGLs and Condensate Sales. Natural gas, NGLs and condensate
revenues increased
•a
Costs and Expenses. Total costs and expenses increased$5.7 million during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 .
Cost of Natural Gas and NGLs. Cost of natural gas and NGLs increased
Operation and Maintenance. Operation and maintenance expense increased
General and Administrative. General and administrative expense increased$2.6 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , primarily related to increased employee severance costs of$2.4 million during the three months endedMarch 31, 2022 and an increase in employee salaries and wages. Depreciation and Amortization. Depreciation and amortization expense increased$1.9 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 as a result of increased depreciation expense on certain gas processing equipment. Interest Expense. Interest expense increased$10.2 million for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to higher interest costs resulting from the issuance of the 2026 Secured Notes and borrowings on the Permian Transmission Term Loan, partially offset by the repayment of the 2022 Senior Notes and Revolving Credit Facility. 24
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Segment Overview for the Three Months Ended
Northeast.
Volume throughput for the Northeast reportable segment follows.
Northeast
Three Months Ended March 31,
Percentage
2022 2021 Change
Average daily throughput (MMcf/d) 741 747 (1)%
Average daily throughput (MMcf/d) (Ohio Gathering) 598 558 7%
Volume throughput for the Northeast, excluding Ohio Gathering, decreased 1%
compared to the three months ended
Volume throughput for the Ohio Gathering system increased 7% compared to the three months endedMarch 31, 2021 , primarily as a result of 17 new well connections that came online subsequent toMarch 31, 2021 , partially offset by natural production declines.
Financial data for our Northeast reportable segment follows.
Northeast
Three Months Ended March 31,
Percentage
2022 2021 Change
(In thousands)
Revenues:
Gathering services and related fees $ 14,636 $ 14,773 (1)%
Total revenues 14,636 14,773 (1)%
Costs and expenses:
Operation and maintenance 1,647 1,280 29%
General and administrative 183 151 21%
Depreciation and amortization 4,300 4,231 -
Gain on asset sales, net (10) (62) *
Long-lived asset impairment - 138 *
Total costs and expenses 6,120 5,738 7%
Add:
Depreciation and amortization 4,300 4,231
Adjustments related to capital reimbursement activity (20)
(21)
Gain on asset sales, net (10)
(62)
Long-lived asset impairment -
138
Proportional adjusted EBITDA for Ohio Gathering 7,276 6,872 Other 6 - Segment adjusted EBITDA$ 20,068 $ 20,193 (1)% ________ * Not considered meaningful Three months endedMarch 31, 2022 . Segment adjusted EBITDA decreased$0.1 million compared to the three months endedMarch 31, 2021 primarily as a result of a$0.4 million increase in operations and maintenance expense for the three months endedMarch 31, 2022 , partially offset by a$0.4 million increase in proportional adjusted EBITDA from Ohio Gathering. 25
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Rockies.
Volume throughput for our Rockies reportable segment follows.
Rockies
Three Months Ended March 31,
Percentage
2022 2021 Change
Aggregate average daily throughput - natural gas
(MMcf/d) 29 35 (17%)
Aggregate average daily throughput - liquids (Mbbl/d) 65
65 0%
Natural gas. Natural gas volume throughput decreased 17% compared to the three
months ended March 31, 2021 , primarily reflecting natural production declines
and weather related downtime, partially offset by three new well connections
that came online subsequent to March 31, 2021 .
Liquids. Liquids volume throughput remained flat compared to the three months
ended March 31, 2021 , primarily associated with 31 new well connections that
came online subsequent to March 31, 2021 , partially offset by natural production
declines and operational and weather related downtime.
Financial data for our Rockies reportable segment follows.
Rockies
Three Months Ended March 31,
Percentage
2022 2021 Change
(In thousands)
Revenues:
Gathering services and related fees $ 17,789 $ 18,896 (6)%
Natural gas, NGLs and condensate sales 13,659 12,337 11%
Other revenues 5,157 5,210 (1)%
Total revenues 36,605 36,443 0%
Costs and expenses:
Cost of natural gas and NGLs 13,422 12,342 9%
Operation and maintenance 6,212 6,836 (9%)
General and administrative 684 672 2%
Depreciation and amortization 7,448 7,473 0%
Gain on asset sales, net 14 (17) (182%)
Long-lived asset impairment 13 95 *
Total costs and expenses 27,793 27,401 1%
Add:
Depreciation and amortization 7,448
7,473
Adjustments related to capital reimbursement activity (478) (464) Gain on asset sales, net 14 (17) Long-lived asset impairment 13 95 Other 21 - 23 Segment adjusted EBITDA$ 15,830
$ 16,152 (2)% _______
* Not considered meaningful
Three months endedMarch 31, 2022 . Segment adjusted EBITDA decreased$0.3 million compared to the three months endedMarch 31, 2021 primarily due to lower natural gas volume throughput on our systems as previously discussed, as well as the expiration of a customer's minimum volume commitment contract in the DJ basin, partially offset by$0.6 million of lower operating and maintenance expenses. 26
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Permian.
Volume throughput for our Permian reportable segment follows.
Permian
Three Months Ended March 31,
Percentage
2022 2021 Change
Average daily throughput (MMcf/d) 27 29 (7%)
Average daily throughput (MMcf/d) (Double E) 187 - n/a
Volume throughput, excluding Double E , decreased compared to the three months
ended March 31, 2021 , primarily as a result of natural production declines,
partially offset by four new connections that came online subsequent to March
31, 2021 .
The following table presents the MVC quantities thatDouble E's shippers have contracted to with firm transportation service agreements and related negotiated rate agreements. (Amounts in MMBTU/day) 2022 2023 2024 2025 2026-2031 Weighted average MVC quantities for the year ended December 31, 622,603 839,247 990,205 1,000,000 5,835,616
Financial data for our Permian reportable segment follows.
Permian
Three Months Ended March 31,
Percentage
2022 2021 Change
(In thousands)
Revenues:
Gathering services and related fees $ 1,847 $ 2,199 (16%)
Natural gas, NGLs and condensate sales 6,867 6,518 5%
Other revenues 1,019 759 34%
Total revenues 9,733 9,476 3%
Costs and expenses:
Cost of natural gas and NGLs 7,092 7,016 1%
Operation and maintenance 1,304 992 31%
General and administrative 363 218 67%
Depreciation and amortization 1,497 1,469 2%
Total costs and expenses 10,256 9,695 6%
Add:
Depreciation and amortization 1,497 1,469
Proportional adjusted EBITDA for Double E 3,175 -
Segment adjusted EBITDA $ 4,149 $ 1,250 232%
________
*Not considered meaningful
Three months ended
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Piceance.
Volume throughput for our Piceance reportable segment follows.
Piceance
Three Months Ended March 31,
Percentage
2022 2021 Change
Aggregate average daily throughput (MMcf/d) 312 340 (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
2022 2021 Change
(In thousands)
Revenues:
Gathering services and related fees $ 20,071 $ 24,784 (19%)
Natural gas, NGLs and condensate
sales 1,895 1,853 2%
Other revenues 1,275 1,177 8%
Total revenues 23,241 27,814 (16%)
Costs and expenses:
Cost of natural gas and NGLs 1,108 1,119 (1)%
Operation and maintenance 5,273 4,942 7%
General and administrative 328 298 10%
Depreciation and amortization 12,780 10,873 18%
Gain on asset sales, net - (57) *
Long-lived asset impairment - 970 *
Total costs and expenses 19,489 18,145 7%
Add:
Depreciation and amortization 12,780 10,873
Adjustments related to capital reimbursement activity (899)
(427)
Gain on asset sales, net - (57) Long-lived asset impairment - 970 Other 135 6 Segment adjusted EBITDA$ 15,768 $ 21,034 (25%) ________
*Not considered meaningful
Three months endedMarch 31, 2022 . Segment adjusted EBITDA decreased$5.3 million compared to the three months endedMarch 31, 2021 , primarily reflecting a decrease in volume throughput as a result of natural production declines as discussed above as well as$3.3 million in reduced revenue related to the expiration of a customer's minimum volume commitment contract in 2021. 28
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Barnett.
Volume throughput for our Barnett reportable segment follows.
Barnett
Three Months Ended March 31,
Percentage
2022 2021 Change
Average daily throughput (MMcf/d) 197 195 1%
Volume throughput increased 1% compared to the three months ended
Financial data for our Barnett reportable segment follows.
Barnett
Three Months Ended March 31,
Percentage
2022 2021 Change
(In thousands)
Revenues:
Gathering services and related fees $ 9,677 $ 9,696 0%
Natural gas, NGLs and condensate sales - 55 (100%)
Other revenues (1) 2,063 1,061 94%
Total revenues 11,740 10,812 9%
Costs and expenses:
Operation and maintenance 2,124 2,464 (14%)
General and administrative 242 235 3%
Depreciation and amortization 3,792 3,797 -
Long-lived asset impairment - 289 *
Total costs and expenses 6,158 6,785 (9%)
Add:
Depreciation and amortization 4,026 4,031
Adjustments related to capital reimbursement activity (327)
(331)
Long-lived asset impairment - 289 Other 5 - Segment adjusted EBITDA$ 9,286 $ 8,016 16% ________
*Not considered meaningful
(1)Includes the amortization expense associated with our favorable gas gathering contracts as reported in Other revenues.
Three months endedMarch 31, 2022 . Segment adjusted EBITDA increased$1.3 million compared to the three months endedMarch 31, 2021 , primarily as a result of a$1.0 million increase in other revenues for the three months endedMarch 31, 2022 . 29
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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,
natural gas and crude oil marketing services, transaction costs and interest
expense.
Corporate and Other
Three Months Ended March 31,
Percentage
2022 2021 Change
(In thousands)
Revenues:
Total revenues $ 171 $ - *
Costs and expenses:
Operation and maintenance 502 79 *
General and administrative 11,157 9,005 24% Transaction costs 246 - * Interest expense 24,163 13,953 73% ________
* Not considered meaningful
General and Administrative. General and administrative expense increased by 2.2 million, compared to the three months endedMarch 31, 2021 , primarily related to increased employee severance costs of$2.4 million during the three months endedMarch 31, 2022 and an increase in employee salaries and wages. Interest Expense. The increase in interest expense for the three months endedMarch 31, 2022 , compared to three months endedMarch 31, 2021 , was primarily due to higher interest costs resulting from the issuance of the 2026 Secured Notes and borrowings on the Permian Transmission Term Loan, partially offset by the repayment of the 2022 Senior Notes and Revolving 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, 2022 , our material off-balance sheet arrangements and transactions include (i) letters of credit outstanding against our ABL Facility aggregating to$18.4 million , (ii) letters of credit outstanding against our Permian Transmission Credit Facility aggregating to$5.5 million , and (iii) outstanding surety bonds aggregating to$2.0 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. 30
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Indebtedness Compliance as ofMarch 31, 2022 . As ofMarch 31, 2022 , we were in compliance with all covenants contained in the Senior Notes, 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, 2022 , the First Lien Net Leverage Ratio and Interest Coverage Ratio was 0.97:1.00 and 2.72:1.00, respectively.
Credit Agreements and Financing Activities
ABL Facility. As ofMarch 31, 2022 , we had a$400.0 million revolving ABL Facility with a maturity date ofMay 1, 2026 . As ofMarch 31, 2022 , the outstanding balance of the ABL Facility was$233.0 million and the available borrowing capacity totaled$148.6 million after giving effect to the issuance thereunder of$18.4 million of outstanding but undrawn irrevocable standby letters of credit. 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. LIBOR Transition LIBOR is the basic rate of interest widely used as a reference for setting the interest rates on loans globally. In 2017, theUnited Kingdom's Financial Conduct Authority , which regulates LIBOR, announced that it intended to phase out LIBOR by the end of 2021. TheU.S. Federal Reserve , in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of largeU.S. financial institutions, is considering replacingU.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate ("SOFR"), calculated using short-term repurchase agreements backed byTreasury securities. AfterDecember 31, 2021 , theUnited Kingdom ceased publications of certain LIBOR tenors and expects to cease publications of all USD LIBOR tenors afterJune 30, 2023 . We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, however, we are not able to predict when LIBOR will cease to be available, whether SOFR will become a widely accepted benchmark in place of LIBOR or what the impact of such a possible transition to SOFR may be on our business, financial condition and results of operations. The ABL Facility includes an ability of the administrative agent to transition loans based on LIBOR to loans based on term SOFR or daily simply SOFR. The adjustment rate upon a transition to term SOFR is 11.448 bps for a one-month tenor, 26.161 bps for a three-month tenor, 42.826 for a six-month tenor, and 71.513 for a twelve-month tenor. This transition has not yet occurred with the ABL Facility. Cash Flows The components of the net change in cash and cash equivalents were as follows: Three Months Ended March 31, 2022 2021 (In thousands) Net cash provided by operating activities$ 46,046 $ 51,430 Net cash used in investing activities (15,297) (229) Net cash used in financing activities (37,841) (42,445)
Net change in cash, cash equivalents and restricted cash
Operating activities.
Cash flows provided by operating activities for the three months ended
•a
•positive adjustments of
Cash flows provided by operating activities for the three months ended
•net income of
•
Investing activities.
Cash flows used in investing activities during the three months ended
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•$8.4 million for investments in the
•$8.7 million cash outflow for capital expenditures; offset by
•$1.9 million of cash proceeds from the sale of a compressor.
Cash flows used in investing activities during the three months ended
•$5.6 million for cash investments in the
•
•
Financing activities.
Cash flows used in financing activities during the three months ended
•$34.0 million of cash outflow for repayments on the ABL Facility.
Cash flows used in financing activities during the three months ended
•$55.0 million of cash outflow for repayments on the Revolving Credit Facility; offset by
•$17.5 million from borrowings under the Permian Transmission Credit 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.
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.
Considering the current commodity price backdrop and continued uncertainty regarding impacts from the COVID-19 pandemic, we will remain disciplined with respect to future capital expenditures.
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 fiscal year 2025, the Partnership is
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 Credit 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 the Partnership does 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 are subject to certain rate escalations. Per the terms
of the 2026 Secured Notes Indenture, the designated amounts are
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$50.0 million in aggregate byApril 1, 2023 , otherwise the interest rate shall automatically increase by 50 basis points per annum;$100.0 million in aggregate 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 in aggregate byApril 1, 2025 , otherwise the interest rate shall automatically increase by 200 basis points per annum (minus any amount previously increased). To the extent the Partnership makes an offer to purchase, and the offer is not fully accepted by the holders of the 2026 Secured Notes, the Partnership 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.
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 of theSummit 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. 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.
Summarized Balance Sheet Information. Summarized balance sheet information as of
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March 31, 2022
SMLP Obligor Group
(In thousands)
Assets
Current assets $ 2,368 $ 66,010
Noncurrent assets 5,230 2,129,341
Liabilities
Current liabilities $ 9,551 $ 77,209
Noncurrent liabilities 1,662 1,241,004
December 31, 2021
SMLP Obligor Group
(In thousands)
Assets
Current assets $ 2,495 $ 70,483
Noncurrent assets 4,776 2,149,300
Liabilities
Current liabilities $ 12,463 $ 58,658
Noncurrent liabilities 1,771 1,274,803
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, 2022 and for the year ended December 31, 2021 follow.
Three Months Ended
March 31, 2022
SMLP Obligor Group
(In thousands)
Total revenues $ - $ 96,126
Total costs and expenses 607 82,015Loss before income taxes and income from equity method investees
(607) (8,757)
Income from equity method investees - 3,323
Net loss $ (657) $ (5,434)
Year Ended December 31, 2021
SMLP Obligor Group
(In thousands)
Total revenues $ - $ 400,619
Total costs and expenses 23,989 317,975
Income (loss) before income taxes and loss from equity method investees
(37,618) 13,931
Income from equity method investees - 9,116
Net income (loss) $ (37,291) $ 23,047 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, 2021 . 34
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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 orOPEC or as a result of theRussia -Ukraine conflict;
•the extent and success of our customers' drilling and completion efforts, as well as the quantity of natural gas, crude oil 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;
•our ability to refinance near-term maturities on favorable terms or at all and the related impact on our ability to continue as a going concern;
•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;
•any other issues that can result in deficiencies in the design, installation or operation of our gathering, compression, treating and processing facilities;
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•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;
•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
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