FINAL TRANSCRIPT
CHKM - Springridge Acquisition Update
Event Date/Time: Dec. 17. 2010 / 2:20PM GMT
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
CORPORATE PARTICIPANTS
Brad Mueller
Chesapeake Midstream Partners - Controller
Mike Stice
Chesapeake Midstream Partners - CEO
Bob Purgason
Chesapeake Midstream Partners - COO
Dave Shiels
Chesapeake Midstream Partners - CFO
CONFERENCE CALL PARTICIPANTS
Stephen Maresca
Morgan Stanley - Analyst
Darren Horowitz
Raymond James & Associates - Analyst
Sharon Lui
Wells Fargo Securities - Analyst
Michael Cerasoli
Goldman Sachs - Analyst
Gabe Moreen
BofA Merrill Lynch - Analyst
Louis Shamie
Zimmer Lucas - Analyst
Yves Siegel
Credit Suisse - Analyst
Ronnie Ganguly
JPMorgan Chase & Co. - Analyst
PRESENTATION
Operator
Good morning and welcome to the Chesapeake Midstream Partners conference call. Today's conference is being recorded. At
this time I would like to turn the conference over to Brad Mueller, Controller for the Partnership.
Brad Mueller - Chesapeake Midstream Partners - Controller
Thank you, operator. Good morning to everyone, and thank you for being with us today. Joining me this morning are Mike
Stice, Chief Executive Officer; Dave Shiels, Chief Financial Officer; and Bob Purgason, our Chief Operating Officer.
Mike, Dave, and Bob will begin the call with some prepared remarks on the acquisition and our outlook for 2011, and then will
move into Q&A. I would like to note before we get started that the presentation materials that will be referenced during the
prepared remarks can be found by visiting www.chkm.com, where you will find him on the main page of the website.
You will also find a copy of yesterday's press release in the News section of the website.
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Today we will be discussing forward-looking statements that give our current expectations or forecasts for events that may
include but are not limited to estimates of expected gathering, treating and compression volumes and future operating expenses,
planned capital expenditures and anticipated asset acquisitions and sales, as well as statements concerning anticipated cash
flow and liquidity, business strategy and other plans and objectives for future operations.
Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable,
we can give no assurance they will prove to have been correct. Please see our prospectus dated July 28, 2010, and filed with
the SEC on July 30, 2010, for a listing of factors that could cause actual results to differ materially from expected results.
With that, I will turn the call over to Mike.
Mike Stice - Chesapeake Midstream Partners - CEO
Thank you, Brad, and happy holidays, everyone, and good morning. We felt we would close out the year with an early holiday
present to ourselves and our investors by announcing our first drop-down since the IPO. Pretty exciting time for me and the
management team and we are thrilled to be on this phone call today.
I would turn you to Slide 1 and I will comment to a few of the slides and I will ask Bob Purgason to describe the asset, and then
we will have Dave Shiels give some financial implications of the drop-down and I will close today with offering some outlook
on the combined business and portfolio.
So on Slide 1, we wanted to reiterate how this MLP has been focused heavily on creating a best in class midstream business
model. We are doing that mostly by contractual structure and making sure that we are staying committed to a low-risk business
model. And specifically I wanted to highlight that this is a $500 million purchase price with a funding from $250 million in cash,
$250 million from our revolver. It is that long-term fee-based gas gathering agreement that maintains that commitment to the
low-risk business model.
This is 100% of the Springridge gas gathering system within the Haynesville, the Haynesville being one of the more exciting
plays in the unconventional shale development. We are going to close before December 31, 2010, and I am most excited by
the fact that we have completed our first drop-down within six months from our initial IPO.
This particular asset, as I have highlighted before, we find extremely attractive, because of the growth platform it provides. This
is a growing asset.
So Slide 2, I wanted to get into a few more details on the low-risk business model. It came with a 10-year gas gathering agreement
from Chesapeake, inclusive of an acreage dedication for the large AMI for Caddo and De Soto Parish. It is a 100% fixed fee gas
contract. It came with a three-year minimum volume commitment set at 75% of the sellers projected volume.
It has a 10-year annual rate redetermination that begins at year three. So effectively the first redetermination calculation will
be 1/1/2013 and annually thereafter until the end of the 10-year period.
Most importantly, this asset, when you consider the portfolio, provides basin diversification from our existing portfolio. As you
know, we are -- Barnett and Mid-Continent and the Mid-Continent including Anadarko and Permian, this adds the most attractive
unconventional play at the Haynesville and it is the core of the core within the Springridge. So we're really thrilled to have this
footprint in our portfolio.
We are also excited that there is additional third-party upside within this footprint. There are other producers in the acreage in
the AMI that we feel that we are going to be able to add to our business. There is significant organic growth remaining in the
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
asset from Chesapeake infield drilling. And we clearly do have the natural consolidator footprint, much like we have in the
Barnett.
I also like the fact that has got very attractive upstream F&D cost, positioning itself very well within the broader portfolio.
The most important thing to investors is this deal is immediately accretive to unit holders with additional growth upside.
If I would, I would like to take this time and turn it over to Bob, and have him describe more specifically the Springridge assets.
Bob Purgason - Chesapeake Midstream Partners - COO
Thanks, Mike. As Mike said, the great thing about this particular asset or one of the great things is its location. It is in the core
of the Haynesville play, one of which Chesapeake is the number-one acreage holder, and we now have through this acreage
dedication and AMI, a great position, substantially in Caddo County, but with some reaches into De Soto County.
Today's throughput is over 400 million cubic foot a day, and over 600 million of capacity in that facility. 27,000 horsepower of
compression that is leased, and 220 miles of pipeline.
And just so my friends in Louisiana don't get too upset, actually it is Caddo Parish. So I will make sure that I don't have any calls
afterwards from all my Louisiana friends.
The other piece of this system is it's designed to provide great optionality to the producer in terms of markets with interconnects
to Energy Transfer's Tiger Pipeline that has just recently started up, CenterPoint 42 inch, that traverses that 42 inch corridor,
and then additional interconnections with Texas Gas transmission. We have about 350 GPM of treating capacity in this facility.
So it is able to manage the CO2 and H2S that is somewhat prevalent in this portion of the Haynesville.
As Mike spoke to organic growth, we have here this facility has been designed to take advantage of pad drilling to the max. We
call it the superpad concept, where the pipelines are designed to split the section lines and then you can quickly connect to a
pad on either side of that section line to fully exploit the development of the field for the potential that is there with minimal
additional capital exposure.
So a lot of capital leverage on a go forward-basis as volumes develop and as you move to infill development.
Haynesville is still in the acreage capture mode right now. But as this field moves into full development, very low connection
costs.
You can look at our presentation and see on Slide 4 that we have had substantial growth historically. Just last year, this facility
was ranging just under 300 million a day and now has topped 400 million today as you can see and we see continued growth
with about 30 or so wells waiting on completion that will be connecting early in the first quarter and on into the second quarter
that will continue the volume growth from this asset.
So we are really pleased with the organic growth here. As Mike said, developing this asset or having this asset in a low finding
cost area, but also in the second-largest gas field in North America, the Haynesville.
If you look at this asset and opportunity compared to our business model, we have spent a lot of time talking about the low-risk
business model, what kind of risk factors there are in any of these investments, and on our Slide 5 we compared with our existing
business model and where Springridge sits. Again, on commodity price exposure this is a totally fixed fee system. In terms of
dedication and long-term re-contracting risk, we've got a 10-year acreage and AMI, an area of mutual interest, where all
development from Chesapeake is dedicated to us.
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
As Mike mentioned, we have the three-year 75% minimum volume commitment. We have the annual fee escalation feature as
we have had in some of our other contracts, 2.5% in this case. We have a fixed cost contract with our compression cost, so we've
got that component covered as we have in our other agreements as well. And, as Mike spoke to, capital redetermination here
protects us both on the volume and the capital efficiency basis.
The feature here -- given we know that the production growth is strong in the first year of the project, having that two-year
period before we have that our first redetermination, gives us additional good cash flow in the early years of the project.
So the structural and contractual provisions of this transaction are as promised, appropriate, on a go-forward basis and provide
protected and visible distributions to the unit holders.
Mike Stice - Chesapeake Midstream Partners - CEO
Dave.
Dave Shiels - Chesapeake Midstream Partners - CFO
Thanks, Bob; thanks, Mike. Bob talked about the throughput growth we have seen in the Haynesville in the last couple of years,
so it should be no surprise to anybody that we are going to see significant EBITDA growth with this asset over the future years.
On Slide 6, you can see the EBITDA for Springridge is $42 million in 2011. That will have a 14% growth rate over the next four
or five years, and it grows all the way to approximately $70 million by 2015. So what that does for us is buys down the multiple
to around seven times, which is right in line with our mid-teens return that is the objective for Chesapeake Midstream Partners.
The next slide, Slide 7, lays out our liquidity position post Springridge acquisition. And, very simply, like Mike said up front, we
will fund the Springridge acquisition with approximately $250 million in cash that are proceeds from the IPO and $250 million
from our credit facility.
But the point I wanted to make here is we still have a terrific liquidity position. We have $500 million left on our revolver, and
even after the acquisition, our debt to EBITDA ratio is less than 1. So coming out of the Springridge acquisition, it has tremendous
growth. We still have a fantastic liquidity position to move forward and take advantages of opportunities in the future.
With that I will send it back to you, Mike.
Mike Stice - Chesapeake Midstream Partners - CEO
Thank you, Dave. I like Slide 8, because it shows you what the combined new CHKM asset portfolio looks like. Love adding the
state of Louisiana. In the corner, you can see where Springridge assets are in the upper northwestern corner of Louisiana there.
This brings our invested capital total for the entire CHKM to $2.7 billion, gives us access to dedicated acreage of Chesapeake of
2.6 million acres, brings us well over 3,000 miles of pipe in the ground, and I particularly want to point to our new volume.
When you add the 400 million a day that Bob spoke to earlier, we are almost a 2 Bcf a day midstream gathering company today.
This is a very significant and material business, and I wanted to highlight that we have added 42 employees to our direct
seconded employee list, bringing our new employee count to 287.
So in many ways, I oftentimes have commented to natural consolidator footprint and the importance of that, but as you can
also see there is a contiguous nature of adding the Springridge Gas Gathering System to our portfolio. We are now predominantly
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
in Texas, Oklahoma and Louisiana, and we think there is some synergies in cost in managing those business from a contiguous
fashion.
So I want to not spend too much time on Slide 9, but I just wanted to highlight that this is the first of many drop-down
opportunities. This slide we shared recently to show you all the other Chesapeake Midstream Development assets that are
prepared for drop-down for the future. We will begin immediately looking at the next one. Not providing any outlook as to
which one, but we will continue to look for the asset with the right fit, the right contractual terms and the right overall portfolio
for our investors. But I am proud to put a checkmark beside Springridge Gas Gathering System and announce our very first
drop-down.
So with that, we would like to offer some additional outlook for 2011. I think most of you know that all we have done to date
since the IPO is we offered outlook on the next 12 months, so which it would end in July of 2011. With this transaction, we felt
like it was appropriate to update everyone on where we think we are going to be in regard to EBITDA, expansion capital and
maintenance capital for the calendar year 2011.
So, including the Springridge asset, our outlook for 2011 is $332 million in EBITDA, $256 million in expansion capital, and we
have added an additional $4 million in maintenance capital to our previous $70 million to achieve a $74 million combined
maintenance capital for 2011.
We feel with this asset we are going to deliver solid accretion, and we are looking forward to the strong growth that our existing
assets bring, as well as Springridge.
So we are very excited about being able to provide this presentation to you today. We know there will be a number of questions,
so with that I would like to turn it over and begin any questions the group might have.
QUESTIONS AND ANSWERS
Operator
(Operator Instructions). Stephen Maresca, Morgan Stanley.
Stephen Maresca - Morgan Stanley - Analyst
Good morning, everybody, and happy holidays to you as well. A couple of questions. On Slide 6, on the EBITDA ramp, how
should we think about volumes now at 400 and the capacity is 635 and, obviously, thanks for the historical trajectory chart. But
how should we think about it going forward in terms of the volume ramp up and what are Chesapeake's drilling plans for next
year in the region?
Bob Purgason - Chesapeake Midstream Partners - COO
Stephen, if you go back to Chesapeake's latest rig count in the Haynesville, they have been running 34 to 35 rigs. And as they
have said, they would expect when the held by production period is complete, which is basically mid-2011, you'll start to see
those rigs fall off to the 20 range.
So, a rig count that is declining and we would have expect there's been between five to nine rigs running in this area historically
as the Haynesville has ramped up. And we expect it to stay in the lower end of that range going forward until gas prices change
again. That is built into our forecast. But with the -- as I mentioned the 30 or so wells that are waiting on completion, plus the
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
drilling that is going on now, we still can see continued volume growth up into that 500 range, but not getting up near the
capacity of the system here in the near term until we see a move in gas prices.
Mike Stice - Chesapeake Midstream Partners - CEO
And Stephen, I would just add to that that we have very good line of sight on 2011 volume. Beyond that, obviously, we have
to be somewhat predictive on commodity prices and the activity of the producers, not only Chesapeake, but third parties within
the AMI.
Part of our purpose for the three-year MVC was to protect us from volume risk during that early period. But we feel pretty
confident that when you stack the Haynesville, specifically up from a funding and development cost basis, to the other alternatives,
this is going to be an attractive place for Chesapeake and other producers to drill for some time to come.
Stephen Maresca - Morgan Stanley - Analyst
Okay, is there any CapEx that needs to be done from your standpoint? Or is it just the well connects?
Bob Purgason - Chesapeake Midstream Partners - COO
No. There is still a little bit of expansion capital going on here completing the build out, particularly in the northern portion of
the system. And actually they are just in the process of commissioning one compression station that is in final stages. Mid-30s
in terms of where we are spending capital this next year.
Stephen Maresca - Morgan Stanley - Analyst
And a final question, then I will get off. How should we think going forward for the remaining assets or in terms of the drop-downs
and contractually, will they all have the MVCs in them, is that how we should be thinking?
Mike Stice - Chesapeake Midstream Partners - CEO
Well, I think the -- as you know, there is always another party on that negotiation, and there is a value consideration that we
have to factor in it. When you ask for contractual terms for protection, it has implications to the value. We have to negotiate
the right deal.
My commitment is to always look to embrace the low-risk business model and get the best contractual terms and conditions
we can. Obviously, not in every case are we going to get everything we want. But at the same time, we have traded value for
protection to stay committed to that low-risk business model. Part and parcel, the annual fee redetermination does that for us.
So my commitment to my investors are that we are going to be looking for that low-risk business model and trying to get those
kinds of contractual will and conditions, but every asset is different. Not every asset has the kind of exposure that you're trying
to protect yourself from with volume commitments or annual rate redetermination, and if we get to where we have confidence
in what we can deliver, without such terms then, of course, we will take the value rather than the protection.
So I think you will see that we are going to be very disciplined in the way we contract for our supply. And we're going to do our
best to get as many of those contractual protections without costing us too much value.
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Operator
Darren Horowitz, Raymond James.
Darren Horowitz - Raymond James & Associates - Analyst
Mike, first question, a big-picture question, how do the upstream F&D costs in this area compared to your other assets in the
Barnett and Mid-Con? I am just trying to think about this kind of holistically as we forecast a couple of years out for capital
allocation in different areas.
Mike Stice - Chesapeake Midstream Partners - CEO
Well, you asked a good question on F&D costs. There's really -- just to give you the high level, there's two thoughts here. One,
it compares very favorably from an F&D cost standpoint, but as you know, the Barnett is very good on F&D costs as well.
If you can go to some of the Investor Presentations that are out there on Chesapeake, they do a really nice comparison. I forget
which slide it is, but it does a side-by-side for you, where it compares the Marcellus, the Haynesville, the Barnett and the
Fayetteville.
What's the interesting takeaways from that slide is that you find that the Barnett is very good on F&D costs, but you need to
look at the volume profile as well, so there can get an idea of what the IRR is. In the Haynesville, you have a very nice beginning
kick in the volume. So you get early revenues.
So the Haynesville actually from an IRR standpoint is better than the Barnett for the producer. From an F&D cost standpoint
alone, the Barnett is actually better. What I liked about the basin diversification of adding Springridge now is because these
assets are different, they have better EURs in the Haynesville, larger volume kicks and yet they are still very competitive with all
the unconventional assets from the finding and development costs.
So this is going to attract the producers' drillbit much better than most of the basins in North America. So there is good data
out there on it. There is a great comparison in that slide. I would point you to it. But it does fit really well.
And back to Stephen's point, I think it is critical to look at it from a portfolio standpoint. We actually feel that the Springridge
fits perfect because it is beyond the hump of capital costs. His point is how much more capital do you have to develop the asset.
All of our assets have gotten to that mature stage and Springridge is no different.
Darren Horowitz - Raymond James & Associates - Analyst
Okay, I appreciate the color. Taking that a step further, how do you guys look and balance the opportunity for potential third-party
volume growth?
Mike Stice - Chesapeake Midstream Partners - CEO
From a balance standpoint, I intend to be very aggressive for third-party volume growth. As you know, we oftentimes put in
assets that have lower capacity utilization and therefore spare capacity to be exploited by additional third-party volumes.
And so, we are lucky in that the Springridge there are other producers within the AMI, that we are going to be able to have a
very competitive way to go and attract them to our system. We have already done so. We've recently signed up a couple of
producers into our system, in fact, during the last few months.
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
So we know we are going to be able to offer these attractive rates, the same ones we have offered to Chesapeake, to others
and attract third-party volume to our system and ultimately increase their utilization rate. That is the name of the game. You
need your midstream gathering system to be at high utilization rates, and to be able to charge market rates to attract third-party
volumes into your system. And Springridge is very well established and very well set up to do that.
Darren Horowitz - Raymond James & Associates - Analyst
Okay, and then final question for me and this is more of a quant question, but as you make that step function over time from
$42 million in EBITDA up to $70 million by 2015, what do you have modeled in for the rate redetermination in early 2013 relative
to where it is today? Is there a bit of a kind of a step function upward or how should we think about that?
Mike Stice - Chesapeake Midstream Partners - CEO
Well, as you know, the outlook that we provide is this is a mid-teens return formula. The annual redetermination works both
ways. So, the way I would coach you in that regard is just to target of mid-teens return and you know the capital that we are
deploying, and it is always going to come back to that kind of number. This is just like the other assets in our portfolio.
So the rate redetermination works both ways. In other words, there are years in the model where the rate redetermination
would reduce the tariff when we have overearned in the previous year, and there are times when in the model where the rate
increases, where there might have been underearned periods.
But bottom line for your purposes, I think the best way to do is to target a mid-teens return, like we have done on all of our
previous transactions.
Operator
Wells Fargo, Sharon Lui.
Sharon Lui - Wells Fargo Securities - Analyst
Just a follow-up on Darren's question. Out of the current volumes right now, how much are associated with third parties?
Dave Shiels - Chesapeake Midstream Partners - CFO
In the current volumes, very few. I think it is 96% Chesapeake volumes and 4% third-party. There has not been, as you know, a
very aggressive stance towards third-party volumes while it was being developed within the Chesapeake portfolio. The point
we are trying to make here is that we see lots of opportunities, and we are going to go after those opportunities with our spare
capacity.
So does that answer your question? And, by the way, happy holidays.
Sharon Lui - Wells Fargo Securities - Analyst
You too.
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Bob Purgason - Chesapeake Midstream Partners - COO
Let me just add, the one additional third-party contract we have had, feedback from that producer and their acreage dedication
is they plan to put one rig to work getting that acreage held by production. So we've got pretty good line of sight that we will
have one third-party rig running in our area.
Sharon Lui - Wells Fargo Securities - Analyst
Okay, great. Also, if you could just talk about the maintenance CapEx. The incremental $4 million looks a bit low in comparison
to the other maintenance CapEx levels in your portfolio.
Bob Purgason - Chesapeake Midstream Partners - COO
Absolutely, and we have used the same methodology to come up with our maintenance capital here. But the key distinction
is I talked about the superpad concept and that design of this system was laid out knowing shale plays, as Chesapeake did when
they bought their Haynesville acreage and laid this out. They were able to put the main trunk lines down section lines. We have
already connected a large majority of the pads to this gathering system, and there is 90 some odd connections to pads, another
30 or so that we are going to do this year. And those connections are relatively cheap.
Now you go to the Barnett, where we are still building large urban infrastructure for those connections going forward, and it
takes a lot more capital to build that keep even well-connect.
Here in the Haynesville you have very high initial production rates and low capital to connect incremental pads. That leverage
really allowed us to make a Haynesville appropriate $4 million maintenance capital.
Mike Stice - Chesapeake Midstream Partners - CEO
There is really three things to think about a regard to why the maintenance capital is different. It is rural rather than urban. It is
superpad rather than normal pad. And then, of course, the volumes themselves, the higher EURs and higher initial production
rates allow you to get to making up the volume much quicker than with the same dollar that you might in the other assets.
Sharon Lui - Wells Fargo Securities - Analyst
Okay, yes, that is helpful. I guess my final question, if you can just provide what are the minimum volume commitment levels
over the next three years?
Mike Stice - Chesapeake Midstream Partners - CEO
We haven't offered that level of detail on the outlook. We have a projected volume curve that was provided by the seller. We
locked in three years at 75% of that volume curve. But we are not providing that specific detail within the contract.
Sharon Lui - Wells Fargo Securities - Analyst
Okay, and would you be able to provide what is the gathering fee that you are charging on the system?
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Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Mike Stice - Chesapeake Midstream Partners - CEO
It is in the low 40s, is our initial rate, and then it escalates at 2.5% per year.
Operator
Michael Cerasoli, Goldman Sachs.
Michael Cerasoli - Goldman Sachs - Analyst
Good morning and happy holidays. Just a few questions. On the third-party volumes, would there be any sort of incremental
capital outlay relative to how much you spend on gathering the CHK volumes?
Bob Purgason - Chesapeake Midstream Partners - COO
Michael, currently, they will have a very small amount of capital. We got to establish a central delivery point for that producer
and then they will be connecting the pad from there. So minimal capital on this third-party exposure.
I think if you look at the Haynesville's development right now, most of the players have got their outline laid out and their
natural areas for gathering. And so, we expect to capture a significant percentage of the third-party volume within our footprint.
And I think that is the right way to think about that third party, which says we got the infrastructure in place by and large, and
then we will go get those third parties from within our footprint.
Michael Cerasoli - Goldman Sachs - Analyst
So there is no logistical or geographic issue that would cause it to be -- to cost a little bit more to hook up those volumes relative
to CHK?
Bob Purgason - Chesapeake Midstream Partners - COO
No.
Michael Cerasoli - Goldman Sachs - Analyst
Okay, and then just separately, should we consider this the cash and revolver draws as a permanent financing? And do you
have a target debt equity level looking forward a couple of years?
Dave Shiels - Chesapeake Midstream Partners - CFO
I wouldn't consider the draw on the credit facility as permanent financing, by any means. So we will look at additional financing
opportunities over the next few months. Obviously, it is a good time to look at additional financing opportunities, and we will
investigate that. So on the debt to EBITDA question or the capital structure question, we have talked all along about 50-50 debt
to equity loan-term structure.
That will take some time for us, given our current position. It will take multiple years to get there. But that is certainly a long-term
objective. But clearly we have a fantastic credit facility that we are taking advantage of in the short term and then we will see
whether the debt markets or equity markets make more sense in the next few months.
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Operator
Gabe Moreen, Banc of America - Merrill Lynch.
Gabe Moreen - BofA Merrill Lynch - Analyst
Good morning, everyone, and happy holidays. Quick question, I guess, on Slide 6 in getting to that approximately $70 million
in EBITDA. Just curious and appreciating, obviously, there is the fee escalators and other things contributing to that. Ramp
potentially, but just volume assumptions, is that just envisioned filling the 635 in capacity by 2015?
Mike Stice - Chesapeake Midstream Partners - CEO
Well, there's a couple of things. One is obviously you will be filling the capacity, but you have to keep in mind that that capacity
is a time in space. It is very easy to expand that 635 incrementally. It is like all of these developments in the gas gathering
business. You build the backbone infrastructure, what I call the permanent big pipe diameter, and then you can easily add it
least compression and line looping to deal with any capacity constraint.
So I think it is fair to think about it, fill up the 635 or get to a higher utilization rate at a minimum, but also you will look at
engineering your way into low-cost increases of that capacity as the system grows in various different directions.
Gabe Moreen - BofA Merrill Lynch - Analyst
Okay, got it. Then just bigger picture question, in terms of the overall asset portfolio at CHKM. I know you talked about liquids
opportunities in your last call. Just thinking about with the first drop-down being dry gas, albeit very low cost, low F&D cost dry
gas, just what you're thinking about in terms of portfolio gas versus liquids and whether with this first drop-down you think
about the need to potentially balance that with future drop-downs or acquisitions?
Mike Stice - Chesapeake Midstream Partners - CEO
It is a great question. I think the answer is, yes, it is one of the portfolio considerations. We are very fortunate that our existing
footprint has us in two very rich liquid areas. So we are going to be making up some of that anyway. As you know, we are already
in the Granite Wash, where it is the highest return Chesapeake drilling with significant associated gas and very rich NGL. We
are looking forward to expanding our offering out there into other services, potentially processing potentially NGL takeaway.
Pretty excited about what is going on in the Permian, as well. There is more NGL there, so I don't necessarily feel like I need to
drop-down or acquire something in that area, because we already have it in our existing portfolio, albeit a little slower, because
it will have to organically grow to that stage.
But you are exactly right. That is one of the things I look at when I consider the broader portfolio.
You're also right about the Haynesville Springridge being a dry gas component. What I was really attracted to in the Springridge
is the growth curve. The growth curve means a lot to me. I also liked where it was, relative to the return threshold for producers.
And I like the fact that there were other producers within the AMI, so that could go after some third-party volumes and increase
that from the current percentage.
So there is lots of things about the Haynesville I love. It is one of the preeminent unconventional basins, the second-largest
basin in North America. And so, I just love the fact that we brought it in here. I couldn't be more excited. So it is kind of a neat
portfolio we've got now with that growth in our curve as well.
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Operator
Louis Shamie, Zimmer Lucas.
Louis Shamie - Zimmer Lucas - Analyst
Good morning, guys. Most of my questions have been answered. I just want to ask about the $332 of EBITDA, the guidance for
the full company for full year '11. With some of the assumptions underlying that were regards to growth in the Barnett and the
Mid-Continent outside of this drop-down.
Mike Stice - Chesapeake Midstream Partners - CEO
So if you're asking a question about generally how we see the portfolio contributing to that $332 million, obviously Springridge
is a major contributor at $42 million. If you just do the math you're looking at roughly $290 million from the base business. What
we see the base business contributing in both the Barnett, the Barnett is supported by the contractual MVC that we have there.
The Mid-Continent has some new growth in it. Where we are seeing gathering capital being deployed for the liquid plays in
the Granite Wash and we have some new growth in the Permian as well.
So I would basically say Barnett is business as usual. Mid-Continent is growing. And the Springridge, obviously, is additive to
get to the $332 million. Any other comments, guys?
Dave Shiels - Chesapeake Midstream Partners - CFO
Yes, I would just mention that when you take out Springridge and look at the base business, the EBITDA growth is right in line
with what we have been talking about all along, which is 4% to 5% once you exclude the $17 million carryover from the Barnett
MVC in 2009. So we have talked about that a fair amount with investors the fact that embedded in 2010 is $17 million of EBITDA
that is a carryover from 2009.
That is a one-time event. That is not part of the MVC structure going forward. When you take that out and do an apples-to-apples
comparison, look at the base business 2011 to 2010, we are right around the 4% to 5% organic growth where we said we would
be. And then when you layer on Springridge, we were well into the double-digit EBITDA growth.
Mike Stice - Chesapeake Midstream Partners - CEO
I think that is important. You asked this question previously, I recall. The 4% to 5% of what we would consider to be the organic
growth component, and we mentioned at the IPO, if you recall, that we would be in the high-single digits with the drop-down.
I think it is clear that the quality of the Springridge asset is going to put us over the hump, and get us in the double digits. So
pretty excited about that.
Louis Shamie - Zimmer Lucas - Analyst
That's great. Can you give any detail on the growth CapEx budget and how it breaks out between those three business areas?
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Bob Purgason - Chesapeake Midstream Partners - COO
I guess, really, that mid-30s that we will be spending around Spring Ridge is probably the best component of that. Barnett is
going to ramp down a little bit from our historical spending, but still be substantial. And the remainder will be in those oil plays
that we talked about in the Permian and Mid-Continent.
Louis Shamie - Zimmer Lucas - Analyst
Great. Okay, well, thanks so much and congratulations on the deal.
Operator
Yves Siegel, Credit Suisse.
Yves Siegel - Credit Suisse - Analyst
Happy holidays to everybody. I just have a couple of naive questions for you. If I could, when you negotiated the transaction
was there any thought on going beyond three years for the minimum volume commitment and then also on the acreage
dedication, going beyond 10 years to the -- it is just to the life of the field?
Mike Stice - Chesapeake Midstream Partners - CEO
Well, obviously, there was thought. I am not sure -- I think the thought might have been more us and less Chesapeake, but the
point is as you know you've got a counterparty. You're negotiating these terms and conditions with. I felt pretty strongly that
we needed a minimum of three years and a lot of this comes into what your outlook is for commodity prices and what the
implications might end up being for drill rigs in the area. I was willing to give up some things in order to achieve that three
years.
Obviously, minimum volume commitments are not things producers generally like to give. It is a bit of certainty and shifts the
risk from the gatherer to the producer. So, you do the best you can in trying to get to those commercial terms.
I do believe that the rate redetermination is a fair deal. It works both ways. It is a calculated transaction that basically targets
mid-teens return, and I think it helps both parties. It makes sure the gatherer is offering a fair service for a fair price. And yet it
does cap the gatherer's ability to achieve upside.
And so, over time, I think as we grow and get better at line of sight and predictability on some of these portfolios and some of
these assets I would like to believe we will be able to manage with less of these terms and conditions. But the reality of it is I'm
going to stay committed to this low-risk business model. I've got to have some of these terms and conditions so that we can
make sure that we can have predictable distribution.
Bob Purgason - Chesapeake Midstream Partners - COO
Yves, let me just embellish one of Mike's comment here. And that is the redetermination that we talked about at the IPO was
always addressed in terms of fixing our capital risk. But it additionally has a volume component to it. So it wasn't really necessary
to have this really long-term MVC when you have a portion of the component volume adjusting rates as well in our
redetermination. I think that is something that shouldn't be missed as an analyst is looking at this. And it really does give us
more volume protection than a three-year 75% MVC might on its face at a peer.
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Mike Stice - Chesapeake Midstream Partners - CEO
That is a great point, and I just wanted to remind everybody what is in the rate redetermination is the compression cost. It has
also got the volume, as Bob just highlighted, and we ultimately calculate the rate. And so you have the capital cost, the volume
and the compression cost that ultimately determines the rate.
There is still remaining upside for the gatherer for third-party volumes and operating costs synergies. That is all kept by the
gatherer.
Yves Siegel - Credit Suisse - Analyst
Got it. Well, thanks. And just a quick follow-up. What are you thinking about the long-term gas price?
Mike Stice - Chesapeake Midstream Partners - CEO
That is a dangerous question, we generally --.
Yves Siegel - Credit Suisse - Analyst
And we are going to hold you to it.
Mike Stice - Chesapeake Midstream Partners - CEO
Yes. You know what, I quit predicting gas price along with financial markets a long time ago. I think it is fair to say that today's
market is somewhat bearish and the forward curve doesn't look too good either.
But I happen to -- I am a big believer in natural gas, and I wouldn't be in the business I'm in if I didn't believe that this is indeed
the fuel of choice. I think we are seeing movement on the Hill where people are starting to appreciate the value that natural
gas brings. Obviously coming from my international experience, the rest of the world gets it. The rest of the world is very excited
about what natural gas is about.
And you are starting to see the internationals come in and play a significant role. Just look at the announcement of CNOOC's
acquisition of Chesapeake Eagle Ford position.
We have got an abundant supply here that has all the advantages of distribution and, frankly, environmental advantages. I am
just waiting for the tipping point where everybody comes to that conclusion. And then I think natural gas is going to rebound
in a very, very healthy way and we are well positioned to take advantage of that.
Yves Siegel - Credit Suisse - Analyst
I agree with you. Then my last question is when you think about the takeaway capacity, is that --? You listed three pipelines
there on Slide 3. Is that all -- does Chesapeake have capacity on all those pipelines? Basically, it is their capacity?
Dave Shiels - Chesapeake Midstream Partners - CFO
I believe you would look at their position. Texas Gas, the capacity there is held by their traditional long-term shippers, so generally
Texas Gas is used to backhaul the Carthage. It was that initial let's just get this gas moved capacity of the Haynesville. What
14
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
you're seeing is that Chesapeake and others have firm capacity on that CenterPoint 42 and like I said, the Tiger project has just
started up ahead of schedule, and Chesapeake has a very large firm commitment position, as they have announced, on that
Tiger Pipeline.
So lots of firm takeaway from this. Another reason why we think volumes will continue to be produced in the Haynesville,
because there is a lot of infrastructure in place and capital commitments or demand charge commitments folks have, to make
sure gas flows from the Haynesville.
Mike Stice - Chesapeake Midstream Partners - CEO
By the way, that is another consideration in the portfolio. We wanted to make sure that we had a mix of netback opportunities,
because as you know, that can be the deciding factor of where the drillbit goes. And in this case, you got a forward haul to
Perryville and still have access to Carthage. But, as you know, Barnett has the outlet to Carthage. So I like the access to a new
index point coming out of our portfolio.
Yves Siegel - Credit Suisse - Analyst
Got it, all right. Well, guys, have a great holiday, and just to let you know, we are freezing up here in New York.
Mike Stice - Chesapeake Midstream Partners - CEO
Well, we are enjoying it as well. We are in New York as well.
Operator
Joel Allman, JPMorgan.
Ronnie Ganguly - JPMorgan Chase & Co. - Analyst
This is actually Ronnie. I work with Joe. You mentioned, briefly, compression. Haynesville wells come online at high pressure.
When do you think you're going to need to increase compression in the field?
Mike Stice - Chesapeake Midstream Partners - CEO
As you know, these wells are super. And they do come on at high pressure. And it is neat to see that we have some time to
decide when to go to low pressure. But it varies.
These wells have surprised everyone. And, obviously, we will not take them down to low pressure until they need to. There are
some areas in the northern Shreveport area where we would like to operate the pipeline system at a little lower pressure than
the rest of the system. We call that our Pines Compressor Station. But most of the compression inside this AMI is used to make
redelivery pressures into the three pipes that Bob talked about previously.
It has been one of the exciting things about the Haynesville, is the strength of the wells and their ability to deliver high pressure.
However, with that said, all these wells have a tendency to decline over time, and their capability decline, and they will be
long-term compression requirements as these wells struggled to make delivery pressure.
But in the Haynesville, we see that happening much later. In the Barnett, you are doing that much earlier in the cycle.
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
Bob Purgason - Chesapeake Midstream Partners - COO
Just to be clear, the legacy Haynesville area pipes all took away at 700 to 900 pounds. The legacy systems like Texas Gas and
Gulf South, all the others. These new pipes have come in with brand-new steel. They're in the 1,300-pound delivery pressures.
So even though we've got very high pressure gathering in that area from a traditional sense, there is still a slight boost, that's
necessary, to make sure we get into those very high-pressure, high-capacity pipes.
Mike Stice - Chesapeake Midstream Partners - CEO
So the horsepower you are seeing in this asset is that redelivery horsepower.
Ronnie Ganguly - JPMorgan Chase & Co. - Analyst
Great, thanks. And then the 14% CAGR that you show in Slide 6, that assumes the 2.5% annual inflation or escalation, right?
Mike Stice - Chesapeake Midstream Partners - CEO
Yes, it does.
Ronnie Ganguly - JPMorgan Chase & Co. - Analyst
So is it safe to assume you're looking at around 11% to 12% production volume growth?
Dave Shiels - Chesapeake Midstream Partners - CFO
No, I don't think that is --.
Mike Stice - Chesapeake Midstream Partners - CEO
Not volume itself. It is overall contribution. You are right. Volume is contributing to that. But the overall CAGR takes all of the
factors into consideration. All the financial, operating costs. It is a full model.
Ronnie Ganguly - JPMorgan Chase & Co. - Analyst
Okay. Okay, great. Thank you, guys.
Operator
We have no further questions at this time. I will turn the conference back over to Mr. Stice for any additional or closing remarks.
Mike Stice - Chesapeake Midstream Partners - CEO
Well, I just wanted to close with how excited we are to get this transaction done before the holidays; will make a better holiday
for the management team. I am certain of that. But I also cannot express how thrilled we are to have such a high-quality
drop-down in such a short period time.
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FINAL TRANSCRIPT
Dec. 17. 2010 / 2:20PM, CHKM - Springridge Acquisition Update
If you recall, I made a commitment that we would do one of these in the first year. It is pretty exciting to me to have the first
one done in the first six months.
As you also saw on the previous slide that I showed you, there is plenty of those waiting to be dropped down. We are going to
go and get right back to the drawing board and start evaluating what the next best alternative is, considering all the portfolio
considerations that we commented to earlier in this call.
So we are very excited to be making this announcement. We hope that we have answered all your questions. We really want
to wish everybody a happy holiday, and for everyone to be safe and be sure to turn up your thermostat. Thank you very much.
Operator
Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.
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