Copano Energy Reports Fourth Quarter and Full Year 2012 Results - Updates 2013 Guidance

HOUSTON, Feb. 28, 2013 /PRNewswire/ -- Copano Energy, L.L.C. (NASDAQ: CPNO) today announced its financial results for the three months and year ended December 31, 2012 and its updated 2013 guidance.

Fourth Quarter 2012 Highlights:

• Total distributable cash flow of $46.2 million, a 9% increase from the fourth quarter of 2011
• Total segment gross margin of $74.3 million, a 20% increase from the prior year period
• Adjusted EBITDA of $60.9 million, a 6% increase from the prior year period
• Volumes gathered from the Eagle Ford Shale play averaged 644,000 MMBtu/d, a 104% increase from the prior year period
• Texas segment natural gas liquids (NGL) production of over 56,000 Bbls/d, a 67% increase from the prior year period

2013 Guidance Update:

• Adjusted EBITDA and Total Distributable Cash Flow unchanged from previous guidance
• Common unit distribution to remain at $0.575 per quarter due to merger agreement with Kinder Morgan Energy Partners (KMP)
• Expansion capital expenditures to increase to $400 to $450 million compared to previous guidance of $250 to $300 million primarily due to addition of the DK pipeline loop, a 65-mile, $100 million project to loop the DK pipeline from DeWitt County to Copano's Houston Central complex, as well as other new capital projects in Texas and Oklahoma

"Our fourth quarter results demonstrate the momentum of our operations and success of our Eagle Ford strategy, and provided an excellent finish to an exciting and eventful 2012," said R. Bruce Northcutt, Copano's President and Chief Executive Officer.

"Our recently announced transaction with Kinder Morgan Energy Partners positions Copano to continue executing on our strategy as part of a larger, more diversified company.  We look forward to completing the transaction and moving ahead as part of KMP, which we expect to occur in the third quarter of 2013," Northcutt added.

Fourth Quarter Financial Results

Total distributable cash flow was $46.2 million, a 9% increase from the fourth quarter of 2011, and a 19% decrease from the third quarter of 2012.  The decrease from the third quarter of 2012 was primarily due to the one-time gain on the sale of the Lake Charles processing plant in the third quarter.  The increase from the prior-year period was primarily due to increased throughput from the Eagle Ford Shale.  These benefits were partially offset by lower NGL prices and higher operating expenses.  Fourth-quarter 2012 total distributable cash flow represents 100% coverage of the fourth-quarter distribution of $0.575 per unit, based on common units outstanding on the distribution record date.

Revenue for the fourth quarter of 2012 increased 12% from the fourth quarter of 2011 to $396.8 million, and increased 8% from the third quarter of 2012.  Total segment gross margin increased 20% from the fourth quarter of 2011 to $74.3 million, and decreased 1% compared to the third quarter of 2012.  Adjusted EBITDA increased 6% from the fourth quarter of 2011 to $60.9 million, and decreased 17% from the third quarter of 2012.  The decrease in Adjusted EBITDA from the third quarter of 2012 was primarily a result of the one-time gain on the sale of the Lake Charles processing plant in the third quarter.  Net loss to common units was $50.7 million for the fourth quarter of 2012 compared to a net loss of $1.2 million for the fourth quarter of 2011.  The net loss in the fourth quarter of 2012 includes a $66.3 million non-cash impairment charge related to Copano's investments in Bighorn Gas Gathering and Fort Union Gas Gathering.

Corporate and other activities, which include Copano's commodity risk management efforts, resulted in a loss of $1.2 million for the fourth quarter of 2012, consisting of $5.7 million in non-cash amortization expense and $1.5 million of unrealized losses on commodity derivative instruments, offset by $6.0 million of net cash settlements received.  Corporate and other activities for the fourth quarter of 2011 resulted in a $12.5 million loss consisting of $7.5 million of non-cash amortization expense, $2.9 million of net cash settlements paid and $2.1 million of unrealized mark-to-market losses on commodity derivative instruments.  Corporate and other activities for the third quarter of 2012 resulted in a $3.7 million loss consisting of $5.9 million of non-cash amortization expense and $2.6 million of unrealized losses on commodity derivative instruments, offset by $4.8 million of net cash settlements received.

Total distributable cash flow, total segment gross margin, adjusted EBITDA and segment gross margin are non-GAAP financial measures, which are reconciled to their most directly comparable GAAP measures at the end of this news release.  Please read "Use of Non-GAAP Financial Measures" beginning on page 7 of this news release.

Current Expansion Projects Update

• Copano's first 400 MMcf/d cryogenic expansion at its Houston Central complex is mechanically complete, and final preparations are underway for a projected in-service date late in the first quarter of 2013.  Additionally, Formosa's fractionation expansion at its Point Comfort facility is underway and is expected to be in service in the second quarter of 2013.  Copano will have 37,500 Bbls/d of fractionation capacity at Formosa's facility when the expansion is complete.
• An EPA permit application has been submitted and the public review and comment period recently ended for the second 400 MMcf/d cryogenic expansion at Houston Central.  The 2014 cryogenic expansion is supported by long-term, fee-based capacity commitments with major producers.  When the second cryogenic expansion is complete, Copano will have a total of 1 Bcf/d of highly efficient cryogenic processing capacity at its Houston Central complex.
• Construction on the 65-mile southwest extension of Copano's wholly-owned DK pipeline into McMullen County, Texas is nearing completion, and is expected to begin service in the first quarter of 2013. 
• Copano has approved a project to loop approximately 65 miles of its DK pipeline from DeWitt County to the Houston Central complex, along the same path as the existing DK pipeline.  The project is expected to begin service in the fourth quarter of 2013 and is projected to cost approximately $100 million. The addition of the loop line creates a fuel reduction by reallocation of compression and provides increased pipeline capacity to serve the processing plant expansions at Houston Central.  The project is supported by long-term, fee-based capacity commitments.
• Copano, along with its joint venture partner, Magellan Midstream Partners, continues to make progress on the Double Eagle pipeline.  The Three Rivers Terminal and the mainline between Three Rivers and the Magellan Terminal in Corpus Christi will be placed in service in March 2013.  The eastern leg of the pipeline from Three Rivers to Karnes County is expected to be complete in March 2013 and the western leg from Three Rivers to Gardendale is scheduled to be complete by the third quarter of 2013.
• In Oklahoma, Copano has completed construction of a pipeline connecting Copano's Osage and Stroud systems in order to deliver rich Mississippi Lime gas gathered on the Osage system to the Paden processing plant, providing processing and nitrogen rejection services to producers in the Mississippi Lime. 
• In the Woodbine Shale play in Texas, Copano has leased and is installing a 10 MMcf/d refrigeration unit, which is expected to begin processing gas early in the second quarter of 2013.

Fourth Quarter Operating Results by Segment

Texas

Segment gross margin for Texas increased 12% from the fourth quarter of 2011 to $54.6 million.  The increase from the prior year period was primarily a result of volume growth from the Eagle Ford Shale, partially offset by a decline in leaner gas volumes at the Houston Central complex, which were displaced to accommodate richer Eagle Ford Gathering fee-based gas volumes.

During the fourth quarter of 2012, Texas segment service throughput volumes averaged 814,684 MMBtu/d of natural gas and were relatively unchanged when compared to the fourth quarter of 2011.  The Texas segment gathered an average of 518,355 MMBtu/d of natural gas, also were relatively unchanged when compared to the fourth quarter of 2011.  Volumes processed at Copano's plants and third-party plants in Texas averaged 755,395 MMBtu/d during the fourth quarter of 2012, an increase of 5% over the fourth quarter of 2011, primarily due to higher volumes processed at the Houston Central complex, partially offset by the volume impact of the sale of the Lake Charles plant in the third quarter of 2012.  Fourth-quarter NGL production averaged 56,434 Bbls/d at Copano-owned plants and third-party plants, an increase of 67% from the fourth quarter of 2011, reflecting a substantial increase in the NGL content of volumes and higher recovery rates at the Houston Central complex, and increased volumes at the Saint Jo plant in the north Barnett Shale Combo play in north Texas.

Eagle Ford Gathering, Copano's unconsolidated joint venture with Kinder Morgan, provided gathering services for an average of 406,425 MMBtu/d during the fourth quarter of 2012.  Texas segment gross margin results do not include the financial results and volumes associated with Copano's interest in Eagle Ford Gathering, which is accounted for under the equity method of accounting and shown in Copano's financial statements under "Equity in loss (earnings) from unconsolidated affiliates." For the fourth quarter of 2012, equity earnings and distributions from Eagle Ford Gathering totaled $13.8 million and $8.3 million, respectively.

Oklahoma

Segment gross margin for Oklahoma was $21.2 million for the fourth quarter of 2012, a decrease of 17% compared to the fourth quarter of last year.  The year-over-year decrease was due primarily to lower NGL and natural gas prices, which resulted in a 16% decrease in realized margins on service throughput compared to the fourth quarter of 2011. 

The Oklahoma segment gathered an average of 303,645 MMBtu/d of natural gas, a decrease of 1% compared to the fourth quarter of 2011, due primarily to lower lean gas volumes from the Woodford Shale.  Volumes processed at wholly owned and third-party plants in Oklahoma increased 2% compared to the fourth quarter of 2011, averaging 162,057 MMBtu/d.  Fourth-quarter NGL production at wholly owned and third-party plants averaged 16,390 Bbls/d, a decrease of 6% from the fourth quarter of 2011 primarily due to some of Copano's plants operating in ethane rejection during the fourth quarter of 2012.

Rocky Mountains

Segment gross margin for the Rocky Mountains segment was a loss of $0.2 million in the fourth quarter of 2012 compared to a gain of $0.4 million for the fourth quarter of 2011.  Rocky Mountains segment gross margin results do not include the financial results and volumes associated with Copano's interest in Bighorn and Fort Union, which are accounted for under the equity method of accounting and shown in Copano's financial statements under "Equity in loss (earnings) from unconsolidated affiliates."

Average pipeline throughput for Bighorn and Fort Union on a combined basis increased 7% to 675,662 MMBtu/d in the fourth quarter of 2012 as compared to 630,843 MMBtu/d in the fourth quarter of 2011.  The volume increase is due primarily to producers increasing volumes on Fort Union to access downstream markets; however, because Fort Union has firm volume commitments from these producers, the increase did not have a material impact on Copano's equity earnings or distributions.  For the fourth quarter of 2012, combined equity losses for Bighorn and Fort Union totaled $61.2 million, which included a $66.3 million non-cash impairment charge, compared to equity earnings of $3.7 million for the same period in 2011. The fourth quarter of 2012 non-cash impairment charge was primarily the result of a decline in forecasted future volumes after a major producer in the region disclosed that some of their current and future production was being abandoned.  Combined distributions from Bighorn and Fort Union totaled $4.4 million in the fourth quarter of 2012 compared to $5.8 million in the fourth quarter of the previous year.

Year End Financial Results

Revenue for 2012 increased 5% to $1.4 billion compared to $1.3 billion in 2011.  Operating segment gross margin increased 1% to $293.7 million in 2012 compared to $292.2 million for 2011.  Total segment gross margin increased 14% to $287.1 million for 2012 compared to $252.6 million for 2011.  Adjusted EBITDA for 2012 was $242.6 million compared to $211.3 million for 2011.  Net loss was $139.0 million for 2012 compared to a net loss of $156.3 million for 2011.    Net loss for 2012 includes a $215.0 million non-cash impairment charge relating to Copano's Rocky Mountains assets.  Net loss for 2011 includes a loss on the refinancing of unsecured debt of $18.2 million, a $170.0 million non-cash impairment charge relating to Copano's Rocky Mountains assets and a $3.4 million non-cash impairment charge relating to assets in south Texas.

Net loss to common units for 2012 after deducting $36.1 million of in-kind preferred unit distributions totaled $175.1 million, or $2.39 per unit on a diluted basis, compared to a net loss to common units for 2011 of $189.0 million, or $2.86 per unit on a diluted basis, for 2011.  Weighted average diluted units outstanding totaled 73.2 million for 2012 as compared to 66.2 million for 2011.

Cash Distributions

On January 10, 2013, Copano announced its fourth quarter 2012 cash distribution of $0.575 per unit, or $2.30 per unit on an annualized basis, which was paid on February 14, 2013 to common unitholders of record at the close of business on January 31, 2013.  This distribution is unchanged from the third quarter of 2012.

Updates to 2013 Guidance

Copano announced today the following updates to its forecast for certain financial items for 2013:

Use of Non-GAAP Financial Measures

This news release and the accompanying schedules include non-generally accepted accounting principles, or non-GAAP, financial measures of total distributable cash flow, total segment gross margin, adjusted EBITDA and segment gross margin.  The accompanying schedules provide reconciliations of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP. Non-GAAP financial measures should not be considered as alternatives to GAAP measures such as net income (loss), operating income (loss), cash flows from operating activities or any other GAAP measure of liquidity or financial performance.  Copano's non-GAAP financial measures may not be comparable to similarly titled measures of other companies, who may not calculate their measures in the same manner.

Copano's management team uses non-GAAP financial measures to evaluate its core profitability and to assess the financial performance of its assets.  Subject to the limitations expressed above, Copano believes that investors and other market participants benefit from access to the various financial measures that its management uses in evaluating its performance because it allows them to independently evaluate Copano's performance with the same information used by management.

Copano Energy, L.L.C. is a midstream natural gas company with operations in Texas, Oklahoma and Wyoming.  For more information, please visit http://www.copano.com.

This news release includes "forward-looking statements," as defined by the Securities and Exchange Commission.  Statements that address activities or events that Copano believes will or may occur in the future are forward-looking statements.  These statements include, but are not limited to, statements about future producer activity and Copano's total distributable cash flow and distribution coverage.  These statements are based on management's experience and perception of historical trends, current conditions, expected future developments and other factors management believes are reasonable.  Important factors that could cause actual results to differ materially from those in forward-looking statements include the following risks and uncertainties, many of which are beyond Copano's control: the volatility of prices and market demand for natural gas, crude oil, condensate and NGLs, and for products derived from these commodities; Copano's ability to continue to connect new sources of natural gas, crude oil and condensate, and the NGL content of new gas supplies; the ability of key producers to continue to drill and successfully complete and connect new natural gas and condensate volumes and such producers' performance under their contracts with Copano; Copano's ability to attract and retain key customers and contract with new customers, and such customers' performance under their contracts with Copano; Copano's ability to access or construct new pipeline capacity, gas processing and NGL fractionation and transportation capacity; the availability of local, intrastate and interstate transportation systems, trucks and other facilities and services for condensate, natural gas and NGLs; Copano's ability (and the ability of its third-party service providers) to meet in-service dates, cost expectations and operating performance standards for construction projects; Copano's ability to successfully integrate any acquired asset or operations; Copano's ability to access its revolving credit facility and to obtain additional financing on acceptable terms; the effectiveness of Copano's hedging program; general economic conditions; force majeure events such as the loss of a market or facility downtime; the effects of government regulations and policies; Copano's ability to complete the proposed merger with Kinder Morgan; and other financial, operational and legal risks and uncertainties detailed from time to time in Copano's quarterly and annual reports filed with the Securities and Exchange Commission.  Copano does not undertake to update any forward-looking statement except as provided by law.