Resources Connection, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Regency Energy Partners LP Earnings Conference Call. My name is Rachel, and I'll be your operator for today. [Operator Instructions] I would now like to turn the call over to Lyndsay Hannah, Manager of Finance and Investor Relations. Please proceed.

[Lyndsay Hannah:]

Good morning, everyone, and welcome to our call. Today, we will cover Regency's performance from the second quarter of 2013. Presenting on the call will be Mike Bradley, President and Chief Executive Officer; and Tom Long, our Chief Financial Officer. Additionally, Jim Holotik, our Chief Commercial Officer, is available for Q&A. Following our prepared remarks, Regency will open the call to participants for questions. You may access the earnings release issued this morning through Regency's website at regencyenergy.com. Our call is being recorded and is also broadcast live over the Internet on the Regency corporate website. An archive of the website -- of the webcast will be available on the website following today's call. Please note we plan to file our 10-Q later this afternoon. And according to accounting requirements, our second quarter 2013 and historical results have been recast to include Regency and SUGS results combined. Tom will provide you with additional information on this later in the call. During the call, we may make forward-looking statements. You are reminded that actual results may differ materially from any forward-looking statements. You should refer to our SEC filings for a more complete discussion of the risks involved in our business and in the ownership of our limited partnership unit. Also during the call today, we will refer to various non-GAAP measures. For your reference, reconciliations of these measures back to the comparable GAAP measures are provided in our press release issued this morning, which can be found on our website. With that, I will turn the call over to our CEO, Mike Bradley.

[Michael J. Bradley:]

Thanks, Lyndsay, and hello, everyone, and thank you, again, for joining us on our call this morning. We are very pleased with our second quarter results as we experienced strong growth across our GMP, Contract Compression and NGL Logistics businesses and continued to realize benefits from our growth projects that came online at the end of last year and earlier this year. For my summary, I will discuss our second quarter financial results excluding the effects of pooling, which includes 2 months of SUGS' results for 2013 and does not include SUGS for 2012, which we will refer to as legacy Regency. So starting with an overview of our second quarter results, adjusted EBITDA, including 2 months of SUGS, was $159 million compared to $115 million for legacy Regency in the second quarter of 2012 or an increase of 38%. Distributable cash flow for the second quarter increased 40% to $101 million compared to $72 million for the second quarter of 2012. We have seen a significant improvement in our coverage ratio over the past several quarters, reaching 1.02x, excluding asset sales and the accelerated interest payment in the second quarter of 2013. And as we announced last week, we increased our distribution by $0.02 annually to $1.86 per unit. For our Gathering and Processing segment, average volumes for May and June, since we only owned SUGS for 2 months during the second quarter of 2013, increased by nearly 60% to 2.2 million MMbtus per day compared to 1.4 million MMbtus per day for the same months in 2012. The average NGL production during May and June of 2013 increased 137% to 90,000 barrels per day compared to 38,000 barrels per day for May and June of 2012. We are very pleased with the growth in volumes from our Gathering and Processing business, which included the addition of SUGS but also very importantly, solid growth from the legacy GMP assets, primarily in South and West Texas and North Louisiana. Looking at our performance by region. In West Texas, we continued to make good progress integrating the SUGS assets with our existing Permian system and are still on pace to realize approximately $25 million in synergies from the acquisition and integration of these assets in 2013, increasing to $40 million in 2014. We have completed our 90-day integration plan, which includes the integration of both the Regency and SUGS commercial, engineering and operations teams, and we're excited about the benefits we have identified over the last 3 months. From the organization and asset integration we have completed so far, we are already realizing lower costs; improved efficiencies, such as reduced fuel consumption; and we continue to find opportunities to reduce or defer capital investment through the combined system footprint. Additionally, we have increased flexibility to shift volumes within the system and load our most-efficient plants, increasing reliability to producers and improving overall volume throughput. From the first quarter of 2013 to the second quarter of 2013, total West Texas volumes, including SUGS for both quarters, have increased 14%, and NGL production has increased 12% as a result of increased drilling and operational improvements. During the second quarter, we signed new agreements that contained throughput commitments and aid-and-construct commitments along with acreage dedications of approximately 50,000 acres. This provides for the opportunity for Regency to construct 2 new pipeline extensions, increasing our access into new gas supplies areas. In South Texas, volumes on our Eagle Ford expansion project continued to grow during the second quarter, increasing 30% over the first quarter of 2013 to an average of approximately 450,000 MMbtus per day. Volumes at our Tilden Treating plant also increased from Q1 to Q2 by 16% to around 100,000 MMbtus per day. Total South Texas volumes are up more than 50% year-over-year to 860,000 MMbtus per day. For North Louisiana, drilling continues to be very active in the richer Cotton Valley play, and overall volumes at our Dubach facility have increased more than 60% year-over-year to an average of 175,000 MMbtus per day during Q2 of 2013. Looking at our Lone Star Joint Venture in the second quarter of 2013, adjusted EBITDA increased 25% compared to the second quarter of 2012, which was primarily due to the startup of our Mont Belvieu fractionator and an increase in volumes associated with the NGL pipeline expansion. We expect to see continued growth in cash flows from these assets as throughput volumes increase over the next 12 to 18 months. Demand for NGL infrastructure remains strong, and we're excited about the additional opportunities we are seeing for this business. Next, for Contract Services, third-party horsepower for our compression business increased by over 150,000 horsepower or more than 20% in the second quarter of 2013 compared to the second quarter of 2012, primarily in South and West Texas, where we see the strongest demand. Our utilization rate for Contract Compression business increased to 95% at the end of second quarter compared to 84% at the end of the second quarter of 2012. New opportunities are driving increased CapEx spending for compression due to continued strong demand. As of August 1, we have approximately 90,000 additional horsepower booked to be set for the remainder of this year. Additionally, bookings for coolers and fuel gas conditioning skids were strong in the second quarter, and we remain very encouraged about additional treating opportunities in 2013 and into 2014. Looking ahead, we have brought online an additional 270 million a day of processing capacity and over 160 million a day of treating capacity in the third quarter. And we expect these projects to contribute to earnings growth for the remainder of 2013 and into 2014. Our Dubach expansion in North Louisiana, which adds an additional 70 million a day of processing capacity, came online at the end of June, bringing the total capacity of the facility to approximately 200 million a day. We expect the entire facility to be at capacity by the end of the third quarter. Our Edwards Lime expansion project in South Texas, which adds an incremental 90 million a day of treating capacity, was also brought online in late July. Additionally, our 200 million a day Red Bluff cryogenic processing plant in West Texas began operations earlier this month, and volumes in this area are expected to increase throughout the remainder of the year. And as we mentioned in the first quarter, we are proceeding with our expansion to connect our Dubach gathering system to our 200 million a day Dubberly refrigeration plant, which is driven by continued drilling in the Cotton Valley and Brown Dense plays. This project is expected to be online by the end of the year, with ramp-up occurring in the first quarter of 2014. And for Lone Star, frac 2 continues on pace to be in service by the end of 2013. So in summary, we are very pleased with our second quarter performance during which adjusted EBITDA, including 2 months of SUGS, increased 38% year-over-year; coverage for the quarter reached 1.02x, excluding asset sales and the one-time interest payment; and we announced an increase in distributions. Going forward, Regency remains poised for additional growth for the remainder of this year and into 2014. We expect the SUGS acquisition, along with the ramp-up of our announced growth projects, to continue supporting our objectives of improving coverage and increasing distributions. Additionally, we expect many of our growth projects will lay the foundation for further expansion, and drilling continues at a strong pace in South Texas, West Texas and North Louisiana. With that, I will turn the call over to Tom, who will take you through a review of our financial performance.

[Thomas E. Long:]

Thanks, Mike. And as a reminder, Mike discussed second quarter 2013 results including 2 months of SUGS compared to legacy Regency second quarter 2012 numbers. We have recast second quarter 2013 and historical results to combine Regency and SUGS due to the as-if pooling accounting treatment required for an acquisition between common-controlled entities. Adjusted EBITDA for Q2 of 2013 increased to $155 million compared to $138 million for Q2 of 2012. This was primarily due to volume growth in the Gathering and Processing segment, primarily in South and West Texas and in North Louisiana, as well as increased volumes at our Lone Star Joint Venture and increased revenue-generating horsepower for CDM. Regency's distributable cash flow, which includes 2 months of SUGS results, was $101 million for Q2 of 2013. DCF for 2012 is legacy Regency and DCF for 2013 includes 2 months of results from SUGS. Coverage for the second quarter was 1.0x. Now turning to our performance by segment and starting with Gathering and Processing, adjusted segment margin for the second quarter of 2013 increased 15% to $132 million compared to $115 million for the second quarter of 2012. This was primarily due to an increase in volumes, which were up 18% to 2.2 million MMbtus per day. Additionally, NGL production averaged 89,000 barrels per day for Q2 of 2013, which was a 15% increase over the second quarter of 2012. Now discussing volumes by region, beginning with North Louisiana, our Dubach system, which has higher GPM volumes, continues to see all-time throughput highs as strong drilling in the Cotton Valley area continues. Volumes in the system have increased more than 60% year-over-year. For 2013, we expect volumes to continue increasing, primarily around our assets in the Cotton Valley area. Looking at West Texas, systemwide volumes have increased 13% since the second quarter of 2012. We expect volumes to increase throughout the remainder of the year due to startup of the 200 million a day Red Bluff plant as we continue to optimize these assets. And finally, in South Texas, overall volumes increased more than 50% year-over-year. In 2013, we expect overall volumes to continue increasing, creating additional opportunities to provide gathering, processing and contract services to our customers. Turning to Natural Gas Transportation segment, for the Haynesville Joint Venture, adjusted EBITDA was $13 million for Q2 of 2013 compared to $18 million for Q2 of 2012. This decrease was primarily due to the expiration of some legacy contracts, as well as a customer declaring bankruptcy on April 1 of this year, which contributed about $700,000 to the decrease. Now looking at MEP, our share of the adjusted EBITDA for MEP was $26 million for both Q2 of 2012 and 2013. Volumes were 1.3 million MMbtus per day in Q2 of 2013 compared to 1.4 million MMbtus per day in Q2 of 2012. And we expect MEP volumes will remain constant throughout 2013. For the NGL Services segment, which now is solely the Lone Star Joint Venture, adjusted EBITDA was $20 million for the second quarter of 2013 compared to $16 million for the second quarter of 2012. This increase was primarily due to the startup of frac 1 and the new Gateway NGL Pipeline, which both went into service in December of 2012. This was partially offset by lower pricing and lower volumes at the Refinery Services area. For the second quarter of 2013, total NGL Transportation throughput volumes, which includes volumes from both the West Texas pipeline and the Gateway NGL pipeline, increased to an average of 163,000 barrels per day for an average -- from an average of 133,000 barrels per day for the second quarter of 2012. Refinery Services throughput volumes averaged 15,000 barrels per day for Q2 of 2013 compared to 21,000 barrels per day for Q2 of 2012 and 17,000 barrels per day for Q1 of 2013. This decrease was primarily due to a plant turnaround, as well as the expiration of a contract in mid-June, which was expected. Fractionation throughput volumes averaged 87,000 barrels per day for Q2 of 2013 compared to 51,000 barrels per day for Q1 of 2013. Turning to our Contract Services segment, which combines our compression and treating businesses. For the second quarter of 2013, Contract Services segment margin increased to $49 million for Q2 of 2013 compared to $45 million for Q2 of 2012 primarily due to an increase in third-party revenue-generating horsepower from 739,000 to 897,000 as a result of additional horsepower placed in to service in South and West Texas, along with North Louisiana. Segment margins associated with third-party compression services was up approximately 20% over the second quarter of 2012. And for our liquidity position, in May, we amended our credit facility to increase the capacity to $1.2 billion with a $300 million accordion feature, extending the maturity date to May of 2018 and improved our pricing by 75 basis points. And in June, we redeemed the remaining $163 million of our outstanding 9 3/8% senior notes. At the end of the second quarter of 2013, we have over $850 million of available liquidity. In addition, during the second quarter, we received net proceeds of $128 million from our continuous offering program. There is now $56 million remaining available under this program. Now for Regency's CapEx. We are increasing our forecasted growth CapEx expenditures to approximately $800 million. This includes $465 million related to the Gathering and Processing segment, $175 million related to the Lone Star Joint Venture and $160 million related to Contract Services segment. We continue to forecast maintenance capital expenditures of approximately $45 million. For the 6 months ended June 30, 2013, Regency incurred $435 million of growth capital expenditures and $20 million of maintenance capital expenditures. And for our DCF sensitivities for the balance of 2013, a $10 per barrel movement in crude oil, along with the same percentage change in NGL pricing, would result in approximately $4 million change in Regency's forecasted 2013 DCF. And a $1 per MMbtu movement in natural gas pricing would result in approximately $8 million change in Regency's forecasted 2013 DCF. And we'll now open the call up for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Edward Rowe of Raymond James.

[Edward Rowe:]

In regards to the slight decline in Lone Star from Q1 to Q2, is the majority of that just due to the refinery downtime? And do you expect fractionation volumes and the NGL volumes to offset this decline going forward?

[Michael J. Bradley:]

Yes, I think the majority of that was due to the downtime in Refinery Services. We're also seeing a little bit of impact from ethane rejection on total barrels, but we still see this business ramping up going into the end of the year and into 2014, so...

[Edward Rowe:]

Okay. All right, very good. And in light of the announcement by Kinder and MarkWest, there's going to be a lot of Y-grade coming down to the Gulf Coast. From a high-level picture, do you guys see the potential for a shortage in NGL storage or more so in, I guess, brine storage capacity that could really come down the line?

[Thomas E. Long:]

Well, I think in terms of Lone Star, we've got a good storage situation in Mont Belvieu and the ability to expand, as well as the brine available to do that. So I think we're in pretty good shape there.

[Edward Rowe:]

All right. That's great. And last question. In terms of the volume ramp in the Red Bluff and mostly in West Texas, do you guys still see the general tightness within the region for gas processing to really continue throughout 2013 and '14?

[Thomas E. Long:]

Yes, I mean, we are -- we continue to see very good activity on the drilling side to support the volume increase for our facilities, and we're still in the planning stage of adding another 200 million a day processing plant some time in 2014.

[Operator:]

Your next question comes from the line of Michael Gaiden of Robert W. Baird.

[Michael W. Gaiden:]

Can I please ask about the SUGS integration plan? And can you maybe talk about any key insights there and potential areas for additional upside in terms of cost savings that you've identified over the last month or so that maybe you didn't know of before the integration got underway?

[Michael J. Bradley:]

Yes, I think the integration plan, as we talked about, we had a very detailed set of plans to implement, actually, day 1 of the closing. And that included the organization, we got the commercial teams together to look at opportunities from the combined companies, and then we had the asset team look at all the different ways we could interconnect the system to improve the efficiency and the ability to move gas to the most efficient plants. And so what we've seen is we've seen the kind of opportunities we expected in terms of cost savings and fuel efficiencies. We're excited that we're actually finding some more opportunities that we're encouraged about, particularly as you look at the integration of the systems. For example, we had some turnarounds planned in the fourth quarter -- or third quarter, fourth quarter. And as a result of what we put together, we see that there will be little impact to any producer as a result of those turnarounds. By the way, we have integrated the systems, so we think that's a real positive. So we're not done looking, but we're very excited about the progress we made on our 90-day integration plan, and we are meeting or exceeding our expectations on that.

[Michael W. Gaiden:]

Great. Can I ask also about SUGS? The SUGS contribution agreement adjustment line item in the DCF reconciliation, can you walk us through how that is determined? And can you also talk about if there'll be any go-forward impact from that line item in the back half of the year now that the deal has closed?

[Thomas E. Long:]

Yes, this is Tom Long. That basically was the distribution, meaning that we had a mechanism within the contribution agreement that, for the month of April, where Regency did not own the assets, we would go ahead and pay the full quarter distribution, but that 1 month would come back to us. So that's what that adjustment is. As you look forward, the second part of your question, now that we're -- got past the last quarter, that's a partial quarter we owned it, there shouldn't be any more of those adjustments.

[Michael W. Gaiden:]

Great, Tom. And can I also ask one follow-up question about DCF coverage? The partnership increased its distribution this quarter even though DCF coverage remains right about 1x. Are you comfortable continuing to increase your distribution in the back half of the year, even though it might mean that coverage remains tight? How do you think about that tradeoff here for the rest of the year?

[Michael J. Bradley:]

Well, I think the way we look at coverage, obviously, that's a decision we make quarterly with the Board in terms of distributions, but we do take a forward look at our business when we determine our distribution policy. I think when you look at the quarter and we -- excluding the asset sales and the one-time interest payment, we came in at 1.02x. We feel very good about the forward look for the company, and we still target around a 1.1x, but like we have said previously, we'll take a look at how our business looks forward in determining our distribution policy.

[Operator:]

[Operator Instructions] Your next question comes from the line of James Jampel of HITE.

[James Jampel:]

You mentioned that most of your ATM has been utilized. Do you see yourselves re-upping on that? And how will that impact your need to access the public equity markets later this year?

[Thomas E. Long:]

Yes, this is Tom again. We do plan to keep an ATM program in place. So as we roll through this one, I think you could see us to continue to access the capital markets through this. And as you know, with all the projects we've talked about here, with the CapEx program, these things work nicely with that versus any type of a large, lump-sum CapEx coming in at any single time. So as you look out, I think even as you look at where our leverage ratio is, et cetera, we feel like our balance sheet is very strong right now, and we think the ATM program will be all we'll need now. As always, if we ever see an opportunity that we really want to go after, et cetera, we'll always look at all of our options there as far as accessing the capital markets. But we do feel like the ATM program fits with the plan we have in place right now, so ...

[James Jampel:]

Great. And then given the recent restructuring at your general partner, how might that influence the ultimate disposition of Regency vis-a-vis the Energy Transfer complex?

[Thomas E. Long:]

At this point in time, we have nothing to add in terms of what may happen to Regency down the road. And so from our perspective, it's business as usual here at Regency, and if and when that ever made sense, then we will probably hear more about that. But at this point in time, I'm not aware of anything that would impact Regency.

[Operator:]

And now I'd like to turn the call over to Mike Bradley, President and CEO, for closing remarks.

[Michael J. Bradley:]

Well, again, thank you, everybody, for joining our call. And in conclusion, I want to highlight that we continue to benefit from the high levels of drilling activity in the Eagle Ford and Permian, as well as the richer gas plays in North Louisiana. We're already beginning to see volume and margin growth associated with the ramp-up of our recently completed growth projects, and we expect their contributions to increase as they continue to ramp up throughout the year and into 2014. Our current growth projects, as well as the additional growth opportunities we're seeing, leave us well-positioned to improve coverage and increase distributions as they contribute to additional earnings and volume growth. We are very excited about the combination of SUGS and Regency Permian assets and believe this acquisition also puts us in an excellent position to capture additional growth. Finally, we are very, very pleased with how the employees of SUGS, Regency and our Contract Services group have come together to make sure this is a very successful acquisition. With that, thanks again, and have a great day.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.