Resources Connection, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2013 Regency Energy Partners LP Earnings Conference Call. My name is Karen, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I'd like to turn the call over to Lyndsay Hannah, Manager of Finance and Investor Relations. Please go ahead.

[Lyndsay Hannah:]

Good morning, everyone, and welcome to our call. Today, we will cover Regency's performance for the third 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 yesterday 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 webcast will be available on the website following today's call. Please note, we plan to file our 10-Q tomorrow. And as a reminder, according to the accounting requirements, our historical results have been recast to include Regency and SUGS results combined. During the call, we may make forward-looking statements. You are reminded that actual results may differ materially from any forward-looking statement. 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 units. Also during the call today, we will refer to various non-GAAP measures. Reconciliations of these measures back to the comparable GAAP measure are provided in our press release issued yesterday, which can be found on our website. With that, I will turn the call over to our CEO, Mike Bradley.

[Michael J. Bradley:]

Thank you, Lyndsay, and good morning, everyone. And thank you, again, for joining us on our call today. We are very pleased with our third quarter results as we experienced strong growth across our Gathering and Processing, Contract Compression and NGL Logistics businesses, and continued to realize benefits from our growth projects that came online during this year. But before we go into our financial results for the quarter, I'd like to highlight, again, the exciting news we announced in October. Regency entered into an agreement to purchase PVR Partners in a unit-per-unit transaction valued at approximately $5.6 billion, including the assumption of net debt. PVR owns and operates natural gas midstream pipelines and processing plants located in 2 prolific producing areas, the Marcellus and Utica shales in Appalachian and the Granite Wash in the Mid-Continent region. These are very complementary businesses, and this acquisition supports our goals of increasing scale and basin diversity, and pursuing acquisition of assets that are a strategic fit with our current portfolio. We expect this transaction will provide an even stronger foundation to build upon by further positioning Regency as a leading midstream company, with assets in many of the most economic high-growth oil and gas plays in the U.S. We anticipate this transaction will close in the first quarter of 2014, subject to HSR approval, which we filed on October 30, and other customary closing conditions, including a PVR unitholder vote. At this point, we remain limited in what we can discuss, but we'll continue to provide updates as they are available. Now for my summary of our financial results. I will discuss our third quarter 2013 results compared to our legacy Regency third quarter 2012 results, which does not include SUGS for 2012. Adjusted EBITDA was $172 million compared to $115 million for legacy Regency in the third quarter of 2012, or an increase of 50%. Distributable cash flow for the third quarter increased 67% to $115 million compared to $69 million in the third quarter of 2012. We have seen significant improvements in our coverage ratio over the past several quarters, reaching 1.12x in the third quarter of 2013. And as we announced last week, we increased our distribution on our LP units by $0.02 annually to $1.88 per unit. For our Gathering and Processing segment, average volumes for the third quarter of 2013 increased by more than 50% to 2.2 million MMbtus per day compared to 1.4 million MMbtus per day for the legacy Regency assets. The average NGL production during the third quarter of 2013 increased 166% to 97,000 barrels per day compared to 36,000 barrels per day for the third quarter of 2012. We are very pleased with the growth in volumes from our Gathering and Processing business, which included the addition of SUGS and the startup of the Red Bluff plant during the quarter, but also very importantly, solid growth from the legacy G&P assets, primarily in South and West Texas and North Louisiana. Looking at our performance by region. In the Permian Basin, the integration of the SUGS assets with our existing Permian system is nearly complete, and we are on track to realize expected synergies and operational benefits from the integration of these assets, which we have previously discussed. The $200 million-a-day Red Bluff expansion came online early in the third quarter and we are very pleased with its performance, and expect this facility to continue to ramp up into early next year. From the third quarter of 2012 to the third quarter of 2013, total Permian NGL production, including SUGS, has increased nearly 20% as a result of increased drilling, completion of our gathering system integration and other operational improvements. In South Texas, volumes are up more than 35% year-over-year to over 850,000 MMbtus per day. Our Edwards Lime expansion project started up in the third quarter, which is backed by firm commitments. This includes an oil gathering system with volumes of approximately 10,000 barrels per day, which is expected to continue to ramp up into 2014. Additionally, volumes at the Tilden Treating Facility increased 5% from Q2 '13 to Q3 '13, and we continue to see increased demand for treating services. 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 190,000 MMbtus per day during Q3 of 2013. Our cryogenic processing capacity at Dubach is now full, including the expansion we brought online in June. While we have additional -- we do have additional refrigeration and JT processing capacity available to accept more volumes while we construct our new line to our Dubberly refrigeration facility. Now looking at our Lone Star Joint Venture. In the third quarter of 2013, adjusted EBITDA increased nearly 100% compared to the third quarter of 2012, which was primarily due to the startup of our first Mont Belvieu fractionator and an increase in volumes and margin associated with the NGL pipeline expansion. Also last week, we announced that our second fractionator at Mont Belvieu is now in service, ahead of schedule and under budget. 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 are very excited about the additional opportunities that we are seeing for this business. Next for the Contract Services segment. Total revenue-generating horsepower reached over 1 million horsepower for Q3 of 2013. Third-party horsepower for our Compression business increased by over 180,000 horsepower or nearly 25% in the third quarter of 2013 compared to the third quarter of 2012, primarily in South and West Texas, where we saw the strongest demand. Our utilization rate increased to nearly 97% at the end of the third quarter compared to 87% at the end of the third quarter of 2012. New opportunities are driving increased CapEx spending for Compression due to continued strong demand. As of November 1, we have approximately 50,000 [ph] additional horsepower booked to be set for the remainder of the year. Looking ahead, in the Permian, we are pursuing additional gathering system expansions into newly developing areas, including oil-gathering opportunities in conjunction with the installation of gas-gathering assets. Also, we are completing turnarounds and significant upgrades on 3 plants that will result in more efficient processing of the richer developing gas supplies and improve overall reliability. Our pipeline expansion project in North Louisiana, which connects our Dubach gathering system to the 200 million-a-day Dubberly refrigeration plant, is still expected to be completed by the end of the year, with first flows in Q1 of 2014. This pipeline will have a capacity of up to 400 million a day. So in summary, we are very pleased with our third quarter performance, during which adjusted EBITDA increased 50% year-over-year due to the addition of SUGS and growth in our other business segments. Coverage for the quarter reached 1.12x, as I mentioned, and we announced an increase in distributions. Going forward, Regency remains poised for continued growth. We expect the SUGS acquisition, along with the completion and startup of our announced growth projects, to continue supporting our objectives of increasing distributions to our unitholders. In addition, we believe the acquisition of PVR is a very compelling and strategic opportunity for Regency. We expect the combination of Regency and PVR assets to strengthen our position as a major player in the majority of the most prolific oil and gas plays in North America and create new opportunities for growth. 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. As a reminder, Mike discussed third quarter 2013 results, including SUGS, compared to legacy Regency third quarter 2012 numbers. We have recast historical results, combining Regency and SUGS, due to the as-if pooling accounting treatment required for an acquisition between common-controlled entities. Adjusted EBITDA for Q3 2013 increased to $172 million compared to $140 million for Q3 of 2012. This was primarily due to volume growth in the Gathering and Processing segment 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 was $115 million for Q3 of 2013. Looking at performance by segment, and starting with Gathering and Processing. Adjusted segment margin for the third quarter of 2013 increased 20% to $142 million compared to $118 million for the third quarter of 2012. Volumes for the third quarter of 2013 were up 12% to 2.2 million MMbtus per day, primarily due to an increase of more than 60% year-over-year on our Dubach system in North Louisiana, a 35% overall increase in South Texas and an 8% increase system-wide in West Texas, inclusive of SUGS for both periods. Additionally, NGL production averaged 97,000 barrels per day for Q2 of -- sorry, Q3 of 2013, which was a 24% increase over the third quarter of 2012. Now turning to our Natural Gas Transportation segment. For the Haynesville Joint Venture, our adjusted EBITDA was $14 million for Q3 of 2013 compared to $16 million for Q3 of 2012. And at our MEP Joint Venture, our share of adjusted EBITDA was $26 million for both Q3 of 2012 and 2013. Volumes were 1.3 million MMbtus per day in Q3 of 2013 compared to 1.4 million MMbtus per day in Q3 of 2012. And for our NGL Services segment, which is solely the Lone Star Joint Venture, adjusted EBITDA was $25 million for the third quarter of 2013 compared to $13 million for the third quarter of 2012. This increase was primarily due to the startup of frac 1 and the Gateway NGL pipeline, which both went into service in December of, 2012, as well as higher volumes at Refinery Services and higher olefin stream. For the third 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 172,000 barrels per day from an average of 132,000 barrels per day for the third quarter of 2012. Refinery Services throughput volumes averaged 12,000 barrels per day for Q3 of 2013 compared to 11,000 barrels per day for Q3 of 2012. And fractionation throughput volumes, which is frac 1, averaged 72,000 barrels per day for Q3 of 2013. Turning to our Contract Services segment. For the third quarter of 2013, Contract Services segment margin increased to $52 million compared to $48 million for Q3 of 2012. Contract Compression segment margin increased $6 million to $45 million for Q3 of 2013, primarily due to an increase in third-party revenue-generating horsepower. And for our liquidity position, in September, we announced a public offering of $400 million, 5.75% senior notes due 2020, and used the proceeds to pay down outstanding borrowings under our revolving credit facility. As a result, at the end of the third quarter of 2013, we had approximately $1 billion of available liquidity. In addition, during the third quarter, we received net proceeds of $21 million from our continuous offering equity program. There is now $34 million remaining available under this $200 million program. Pro forma leverage ratio at September 30, 2013, for the credit facility is 4.1x. Now for our 2013 CapEx. We are increasing our expected CapEx investments to approximately $870 million. This includes $500 million related to the Gathering and Processing segment, $220 million related to the Contract Services segment and $150 million related to the Lone Star Joint Venture. We forecast maintenance capital expenditures of approximately $40 million. As 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 an approximately $1 million change in Regency's forecasted 2013 DCF. And $1 per MMbtu movement in natural gas pricing would result in an approximately $3 million change in Regency's forecasted 2013 DCF. And a $0.05 per pound change in ethylene and propylene would result in about a $1.6 million impact. And with that, we'll now open the call up to your questions.

[Operator:]

[Operator Instructions] First question we have comes from the line of Edward Rowe of Raymond James.

[Edward Rowe:]

While there is preliminary results out of the Brown Dense, they've been pretty solid, but given the new pipeline expansion at Dubach and Dubberly plants and -- how do you see supply dynamics really shaking out in the region for possible gas processing capacity expansions?

[Jim Holotik:]

It's Jim Holotik. There are expansion in the Dubberly -- the Dubberly expansion is primarily coming out of the Cotton Valley and we see certain -- they're making some good wells there, and the majority of this pipeline has a firm component with it. Also the Brown Dense itself, we are seeing that while they are drilling some good wells in there, we are seeing them expand the parameters of their drilling and still making additional wells. So we're optimistic that we will continue to see additional growth in that area also.

[Edward Rowe:]

Okay, that's helpful. In terms of West Texas, Gateway and, I guess, maybe potential projects for looping to expand volumes there, how much capital and what would be the timeframe to be able to increase that capacity, given production out of the Permian?

[Michael J. Bradley:]

This is Mike. At this point in time, we do have the ability to increase capacity of the system via adding additional pump stations. And there is a point at which it becomes more economical to loop the pipeline, and we still see that as an opportunity as we go into probably '15 or '16, as a possibility. So that would be a rough timing on that. We're very excited about what we're seeing in terms of volumes, fractionation opportunities. So we're -- like I said, we are very encouraged about the potential to continue expanding the system.

[Edward Rowe:]

Okay. That's great. Just a really general question. Given that refineries are moving more toward light sweet crude, in terms of the Refinery Services within Lone Star, are there any opportunities within that side of the business?

[Michael J. Bradley:]

In terms of...?

[Edward Rowe:]

Yes. I mean...

[Michael J. Bradley:]

In terms of delivering crude?

[Edward Rowe:]

Yes, or -- I mean, there is, I guess, off-gas capabilities...

[Michael J. Bradley:]

Off-gas, yes. Yes, we do see other opportunities for off-gas, and those are some opportunities that we continue to pursue.

[Edward Rowe:]

Okay. Just last couple of housekeeping questions. The SG&A decline, was that due to some cost-saving initiatives? And second, the maintenance CapEx quarter-over-quarter variance, what was that attributable to?

[Thomas E. Long:]

Well, as far as the SG&A, we do have some cost initiatives underway, but I think you'll also see that part of that was the ETE management fees that, if you remember in the transaction we announced, we were going to go 8 quarters of a holiday on that, and that's $10 million a year payment.

[Operator:]

[Operator Instructions] Your next question comes from the line of Michael Gaiden of Robert W. Baird.

[Michael W. Gaiden:]

First, a question for Tom. Can I please ask how much more of the synergies with SUGS should we expect to see flowing into the fourth quarter, as well as perhaps 2014 P&Ls? How far through realization of those gains are we?

[Thomas E. Long:]

Well, the guidance that we've given, which by the way we feel very good about, is we had $25 million of synergies associated with the SUGS in 2013. So if you kind of -- that's pretty even as you look out to that fourth quarter, in answer to your question there. As you look out to 2014, we're very comfortable with the $40 million annual number that we gave from that -- at the time that we made the acquisition.

[Michael W. Gaiden:]

And to the extent that you can, can you comment on your ability to quickly enact all the potential financial synergies with PVR and refinancing their higher coupon debt, once that deal closes? Are there a lot of hurdles to making that happen, or is that [indiscernible]?

[Michael J. Bradley:]

I think we had some trouble with hearing your question. Tom, did you get that or...?

[Thomas E. Long:]

No. I think you're cutting in and out. I think we got some of it about how much we think we can achieve. Let me repeat it back to you and see if it's right. But associated with the PVR, how many of the synergies -- how much in synergies we think we can achieve, especially associated with the debt?

[Michael W. Gaiden:]

Yes, sir. Yes, exactly. Given PVR's higher coupon debt, how much of that could we expect to be quickly refinanced by Regency, once the deal closes?

[Thomas E. Long:]

Yes. We're currently still analyzing the strategy there. I think, when you look out, you'll see at least a call date on the 8.25% that comes up on April 15 of 2014, so shortly after the guidance we've given on closing on this. So you could probably see us, obviously, targeting those. As to the rest of them, we're still evaluating as to what is the optimal approach there. The other piece of that as far as the credit facility goes, I mean, obviously, we have some -- I think, some very strong pricing on our credit facility, and we plan to roll the PVR credit facility into the Regency credit facility. So that's another savings you could anticipate us achieving also.

[Operator:]

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

[Michael J. Bradley:]

Well again, thanks, everybody, for joining today. We're very excited about our quarter and what we see going forward for Regency, and look forward to our next earnings call in February. So have a great day, and thanks again.

[Operator:]

Thank you for joining today's conference. This now concludes the presentation. You may now disconnect, and have a good day.