Resources Connection, Inc.
Q1 2014 Earnings Call Transcript

Published: 7 May 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2014 Regency Energy Partners LP Earnings Conference Call. My name is Wrigley, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. 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 for the first quarter of 2014. 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 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 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 units. Also during the call today, we will refer to various non-GAAP measures. Reconciliations of these measures and 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:]

Thanks, Lyndsay, and hello, everyone, and thank you again for joining us on our call this morning. We are very pleased with our first quarter results, as we experienced strong growth across our GMP, Contract Compression and NGL Logistics businesses, and additionally, we closed on 2 important acquisitions, which will provide significant opportunities going forward. Now let me start this morning with some key highlights for the quarter. First, on March 21, we closed our merger with PVR Partners. We are very excited about this acquisition as we now have a significant position in the Appalachian shales, as well as an expanded presence in the Mid-Continent, which are presenting substantial growth opportunities that I will discuss in a minute. Additionally, we are already finding incremental growth opportunities on top of the ones identified during our due diligence. We are on track to achieve approximately $30 million in annual synergies from this acquisition, primarily through personnel savings, benefits and insurance, IT and other corporate related costs, as well as some OpEx savings driven by asset consolidation and integration. Additionally, there are significant savings as a result of our financing activities, which Tom will discuss later on the call. We are currently executing on our 90-day integration plan, and have already completed integrating employees into the organization and have made substantial progress integrating processes. From the organization and asset integration we have completed so far, we are already realizing lower costs and improved efficiencies and we continue to find opportunities to lower capital cost and operating costs. In addition, we are in the process of executing on a compression consolidation plan, that is expected to drive higher fleet utilization and lower fuel consumption. Next, on February 3, we closed on our acquisition of Hoover's midstream assets. As previously mentioned, the Hoover gas assets were already connected to Regency's existing Permian Basin gathering system, which facilitated a quick integration. This acquisition, has provided us with a platform for oil gathering, and existing Hoover system is currently flowing approximately 17,000 barrels a day, which is up from 10,000 barrels a day upon closing in February. We have additional expansions planned for these assets, which I will discuss shortly. Also this morning, we announced plans to construct a new 200 million a day cryogenic processing plant at Dubberly along with a new 160-mile, 8- and 10-inch NGL pipeline from Dubberly for delivery to fractionation facilities. These new facilities are supported by strong growth in the richer Cotton Valley formation. The new plant will set gas directly from the recently completed Dubberly gathering trunkline and the residue gas from this facility will be delivered into the rig system. The new NGL line will have a capacity of approximately 25,000 barrels a day expandable to 45,000 barrels a day with additional pump stations. This line will create an additional outlet for the newly produced NGLs from the region, and these projects are backed by fee-based contacts and the combined project cost is expected to be approximately $260 million with an in-service date in mid-2015. Now looking at our first quarter results. In my discussion, we'll assume a full quarter of the PVR results in comparison to our legacy first quarter of 2013, which do not include SUGS, PVR or Hoover. Adjusted EBITDA increased nearly 130% to $289 million compared to $127 million for legacy Regency for first quarter 2013. This includes approximately $94 million from the legacy PVR assets. DCF for the first quarter, which is already adjusted to include a full quarter DCF contribution from PVR, increased 80% to $182 million compared to $101 million for 2013, and coverage was 1.02x with the recent distribution increase. This growth was driven by recent acquisition, including SUGS, PVR and Hoover, as well as increase in volumes due to our recently completed growth projects in our Gathering, Processing and NGL Logistics segments, along with growth in our Contract Services bid. For Gathering and Processing excluding PVR, average volumes for the first quarter increased to 2.4 million MMbtus per day compared to 1.5 million MMbtus per day in 2013. And average NGL production for the first quarter more than doubled to 98,000 barrels a day compared to 43,000 barrels per day for 2013. All volumes associated with the Eagle Ford and Edwards Lime expansions, as well as the new Hoover assets were 29,000 barrels per day for the first quarter of 2014, compared to 4,000 barrels per day in Q1 of 2013. Total PVR volumes grew 29% over the first quarter of 2013 from 1.7 million MMbtus per day to 2.2 million MMbtus per day. For the Contract Services segment, we continue to see increased demand for Contract Compression, which drove our revenue-generating horsepower to a all-time high of 1,120,000 horsepower at the end of the first quarter. Third-party revenue-generating horsepower for our Compression business increased more than 25% from first quarter of 2013 to the first quarter of 2014 or an increase of over 220,000 horsepower. Our utilization rate was 97% at the end of first quarter of 2014. And for the NGL Logistics segment, adjusted EBITDA increased nearly 45% in the first quarter of 2014, which is primarily due to volume growth on Frac I and the gateway NGL pipeline, as well as the startup Frac II. But looking ahead, for the GMP business in addition to the expansions at Dubberly, I just discussed, we are also moving forward with the construction of several growth projects, including those related to the recently acquired Hoover and PVR assets. In the Permian, we have continued to expand our footprint by constructing approximately 50 miles of pipe and extending our region to Andrews and Culberson counties and continue to add additional dedicated acreage. We further expect to add additional processing capacity in the Permian to handle increasing volumes, and will provide more details at a later time. The addition of Hoover has provided Regency with an oil gathering footprint, and we are in the process of adding additional pump stations to increase our Permian gathering capacity from 24,000 barrels a day to 100,000 barrels per day, which will fill out our hydraulic capacity on the system. This capacity will be fed by new oil lines from our ongoing expansion of the oil gathering system, which includes construction of over 60 miles of laterals. For our Eastern business assets, we continue to move forward with the completion of right of way oil materials and finalization of engineering for the Utica Ohio River project, which was announced in the fall. We are very excited about the potential of this project, which includes construction of a 52-mile trunkline along with wellhead gathering and associated compression. The trunkline will now be upsized to a minimum diameter of 24 inches, and will have a minimum capacity of 750 million a day. We are currently assessing the possibility of further upsizing this project. Total project costs are expected to be at least $300 million. This project creates a first mover advantage and will be a main takeaway option for the Utica lean gas development, providing interconnectivity with Rex, TEP and potentially others. We see significant upside potential for this project, which is backed by fee-based commitment. The trunk-lining is expected to be in service in the third quarter of 2015, and the gathering laterals that we phased in over time based on producer drilling programs. Next, we are moving forward with a $330 million expansion of our Lycoming System, which will add 10 miles of 24-inch trunkline along with gathering and compression and will further extend our infrastructure in Bradford and Sullivan counties. This project will alleviate future capacity constraints by allowing bidirectional flow, providing shippers with access to multiple markets, including TGP and Transco, as well as connecting our Lycoming System to our Bradford County gathering system. This is expected to add over 500 million a day of capacity as backed by existing and newly dedicated acreage. The trunkline is expected to be operational in mid-2015, with remainder of the gathering to be phased in over the next several years. Additionally, we are moving forward with the $61 million build-out of our East Clinton gathering system, which will add a trunkline with associated laterals, compression and dehydration. This project will provide delivery into Transco's línea lateral 300-million-a-day interconnect, and is backed by a fee-based commitment and is expected to be in service in early 2015. We are continuing to see increased production around our systems, which is creating opportunities for expansion as we provide our customers with the necessary infrastructure to meet our downstream firm takeaway obligations -- to their downstream firm takeaway obligations. For example, as part of the continued volume growth in our Susquehanna and Wyoming county area, we are moving forward with adding approximately 8,000 horsepower at our Auburn and Corbin compression stations, and this expansion will increase deliverability to TGP by approximately 200 million per day and we expect these to be complete in December of this year. For Contract Compression, we expect demands remain strong for 2014, and we're seeing our largest opportunities coming from the Permian Basin, Eagle Ford, Niobrara and Appalachian shales. On our fourth quarter call, I mentioned that as of January 1, we had approximately 90,000 horsepower already booked to be set in the first quarter and early second quarter. Approximately 75,000 of this horsepower was set in the first quarter, and the remaining 15,000 was set in April. In addition, we now have an incremental 110,000 horsepower booked to be set in the second and third quarters with solid opportunities to set an additional 125,000 horsepower by year end. And for Lone Star, we expect to see growth continue in 2014 as demand for NGL infrastructure remains strong and we're excited about the additional opportunities we are seeing for this business. Our LPG export facility with Sunoco Logistics remains on budget and on schedule for startup in Q1 of 2015. And we continue to evaluate the addition of downstream infrastructure to deliver products to market. In summary, we are very excited about the remainder of 2014, but also into 2015, as we expect strong volumes and earnings growth to continue. A portion of this growth will be driven by volume growth around our recently completed major projects, particularly in North Louisiana, West Texas and the South Texas regions, all of which are experiencing higher volumes year-to-date. As mentioned, we have additional projects underway, including several in the eastern region and are well positioned for additional significant growth in 2014 and 2015 and beyond. In total, we now have a backlog of approximately $2 billion of organic growth projects that we plan to execute over the next 2 or 3 years, and we expect that number to increase. As a result of our expected growth, we continue to plan on recommending to our Board of Directors a distribution increase of 6% to 8% for full year 2014 subject to Board approval and future operating results. Before I turn the call over to Tom, I'd like to provide a brief update on the acquisition of Eagle Rock's midstream business. On April 29, Eagle Rock received unitholder approval to move forward with the acquisition. And on April 30, we jointly announced that we have certified substantial compliance with the FTC in response to its request for additional information. In order to facilitate the FTC's review, we have agreed not to close on the proposed transaction before June 30, 2014, unless the FTC first closes its investigation. At this time, we will not be able to comment further on the Eagle Rock acquisition or the FTC review. With that, I will turn the call over to Tom, who will take you through a review of our financial performance.

[Thomas E. Long:]

Yes, thank you, Mike. As a reminder, Mike discussed first quarter results, including a full quarter of PVR and SUGS compared to legacy Regency 2013 numbers. In our SEC filings, we have recast historical results to combine Regency and SUGS due to the "as-if-pooling" accounting treatment required for an acquisition between common controlled entities. In addition, our first quarter results include 11 days contribution from PVR. Adjusted EBITDA for Q1 2014 increased to $205 million compared to $120 million in 2013. This was primarily due to volume growth in the Gathering and Processing segment, which was primarily in South and West Texas and the North Louisiana, as well as increased volumes at our Lone Star Joint Venture. In addition, we also had increased generating -- revenue-generating horsepower from CDM, and of course, 11 days of PVR earnings. Regency's DCF, which as Mike mentioned, has been adjusted to include full quarter Bcf contributions from PVR, which -- the number was $182 million for Q1 of 2014 and our coverage was 1.02x. Looking at performance by segment. Starting with Gathering and Processing. Adjusted segment margins for Q1 of 2014 increased 55% to $166 million compared to $107 million for 2013. Total GMP volumes increased to 2.7 million MMbtus per day in Q1 of 2014 compared to 2 million MMbtus per day in Q1 of 2013. And this was primarily due to strong growth from both our and Dubach and Dubberly systems in North Louisiana, nearly 50% increase in volumes on our Eagle Ford expansion project in South Texas and a 40 -- nearly 45% increase in West Texas. Additionally, NGL production averaged 101,000 barrels per day for Q1 of 2014, which was a 23% increase over 2013. Total PVR volumes were up 29% over the first quarter of 2013, from 1.7 million MMbtus per day to 2.2 million MMbtus per day. For our Contract Services segment, for the first quarter of 2014, segment margin increased to $56 million compared to $47 million for 2013, which was primarily due to an increase in third-party revenue-generating horsepower, which was 853,000 increasing to 1.1 million as a result of units placed into service in South and West Texas, Colorado, Ohio and Pennsylvania. Turning to the NGL Services segment, which is solely the Lone Start Joint Venture. Adjusted EBITDA was $33 million for Q1 of 2014 compared to $23 million for Q1 of 2013. This increase was primarily due to volume growth on Frac I and II, as well as the Gateway NGL pipeline. For Q1 of 2014, total NGL transportation throughput volumes, which includes volumes from both the West Texas Pipeline and the Gateway NGL pipeline increased to an average of 184,000 barrels per day from an average of 153,000 barrels per day in Q1 of 2013. And fractionation throughput volumes averaged 135,000 barrels per day in Q1 of '14 compared to 51,000 barrels per day for Q1 of 2013. Now turning to Natural Gas Transportation segment. For the Haynesville Joint Venture, adjusted EBITDA was $14 million for both Q1 of 2014 and 2013. And for the Mid-Continent Express Pipeline, adjusted EBITDA was $26 million for both Q1 2014 and 2013. And for the new segment that came with the PVR acquisition, our Natural Resources segment, we did have 11 days recorded on Regency's books. That number was $2 million, which was from March 21 to March 31. Now looking at our liquidity position at the end of the first quarter. We had $873 million of available liquidity. In February, we completed an amendment to our existing credit facility, which increased the commitments from $1.2 billion to $1.5 billion. For the first quarter, we received net proceeds of $34 million from our ATM program, which actually completed that program. On April 30, we have just gone effective on our new $400 million ATM program, which we expect to use the proceeds to help fund the 2014 CapEx program. And likewise, we recently called the PVR's 8.25% notes due 2018. As a result, we expect interest expense savings of over $10 million a year from calling back in these notes. Our exchange of the $550 million of Eagle Rock notes due in 2019 is underway and is expected to be completed upon closing of the acquisition. As for CapEx. For the first quarter of 2014. We incurred $188 million in organic growth capital. We also incurred $22 million in maintenance CapEx. For the full year of 2014, we are increasing our expected growth CapEx expenditures from $540 million to $1.2 billion, inclusive of our recently announced expansion in North Louisiana and planned expenditures in the Marcellus and Utica region. This includes $860 million related to the Gathering and Processing segment, $250 million related to the Contracts Services segment and $110 million related to Lone Star Joint Venture. For 2014, we expect to spend approximately $90 million in maintenance CapEx. And for DCF sensitivities, for the balance of 2014, a $10 per barrel movement in crude oil along with the same percentage change in NGL pricing would result in approximately $6 million change in Regency's forecasted DCF. And a $1 per MMbtu movement in natural gas pricing would result in approximately $6 million change in Regency's forecasted DCF. And with that, we'll open the call up for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line off Gabe Moreen with Bank of America.

[Gabriel P. Moreen:]

It sounds like PVR assets are off through a really nice start under the Regency umbrella. And I guess regarding that on the Utica Ohio River Project, I guess, I'm curious on that project, the decision to potentially upsize it further, what you need to see, would it just be producer commitments? Or is it your view in terms of drilling activity? And then around the $300 million number that you laid out there, is that inclusive of the laterals you expect to build to the line? Or is that a number that doesn't include those laterals?

[Jim Holotik:]

The $300 million number does not include the laterals. Those will be included on more or less of separate gathering agreement. We are talking with additional producers in the area and given some of the successes that we're seeing in that area has given us reason to think that there might -- that there is potential to upsize, so we're always looking at the potential and likely to upsize this pipeline prior to putting anything into the ground.

[Gabriel P. Moreen:]

Thanks, Jim. And I guess as a follow-up to that, are any of binding open seasons on reversal of capacity like Rex, are you guys -- is your project dependent on how any of those go?

[Jim Holotik:]

No, we're seeing a number of projects being put on the board in the area and so there is no one specific project that we're dependent upon at all.

[Gabriel P. Moreen:]

Great. And then, last 2 questions from me. First on the new processing plant and if you can just help me understand in terms of the contracting dynamic in rigs, obviously rigs was down year-over-year because you lost a contract, it looks like -- can you talk about where this will take you in terms of rigs capacity utilization and contract profile?

[Jim Holotik:]

. The majority to the gas will be coming out of the Dubberly system -- well, all of the gas will be tied into rigs. And right now the majority will flow under an IT rate, which is going to be a rate that's comparable to all the rates that are in that area at this present time.

[Operator:]

Your next question comes from the line of Abhi Rajendran with Crédit Suisse.

[Abhiram Rajendran:]

Couple of quick questions. First on distribution growth. Your 68% growth guidance for this year, I guess, is the range more a function on timing of closing on Eagle Rock or more a function of how the growth comes in, if could you just walk through some of the puts and flow shares [ph], that would be great?

[Michael J. Bradley:]

Yes, I think it's -- I think number one, it's -- we look at the rate of growth we are currently seeing from our existing assets as one factor in that. And then the second is the closing of Eagle Rock. But I think kind of we're very comfortable with our existing assets and we would obviously excite about the Eagle Rock acquisition and the opportunities that it would afford us. But I think would also be beneficial.

[Abhiram Rajendran:]

Okay, great. And then just a quick question on Lone Star. Could you talk a bit about the interest and opportunities for another Lone Star frac, how you're thinking about that possible project?

[Michael J. Bradley:]

Well, I think it's something that we've continued to assess, as we've mentioned. And I think the potential is definitely there for Lone Star to add a frac tree, and I think at the appropriate time we'll obviously let everybody know when that project gets going.

[Abhiram Rajendran:]

Okay, great. And then just one kind of housekeeping question. What was your unit count exiting the quarter, at Regency kind of factoring all the deals?

[Michael J. Bradley:]

Our unit count at the end of the quarter was 350 million units. Was your question about, was it at the beginning of the quarter also?

[Abhiram Rajendran:]

No, no. Yes, that's what I was looking for, just what it was existing.

[Operator:]

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

[Michael W. Gaiden:]

I'd like to hear about the already commenced refinancing at it relates to PVR interest savings. Can you talk about what other financial synergies you are currently contemplating as it relates to the legacy PVR capital structure?

[Michael J. Bradley:]

Yes. That's -- the 300 million was the -- of course, was the first piece that we were able to call, so we were -- obviously had that one planned to bring back in on April 23, is when we brought those back in. As far as the -- looking forward, we do have a little bit more on a claw feature with any equity offerings we do, that number is probably about in the, I think, 80 -- mid-80 million dollars or so that we're looking at. After that, we are probably just going to look for the various call dates after that. No plans right now to do any type of a tender.

[Michael W. Gaiden:]

Great. Can I also ask the 2 interrelated questions about the organic growth at backlog. It's certainly encouraging to hear about all these projects and the growth of your backlog. Can I ask 2 questions please. One, do you think your ATM programs, the one that's now effective for $400 million is enough to satisfy your equity capital needs for your organic spending budget for the year? And two, I wanted to ask with the growth of your backlog, are you by chance also seeing compression on the EBITDA multiples of these projects i.e. are they getting even more profitable now? Your color on both those items would be appreciated.

[Thomas E. Long:]

Okay. I'll -- let me respond to the capital market -- the ATM portion of it. We do still like the $400 million ATM, our plans are right now just to utilize that depending on how quickly we go through that, we would probably look at putting another one in place. Once again, we always target to stay right about the 4x leverage ratio. So we will keep a balance looking at that as we go out through the year to see what makes sense if there is any other capital needs. I would remind you that as part of the Eagle Rock transaction, as you know, we have $200 million of equity going to Eagle Rock as part of that transaction and we have $400 million of that going to ETE, so there's $600 million that will come about as part of the Eagle Rock transaction. So between -- what I have laid out here and then the continuing ATM, we'll evaluate whether we need any other capital needs later in the year.

[Michael J. Bradley:]

And this is Mike, I think as it relates to the multiples or returns on our projects, the bulk of these projects are all associated with our existing systems and expansions and extensions, and really I think we're very pleased with the returns from all these projects as we look forward.

[Operator:]

There are no further questions left in the queue. I would now like to turn the conference back over to Mike Bradley for closing remarks.

[Michael J. Bradley:]

Well again, thanks, everyone, for joining us on our call and like we said, we're very pleased with our first quarter, but more importantly, we're very excited about what we see ahead for Regency and all the opportunities that are developing. And I think with the several growth projects expected to ramp up in 2014, as well as the projects being developed for 2015, we feel very confident that Regency remains poised for significant growth going forward. Again, thank you, we appreciate your questions, and have a great day.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect your lines.