Resources Connection, Inc.
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Regency Energy Partners LP Earnings Conference Call. My name is Lawanda, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Lyndsay Hannah, Director 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 second 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 this afternoon. And as a reminder, according to accounting requirement, our historical results have been recast to include Regency and SUGS results combined. During the call, we may make forward-looking statements. You're reminded that actual results may differ materially from any forward-looking statements. You should refer to our SEC filings for a more complete discussions 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:]

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 continue to experience strong growth across our G&P, Contract Compression and NGL Logistics businesses. Additionally, we closed on the acquisition of Eagle Rock's midstream assets, our third acquisition completed in 2014, which we are very excited about and will discuss more shortly. Third, we announced a significant project, which will continue to support our long-term organic gross story in the Appalachian basins. And finally, the PVR integration is going very well, and we are very pleased with the contribution from these assets in the second quarter. Now I'll walk through some key highlights for the quarter before turning it over to Tom. And I'll start with our second quarter results, which I will compare our second quarter of 2014 financial results to our legacy second quarter of 2013, which include only 2 months of SUGS results, as we acquired the SUGS assets on April 30 of last year. Adjusted EBITDA increased 93% to $307 million, compared to $159 million for the second quarter of 2013. DCF for the second quarter more than doubled to $207 million, compared to $101 million for 2013. And coverage was 1.08x with our distribution increase, excluding the units issued July 1 associated with the EROC acquisition. Coverage was still above 1, including the new units, which had no earnings associated with them during the second quarter. This growth was driven by our acquisition of SUGS, PVR and Hoover, as well as an increase in volumes in our legacy gathering, processing and NGL Logistics segments, and strong horsepower growth in Contract Services. For example, our average G&P volumes for the second quarter grew more than 120% to 4.9 million MMbtus per day, and NGL production grew 50% to 134,000 barrels per day. Oil volumes were 44,000 barrels per day compared to 7,000 barrels per day. For Contract Services, demand remains strong and third-party revenue-generating horsepower increased more than 25%. And for Lone Star, adjusted EBITDA increased nearly 75% in the second quarter of 2014, which is primarily due to volume growth in fractionation and NGL throughput. Next, we closed on our acquisition of Eagle Rock's midstream business on July 1, which when combined with our recent acquisition of PVR, will create a leading midstream player in the Midcontinent and Texas Panhandle, and significantly increase our presence in East Texas. The combination of the EROC and PVR Mid-con assets increases our total processing capacity from 50 million a day at the beginning of the year to approximately 900 million a day as of July 1. As I mentioned, the integration of PVR is going very well, and we are on our way with the integration of the EROC midstream assets. We are also very pleased with the combined synergies that we have identified so far, which now totaled more than $70 million on an annual basis. This is in addition to the elimination of the Eagle Rock corporate G&A allocation, which was $28 million for 2013. The synergies will primarily be achieved through G&A, financing and OpEx savings, along with identified asset efficiencies with the combined Mid-Con assets, and we continue to pursue additional synergies. The organization integration is complete for all transactions resulting in significant G&A savings, and we continue to execute on non-personnel G&A synergies in areas like corporate cost consolidation, including IT, benefits, insurance and office space. In the Mid-Con region, we are in the process of connecting the systems to increase reliability and performance of our plans and compression, as well as drive down operating expenses with asset consolidation and lower fuel consumption. Additionally, we are identifying several opportunities to reduce our capital cost for new products by leveraging available capacity from combining the systems. Also this morning, we announced plans to significantly expand our Utica Ohio River Project. We have entered into a gathering agreement with American Energy - Utica and a joint venture with American Energy - Midstream. This gathering agreement, combined with other producer commitments, has created the need to upsize the project to a 52-mile, 36-inch trunkline, as well as associated compression, versus the previously announced 24-inch. It will have a capacity of 2.1 Bcf a day with deliveries to Rex and Texas Eastern on the southern end. Additionally, there is potential to tie into interstate pipelines on the northern end, which would increase capacity to 3.5 Bcf again. This project, which is backed by over 2 Bcf a day of firm volume commitments, creates a first mover advantage and will be a main takeaway option for Utica lean gas development. Regency will construct and operate the system, and we anticipate a third quarter 2015 in-service date. The cost will be approximately $500 million, with Regency contributing 75% and ARM the remaining 25%. We are very excited about this project, and expect additional opportunities to develop around the system. Looking ahead, for the G&P business, in addition to the Utica expansion I just discussed, we continue to move forward with the construction of several previously announced growth projects, including those related to the recently acquired Hoover and PVR assets, and now have a current backlog of $1.9 billion in approved organic growth projects, which excludes approximately $450 million of capital spend year-to-date. Drilling continues to be very active in all of our operating areas, and Regency's expanding assets are well positioned to capture new opportunities. In the Permian, we are moving forward with the construction of our previously discussed 200 million a day processing facility at Mivida, along with additional treating capacity. We are expecting to expand our system with at least 2 additional processing facilities in this region in the near future. Additionally, our crude oil gathering volumes continue to increase, and we are currently expanding our mainline capacity from 25,000 barrels a day to 100,000 barrels per day along with further expansion of our oil gathering system. For our Eastern assets, in addition to the upsized Utica project, we are currently constructing approximately 800 million a day in system expansions and interconnect capacity, which will be coming online throughout 2015 and 2016 and is supported by projection for increased volume growth, due to the pad drilling in this region. The projects include an expansion of our Lycoming System, which will further extend our infrastructure into Bradford and Sullivan counties and provide increased deliverability into TGP and Transco, as well as the buildout of our East Clinton gathering system, which will provide delivery into Transco. They are backed by fee-based commitments for new and existing acreage dedications. For our South Texas assets, we are approaching capacity at our recently expanded Tilden and Edwards Lime joint venture facilities due to a continued growth in sour gas volumes. As a result, we are now planning to further expand these facilities over the next year to accommodate the increase in volumes. On the Eagle Ford gathering system, volumes are running above our projections, and we see the potential for new growth as producers utilize longer laterals and new frac techniques. In the Mid-Continent, we added 53 new well connects during the second quarter, which were more than doubled the first quarter. We are very pleased with the drilling activity around these assets and are currently pursuing additional expansion opportunities around those systems. Additionally, as we integrate systems into a single large super system, we are finding ways to improve efficiencies, reliability and increased throughput capacity. For North Louisiana, the construction of our new 200 million a day cryogenic processing plant at Dubberly, as well as the new NGL pipeline is on schedule to be in service in mid-2015. Currently, our combined Dubach and Dubberly facilities in North Louisiana are reaching capacity, and we are adding additional capacity to our Elm Grove facility to handle the expected volume growth prior to the startup of the Dubberly cryo. For Contract Compression, we expect demand to remain strong for the remainder of 2014 and into 2015, and we are seeing our largest opportunities coming from the Permian Basin, Eagle Ford, Niobrara, and Appalachian Shales, as well as the Gulf Coast. On our first quarter call, I mentioned that we had opportunities to set approximately 235,000-horsepower by yearend. 115,000-horsepower was set in the second quarter, and we now expect an additional 160,000-horsepower to be set by yearend. And for Lone Star, we expect to see growth continue in 2014 and 2015, as demand for NGL infrastructure remains strong, and we are 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. So in summary, we are very excited about the remainder of 2014 and into 2015, as we expect strong volumes and earnings growth to continue. This growth is being driven by our substantial positions in some of the most prolific shale plays, along with our acquisition strategy, which is coming together as expected. With that, I'll turn the call over to Tom, who will take you through our financial performance.

[Thomas E. Long:]

Thanks, Mike. As a reminder, Mike discussed second quarter results, including a full quarter of SUGS compared to legacy 2013 numbers with only 2 months of SUGS. Adjusted EBITDA for Q2 of 2014 increased to $307 million, compared to $155 million in 2013. This was primarily due to the addition of the PVR assets, volume growth in the legacy Gathering and Processing segment, increased volumes at our Lone Star Joint Venture, and increased revenue-generating horsepower for Contract Services. Regency's DCF was $207 million for the second quarter of 2014. Looking at our performance by segment and starting with Gathering and Processing. Adjusted segment margin for Q2 of 2014 doubled to $267 million, compared to $132 million for Q2 of 2013. Total GMP volumes more than doubled to 4.9 million MMbtus per day in Q2 of 2014, compared to 2.2 million MMbtus per day in Q2 of 2013. This was primarily due to a 50% increase in combined volumes on our Dubach and Dubberly systems in North Louisiana, a 40% increase in volumes in West Texas, a 35% increase in volumes on the Marcellus asset, and a 20% increase in volumes on our Eagle Ford gathering system. Additionally, NGL production averaged 134,000 barrels per day for Q2 of 2014, which was a 50% increase over 2013. For our Contract Services segment, for the second quarter of 2014, segment margin increased to $63 million compared to $49 million for 2013. This was primarily due to an increase in third-party revenue-generating horsepower, which increased from 897,000 to 1.1 million horsepower. As a result of additional horsepower placed in service in South and West Texas, Colorado, Ohio and Pennsylvania. Turning to the NGL services segment. Adjusted EBITDA increased 75% to $35 million for Q2 of 2014, compared to Q2 of 2013. This was primarily due to throughput growth on fracs 1 and 2 and on the Lone Star West Texas Pipeline, as well as increase in marketing income due to a more favorable price environment. Total NGL Transportation volumes on the Lone Star West Texas Pipeline increased to an average of 215,000 barrels per day from an average of 163,000 barrels per day. And fractionation throughput volumes averaged 177,000 barrels per day, compared to 87,000 barrels per day Q2 of '13. Now turning to our Natural Gas Transportation segment. For the Haynesville Joint Venture, adjusted EBITDA was up slightly to $14 million for Q2 of 2014, as compared to $13 million for Q2 of 2013. This was primarily due to an increase in IT volumes. And for MEP, our share of adjusted EBITDA was $26 million for both Q2 of 2014 and Q2 of 2013. And for our natural resources segment, margin was $20 million for Q2 of 2014. Now for our liquidity position. At the end of the second quarter, we had $650 million of available liquidity. In May, we entered into a new $400 million ATM facility, and for the second quarter, we received net proceeds of $31 million from this program. Upon closing of the Eagle Rock acquisition in July, we completed the exchange of $499 million of EROC senior notes that are due 2019 that have -- we exchanged those for new 8 3/8% Regency senior notes with a call date of June 1 of 2015. In addition, in we July we issued $700 of million 5% senior notes due July 2022 to reduce the outstanding balance on our revolving credit facility and improve our liquidity position. For CapEx, for the 6 months ended June 30, 2014, we incurred $443 million in organic growth capital and $37 million in maintenance CapEx. For the full year 2014, we are increasing our expected growth CapEx expenditures to $1.25 billion, inclusive of our recently announced expansion in the Utica Shale. The split of the $1.25 billion includes $850 million related to Gathering and Processing segment, $300 million related to the Contract Services segment, and $100 million related to Lone Star. For 2014, we expect to spend approximately $90 million in maintenance CapEx. And for our DCF sensitivities, for the balance of 2014, a $10 per barrel movement in crude oil, along with expected percentage change in NGL pricing would result in approximately $8 million change in Regency's forecasted DCF, and a $1 per MMbtu movement in natural gas pricing would result in approximately $7 million change. And with that, we'll open the call up your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Abhi Rajendran with Crédit Suisse.

[Abhiram Rajendran:]

A couple of quick questions. First, the margins in the G&P segment seemed to come in from the first to second, after kind of integrating all the numbers in from PVR. Can you talk about why that might have been the case? And then how to think about that going forward? And this is -- I'm just kind of talking about EBITDA per MMbtu.

[Thomas E. Long:]

Yes, Abhi, this is Tom. I will say, there's probably no specific driver there that I can really -- that we can probably really identify. I think, overall, we felt very good about the overall margins we are seeing across the segment. As you know, we don't have a lot of commodity sensitivity from that standpoint. So that's one that I'll follow back up with you.

[Abhiram Rajendran:]

Okay, sounds good. Yes, no problem. And I just had a couple of other quick questions. Obviously, the backlog of projects looks very strong, including today's announcement. So can you just talk about, just kind of given that as a backdrop, the opportunities set for the next several years is quite strong. Can you just talk about how you guys are thinking about your range for distribution growth this year? And then, and also sort of beyond this year, how we should think about growth, whether you'll sort of remain in like the mid- to high-single-digits per year or if you could even possibly keep that higher now that Eagle Rock is done and synergy opportunities are coming through and things like that? Any color there would be helpful.

[Thomas E. Long:]

Yes, I think we had -- have already stated that we plan to recommend between a 6% and 8% increase in distributions for 2014. We remain very well on track for that, I think, going forward into 2015. And we see a lot of continued growth in our business. And obviously, with the potential synergies we have already identified, we -- our intention is to continue to grow our distributions at a good percentage. And in addition to that, we've already stated we're trying to build coverage and increase distributions, and I think we're on our way to a very good start to that. So we're very encouraged with what we're seeing for 2015 right now.

[Abhiram Rajendran:]

Okay, got it. And then, just last quick one for me. On the NGL part of the business, I guess, what's the -- what do you -- what would you say is the likelihood of a frac 3 announced at some point. What are sort of puts and takes there? Any color there would be helpful.

[Thomas E. Long:]

Yes, I think the -- we're continuing to see very strong demand for not only frac capacity, as well as pipeline capacity. So I think we're very encouraged about what we potentially see ahead for further expansions.

[Operator:]

Your next question comes from the line of Gabe Moreen with Bank of America Merrill Lynch.

[Gabriel P. Moreen:]

On the announcement with the JV with American Energy midstream, can you talk about, I guess- whether everything going forward in the Utica now is going to be done through that JV, as part of the agreement? And to what extent do you think more stuff's to come in the Utica?

[Jim Holotik:]

Gabe, no, not everything in the Utica will be done within that agreement. Naturally, we will always make available certain opportunities as they arise in that area. One of the great things that we think we've got in the Utica is that the first mover opportunity in the area and backed by a lot of really strong commitments to the system.

[Gabriel P. Moreen:]

And can you talk about, Can you talk about I guess, when the project returns entering the JV, does that -- did that return the project, or does that change the project returns? Or is it just something where you got the opportunity to upsize the project and maybe even more on top of it?

[Jim Holotik:]

I think, it's really more of a combination of both. It certainly gave us the opportunity to upsize the project and then, that way allows us to expand out to additional producers in the area.

[Gabriel P. Moreen:]

Okay, great. And as far as the CapEx update, Tom, can you talk about -- it doesn't sound like anything's in there yet for EROC and those assets, is that something where -- there are just no growth CapEx? It was in your guidance previously. Can you just talk about that?

[Thomas E. Long:]

No, it actually does include the Eagle Rock as you look at over the remainder of the year. As we went through that entire process, we never really baked in a lot of growth capital for that. There's, obviously, a lot of good operating synergies and consolidation opportunities in that area. So it's not one that really had a any -- much of any material amount of growth capital added to it. So I think the $1.25 billion that we've given for 2014 is all-inclusive with all the acquisitions.

[Michael J. Bradley:]

And Gabe, this is Mike Bradley. One other thing that I'll add to that is that, as I mentioned, as we have sat down and studied all the potential interconnects and how to tie the system together, we're actually finding ways to increase capacity of the existing systems, which goes the point that it's producing what we think our growth capital needs are going to be by better utilizing the system that's in place. So we have the ability to continue to grow that system but with a lot less capital than if they were standing alone.

[Gabriel P. Moreen:]

Okay, got it. And just last question from me in terms of where you guys feel you are on the balance sheet and liquidity for the rest of the year, equity needs, and I guess, the ATM usage, if you covered that in the prepared remarks?

[Thomas E. Long:]

Yes, you bet. We did put in place a $400 million ATM during the second quarter that we've actually utilized $31 million off of that. So our plan is to continue to use that over the last half of the year. It's where we feel like our capital needs, and we'll will continue to use the credit facility with the $700 million bond offering that we recently did, as you can probably see, we had a lot of dry powder on our $1.5 billion credit facility. And that's, of course, still targeting, staying 4-ish x leverage ratio.

[Operator:]

Your next question comes from the line of Shneur Gershuni with UBS.

[Shneur Z. Gershuni:]

Just a couple of quick follow-up questions related specifically to EROC. Does the fact that we're now completed with it and you've a chance to sort of look and I realized it's only a month in and so forth, but when you talk about the 6% to 8% growth rate, does this put you a little closer to the upper end of that type of growth rate? And then, secondly, I was wondering if you can sort of talk about synergies on the capital side. I believe you just mentioned to Gabe there were just some. Should we see it in the form of lower maintenance CapEx? Or are there some kind of low-hanging fruit opportunities that give you very high return options because there's minimal capital involved?

[Michael J. Bradley:]

Yes, I think to your first point, I mean, obviously, we're very excited about the combination, we're seeing great synergies. And our goal, obviously, is to always beat our distribution growth projections to the extent we can. So we're very focused on that. And I have to compliment the entire team that's been going through this process and the synergies that have been identified, and how well it's gone, which I think is now speaking to the point that we can grow that Mid-Con system with a lot less capital than we originally expected. And there are opportunities around there. We continue to pursue them. And so in terms of growth capital, it's just not going to be a large number right now, only because of how we are configuring the systems to better utilize capacity. And that's a good thing because, obviously, that creates a higher return than spending more capital.

[Shneur Z. Gershuni:]

So to summarize then, could some of the synergy opportunities really be revenue, effectively revenue synergy opportunities? And is there potential upside to, kind of the numbers you highlighted earlier today?

[Michael J. Bradley:]

Yes, we've -- a lot of synergies that we've identified and are included in that are not so much revenue synergies. Some are. There's some planned efficiencies, but that doesn't include the additional growth that we're going to be able to capture without spending a lot more capital. So we continue to push forward in identifying more synergies. The thing about the Eagle Rock transaction versus the PVR transaction is we did get hung up with the FTC process a lot longer than we expected. And as a result of that, we were limited in what we could do prior to FTC approval. And so assuming as we got FTC approval, we closed, the teams came together and have been working very hard in identifying it. So we're still in the process of looking for more.

[Shneur Z. Gershuni:]

Okay, fair enough. Just had a couple of quick follow-ups. Obviously, the last 12 months have been pretty active on the M&A front, almost to the point where you've effectively transformed the partnership. Are you still looking at M&A opportunities? Or are you pivoting more towards the execution side, just kind of wondering how you see the roadmap over the next 12 months.

[Michael J. Bradley:]

Well, clearly, we've got a team focused on the integration execution of the acquisitions that we've completed. That's very important, and there's a lot of value to be extracted, and so we have a strong focus on that. Having said that, like the Hoover acquisition, that came up right in the middle of Eagle Rock and PVR, and it was such a good fit that we went ahead and moved forward with that. And we'll continue to look at those kinds of opportunities over the next 12 months as well.

[Shneur Z. Gershuni:]

Okay. And then just one final question. Given all the change and everything else, do you think it makes sense to be hosting an Investor Day sometime in the near future? Just sort of to discuss all the opportunities in more expanded depth?

[Michael J. Bradley:]

Absolutely, and I think we're scheduling one for November, and something should come out on that soon if it hadn't already. But it's going to be a full Energy Transfer family Investor Day, and we'll each go through our own opportunities and updates.

[Operator:]

[Operator Instructions] Your next question comes from the line of Eric McCarthy with Balyasny.

[Eric McCarthy:]

Just to expand a little bit on Gabe's question on the Utica projects. A point of clarification, the $500 million of capital, is that net to RGP or that's gross for the project?

[Michael J. Bradley:]

That's gross.

[Eric McCarthy:]

That is gross. Okay, got it. The 75% of that for the RGP.

[Michael J. Bradley:]

Yes.

[Eric McCarthy:]

And then, on Gabe's question touched on returns. Is there a targeted return we can think of for that project?

[Michael J. Bradley:]

On projects like these, we pretty much target mid- to high-teens.

[Eric McCarthy:]

And that's on equity?

[Michael J. Bradley:]

Yes, that's unlevered. Unlevered return.

[Eric McCarthy:]

Got it. And what's the -- you said in-service third quarter '15, what's the ramped in to achieve that? The all-in return?

[Jim Holotik:]

Well, the return itself is based on our ramp-up. So we're fully expecting the ramp-up to be within our economic model, probably over -- I'll tell you, between 3 to 4 years.

[Eric McCarthy:]

And then, how about the potential to upsize that to 3.5 a day change that targeted return? Is it even economics if it were to ramp from 2 to 3.5? Or does it become more accretive use of capital?

[Jim Holotik:]

It'll come more accretive, basically, we'll have the infrastructure in, and all we're doing is to be adding additional interconnection to the north.

[Operator:]

Your next question comes from the line of Jerren Holder with Goldman Sachs.

[Jerren Holder:]

I have one quick one maybe on ethane exports and the potential of the Lone Star facility to potentially do that sometime later on the line.

[Michael J. Bradley:]

I'm sorry, you talked about...

[Jerren Holder:]

The LPG export facility, if in the future that could be expected to include ethane exports, if it's capable of potentially doing that?

[Michael J. Bradley:]

Well, I think the possibility is there and definitely, that's something that we're all looking at.

[Operator:]

And with no further questions, 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, and we are very pleased and very excited about what's been happening at Regency and in particularly are excited about what the potential is going forward. With the completion of the of Hoover, PVR and Eagle Rock and the several growth projects that are expected to continue ramping up in 2014, Regency remains poised for significant growth. I think that we believe we've transformed Regency into a very strong, diversified Gathering and Processing and Transportation company in all of the major shale plays or in most of the major shale plays in the United States. And I really want to complement and express my appreciation to the Regency team, as well as the employees that have joined us from PVR, Eagle Rock and Hoover, who are really contributing to the overall success, not only performance, but also the integration of these combined businesses. With that, we thank you, and have a great day.

[Operator:]

Thank you for joining today's conference. That concludes the presentation. You may now disconnect. And have a great day.