Resources Connection, Inc.
Q3 2014 Earnings Call Transcript

Published: 9 Nov 2014

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2014 Regency Energy Partners LP Earnings Conference Call. My name is Chris, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operators Instructions) As a reminder, this conference is being recorded for replay purposes. And at this time, I would now like to turn the conference over to your host for today, Mr. Lyndsay Hannah. Ma'am, you may proceed.

[Lyndsay Hannah:]

Good morning, everyone, and welcome to our call. Today, we will cover Regency's performance for the third 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 that we plan to file our 10-Q later today. 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. Before we turn to our results, we'd like to say a brief overview about Regency's 2014 Investor Day. It will be held at the Ritz-Carlton in Dallas on November 17. At this event, we'll provide an in-depth look at our operations and discuss our growth strategy and opportunities. We hope you'll be able to join us. If you're interested in attending, please email us at [e-mail] or call us at 214-840-5477. 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 third quarter results as we continue to experience strong growth across our G&P, Contract Compression and NGL Logistics businesses. Also the integration of the PVR in Eagle Rock midstream assets is going very well and we were pleased with their contribution in the third quarter. Now I'll walk you through some key highlights for the quarter before turning it over to Tom. And I'll start with our third quarter results. Adjusted EBITDA doubled to $344 million, compared to $172 million for the third quarter of 2013 and DCF for the third quarter nearly doubled to $215 million, compared to $115 million in 2013. This growth was driven by our acquisitions of PVR, Eagle Rock midstream 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 G&P volume for the third quarter grew more than 160% to 5.7 million MMbtus per day and NGL production grew nearly 85% to 178,000 barrels per day. Oil volumes were 49,000 barrels per day compared to 9,000 barrels per day. And for contract services, demand remained very strong and third-party revenue generating horsepower increased 25% to a little over 1.2 million horsepower. In for Lone Star, adjusted EBITDA increased 60% in third quarter of 2014, which is primarily due volume growth in NGL fractionation and throughput. Next, as I stated, we are very pleased with the progress being made on the integration of the PVR and E Rock assets, which continues to grow very well. We have now increased our expected synergies to around $80 million on an annualized basis from a combination of G&A, financing and operating expense savings and we expect that number to increase as we continue to find more opportunities. We have achieved nearly all of our G&A savings, which are better than our original assumptions and we expect to realize the majority of all identified synergies by year-end 2015. In the mid-con region, we are executing on our asset integration plan, which includes projects to integrate the system into a single combined super system to improve asset efficiencies, reliability as well as drive down costs. We expect to leverage our super system flexibility to capture new gas packages as integration of these assets continue. We will pursue additional synergies as we integrate the combined organization and assets. Looking ahead, drilling continues to be very active in our operating areas and Regency's expanding assets are well positioned to capture new opportunities. For the G&P business, we have recently approved another 200 million a day, cryogenic processing facility in West Texas, which is expected to come online in Q3 of 2015 to accommodate production growth supported by existing acreage dedications. This is in addition to the 200 million a day, Mi Vida plant we have discussed previously. We recently agreed to form a 50-50 joint venture with the key producer for Mi Vida plant and Regency will construct and operate the facility on behalf of the JV. This joint venture further expands our relationship with one of our key customers in the Permian. The plant is currently under construction and is expected to be online in Q2 of 2015. Once these two plants are complete, we will have approximately 1.2 Bcf a day of net processing capacity in the [audio dip]. Also we are evaluating a third 200 a day processing expansion in the Permian as well. This is based on discussions we are currently having with producers in the area and see the need for this additional plant in 2016. We also continue to move forward with the construction of our other previously announced growth projects. In West Texas, we are continuing the expansion of oil gathering system and expect to be able to utilize our relationship with Sunoco Logistics for takeaway options on their newly announced Delaware Basin Extension project. In North Louisiana, a 200 million a day Dubberly processing plant and NGL pipeline remain on track to start-up in early Q2 of 2015. In the Eastern region, we continue to expand our gathering systems in the Marcellus, which is expected to add approximately 800 million a day of system and interconnect capacity and we still expect those projects come on-line in 2015 and 2016. Also Phase I of Utica Ohio River Project is expected to be in service in Q2 of 2015 and Phase III to on-line in Q3 of 2015. For South Texas, we are planning to further expand our trading and condensate stabilization capabilities at our Edwards Lime joint venture over the next year to accommodate increasing volumes and we see the potential for new growth on our Eagle Ford gathering system as producers utilize longer laterals and new frac techniques. In the Mid-Continent, we are very pleased with the drilling activity around these assets and are currently pursuing new midstream expansion opportunities around our system. Additionally in East Texas, drilling activity has picked up, which could create the opportunity for additional processing expansion in 2015. For contract compression, we expect demand to remain strong for the remainder of 2014 and 2015 and we're seeing our largest opportunities coming from the Permian Basin, Eagle Ford, Niobrara and Appalachian Shales as well as the Gulf Coast. On our second quarter call, I mentioned we had opportunities to set approximately 160,000 horsepower by year end, 83,000 net horsepower was set in the third quarter and we now expect an additional 100,000 horsepower to be set by year-end. And for Lone Star, we expect to see growth continue in 2015 as demand for NGL infrastructure remain strong and we are excited about the additional opportunities we are seeing for this business. We are pleased to announce yesterday that Lone Star is planning to construct our third 100,000 barrel per day fractionator at Mont Belvieu. This fractionator is expected to cost between $420 million and $430 million fully subscribed under multiple long-term contracts and is expected to be operational by December of 2015. Due to drilling activity in the Permian and Eagle Ford basins, NGL production continues to grow and we continue to evaluate additional fractionation expansion opportunities. Our LPG export facility with Sunoco Logistics remains on budget and on schedule to start-up in Q1 of 2015. For a brief comment on pricing, despite the recent decline in oil prices, we believe we remain in a good position, as our assets are located in core areas of basins with strong activity and attractive drilling economics and we continue to focus on maintaining predominantly fee-based margins and a comprehensive hedging program. Through our hedging program, we continue to target entering 2015 with approximately two-thirds of our commodity exposure hedged and we have made significant progress towards reaching those levels. And for full-year 2015, we expect margins to be approximately 75% fee-based. So in summary, we remain very excited as we look forward into 2015 and 2016, as we expect strong continued growth with additional projects coming online. We now have a current backlog of around $2 billion in approved organic growth projects, net of year-to-date CapEx spend and expect that number to increase soon, and we will discuss more on that at a later time. We'll be providing more details around our 2015 objectives and growth opportunities at our Investor Day, which will be held in Dallas on November 17 and we hope you'll be able to join us. Before I turn it over to Tom, I want to say a special thanks to all of Regency's employees and those who have joined us over the past year from PVR, Eagle Rock, Hoover, have done outstanding job during this time of integration and execution, and we are very pleased with their contribution. With that, I will turn the call over to Tom, who will take you through a review of our financial performance.

[Thomas E. Long:]

All right, thanks, Mike. Adjusted EBITDA for Q3 of 2014 increased to $344 million, compared to $172 million in Q3 of 2013. This was primarily due to the addition of the PVR and E Rock 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 $215 million for the third quarter of 2014 and coverage was 1.01 times. For Q3, as you all are aware, we increased our quarterly distribution to $0.5025 per unit, which is a 6.9% increase over our Q3 2013 distribution rate. Now looking at our performance by segment and starting with Gathering and Processing. Adjusted segment margin for Q3 of 2014 more than doubled to $329 million, compared to $142 million for 2013. Total volumes also more than doubled to 5.7 million MMbtus per day in Q3 of 2014, compared to 2.2 million MMbtus per day in Q3 of 2013. This was primarily due to the additions of the PVR and Eagle Rock midstream assets as well as 40% increase in combined volumes on our Dubach and Dubberly systems in North Louisiana, and a 50% increase in volumes in West Texas, and an 18% increase in volumes on our Eagle Ford gathering system. Additionally, NGL production averaged 178,000 barrels per day for Q3 of 2014. For our Contract Services segment, for the third quarter of 2014, segment margin increased to 27% to $66 million compared to $52 million for Q3 of 2013. This was primarily due to an increase in third-party revenue-generating horsepower from 973,000 to 1.2 million as a result of additional horsepower placed in service in South and West Texas, Colorado, Ohio and Pennsylvania. Turning to the NGL services segment, which is solely the Lone Star joint venture, our 30% ownership. Adjusted EBITDA increased 60% to $40 million for Q3 of 2014, compared to Q3 of 2013. This was primarily due to throughput growth on fracs 1 and 2 and on the Lone Star West Texas Pipeline. Total NGL Transportation volumes on the Lone Star West Texas Pipeline increased to an average of 232,000 barrels per day from an average of 172,000 barrels per day in Q3 of 2013. And fractionation throughput volumes averaged 209,000 barrels per day, compared to 72,000 barrels per day Q3 of 2013. Turning to our Natural Gas Transportation segment. For the Haynesville Joint Venture, adjusted EBITDA was up slightly to $15 million for Q3 of 2014, compared to $14 million for Q3 of 2013. Due to an increase in IT volumes and for our MEP pipe joint venture, our share of adjusted EBITDA was $25 million for Q3 of 2014 compared to $26 million in Q3 of 2013. And for our natural resources segment, margins were $18 million for Q3 of 2014. Now turning to look at our liquidity position. At the end of the third quarter, we had $800 million of available liquidity. As for our ATM facility, we currently have issued nearly $220 million since the end of the second quarter of 2014 out of the $400 million facility. We have also recently called our $600 million of our 6 7/8% [ph] bonds outstanding. And we plan to also increase our credit facility from $1.5 billion to $2 billion and we can look at closing on that prior to Thanksgiving. For CapEx, for the nine-months ended September 30, 2014, we incurred $770 million in organic growth capital and $61 million in maintenance CapEx. For the full-year 2014, we are revising our expected growth CapEx expenditures to $1.1 billion, this is slightly down from the $1.25 billion that we discussed at second quarter and this is really due to just the timing of the spend on the growth projects that are under construction. The split on that $1.1 billion is, $650 million related to Gathering and Processing segment, $350 million related to the Contract Services segment, and $100 million related to Lone Star. For 2014, we expect to spend approximately $80 million in maintenance CapEx. And now for our DCF sensitivities, for the balance of 2014, a $5 per barrel movement in crude oil, along with same percentage change in NGL pricing would result in approximately $1 million change in our forecasted DCF, and a $0.25 per MMbtu movement in natural gas pricing would also result and about $1 million change in our forecasted DCF. Looking out for 2015, a $5 per barrel movement in crude oil prices would result in approximately $7 million change in our forecasted DCF and a 25% per MMbtu movement in natural gas pricing would result in approximately $8 million change in Regency's forecasted DCF. And a 5% per gallon move in NGL prices would result in a $5 million change to our forecasted DCF. And with that, we’ll open the call up to your questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of Abhi Rajendran with Credit Suisse. You may proceed.

[Abhi Rajendran:]

Hi, good morning guys.

[Michael J. Bradley:]

Good morning Abhi.

[Thomas E. Long:]

Good morning.

[Abhi Rajendran:]

A couple of quick questions. Your CapEx came down a little bit for 2014. Can you just talk a little bit about what drove this, is this just a push out of spending or anything else, any color there would be helpful?

[Michael J. Bradley:]

The spending is still going to occur, it's just some of those got pushed out a little bit into 2015.

[Abhi Rajendran:]

Okay, got it. And you guys announced yesterday the new frac in Mont Belvieu. Maybe it's a little bit premature but could you talk a little bit about, I guess the demand and the eventual opportunity for a further frac, just your thoughts on that as it plays out maybe over the next year or two would be helpful?

[Michael J. Bradley:]

Yes. I think that as we've stated frac 3 fully subscribed and we continue to see strong demand for NGL transportation as well as fractionation. So we're very encouraged about the possibility for further fractionation expenses in the future.

[Abhi Rajendran:]

Okay, great and then just a final quick kind of housekeeping question. The Eagle Rock marketing and trading business, I guess, where does that show up in the financials, how you're reporting for that. Any color there be would be helpful just for modeling purposes?

[Thomas E. Long:]

That's currently being reported in the gathering and processing, along with our marketing margins and clearly that is the gas that they're handling is the gas straight out of the mid-con regions.

[Abhi Rajendran:]

Okay, perfect. Thanks very much.

[Michael J. Bradley:]

Thank you.

[Operator:]

(Operator Instructions) And next question comes from the line of Helen Ryoo with Barclays. You may proceed.

[Helen Ryoo:]

Thank you, good morning. Just a few more follow-ups on the frac 3, in terms of the contracting rates is that higher than what you're making on frac 1 and 2. Just trying to get a sense if the rates are still going up?

[Michael J. Bradley:]

I think the rates continue to be consistent, with our other frac contracts, so strong demand and that's a good thing.

[Helen Ryoo:]

Got it. And then you said it's all, the full capacity is subscribed on a long-term fee-based contract. Is there any MBC support?

[Michael J. Bradley:]

Yes, there is I don’t know the exact amount but we expect that fractionator to be full.

[Helen Ryoo:]

Okay. And if it's not full, there is some sort of minimum volume commitments that's kicking in?

[Michael J. Bradley:]

I believe it's probably somewhere around 80%, but I'll need to verify that Helen.

[Helen Ryoo:]

Okay. That's helpful. And then, just in terms of future opportunities, do you have sites to build fracs 4, 5? And then just in terms of lead time, I mean with the permitting process, what is a typical lead time for you to announce a project like this?

[Michael J. Bradley:]

Yes, I think to your first question, yes. There is availability to continue to add additional fracs at our Mont Belvieu site. Second, it probably takes in the order of 12-months to 15-months to go through permitting and construction. I think the Energy Transfer team has done a great job of being able to accelerate construction of frac. So that's probably on the long side.

[Helen Ryoo:]

Okay, that's helpful. And then, you guys announced new processing plants, Energy Transfer also announced two plants this morning. I'm just wondering, I guess all of that liquids will end up in Gateway, is that the right way to think about it? And then, if so, when do you see Gateway building up and needing an expansion?

[Michael J. Bradley:]

Well, I think that's a good question, Helen. And obviously, we're all tied into Lone Star to move those volumes. And so you can begin to think about what the implications are in terms of expansion opportunities, both for pipeline and fractionation. So, I think at a later date, I'm sure we'll be able to talk more about that, but we're very encouraged with additional growth projects for Lone Star on both pipelines and fractionation.

[Helen Ryoo:]

Okay. And then just lastly, the sensitivity number you disclosed for 2015, that is after hedging effect, correct?

[Thomas E. Long:]

That is correct, Helen. That's based upon the hedges we currently have in place as of now.

[Helen Ryoo:]

Okay, thanks for the clarification. Thank you very much.

[Thomas E. Long:]

Thank you, Helen.

[Michael J. Bradley:]

Thank you.

[Operator:]

And we have no further questions at this time. I would now like to turn the call back over to Mr. Mike Bradley for any closing remarks.

[Michael J. Bradley:]

Well, again, thank you everybody for joining our call. We always appreciate the questions and I think that, like Lyndsay said, we're looking forward to our Investor Day on November 17, and hope that many of you will be able to join us. Again, thank you and have a great day.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you so much for your participation. You may now disconnect. Have a great day.