Resources Connection, Inc.
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 Regency Energy Partners LP Earnings Conference Call. My name is Tony, and I will be your operator for today. At this time, all participants are in 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. 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 fourth quarter and full year 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 Web site at regencyenergy.com. Our call is being recorded and is also broadcast live over the Internet on the Regency corporate Web site. An archive of the webcast will be available on the Web site following today's call. Please note that we plan to file our 10-K on February 26. During the call, we may make forward-looking statements. You're reminded that actual results may differ materially from any forward-looking statements. And 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 our Web site. With that, I will turn the call over to our CEO, Mike Bradley.

[Mike Bradley:]

Thanks, Lyndsay, and hello, everyone, and thank you again for joining us on our call this morning. Today I am going to start with a brief overview of 2014 including some of our cost initiatives for the year and we’re very pleased with our performance for 2014 as we continue to experience strong growth across our legacy Gathering and Processing, Contract Compression and NGL Logistics businesses. For our legacy Gathering and Processing, this growth was driven by the ramp up of Gathering including expansion on our Edwards Lime joint venture and Eagle Ford gathering systems in South Texas, processing expansions in North Louisiana and Gathering and Processing expansion in West Texas. For Contract Services, revenue generating horsepower increase in all of our operating regions particularly in the Permian, Eagle Ford and Niobrara. Growth on the Lone Star joint venture was driven by the ramp up of barrels on the Gateway NGL pipeline and the second fractionators. Very importantly, we completed the acquisitions of PVR, the Eagle Rock midstream assets and Hoover which has positioned Regency as one of the largest G&P midstream MLPs. The integration of these assets continues to go very well and we’re pleased with their contribution in the fourth quarter. Now for a brief update on our merger with Energy Transfer Partners. In January, ETP and Regency announced that we’d enter into a merger agreement, pursuant to which Regency will merge into ETP in a unit-for-unit transaction. As discussed earlier, on the Energy Transfer earnings call, ETP and Regency announced that we have amended the merger agreement to; one, replace the cash distribution of $0.32 per unit with additional ETP common units, based on ETP’s closing price prior to closing of the merger; and second, instead of a direct merger, Regency will be merging into a subsidiary of ETP. Upon receipt of the unit holder and regulatory approvals, the merger is expected to close in the second quarter of 2015. As you can appreciate at this point, we will not be able to answer any questions related to the merger. And looking at our financial results for 2014, adjusted EBITDA nearly doubled to $1.2 billion compared to $608 million for 2013, and DCF also nearly doubled to $786 million compared to $411 million for 2013. Our average Gathering and Processing volumes for the year grew more than 120% to 4.8 million MMBTus per day and NGL production grew 65% to 149,000 barrels per day. For Contract Services, demand remained strong and revenue generating horsepower increased nearly 25% to 1.3 million horsepower. And for Lone Star, adjusted EBITDA increased 66% from 2013 to 2014, which is primarily due to volume growth in NGL fractionation and throughput on the Gateway NGL pipeline. Turning to our fourth quarter results. Both EBITDA and DCT nearly doubled to $318 million and $184 million respectively compared to the fourth quarter of 2013. We did experienced several non-recurring items, which included both maintenance capital and operating cost as a result of weather related issues, integration cost and property tax true up. We do not expect the higher integration cost in the fourth quarter to have any impact on the synergies achieved relative to the integration of the PVR and Eagle Rock assets, which we continue expect to be in excess of $80 million annually. Looking ahead, there continues to be significant uncertainly around commodity pricing and producer drilling programs, particularly for the second half of this year and going into 2016. We have clearly seen a rapid decline in commodity prices and rig activity across the majority of the basins in U.S., and we continue to monitor and discuss drilling plans with our customers. Based on discussions to-date, we still believe rig counts in the majority of our core operating areas will allow us to grow average volumes in 2015 compared to 2014 as a result of improved drilling efficiencies and the location of our assets within the core areas of these basins. As we’ve stated before, we believe Regency is well positioned as a result of our diversity of business mix, scale and strategic locations in multiple basins. With the decline in commodity prices, our entire team is focused on implementing strategies to reduce cost, optimize our assets, increase efficiencies and continue to capture new business opportunities. Looking at our CapEx for 2015, we now expect to spend approximately $1.6 billion on organic growth projects in our G&P NGL Logistics and Contract Services businesses. We have deferred some projects but have also added some new projects, so the number is slightly higher than our earlier forecast, Tom will discuss in more detail. Our 200 million a day Mi Vida plant in the Permian will be coming online in the second quarter. We are constructing this plant as part of our joint venture with a key producer in the region and we expect the plant to be full by year end. However, we have delayed our second 200 million a day cryogenic processing facility in West Texas, and we’ll continue to assess the need and location for this expansion. Our 200 million a day Dubberly processing plant and NGL pipeline remain on budget and on track to start-up early in the second quarter and we expect significant volume growth on these assets throughout the year. We continue to move forward with our Utica Ohio River expansion in Phase I of the project, and still expected to be on service in Q2 of 2015, and Phase III come online in Q3 of 2015. This project now includes the construction of a 12 mile 30-inch Harrison County lateral that will connect to the tailgate of the Cadiz processing plant in Harrison County wellhead production in Ohio. We expect to begin receiving volumes from the Harrison County lateral by year end. This project is supported by minimum volume treatments from anchor producers on the project. For Contract Compression, we still expect demand for 2015 to grow but at a slower pace than 2014 based on recent conversations with our customers, and have reduced our expected CapEx spend in 2015 from $300 million to $200 million. Currently, we have 110,000 horsepower book to be set in the first half of this year. And for Lone Star LPG export facility with Sonoco went into service in January. This project is supported by long term fee based commitments and will continue to ramp up during the first half of the year. Additionally, our third 100,000 barrel per day fractionators at Mont Belvieu remains on schedule for start up by December this year, and is fully subscribers under multiple long term contracts. And we still plan to construct the previously announced Lone Star Express NGL pipeline, which is expect to be in service in the third quarter of 2016. Before turning the call over to Tom, I would like to thank all of our Regency employees for their hard work and dedication to the growth of this Company this past year. They are very talented group of individual, and I’ve been honored to lead such a strong organization. Tom?

[Tom Long:]

Thanks Mike. Adjusted EBITDA for 2014 increased to $1.2 billion compared to $608 million for 2013. This was primarily due to volume growth in the Gathering and Processing segment in South and West Texas and in North Louisiana. Increased volumes at our Lone Star joint venture and increased revenue generating horsepower for CDM, as well as the acquisitions of PVR, Eagle Rock and Hoover. Regency’s DCF was $786 million for 2014 and coverage was 0.97 times for the year. For the fourth quarter of 2014, adjusted EBITDA was $318 million and DCF was $184 million. As Mike mentioned, the fourth quarter did include several impacts that resulted in higher expenses compared to the third quarter. These impacts include approximately $20 million of higher O&M compared to the third quarter, primarily due to the weather related issues, some integration cost and property tax true-ups. As well as approximately $15 million of higher maintenance capital, primarily due to compressor overhauls, well and system upgrades and integration initiatives. We do not expect the higher maintenance capital and O&M to be reflective of our 2015 run rate. We also saw about $4 million impact from pricing from the third quarter of 2014 to the fourth quarter. For Q4, we announced a quarterly distribution of $0.5025 per unit, which is a 6% increase over our fourth quarter of 2013 distribution rate. Looking at performance by segment, and starting with Gathering and Process. Adjusted segment margin for 2014 more than doubled to [$1.1 billion] compared to $521 million for 2013. Total volumes also more than doubled to 4.8 million MMbtus per day for 2014 compared to 2.1 million MMbtus per day in 2013. The primary drivers were the addition of PVR and Eagle Rock midstream assets as well as 50% increase in combined volumes on our Dubach and Dubberly systems in North Louisiana, a 45% increase in legacy volumes in West Texas and a 15% increase in legacy volumes in South Texas. Additionally, NGL production averaged 149,000 barrels per day for 2014, which was 65% increase over 2013. And one additional comment on the Permian before moving forward, in late December and in early January the region did experienced severe winter weather, which impacted production and facility operations. Production is still recovering and we do expect to have -- for this to have some impact to the first quarter of 2015 numbers. Moving on to Contract Services, for full year 2014, segment margin increased nearly 25% to $254 million compared to $204 million for 2013. This was primarily due to a 30% increase in revenue generating horsepower from 1 million to 1.3 million as a result of additional horsepower placed into service in South and West Texas, Colorado, Ohio and Pennsylvania. Turning to our NGL Services segment. Adjusted EBITDA increased 65% to $149 million for 2014 compared to $90 million for 2013. This was primarily due to throughput growth on fracs 1 and 2 and on the Lone Star Gateway NGL Pipeline. Total NGL Transportation volumes increased to an average of 211,000 barrels per day from an average of 164,000 barrels per day in 2013. And fractionation throughput volumes averaged 179,000 barrels per day compared to 78,000 barrels per day in 2013. Looking at the Natural Gas Transportation segment, starting with the Haynesville joint venture, adjusted EBITDA was $58 million for 2014 compared to $57 million in 2013 due to an increase in IT volumes. And from MEP, our share of adjusted EBITDA was $102 million for 2014 compared to $100 million in 2013. And for the Natural Resources segment, margin was $58 million for 2014. Now for our liquidity position as of December 31, 2014, we had $500 million of available liquidity. As for our ATM program, we completed our $400 million program during the fourth quarter and put a new $1 billion program in place, which is on hold now pending the merger with ETP. For CapEx, for the year ended December 31, 2014, we incurred $1.2 billion in organic growth capital projects and $101 million in maintenance CapEx. For the full year 2015, we now expect growth CapEx as Mike mentioned to be $1.6 billion. The breakout of that is; includes $1 billion related to the Gathering and Processing segment, which increased from $800 million in our previous guidance. This was primarily related to Harrison County lateral for the Ohio River JV. We also have $400 million related to Lone Star and $200 million related to Contract Services segment. As Mike mentioned, we previously had guidance of $300 million, so we’ve lowered that by $100 million. For 2015, our maintenance capital guidance is $100 million for the year. And with that we’ll now open the call up to your questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Gabe Moreen of Bank of America Merrill Lynch. Please proceed.

[Gabe Moreen:]

Question would be actually more in -- the impairment charge for 4Q. Can you just talk about what that was about?

[Tom Long:]

Gabe it was entirely related to West Texas assets where we have commodity exposure. Of course it was for the amount of $370 million it was the goodwill -- primarily it was the goodwill. As you know, these were assets that we had purchased, the Southern Union Gas Services assets. The value that came over as we brought those assets in were approximately $2 billion and there was this goodwill obviously that came with that. So, with that you’ll remember that we paid about $1.4 billion after you adjusted the original purchase price for the working capital adjustment. So this was really taking the goodwill down to a number that’s obviously still above what we paid for it. But it’s related to West Texas. I would say there was -- I know there is smaller amount in there, probably about $30 million of it that was related to the Hoover assets. So combined, like I said, there were $370 million. Is that helpful?

[Gabe Moreen:]

That’s helpful, Tom. And then is that, just to clarify, is that just a function of commodity pricing and not necessarily volume per se at this point. Is that right?

[Tom Long:]

That is correct because as we ended ’13 with where the prices were, obviously, we were -- we had cushion. But with where prices have come down to, that was the driver behind it.

[Gabe Moreen:]

Got it. And then switching gears, I think there was a co-handling acquisition in 4Q, it sounds like it was relatively small. But can you maybe just talk about the opportunity you saw there, to buy that other stake? And how big it might have been?

[Tom Long:]

We were already in a 50-50 joint venture a non-op position that we had. Our operating partner approached us with the idea of purchasing that. We’ll say that it was a low multiple and it made sense, low single digit multiple as we looked at it. And it also gave us the control over that. But it was small. It was only in about the $13 million price range.

[Gabe Moreen:]

And then just last question sort of bigger picture, Tom you touched on CapEx. And I guess I am just wondering, if we stay at current commodity prices of where we are, I mean do you think that $1.6 billion goes lower? And how low, I guess, in particular since so much of it is in the G&P side of things?

[Mike Bradley:]

Gabe, this is Mike. Based on the commitments we have in place and which include minimum volume commitments, at this point in time, we don’t see that number declining. The Utica Ohio River project along with the Harrison County lateral is still go in that -- significant part of our CapEx. We still have the plants percentage which are backed by in some cases minimum volume commitments, and then the Lone Star, NGL Texas Express is still planning to go forward. So there maybe some minor adjustments. But at this point in time, the projects we have deferred, as I mentioned, have been replaced by projects that have fee based and minimum volume commitments to support the project.

[Gabe Moreen:]

Understood, that’s helpful. Thanks Mike, appreciate it.

[Operator:]

(Operator Instructions) There are no further questions in the queue. I’d like to turn the call back over to Mr. Mike Bradley for closing remarks.

[Mike Bradley:]

Well, again, thank you for joining us on our call today. We appreciate the questions. And hope you all have a great day. Thank you.

[Operator:]

Ladies and gentlemen, that conclude today’s presentation. You may now disconnect. And everyone have a great day.