Resources Connection, Inc.
Q1 2012 Earnings Call Transcript

Published: 9 May 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Regency Energy Partners Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Shannon Ming, Senior Vice President of Finance and Investor Relations. Please go ahead, ma'am.

[Shannon A. Ming:]

Good morning, everyone, and welcome to our call today. Today, we will cover Regency's performance for the first quarter of 2012. Presenting will be Mike Bradley, our President and Chief Executive Officer; and Tom Long, our Chief Financial Officer. In addition, 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 and presentation news on today's call through Regency's website at regencyenergy.com. Our call is being recorded and is also being broadcast live on Regency's corporate website. An archive of the webcast and presentation will be available on the site following today's call. Slide 2 of the presentation describes our use of forward-looking statements and lists some of the risk factors that may affect actual results. Also included in the appendix of the presentation today are various non-GAAP measures that have been reconciled to the comparable GAAP measure. Please note, we will file our 10-Q later this afternoon. With that, I will turn the call over to our CEO, Mike Bradley.

[Michael J. Bradley:]

Thanks, Shannon. And good morning, everyone, and thank you for joining us on our call today. We're very pleased with our results for the first quarter of 2012, during which we continued to increase our adjusted EBITDA and saw volume growth in South and West Texas and in North Louisiana associated with liquids-rich production. Increased drilling in liquids-rich plays will continue to be our primary growth driver across all of our business segments due to the strategic location of our assets and our ability to provide a broad range of services for our customers. Current NGL fundamentals and producer activity in the liquids-rich plays continue to support our projects under construction while also providing new growth opportunities. And in fact, I'm excited to announce today that we will be constructing another expansion through our existing Tilden plant in South Texas. This expansion will provide additional gathering, compression and treating capacity and will allow us to gather and treat an incremental 60 million a day of rich gas that also contains high levels of H2S. This project, which is supported by fee-based contracts in a large acreage dedication, will cost approximately $40 million and is expected to come online in the fourth quarter of 2012. These expenditures are included in Regency's revised 2012 organic growth capital forecast, which Tom will talk about later. Moving on to an update on the progress of the rest of our organic growth projects. Construction of our Eagle Ford expansion project continues and we are on schedule to complete the project in 2014. We are increasing our capital expenditures related to this project from $450 million to approximately $490 million as we have decided to assume a portion of the project that was originally to be provided by a third party. Additionally, we are close to filling our existing processing capacity and are actively working on expanding our processing capacity in the region in 2012. Eagle Ford expansion project and the Tilden expansion give Regency an extensive gathering, processing, compression and treating platform to address increasing demand for liquids and treating services for producers in the Eagle Ford Shale. In West Texas where we are constructing a new processing facility for our Ranch Joint Venture, we have seen rig counts increase 26% from the first quarter of 2011 to the first quarter of 2012. To accommodate production growth associated with the high liquids content, the Ranch Joint Venture's 25 million a day refrigeration plant is expected to go into service in the second quarter of 2012, and we expect the 100 million a day cryo facility to be in service by the end of this year. In addition, we will begin to see -- receive Avalon Shale volumes through our partners' gathering systems as they are connecting their Avalon acreage into their Bone Spring gathering systems to flow volumes to the new processing facility. These facilities will help alleviate capacity constraints at Regency's Waha plant to accommodate additional production growth. Turning to the Lone Star joint venture. In the first quarter of 2012, Lone Star completed an interim expansion project on the West Texas Pipeline to provide additional capacity as a bridge until the gateway pipeline is completed. The interim expansion provides an additional 30,000 barrels per day of liquids takeaway from West Texas. This expansion is allowing Regency to flow additional liquid volumes into Mont Belvieu. The 209,000 barrel per day gateway NGL pipeline is on budget and on schedule to be completed in Q1 of 2013 and is 75% contracted. Fractionators 1 and 2 are also on budget and on schedule to be completed by Q1 2013 and Q1 2014, respectively. Frac 1 is fully contracted, and approximately 65%, contracted for frac 2. In our contract services business, through the first quarter, our compression business has been focused on resource optimization for producers as they shift their drilling programs from dry gas plays to wet gas plays. At the end of the quarter, approximately 70% of our compression revenue was driven from wet gas regions. Growth opportunities for our Contract Compression business are up compared to 2011, and we expect our primary growth opportunities in 2012 to be in the liquids-rich South and West Texas as well as in the Barnett Shale and Southern Louisiana. We currently have 80,000 horsepower booked to be set in the next 90 to 120 days. Approximately 75% of this will be coming from our idle fleet and the majority will be deployed in wet gas regions. We did experience some horsepower returns associated with dry gas areas in the first quarter. However, we do not expect any significant returns for the remainder of the year and we still expect to see our net horsepower grow by 15% to 20% for 2012. In our Contract Treating business, we are increasing our condensate stabilization capabilities to target condensate in oil-rich zones in South and West Texas. In addition, we're in the process of developing new treating products and diversifying our treating product line to move with the shift to liquids-rich plays and be more capable of handling higher concentrations of H2S versus CO2. We still expect to see revenue-generating GPM increase 25% to 35% by year end. As I previously mentioned, our adjusted EBITDA continued to grow in the first quarter, increasing 46% over the first quarter of 2011 primarily due to volume increases in our Gathering and Processing segment and the addition of the Lone Star joint venture which we acquired in May of last year. In South and West Texas, we are getting more liquids than we anticipated, which is a good news, but this created some operational challenges during the quarter resulting in the need to modify some of our facilities to handle the higher liquids gas. We have solutions in the works and, net-net, believe this is an overall positive for our South and West Texas assets. Our fee-based business mix, hedges and increased NGL prices have more than offset the dropping gas prices seen during the first quarter. Also, during the first quarter we strengthened our balance sheet using proceeds from our March equity offering to redeem a portion of our senior notes and to pay down our revolver. To summarize. These are exciting times at Regency and we remain focused on our strategy to execute on our growth projects and capture additional opportunities to increase our footprint in liquids-rich shale plays. We have over $1 billion in organic growth projects currently under construction, and we believe these projects will also lay the foundation for future opportunities as they come online. We expect Regency's growth to accelerate as these projects come online particularly in 2013 and 2014. Now I will turn the call over to Tom, who will take you through a more detailed review of our financial performance for the quarter.

[Thomas E. Long:]

All right, thanks, Mike. Taking a closer look at our first quarter performance on Slide 3. As Mike mentioned, Regency delivered solid financial results for the first quarter. Our adjusted EBITDA increased 46% to $134 million in the first quarter of 2012 compared to $92 million in the first quarter of 2011. The increase in adjusted EBITDA was due to, first off, $18 million associated with increased volumes in South and West Texas and in North Louisiana in our Gathering and Processing segment, a $16 million one-time producer payment received in March of 2012 related to an assignment of certain contracts and $15 million associated with the acquisition of an interest in the Lone Star joint venture in May of 2011. These were partially offset by $7 million of increase in operations and maintenance expense primarily due to the increased volumes across our business segments. Excluding the $16 million one-time item, adjusted EBITDA was up 28% over the first quarter of 2011. For the first quarter, Regency generated $103 million in cash available for distribution, representing a coverage ratio of 1.26x. The increase in cash available for distribution was primarily related to the increase in adjusted EBITDA. Now kind of starting with Gathering and Processing, on Slide 4. Segment margin was $70 million for the first quarter of 2012 compared to $52 million for 2011. This increase was primarily due to higher volumes in South and West Texas and North Louisiana. Throughput increased to 1.4 million MMbtus per day in the first quarter of '12 compared to 1 million MMbtus per day in Q1 of '11. NGL production increased to 38,000 barrels per day in the first quarter compared to 28,000 barrels per day in the first quarter of last year. Taking a closer look at volumes by region. Starting with North Louisiana

[Operator:]

[Operator Instructions] And your first question is from the line of Michael Blum with Wells Fargo.

[Michael J. Blum:]

Just a couple of questions. One, in terms of the incremental processing expansions in South Texas, can you talk about the nature of those contracts? Are those fee-based, or are they just adding onto your existing contract structures, or are those -- will those be POP?

[Michael J. Bradley:]

Michael, I think you're talking about our Tilden Treating expansion. Those are fee-based. It's treating only, not processing.

[Michael J. Blum:]

Okay, but you also talked about restarting a $35 million refrig plant?

[Michael J. Bradley:]

Yes. That's in our North Louisiana over at Dubach where we're running out of processing plants there. There, the majority of our agreements have some fee-based with it, but its majority is POP.

[Michael J. Blum:]

Okay. And then can you just provide a little more detail on the $16 million payment that you received?

[Thomas E. Long:]

Sure, Michael. This was a contract that was -- had some unusual characteristics to it. And as we were transferring from one customer to another, these contracts, this was part of a negotiated deal with them to be able to move those contracts over. We didn't disclose the customer names, but we did -- once again because of kind of the unusual nature of these contracts. Still fee-based, nothing else changed from that standpoint, so...

[Michael J. Blum:]

Okay. And then within Lone Star, the frac 2, which is 65% contracted, what would be your expectations in terms of when you actually put that in service in the beginning of '14? What percent do you think you'll be contracted?

[Michael J. Bradley:]

I think it -- we still expect it to come online in the first quarter of 2014, which is on schedule. We continue to see strong demand for that fractionator, so we would expect capacity to -- or contracted capacity to increase as we get closer to 2014.

[Operator:]

[Operator Instructions] And your next question is from the line of Cathleen King with Bank of America Merrill Lynch.

[Cathleen King:]

I just had a question on the DCF calculation. So I understand that the $16 million one-time producer payment was included in adjusted EBITDA, but then I saw that, in the DCF calculation, there is this other adjustments of $13 million, so I was wondering if -- is that different from that one-time producer payment? And if it is, then what is in that other adjustments line?

[Thomas E. Long:]

Yes, Cathleen, that is different. The $13 million is asset sales, while the $16 million that we referred to is the settlement on the contract.

[Cathleen King:]

Okay. And just a follow-up on the producer payment. So was that -- if I understood that correctly, is that related to one contract with a producer expiring and renewing a contract with a different producer, is that how that works?

[Thomas E. Long:]

No, it was not an expiring contract. It was a contract that was being assigned due to a sell of the production behind it. And once again, this was a guaranteed rate-of-return type contract, so therefore, it had some different -- contracts, excuse me, it's plural, so it had some different characteristics to it. But it was not an expiring -- and I want to emphasize once again

[Cathleen King:]

Okay, understood. And did you guys say just in what region that contract was related to?

[Michael J. Bradley:]

It was in the in the Midcontinent.

[Operator:]

Your next question is from the line of Jeremy Tonet with JPMorgan.

[Jeremy Tonet:]

Just had a small follow-up question on the one-time payment. Is that moving through the income statement in the other income line? Is that where we see it, with that $16.5 million positive there?

[Thomas E. Long:]

Yes, it -- that's where it's recorded.

[Jeremy Tonet:]

Got you, okay. Most of my other questions have been answered.

[Operator:]

Your next question is from the line of Yves Siegel with Credit Suisse.

[Yves Siegel:]

I just got 2 quick ones. Do we --- can you disclose what the asset that you sold, that you took a loss on?

[Michael J. Bradley:]

Asset we sold we took a loss on?

[Yves Siegel:]

Yes, I'm just looking loss on asset sales, net. Is that -- or maybe I just read the wrong -- well, let me rephrase the question. What is -- what was the asset that you sold?

[Michael J. Bradley:]

We -- primarily, it was some compression that sold during the quarter.

[Yves Siegel:]

Okay, got it. And then the other question is, when you think about the Haynesville Joint Venture and the volume degradation, how do you think about that going forward for the rest of the year?

[Michael J. Bradley:]

It's -- for the rest of this year, I mean, we still have 2 sets of agreements

[Operator:]

Your next question is from the line of Heejung Ryoo with Barclays.

[Heejung Ryoo:]

Some more follow-up on the rigs pipeline. Could you remind us what the capacity is on that pipeline? And how much of that is rented out on a long-term firm agreement?

[Michael J. Bradley:]

The total capacity is 2.1 Bcf.

[Heejung Ryoo:]

Okay. And then the long-term firm agreement on that capacity, would you say, is about 1 billion?

[Michael J. Bradley:]

We've got 1.2 billion on the expansion agreements and...

[Shannon A. Ming:]

600...

[Michael J. Bradley:]

Excuse me -- and 600 on the legacy.

[Shannon A. Ming:]

Legacy. For a total of 1.8 billion.

[Michael J. Bradley:]

For a total of 1.8 billion.

[Heejung Ryoo:]

Okay. So 1.2 billion, that's the long-term firm agreement that goes up to 2020 and then 600 million is the capacity that will be coming up for renewal from now 'til 2016?

[Shannon A. Ming:]

That's correct.

[Thomas E. Long:]

Yes.

[Heejung Ryoo:]

Okay. And -- order of magnitude, how much of the capacity on the firm agreement is currently being utilized? Is that fully being utilized? Or are producers actually using less than what they're paying for?

[Michael J. Bradley:]

Our figure is -- you're referring to the long-term agreements?

[Heejung Ryoo:]

Yes, on...

[Shannon A. Ming:]

We're currently selling right under our DCF under all of the agreements.

[Heejung Ryoo:]

Okay. Yes, I guess I was just trying to figure out. Well, then, the -- on the 600 million capacity that's not under long-term firm agreements, is that mostly interruptible volume? Or is there a sort of a term contract on that as well?

[Michael J. Bradley:]

There are term contracts with demand fees associated with them.

[Heejung Ryoo:]

Okay, even on the 600 million capacity?

[Michael J. Bradley:]

That's right.

[Heejung Ryoo:]

Okay, okay, got it. Okay. And then just moving over to, I guess, the Eagle Ford gathering project. I think you mentioned that the cost of that project is going up from $450 million to $490 million. Has the return assumption changed? Or would you be realizing the same kind of returns?

[Thomas E. Long:]

We think, overall, it will be a slight increase to our returns on that project by assuming the additional work that was going to be handled by a third party.

[Heejung Ryoo:]

Okay. So it's a better economics -- it gives you better economics with the higher costs?

[Thomas E. Long:]

Yes.

[Heejung Ryoo:]

Okay, great. And then lastly, you talked about getting some acreage dedication around your Waha plant and your plans to potentially add some processing capacity there. Could you talk about maybe potential size and the timing?

[Michael J. Bradley:]

I'm sorry. Would you repeat that again?

[Heejung Ryoo:]

Yes. The -- you talked about getting more acreage dedication around your Waha plant and that, going forward, you may be adding processing capacity. Did I hear that correctly?

[Michael J. Bradley:]

Yes. We just recently announced a 65,000-acre dedication to our Waha facility. One of the things that -- what this is going to allow us to do is utilizing the Ranch JV. Some volumes will be able to flow from the Waha facility to Ranch JV, which will open up an additional capacity in the Waha facility which will allow us to step into some additional processing in the area. So we're always continuing to look at expanding this area.

[Operator:]

Your next question is from the line of Ethan Bellamy with Robert W. Baird.

[Ethan H. Bellamy:]

Just one follow-up on Yves's question with respect to the compression sales. If I remember correctly, there were something like $12 million in the fourth quarter of compression sales, and I want to know if we're -- if we should be expecting anything recurring -- yes, is this kind of 2 quarters or one-time benefits to the DCF? I just want to see if there's something we should be expecting for the second quarter or for the balance of the year in that area?

[Michael J. Bradley:]

We continue to look at our overall fleet in terms of the current environment for wet gas versus dry gas. And as we have stated, we had about 135,000 horsepower in idle, and we stated during our Investor Day that we plan to sell about 30,000 of that, which is really older, obsolete horsepower that doesn't fit the applications that we're looking for right now. In addition, from time to time, customers have the option to purchase horsepower. So I don't expect horsepower sales to occur every quarter. They may occur, from time to time, lumpy. Sometimes, we'll get horsepower roll in that we no longer need, and we'll sell that. So it just happens from time to time on a quarterly basis but not something that I think we'd expect every single quarter.

[Ethan H. Bellamy:]

Okay, that's helpful. With respect to the horsepower that's left after these recent sales, how much is that? And can you give us a ballpark value on what that might mean?

[Michael J. Bradley:]

Well, we still have, right now, about 135,000 in idle. And as I mentioned, we have 80,000 horsepower booked, of which 75% of that's going to be coming out of that idle fleet. And then, we still plan to sell down some of the 30,000 horsepower that we stated that is really not conducive to the strategy and applications that we're looking for.

[Ethan H. Bellamy:]

Got it. And sorry to keep belaboring this topic, but I'd just be interested in a little education on it. Are those smaller units? Or what makes that particular horsepower sort of less effective than something that might be out on the platform of wet gas?

[Michael J. Bradley:]

They may be smaller units, the older part of our fleet. Some may require upgrades that -- for the applications we're looking for that we prefer to sell off versus upgrade. It's not a significant part of our fleet. It's something that we've talked about in terms of improving the overall returns for this business, and number one is getting our utilization rate up, selling down some of the equipment we don't think we're going to need and maintaining a higher utilization rate on an average basis. So it's mainly just adjusting our fleet to what we see as the most attractive opportunities going forward. There are portions of our fleet that we need more of. I mean, there are units that are in very high demand right now that we don't have that we are continuing to purchase. So it adjusts over time. It's good fleet management and something we've been focused on in improving the overall returns for this business.

[Operator:]

And your next question is from the line of Bernie Colson with Global Hunter.

[Bernard L. Colson:]

I was hoping -- I believe you mentioned, in South and West Texas, you're getting more liquids than you anticipated and you need to modify some facilities to handle the wetter gas. Those -- can you just kind of elaborate on that? And what type of investment are we looking at? And I mean, are you burning stuff away now, or how does that work?

[Michael J. Bradley:]

No, no. What's happened here, it's that we are seeing much richer gas than anybody expected, which is a good thing for the long term. And I think, net-net, it's going to be an overall benefit. In the short term here, we've had to look at modifying some of our facilities to handle more liquids than what was anticipated. So that's what we're in the process of doing, adding facilities to accommodate the higher liquids. We've got some condensate lines we're going to be building here in the next -- one comes online here in Q2 and the other one comes online in Q4 so we can more efficiently move the liquids to end markets. So I guess it's a good thing. It's not a significant amount of capital, Bernie, it's just some modifications we have to take care of. But the good news is, it's very, very rich gas.

[Bernard L. Colson:]

So that stuff you're getting the liquids, you're having a hard time [indiscernible].

[Michael J. Bradley:]

It's a matter of getting the liquids moved out, and it's stored on a temporary basis to get them moved out because the liquids coming in are much higher than what anybody expected.

[Bernard L. Colson:]

Okay. Do you -- would you happen to have a kind of a GPM number of how wet the gas is? You don't have?

[Michael J. Bradley:]

6 to 8, [indiscernible].

[Bernard L. Colson:]

Okay, okay. And then, okay, so -- and then one last question for me is kind of on the frac 2 on Mont Belvieu. Do you care to share kind of -- at 65% contracted, what type of rate return that would provide?

[Michael J. Bradley:]

It's an attractive return of 65%. It's within our target, mid-teens. And obviously, the more it's contracted, it improves from there. So 65% is still a good project for us.

[Operator:]

No other questions. I'd like to turn it back to Mr. Mike Bradley for some closing remarks.

[Michael J. Bradley:]

Well, again, thank you, everybody, for joining our call today. And we appreciate everybody's questions. Overall, we had a very strong quarter, again, during which we continued to benefit from increased activity in the liquids-rich regions. We have significant organic growth projects coming online through 2014 and our assets are positioned for continued development in South and West Texas as well as in the emerging areas such as the Mississippian Shale and the Brown Dense formation. Because of this expected growth and location of our assets, we believe Regency is in a great position to continue to expand our platform, creating unitholder value and growing our distributions. With that, have a great day. Thank you.

[Operator:]

Ladies and gentlemen, that'll conclude today's conference. Thank you so much for joining us, and you may now disconnect. Everyone, have a great day.