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Regency Energy Partners LP (NYSE:RGP)

Q4 2012 Earnings Call

February 21, 2013 11:00 am ET

Executives

Lyndsay Hannah

Michael J. Bradley - Chief Executive Officer of Regency Gp Llc, President of Regency Gp Llc and Director of Regency Gp Llc

Thomas E. Long - Chief Financial Officer of Regency Gp Llc and Executive Vice President of Regency Gp Llc

Analysts

Jason Stevens - Morningstar Inc., Research Division

Scott Fogleman - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Regency Energy Partners LP Earnings Conference Call. My name is Suzanne, and I'll be your operator 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 Lyndsay Hannah, Manager of Finance and Investor Relations. Please proceed.

Lyndsay Hannah

Good morning, everyone, and welcome to our call. Today, we will cover Regency's performance for the fourth quarter and full year 2012. 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, we will open the call to participants in for questions. You may access our earnings release and presentation used on today's call 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 and presentation will be available on our website following today's call.

Also please note, we plan to file our 10-K next Friday, March 1. Slide 2 of the presentation describes our use of forward-looking statements and lists some of the risk factors that may affect actual results. You are reminded that actual results may differ materially from any forward-looking statement. You should refer to our SEC filings for a more complete discussion of the risks involved in our business and in ownership of our limited partnership units. Included in the appendix of today's presentation are various non-GAAP measures that have been reconciled to the comparable GAAP measure.

With that, I will turn the call over to our CEO, Mike Bradley.

Michael J. Bradley

Hello, everyone, and thank you again for joining us on our call this morning. Today, I will start with an overview of 2012, along with some of our accomplishments for the year, which we are very pleased about in the position Regency for significant growth going forward.

For full year 2012, adjusted EBITDA increased 14% compared to 2011, driven by growth in our Gathering and Processing business and a full year contribution from the Lone Star Joint Venture. Our Gathering and Processing volumes and NGL barrels, both increased 20%, driven by increased drilling in liquid-rich plays, where our assets are well positioned in South Texas, West Texas and North Louisiana.

We continue to make good progress on additional modifications to accommodate the richer gas coming into our facilities as producers continue to focus drilling programs on the more liquid-rich and oily locations.

There are a few operational issues impacted our EBITDA and distribution coverage in 2012. As the shift from dry gas areas to liquid-rich shale plays ramped up in 2012, this created great opportunities for additional Gathering and Processing infrastructure around our assets. We had over 700 million [indiscernible] in major expansion projects under construction during 2012, which will add over 200 million cubic feet a day in new processing capacity and additional 150 million cubic feet per day in treating capacity and over 400 miles of new gathering pipeline.

The 100 million today, Ranch Joint Venture's cryoplant and the Tilden Treating expansion, which adds 60 million a day of capacity, are both now in service. The Edwards Lime and Dubach expansions are both expected online by the end of the second quarter of this year and the Eagle Ford expansion project continues to come online in phases with the entire product expected to be completed as drilling dictates in 2014.

We also expect further expansions as drilling continues at a strong pace in South Texas, West Texas and North Louisiana, during 2013, as these areas remain very active and our assets are well positioned for additional growth.

2012 was also an exciting year for our Lone Star Joint Venture. The 209,000 barrel per day Gateway NGL pipeline and the 100,000 barrel per day Frac 1, were placed into service ahead of schedule in December and both are expected to contribute strong cash flows as they ramp-up in 2013 and beyond.

Frac 2 remains ahead of schedule and is expected to be in service by the end of 2013, and Lone Star is evaluating a joint venture with Sunoco Logistics to export NGLs from the Gulf Coast. This project would originate at Lone Star's Mont Belvieu fractionation facility and connect to Sunoco's pipeline that runs through their Nederland Terminal. We expect the launch and open season for the project shortly to determine customer interest and our goal would be to have the project online sometime in early 2015, assuming some of the project details are worked out and we obtain a certain level of customer interest.

For our Contract Services business segment, we continue to see strong bookings in wet gas and oily plays for our compression business in the fourth quarter, which now represents about 73% of our revenue generated horsepower. For full year 2012, we saw a net increase of over 70,000 horsepower with a majority of this increase occurring in the third and fourth quarters, primarily in South and West Texas where demand remains very strong. Our utilization rate for the Contract Compression business increased to 90% at year end 2012, compared to 87% at year end 2011, as the demand in the liquid rich plays more than offset declines in the dry gas areas.

For 2013, we expect utilization to average in the low 90s, which is a level that we feel is optimal to meet our expected customer demand in 2013. We also set our first units in the Utica shale during the fourth quarter and expect additional grassroots expansions in this region in 2013. Already in the first quarter, we have set our first units in the Granite Wash, and we also expect to set units in the Niobrara shale before the end of the first quarter.

We continue to see strong demand in West and South Texas, particularly for larger gas lift opportunities. Additionally, we are pursuing turnkey facility installations that include compression, production facilities in South and West Texas and the Utica shale.

We're very excited about the potential for 2013 given the current level of demand and outstanding requests. For treating, we are very encouraged about the market demand for setting additional treating and other service opportunities in 2013, especially in the Woodbine area, as well as in other parts of Texas and North Louisiana.

So in summary for 2012, we saw a strong performances across several of our businesses and we believe, have positioned Regency for significant earnings growth going into 2013, as we announced several large-scale growth projects. We are already seeing some of these projects lay the foundation for additional expansions to meet growing producer demand in our various operating areas. And the completion of all these projects is expected to improve coverage ratios and position Regency for future distribution growth.

With that, I'll turn the call over to Tom, who will take you through a review of our financial performance.

Thomas E. Long

All right, thanks, Mike. Now, moving to Slide 3. As Mike mentioned, Regency's full year 2012 adjusted EBITDA increased 14% to $480 million compared to $422 million for 2011. The increase in adjusted EBITDA was mostly due to an increase in adjusted total segment margin, primarily related to the volume growth in the Gathering and Processing segment, partially offset by higher operating expenses associated with this growth. and also a full year contribution from the Lone Star Joint Venture in 2012.

Net of hedges. We had a $3 million negative impact from pricing for full year 2011 compared to full year 2012. For the fourth quarter of 2012, adjusted EBITDA increased to $116 million compared to $115 million in the fourth quarter of 2011. The increase was mostly due to an 11% increase in Gathering and Processing segment margin, partially offset by higher operating expenses as well as the true up in ad valorem taxes. Regency grew distributable cash flow to $310 million for 2012, compared to $285 million for 2011. The growth is a result of higher adjusted EBITDA, partially offset by higher interest expense related to the pre-funding of capital projects coming online in 2013.

Now before I go into the overview of our business segment performance for the year, I would like to walk you through some changes to the composition of our business segments. In the fourth quarter, we realigned the composition of our segments to more closely track with how we operationally manage the business. As such, we have restated segment information for early -- for earlier periods to reflect these changes. First, our Gathering and Processing segment remains unchanged. We have eliminated the Joint Venture Segment. Instead, we will now have the Natural Gas Transportation segment, which will be comprised of the rigs and the MEP, as well as the Gulf states Transportation pipelines. The Lone Star Joint Venture will now be a separate segment known as the NGLs Services segment, and our Contract Compression and Contract Treating businesses will now be merged into one segment called Contract Services.

Turning first to performance by segment, starting with Gathering and Processing. Adjusted segment margin for the full year 2012 increased 17% to $274 million compared to $233 million for the full year of 2011. The increase was primarily due to volume growth in South and West Texas and North Louisiana. NGL production averaged 38,000 barrels per day in 2012 compared to 32,000 barrels per day in 2011.

Now discussing volumes by region beginning with North Louisiana. We continue to see consistent drilling by producers connected to our Dubach gathering system. Volumes remained flat overall in this region year-over-year, however, higher-margin volumes did increase around our Logansport and Dubach facilities, which offset the declines in lower-margin volumes at our Elm Grove and Dubberly plants. To facilitate the volume increases at Dubach, we have installed additional compression and dehydration and brought back into service a 35 million a day refrigeration plant. We are expanding our Dubach facility to increase processing capabilities, a portion of which came online in the fourth quarter of 2012 and the 70 million cubic feet per day cryogenic facility is expected to come online toward the end of the second quarter of this year. For 2013, we expect volumes to continue increasing, primarily around our assets in the Cotton Valley area.

Moving on to the Midcontinent region. Year-over-year, volumes remained flat in this area. For 2013, while we currently see some instill drilling in the area, we do expect volumes to decrease slightly.

Looking at West Texas. Volumes at our Waha facility increased more than 9% over year end 2011, mainly driven by higher volumes of associated gas from Permian Basin oil production. Our Ranch JV's refrigeration plant was operational in June of 2012, and our new 100 million a day cryo plant was operational as of December 2012. This facility will provide additional processing capacity for the volume growth that we're seeing in this region. For 2013, we expect volumes in West Texas to increase.

And finally, in South Texas, including the volumes associated with our Eagle Ford expansion project, overall volumes in South Texas increased more than 60% from full year 2011 to full year 2012. In 2013, we expect overall volumes to continue increasing, creating additional opportunities to provide Gathering, Processing and Contract Services to our customers.

Now looking at the Natural Gas Transportation segment for the Haynesville Joint Venture, adjusted EBITDA was $66 million for 2012 compared to $73 million for 2011. This decrease was primarily due to the exploration of some legacy contracts in 2012.

Looking at MEP, adjusted EBITDA was $102 million for 2012 compared to $103 million for 2011. Volumes remained at 1.4 million MMbtus per day in both 2012 and 2011, and we expect MEP volume to remain relatively flat for 2013.

And NGL for our NGL Services segment, which is now solely the Lone Star Joint Venture, adjusted EBITDA was $60 million for full year 2012 compared to $38 million from May through December of 2011. For the full year 2012, total throughput volumes to the West Texas pipeline increased to an average of 134,000 barrels from an average of 130,000 barrels per day for the fourth quarter of 2011. NGL approximation throughput volumes averaged 17,000 barrels per day for 2012 compared to 16,000 from May through December 2011.

Turning to our Contract Services segment, which now combines Compression and Treating businesses. For the full year 2012, Contract Services segment margin was $189 million compared to $185 million for full year 2011. Revenue-generating horsepower increased to 919,000 horsepower from 846,000 horsepower comparing last year 2011 to 2012. The increase in revenue-generating horsepower is primarily due to additional horsepower placed into service in South and West Texas, along with North Louisiana. And for our liquidity position, at year end, we had right at $1 billion of available liquidity on our credit facility.

Now for Regency, 2012 and '13 CapEx. Our 2012 growth capital expenditure was $767 million primarily for Gathering and Processing and our Lone Star Joint Venture. Our maintenance capital was $34 million. For 2013, we expect growth capital expenditures to be approximately $400 million, a $185 million of that is projected for G&P, a $120 million for Lone Star and $95 million for our Contract Services. We do expect maintenance capital to be around $35 million.

With that, we'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jason Stevens from Morningstar.

Jason Stevens - Morningstar Inc., Research Division

Could you remind me of the Contract searches on rigs, particularly with the volumes coming off as much as they are?

Michael J. Bradley

Sure. We've got, of course, 2 buckets, if you will . We have what we call the legacy contracts and then we have the expansion contracts. And what we've seen is some of the legacy contracts that have come up with -- a lot of those have been rolling off. Just to give you, a little -- I guess, a little extra color. If you look out to 2013, we probably have another 110,000 a day rolling off. If you're going to average that through the year, the impact to rigs on that, or to Regency on that, would be $3 million for the entire year, if all goes well off. The rest of the contracts, as far as those expansion contracts, those do run out another 7 years. Yes. I'm sorry, let me add one more thing. We do not expect any roll-offs. Almost legacy contracts, all the way up through 2015.

Operator

Your next question comes from the line of Scott Fogelman from Crédit Suisse.

Scott Fogleman - Crédit Suisse AG, Research Division

I see that you combine the Treating and the -- and Compression for this quarter. Could you just break it out for this quarter what it was between Compression margins and Treating margins?

Michael J. Bradley

Yes, just -- okay, the margin for the compression was $37 million. and the margin for the treating was at $7.3 million.

Scott Fogleman - Crédit Suisse AG, Research Division

$7.3 million. Great. And on the Energy Transfer call, they were forecasting the -- for the new pipeline. They were looking at about 140,000, 150,000 barrels a day on the Lone Star. And I'm a little confused, because, I mean, the West Texas right now is about 140,000 or I mean, your point of 1,368 for this past quarter? So is this in addition to that?

Michael J. Bradley

Yes. The numbers we gave you were based upon the existing pipe that runs from West Texas to Mont Belvieu.

Scott Fogleman - Crédit Suisse AG, Research Division

Okay and so.

Michael J. Bradley

They were not related to the new Gateway that just started up.

Scott Fogleman - Crédit Suisse AG, Research Division

And so that -- when in the future you break those, will you report those separately or are you just going to mix them?

Michael J. Bradley

Right now, we're planning on just giving one number. I mean, as was discussed in the call, we expect the midyear volumes on the Gateway to be in the 140,000 to 150,000 barrels a day. It will continue to ramp up as we go forward and into later 2013 and into 2014, as additional volumes from the Mid plant starting up in West Texas and South Texas come on line. So I think as a report, total volumes, but will obviously, keep everybody up to date on the Gateway.

Operator

Ladies and gentlemen, I will now turn the call over to Mike Bradley, President and CEO, for closing remarks.

Michael J. Bradley

Again, thank you, everybody, for joining us on the call today. And in conclusion, we continue to benefit from the high levels of drilling activity in the Eagle Ford, in the Permian, as well as in the richer gas plays in North Louisiana we we're very excited about what we see as a potential for further expansions in 2013.

In addition, we're looking forward to the completion of our growth projects throughout the year and into 2014, as they will position Regency for further expansions, both organically and true potential acquisitions. It will continue our intense focus on executing on our business and operational objectives, including delivering increased value to our customers and also to our unitholders through distribution growth. Thank you, and have a great day.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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