Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Regency Energy Partners LP (NYSE:RGP)

February 28, 2013 10:00 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

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Louis Shamie

Heejung Ryoo - Barclays Capital, Research Division

Noah Lerner

Operator

Good day, ladies and gentlemen, and welcome to the Regency Energy Partners to Acquire Southern Union Gathering Company, LLC Conference Call. My name is Lisa, 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 your host for today, Ms. Lyndsay Hannah, Manager of Finance and Investor Relations. Please proceed.

Lyndsay Hannah

Good morning, everyone, and welcome to our call. Yesterday, Regency announced the transaction of significant importance. Shortly, we will be hearing from Mike Bradley, President and Chief Executive Officer; and Tom Long, our Chief Financial Officer, regarding this transaction. Following our prepared remarks, Regency will open the call for questions. You may access the press 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 the website 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. You are reminded that actual results may differ materially from any forward-looking statements. You should refer to our SEC filings for a more complete discussion of the risks involved in our business and in the ownership of our limited partnership units.

Please note, the transaction we'll be speaking about today is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions.

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

Michael J. Bradley

Thanks, Lyndsay. Hello, everyone, and thank you for joining us on our call this morning. We are very excited to have the opportunity to share with you a very strategic and significant growth opportunity for Regency, which was announced yesterday. I'll begin with some of the key highlights, and then Tom will review more details on the transaction.

Regency has entered into an agreement to purchase Southern Union Gas Services, Ltd. or SUGS from Southern Union Company, which is a jointly owned affiliate of Energy Transfer Equity and Energy Transfer Partners, for $1.5 billion. SUGS owns and operates 5,600 miles of gathering and NGL pipeline, along with 5 natural gas processing and 5 treating facilities in the Permian Basin. These assets are highly complementary and will significantly expand our West Texas operations in a very strategic basin for us and with the increased size and scale, improve our ability to serve producers in the area, as well as add to our list of organic growth opportunities. Further, we expect this acquisition to be neutral to slightly accretive to Regency in 2013 but enhance our outlook for long-term distribution growth. We anticipate this transaction will close in the second quarter of this year and, as Lyndsay mentioned, is subject to HSR approval and other customary closing conditions.

I think very importantly, looking at the strategic rationale for this transaction, these assets are in an excellent fit with our existing natural gas and natural gas liquids operations, and the integration of these assets will significantly expand Regency's footprint in the Permian Basin in West Texas and southeastern New Mexico while increasing the size and scale of our core gathering and processing business. By combining these systems, we also expect to achieve a range of operational synergies that we believe will create further value for our customers and our unitholders. We anticipate greater flexibility in processing and treating options from the ability to direct gas flows between the combined facilities and optimize plant performances. As a result, we should see increased processing capabilities, improved reliability and reduced cost across the integrated systems. Additionally, the combined systems will also enhance our ability to serve our customers in West Texas by providing a comprehensive midstream natural gas and natural gas liquids platform with excellent downstream connectivity.

With a high level of producer activity in the Permian Basin, driven by oil and liquids, we believe this acquisition will provide a strong and strategic platform on which to further expand our West Texas and New Mexico services through ongoing and proposed large-scale organic growth projects. SUGS is currently constructing a new 200 million a day cryogenic processing plant with associated treating facilities. The new Red Bluff facility is expected to be on service in the second quarter of this year. A second 200 million a day cryogenic processing facility is currently in the planning stages and is expected to come online in mid-to-late 2014. We expect these expansions, as well as future expansion opportunities, to provide additional accretion over time. We've always felt these assets were a great fit for Regency and are very pleased to see this transaction come together.

With that, I'll turn it over to Tom, who will walk you through more details on the transaction.

Thomas E. Long

All right, thanks, Mike. So as mentioned, Regency will obtain 100% ownership of SUGS in exchange for $600 million in cash, which will be funded from long-term borrowings, $750 million of RGP common units and $150 million of newly created Regency Class F units. These units will be equivalent to the common units but will not receive distributions for 8 consecutive quarters post-closing. In conjunction with the transaction, Energy Transfer Equity agreed to the following considerations: first, to forgo IDR payments from Regency associated with the new common units for 8 consecutive quarters post-closing; and second, to eliminate the $10 million annual management fee due from Regency for 2 years post-closing.

Just moving to Slide 6, you will see Regency and SUGS' combined asset map. Mike mentioned, SUGS owns and operates about 5,600 miles of natural gas and NGL gathering lines, as well as 5 processing plants and 5 treating plants, with approximately 500 million a day of capacity. These assets are located in the prolific Permian Basin in West Texas and southeast New Mexico and are divided into 3 systems that consist of a large diameter, low-pressure gathering system, a high-pressure integrated sweet and sour gas gathering system, an 84 miles of high-pressure gathering pipeline that connects the systems. When combined, Regency's West Texas system will be able to provide nearly 750 million a day of processing and 675 million a day of treating capacity. And when the current and planned expansions come online, we will be able to provide approximately 1 Bcf per day of processing and treating capacity in the Permian Basin.

On Slide 7, looking at the business mix overview. As you can see, this acquisition will change our current business mix somewhat. The acquisition of these assets significantly grows the scope of our core gathering and processing business in one of the top oil-producing basins in the region. As we continue to build out our gathering and processing infrastructure in West Texas, we anticipate this expanded system will also feed additional volumes into our Lone Star joint venture and create new opportunities for our Contract Services business over time.

Looking at the Slide 8, we will be assuming some additional commodity exposure once the acquisition closes. However, we are comfortable with this new mix, particularly given the location of these assets. For 2013, our targeted hedging levels are approximately 2/3 of our total commodity exposure. Assuming these target hedge levels are estimated Bcf sensitivities, we'll now be $7 million for a $10 per barrel move in crude oil and $7 million impact for a $1 per MMBtu move in natural gas.

On Slide 9, looking at our revised CapEx. We previously announced expected growth capital expenditures of $400 million for 2013. We are revising that number and expect growth CapEx to be $580 million, which includes $180 million associated with the SUGS growth projects. In addition, we expect maintenance capital expenditures to be around $50 million. Previously, our guidance was $35 million. And lastly, we will continue to prudently manage our balance sheet, and we'll expect to continue target leverage ratio of about 4x.

And with that, we'll go ahead and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Gabe Moreen with Bank of America Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Just thinking about the additional commodity sensitivity you'll be taking on, if you can maybe talk about some of the hedging policies you'll be pursuing in a little more depth. And then just -- I know Regency have been making a big push to get more freebies in the last couple of years and the thought of getting to investment grade. Can you talk about how this transaction, which, on the one hand, gives you more commodity exposure, but on the other hand, gives you more scale, fits into that, push to investment grade and maybe the timeline?

Thomas E. Long

Sure, Gabe. Our hedging policy is we're able to hedge up to 100% of what we consider our forecasted equity link going out for a year. We're able to also keep that up to 75% as you start going out 2 years and 3 years. We do hedge direct hedges, meaning that we're going to use nat gas for nat gas, and we do use NGLs directly there from that -- on that commodity. And when it comes to the C5+ and the condensate, we do use crude oil for those hedges. So we use direct hedges on those. We just do them with counterparties, with the various trading -- or banks that have the trading shops. But we'll -- you can kind of see, I think, from the slide is that if we stay at about that 2/3 level, that currently, we have about 7% exposure. In other words, of the 14% commodity exposure we have, we've hedged about half of it. Our targeted levels are to hedge about 2/3 of the 30% commodity exposure now. So our 7% unhedged is going to move to about 10%, so not up significantly. As to the second part of your question, we did meet with the rating agencies, and Gabe, you actually covered that very well. The commodity exposure was more than offset by the increase in -- positive on the increase in scale that we'd be having after meeting with all 3 of the rating agencies. They were -- like I said, the meetings went well, and they were comfortable with the commodity exposure piece.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. And then if you maybe can just talk about kind of maintenance CapEx with these assets and maybe also what you spent on growth. What was spent in terms of growth CapEx in 2012 with these assets?

Michael J. Bradley

Oh, I don't have that number right handy. We can probably get it for you. In terms of maintenance CapEx, I think for 2013, as Tom mentioned, we had previously disclosed $35 million, and we anticipate that increasing to $50 million once this transaction closes.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Sorry if I didn't catch that. I joined the call late. It took a while to connect. I just was wondering if anybody from Energy Transfer management was there and can kind of, I guess, see to -- speak to the transaction here and, I guess, the simplification, as well as, I guess, the consolidation long-term move of the entities in the Energy Transfer family and how this might fit into that. But if no one's there from Energy Transfer, I guess, no worries.

Michael J. Bradley

No, there's no one from Energy Transfer. You'll have to discuss that with them directly.

Operator

Your next question comes from the line of Michael Blum with Wells Fargo.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

A couple of questions. One, in terms of your estimate that the transaction is accretive, does that assume any synergies in that number? Is that just purely on an EBITDA basis? And then if you could try to -- if you could quantify to the extent what you see as synergies that you think you can extract and the time frame to get there.

Michael J. Bradley

Yes, Michael. I think that at this point, we'll provide more details on the synergies at a later date. But what I can tell you is that we've got 3 things going on at closing. Number one, you've got the new processing plant coming online, and we'll be ramping up for the remainder of the year. Two is the -- we will be immediately implementing some of our synergy plans. That will take effect and build up throughout the rest of 2013. And then three is we are assuming operations for all of the assets in West Texas and New Mexico upon closing, and there will be a transition period that we go through as we transfer those operations. So to answer your question, there will be some synergies captured in 2013. You've got the ramp-up, and then there's other growth projects we have that we'll be working as well.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay, great. And then as we think about the new processing capacity coming on in '13 and then likely in similar amount in '14, how fast do you see those processing plants getting to full utilization?

Michael J. Bradley

Well, we expect to be fully utilized on the processing plants after they come online. There's always a ramp-up period, as you know. But when we look at volumes that we're connecting to the Regency system, we believe that we will fully utilize the processing plants as they come online. I think the other thing is that -- will be the benefit of when the systems -- once we close and we can integrate the systems, we're going to have tremendous flexibility to move gas to various plants, which we think, number one, is going to optimize performance; two, I think, is going to improve reliability for our producers; and three, I think, results in an overall increase in our processing capabilities. So we're very excited about that, we've done a lot of thought and we're very encouraged by what we think these assets -- how they will perform.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

That's helpful. Just 2 more quick ones for me. In terms of -- for the unhedged piece of this transaction on a go-forward basis, what are you assuming for NGL prices and natural gas prices going forward? And also, what are you assuming in terms of a ramp in volumes?

Thomas E. Long

Michael, I'll answer the first part of that. The -- you can use the current -- the curve as of yesterday for all the commodities is what you can use going forward.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Okay. I guess the last question is just a point of clarification. So your 2013 maintenance CapEx goes up by $15 million. Is that -- does that represent half a year of maintenance CapEx for the SUG asset or is that 3/4 of a year? So I'm just trying to figure out a run rate for 2014, basically.

Thomas E. Long

It's half. You can expect about $30 million on an annual basis.

Operator

Your next question comes from the line of Ethan Bellamy with Baird.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

What do you expect the accretion to look like in 2014 if all of your base assumptions hold?

Michael J. Bradley

Obviously, we don't give guidance, as you understand, but we do see these assets -- the accretion definitely improving in 2014.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Okay. And just to confirm, the Class F units are not pick units, correct?

Thomas E. Long

That is correct. They are not pick units. They are -- it's a pure holiday. So...

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Yes. All right. Good. Who are the key producers for the acquired assets? And are those life-of-lease acreage dedications?

Michael J. Bradley

I think that at this point, we're probably not able to disclose all the producers associated with these assets. They're are many of the key producers active in the Permian Basin and represent some of the same customers that we have. But I think in terms of contract terms, the contract terms out there vary from life-of-lease to multi-year. It's a -- they vary.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Okay. And in terms of those contracts, can you give us -- give ballpark of the mix in terms of POP peephole, et cetera?

Thomas E. Long

Yes. There's -- it's probably about 90% is going to be POPs.

Ethan H. Bellamy - Robert W. Baird & Co. Incorporated, Research Division

Okay. And are those -- I know you don't want to give us the exact rates, but are those in line with industry standards?

Thomas E. Long

Yes, they are in line with industry standards.

Operator

Your next question comes from the line of Louis Shamie with Zimmer Partners.

Louis Shamie

My question is just regarding the leverage target of 4x. Now and just like a simple basis looking out, ended 2012, your leverage is pretty high. I guess if you start to adjust for some of the growth projects you're working on that haven't come online yet, that looks better. But with the $600 million that you're funding on this deal and then the CapEx budget for this year, and it seems like the EBITDA from these assets is going to be a little bit small upfront, can you talk about how you manage down and trying to keep to that 4x target?

Thomas E. Long

Yes, you bet. We ended the year right at 4 based upon the way we calculate it for our credit facility, which we are given pro forma credit for these projects as they start up. So...

Louis Shamie

About how much pro forma credit was there for that end of year '12?

Thomas E. Long

Well, I will tell you where we were. We were at about 4.09 to be exact is where we were from a leverage ratio standpoint. And going forward, as these projects continue to ramp up, it's worth reminding you that we were doing a lot of funding during 2012 of these projects that are now starting up, both on the equity, as well as the debt side. So 2013, as these come online, you won't be -- you don't need to expect probably a lot of additional requirements for the projects that are starting up here now from that standpoint. If you look at 2013, even with the new CapEx we've given you, we do not anticipate at least on the equity side any needs from that standpoint. Keep in mind that we do have that continuous offering program out there that still has about $180 million available on that.

Louis Shamie

Okay. And just for the CapEx that you're spending on the SUGS asset, can you talk about how that breaks out, that $180 million that you're spending?

Michael J. Bradley

There's a portion of it that will -- that's associated with the completion of the Red Bluff plant, but the remainder of it is the -- associated with the new processing plant for 2014. And then there's some other growth projects that have been identified that we expect to be completed during 2013 as well. Those haven't been specifically identified individually, but there are some other growth projects that we'll be spending on to get online by the end of 2013.

Operator

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

Heejung Ryoo - Barclays Capital, Research Division

I'll just start with the CapEx question. The new processing plant for next year, what would be the total cost of that project?

Michael J. Bradley

For the new processing plant?

Heejung Ryoo - Barclays Capital, Research Division

Yes.

Michael J. Bradley

For 2014?

Heejung Ryoo - Barclays Capital, Research Division

Yes.

Michael J. Bradley

It's probably in the range of $250 million, somewhere in there. That also includes some treating facilities as well.

Heejung Ryoo - Barclays Capital, Research Division

Right. Okay. And then you'll be spending -- I guess how much of -- are you able to break down how much of that will be spent this year versus next?

Michael J. Bradley

It's included in the $180 million. Again, there's a small portion left at Red Bluff, and then the other significant portion will be with the new facility for 2014. And then, again, the remainder are just some other growth projects that we have identified. I would say that the -- probably, the bulk of the capital on the new plant, not the bulk but probably 60%, 70%, would occur in 2014.

Heejung Ryoo - Barclays Capital, Research Division

Got it. And then in terms of contracts, I know your existing contracts are predominantly POP. When you think about the Red Bluff contract and also the contract you have in mind for this new cryo, would that be more or less consistent with your 90% POP mix?

Michael J. Bradley

Yes.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And then just lastly, a quick maintenance. The -- so what would be the price of the units that will be issued to the common and the Class F units?

Thomas E. Long

They will be $23.91.

Heejung Ryoo - Barclays Capital, Research Division

Okay. And they're both the same price?

Thomas E. Long

That is correct.

Operator

Your next question comes from the line of Noah Lerner with Hartz Capital.

Noah Lerner

One quick question. It looks to me, and my math could be wrong, but on the back of an envelope, that roughly, we've increased the outstanding units by about 18% just with the common and then about 22% 2 years out cash flowing -- or cash paying units once the Fs convert. And I was curious if you can talk a little bit about what kind of impact and how much more difficult you think all these additional units out there that really aren't coming as part of a initially accretive transaction might be to the future growth trajectory of the distributions longer-term. Obviously, there will be some synergies that might help to create some cash flow, and clearly, it's probably an offset from projects that you wouldn't otherwise have gotten. I'm just curious that now we have a bigger base to have to grow distributions off of, how you consider that in the transaction plans.

Michael J. Bradley

Yes, that's a good question. I think looking out going forward, I'd say there's a couple of things to think about here is, one, we do expect cash flows to ramp up on these sets of assets, both from growth projects, as well as synergies that we expect to occur. And those cash flows will start ramping up this year and on into 2014 as the new facility comes online and other growth projects that have been identified come online as well. As I mentioned, we said we expected to be neutral to slightly accretive in 2013, and that it will enhance our -- expect to enhance our distribution growth going forward beyond 2014 and 2015. So I think the third thing is, our forecast, as Tom mentioned, is based on the current forward curve for pricing. So we can't predict pricing, but we feel like this is a good entry point long-term.

Operator

We have no additional questions at this time. I would now like to turn the presentation back over to Mr. Mike Bradley, President and CEO, for closing remarks.

Michael J. Bradley

Again, thank you, everybody, for joining us on our call today. Very good questions. We appreciate that. We appreciate your interest. And like I said at the beginning, we're very excited about this transaction. We think it's going to be a significant growth opportunity for Regency, and we think there's a lot of potential with these assets and our assets combined. And what we see is one of the top oil and liquids basins in the United States. As I mentioned, we've always been interested in these assets and are very excited to see this transaction come about. So with that, thank you. And, everybody, have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Regency Energy Partners LP, Southern Union Gathering Company, LLC - M&A Call
This Transcript
All Transcripts