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Regency Energy Partners LP (NYSE:RGP)

Q4 2013 Earnings Call

February 20, 2014 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

Jim Holotik - Chief Commercial Officer of Regency GP LLC and Executive Vice President of Regency GP LLC

Analysts

Abhiram Rajendran - Crédit Suisse AG, Research Division

Edward Rowe

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

Jerren Holder - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Regency Energy Partners LP Earnings Conference Call. My name is Rachel, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call 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 fourth quarter and full year 2013. 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-K on February 27. As a reminder, according to accounting requirements, our historical results have been recast to include Regency and SUGS results combined. During the call, we may make forward-looking statements. 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. 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 on our website. 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. Today, I will start with an overview of 2013, along with some of our accomplishments for the year, which continue to position Regency for significant growth going forward. We are very pleased with our 2013 results as we experienced strong growth across our G&P, Contract Compression and NGL Logistics businesses. This growth was driven by the $1.4 billion acquisition of SUGS that we completed at the end of April and the nearly $2 billion in major organic growth projects that we have completed since December of 2012. These projects included the addition of new gathering, processing and treating facilities, new horsepower installations and for Lone Star, the completion of our first 2 fractionation facilities, along with the Gateway Pipeline. We're very excited going into 2014 as we expect strong volumes and earnings growth across our Gathering and Processing, Contract Compression and NGL Logistics businesses to continue. This will primarily be driven by volume growth around our major projects, particularly the Dubberly expansion in North Louisiana, the Red Bluff and Ranch JV processing plants in West Texas and the Eagle Ford and Edwards Lime expansions in the South Texas, all of which are experiencing higher volumes year-to-date. And we expect these projects to provide more expansion opportunities as volumes continue to grow in 2014 and 2015 and these plays continue to be developed. In addition, we expect our recently announced acquisitions to contribute to additional growth opportunities, which I will talk about shortly.

Looking at our financial results for 2013. I will discuss our full year results, including 8 months contribution from SUGS compared to our legacy Regency full year 2012 results which do not include SUGS. Adjusted EBITDA was $622 million compared to $479 million for legacy Regency for 2012, or an increase of 30%. DCF for the full year increased 30% to $411 million compared to $310 million for 2012, and coverage was 1.01x for the full year. And as we have previously announced, we increased our distribution on our LP units from $1.84 to $1.90 per unit on an annualized basis.

Turning to our fourth quarter results. Adjusted EBITDA increased to $165 million from $115 million in the fourth quarter of 2012, and DCF increased to $94 million from $68 million. Comparing third quarter to fourth quarter, we did experience a decrease in EBITDA from $172 million to $165 million. The majority of this impact was due to the completion of 3 significant turnarounds and upgrades as I mentioned on the third quarter call. These turnarounds did result in lower volumes, higher maintenance CapEx and operating expenses, which were a onetime impact to the quarter. The remainder was related to weather impacts across our GMP business.

Moving to an overview by segment. For Gathering and Processing, average volumes post closing of SUGS were 2.2 million MMbtus per day compared to 1.4 million MMbtus per day for the legacy Regency assets in 2012. The average NGL production during 2013 post closing of SUGS was 93,000 barrels per day compared to 38,000 barrels per day for 2012. We are very pleased with the growth in volumes from our Gathering and Processing business, which was driven by our major expansions that started up throughout the year. In South Texas, volumes on our Eagle Ford expansion project increased 80% and volumes at the Edwards Lime Joint Venture increased 23%. And volumes at our Dubach facility have increased more than 50% year-over-year to an average of 177,000 MMbtus per day for 2013. On January 1, we brought our Dubberly expansion project online, which included the incremental 200 million cubic feet per day of gathering capacity, expandable to 400 million cubic feet per day with compression, and we completed an upgrade to our 200 million cubic feet per day Dubberly facility. Volumes began ramping up in January and we expect them to continue to grow throughout 2014.

Now looking at our Lone Star Joint Venture. In 2013, adjusted EBITDA increased nearly 50% compared to 2012, which is primarily due to the startup of our first Mont Belvieu fractionator and a Gateway NGL Pipeline, both of which came online in December of 2012. We expect to see growth continue in 2014 as demand for NGL infrastructure remains strong and we're excited about the additional opportunities we are seeing for this business. Our LPG export facility with Sunoco Logistics remains on budget and on schedule for startup in Q1 of 2015. We continue to evaluate the addition of more capacity, particularly for storage, fractionation and terminals to export products via water, truck and rail as demand for NGL-related services continues to grow.

Next, for the Contract Services segment. Over the last year, we have seen a sharp increase in demand for Contract Compression which drove our revenue-generating horsepower to an all-time high of 1,049,000 horsepower at year end 2013. Third party revenue-generating horsepower for our compression business increased by over 180,000 horsepower, or more than 20%, from 2012 to 2013. Our utilization rate was 96% at the end of 2013 compared to 90% at the end of 2012. Demand remains strong going into 2014, and we expect another significant increase in horsepower growth with our largest opportunities coming from the Permian Basin, Eagle Ford, Niobrara and Appalachian shales. As of January 1, we have approximately 90,000 horsepower already booked to be set in the first quarter and early second quarter this year.

Now for an update on our 3 recently announced acquisitions. On February 3, we closed on our acquisition of the midstream assets from Hoover Energy. This acquisition further enhances Regency's geographic footprint in the Delaware Basin in West Texas, and expands our suite of producer services by adding crude and water-gathering services in one of Regency's core operating regions. The Hoover gas assets are already connected to Regency's existing Permian Basin gathering system, which has facilitated a quick integration. This acquisition has provided us with a platform for oil gathering and the existing Hoover system is currently flowing approximately 10,000 barrels per day. We've already began expanding this system by adding over 50 miles of gathering pipeline, which will add another 10,000 barrels per day of capacity. Additionally, we have plans to further extend the oil gathering system into our legacy operating area.

Now for an update on our merger with PVR Partners. We do believe we have a unique opportunity here to combine complementary assets, personnel and operating capabilities while expanding our basin diversity by adding a significant position in the Marcellus and Utica shales. We expect to increased footprint and scale along with the large backlog of organic growth projects will provide substantial growth opportunities for Regency, similar to the growth we have seen and experiencing on our legacy assets. This includes the recently announced Utica Ohio River Project, which creates a first mover advantage with significant upside potential and expected to be in service in early 2015. The unitholder meeting is now scheduled for March 20, and we expect the merger to close soon after, subject to closing conditions and receipt of the PVR unitholder vote.

Lastly, for an update on our acquisition of the midstream business from Eagle Rock. We view this acquisition as a strategic opportunity to expand Regency's core Gathering and Processing business segment but also very importantly, adding significant benefit to the pro forma PVR merger. We expect this acquisition to close in the second quarter, subject to HSR approval, Eagle Rock's unitholder approval and other customary closing conditions. We are very excited about all 3 of these acquisitions which will transform Regency into one of the largest gathering and processing MLPs. Very importantly, it supports our goals of increased distribution growth, increasing our scale and pursuing acquisitions that are a strategic fit with our current portfolio, but also creating new organic growth opportunities and operational synergies. With that, I will turn the call over to Tom, who will take you through a review of our financial performance.

Thomas E. Long

Thanks, Mike. And as a reminder, Mike discussed 2013 results including 8 months of SUGS compared to legacy Regency 2012 numbers. In our SEC filings, we have recast historical results to combine Regency and SUGS due to the as-if pooling accounting treatment required for an acquisition between common controlled entities.

Adjusted EBITDA for 2013 increased to $608 million compared to $517 million in 2012. This was primarily due to volume growth in the Gathering and Processing segment in South and West Texas and in North Louisiana, as well as increased volumes in our Lone Star Joint Venture, increased revenue-generating horsepower for CDM and a full year's contribution from SUGS in 2013 compared to 9 months in 2012. Regency DCF was at $411 million for 2013 and coverage was 1.01x. For the fourth quarter of 2013, DCF was $94 million. As Mike mentioned, the fourth quarter did include onetime impacts related to 3 major turnarounds as well as some weather-related impacts. Our fourth quarter distribution payment did include 4 million units issued upon closing of the acquisition of Hoover's midstream business. Excluding the onetime items, coverage for the quarter would have been approximately 1x.

Looking at our performance by segment, and starting with Gathering and Processing. Adjusted segment margins for 2013 increased more than 25% to $522 million compared to $412 million for 2012. Volumes for 2013 were up nearly 20% to 2.1 million MMbtus per day, primarily due to an increase of more than 50% year-over-year on our Dubach system in North Louisiana, an 80% increase in volumes on our Eagle Ford expansion project in South Texas and a 7% systemwide increase in West Texas inclusive of SUGS for both periods. Additionally, NGL production averaged 90,000 barrels per day for 2013, which was a 30% increase over 2012.

Now turning to our Natural Gas Transportation segment for the Haynesville Joint Venture. Adjusted EBITDA was $57 million for 2013 compared to $65 million for 2012. And our share of the adjusted EBITDA on the Mid-continent Express Pipeline joint venture was $100 million for 2013 compared to $102 million for 2012.

Now looking at the NGL services segment, which is solely the Lone Star Joint Venture. Adjusted EBITDA was $90 million for 2013 compared to $60 million for 2012. This increase was primarily due to the startup of Frac I and the Gateway NGL pipeline, which both went into service in December of 2012. The 2013 total NGL transportation throughput volumes, which includes volumes from both the West Texas Pipeline and the Gateway NGL pipeline increased to an average of 164,000 barrels per day from an average of 134,000 barrels per day in 2012. Refinery Services throughput volumes averaged 13,000 barrels per day for 2013 compared to 17,000 barrels per day for 2012. And fractionation throughput volumes, which is Frac I and II, averaged 78,000 barrels per day for 2013.

Turning to our Contract Services segment. For full year 2013, Contract Services segment margin increased to $204 million compared to $189 million in 2012. Contract Compression segment margin increased $19 million to $178 million for 2013, primarily due to an increase in third party revenue-generating horsepower from 823,000 to 1 million horsepower as a result of additional horsepower placed into service in South and West Texas along with Colorado.

Now looking at our liquidity position. At the end of 2013, we had approximately $675 million of available liquidity. In addition, the full year 2013 will receive net proceeds of $149 million from our continuous offering equity program. There is now $34 million remaining under this $200 million program.

Earlier this week, we completed an amendment to our existing credit facility, which increased the facility commitment from $1.2 billion to $1.5 billion and increased the accordion from $300 million to $500 million.

Now for our CapEx. For 2013, we incurred $948 million in organic growth capital. This includes $550 million related to the Gathering and Processing segment, $270 million related to Contract Services, $123 million related to the Lone Star Joint Venture and $5 million related to just the corporate segment. We also incurred $48 million in maintenance CapEx. In 2014, we expect to invest approximately $540 million in growth CapEx. It includes $230 million related to the Gathering and Processing segment, $200 million related to Contract Services and $110 million related to the Lone Star Joint Venture. We will be discussing more around CapEx projects for PVR and Eagle Rock acquisitions as we close those deals.

Now for our DCF sensitivities. For 2014, a $10 per barrel movement in crude oil along with the same percentage change in NGL pricing will result in approximately $8 million change in Regency's forecasted DCF. And a $1 per MMBtu movement in natural gas pricing would result in approximately $6 million change in Regency's forecasted DCF.

And with that, we'll now open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Okay, our first question comes from the line of Abhiram Rajendran of Credit Suisse.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Just a couple of quick questions. Just on folding in all the acquisitions across Eagle Rock, PVR and Hoover, could you talk a little bit about some of the new project opportunities or synergies that all these projects bring in? And what's the most exciting? Or what are the areas that present the most opportunity? Any color there would be very helpful.

Michael J. Bradley

Sure. As it relates to Hoover, as we've mentioned, that asset was already connected to our system. And so it really provides -- it was a quick integration and expands our gathering system to an area that we currently did not have access to. So we do expect that system to add additional opportunities for new gathering opportunities to bring gas into our plants. And very importantly is the crude oil gathering system which is already operational, and included in our CapEx projects are the expansions of that crude gathering system in 2014.

As it relates to PVR, we're really limited in what we can say until we close. But I think 2 things is, one, as you probably heard or saw -- listened on the earnings call, there is a significant backlog of projects, organic growth projects that we're very excited about. And we'll be discussing more about those once we close. But also very importantly is this Utica Ohio River Project, which we are all very excited about and again, look forward to talking more about that upon closing. As it relates to Eagle Rock, again, we're limited in what we can say on that asset. But I think it fits extremely well with our existing assets and particularly in Mid-continent as we combined the PVR assets, and we think will provide a lot of flexibility for our producers and provide a very competitive platform for Regency to continue to grow its business in that particular area.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay. Great. And then, just a quick question on some of the nat gas transport pipes. Can you talk a little bit about re-contracting renewals for those pipes? How should we think about any changes in transportation rates as you're kind of going through that process?

Jim Holotik

Sure. On our RIGS pipe, currently we have 2 contracts that we have renewed at the same rate on our legacy system. One of them just rolled over and the other one renewed for an additional year. And then on our expansion portion of the system, those contracts will continue to run through 2020 and 2022. We are seeing some uplift from the expansion in our Dubach and Dubberly facility having being able to bring that online earlier than expected. So we were expecting additional volumes to hit the RIGS system through that.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay. Great. And then maybe on MEP as well?

Jim Holotik

MEP is -- we don't have any current explorations on MEP. And so it stayed relatively flat year-over-year with the firm commitments that we currently have.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay. Great. And then, last quick one if I may. You've obviously taken up your distribution growth outlook for this year from what was kind of more in the low-single digits to 6% to 8%. As you're kind of looking ahead, is this sort of the level that you'd like to be at, kind of in this mid to high single digit rate growth sort of rate? Do you think that's a sustainable rate over the next couple of years? Any color on that would be helpful.

Michael J. Bradley

Yes. We still plan to recommend to our board that range of percentage increase for 2014. I think as we get into 2015, 2016, while I can't comment specifically, I would hope that we can continue to see that rate or better, particularly as all these organic growth projects start to come online.

Operator

And our next question comes from the line of Edward Rowe of Raymond James.

Edward Rowe

I wanted to see if you can provide some color around the magnitude that weather had in terms of the G&P segment and NGL and possibly MEP, in terms of volumes and if that caused some of the differences or downward variance versus what you guys were anticipating.

Michael J. Bradley

Yes, let me comment on that. I mean, first of all, as I mentioned, and I mentioned this in our third quarter call, we had -- we completed 3 significant turnarounds and upgrades in Q4, which impacted not only volumes but maintenance CapEx and operating expenses as a result of those turnarounds, which are pretty much onetime events. So the bulk of the impact to the quarter came from that activity there. There was some weather-related freeze-offs and impacts across our system. I wouldn't call that significant. And then, I think Lone Star did have some impacts as well just due to freeze-offs. But I don't think that we would call any of those real material items. So the bulk of it was the turnarounds and the cost associated with the turnaround.

Edward Rowe

Okay, that's helpful. And kind of just a follow-up on that. In terms of SG&A, were there any merger-related expenses that kind of bled into the fourth quarter and will also go into 1Q as well?

Thomas E. Long

No. There was not. There not anything really material in the fourth quarter that -- from an SG&A standpoint. I think you'll see -- you will see some of those obviously flow in more as we move closer towards the closing of the PVR transaction as well as the Eagle Rock.

Edward Rowe

Okay, great. Last question, while XTO's footprint is somewhat east of your facilities, can you share with us if there were any discussions on RGP conducting this project given your scale within the region?

Michael J. Bradley

Let me comment this in general. We have a very significant position in the Permian Basin. And the bulk of our focus has been in and around that core area. We continue to see expansion projects associated with that. I can't comment on specific producers, but that was just not an area that we're particularly focused on as we have a lot of activity going on around our core system.

Edward Rowe

Okay. And just kind of a quick follow-up, there's been a lot of activity in the Midland Basin and, Pioneer's been discussing that they'll probably need a new gas processing plant every 18 months. Are there any scenarios where you guys would move gathering pipelines further east to capture some of those volumes, just looking at some of the opportunities further east?

Jim Holotik

Yes. You see, as Mike said, we do have a quarter that we're concentrating in, but also, we continue to look that opportunity to increase our footprint out to the east, and are visiting with or always in contact with producers in that area to see if there's somewhere that we might be able to expand our system.

Operator

[Operator Instructions]

You have a further question from Michael Gaiden of Robert W Baird.

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

I wonder if you could shed some light on the sequential decline in EBITDA from the Lone Star Joint Venture? I was a bit surprised about that, especially given the large increase in fractionation volumes there.

Thomas E. Long

Yes, you bet. So from Q3 of '13 to Q4 of '14, we continue to see good margin growth. But it was offset in the fourth quarter, primarily in the Refinery Services segment. The refinery that we have an agreement with did have some operational disruptions, which was an impact. But in addition to that, I will say that the operating expenses that were accrued during the fourth quarter were at a little bit higher rate, I would consider that more of a nonrecurring. Those were really kind of related to some of ad valorem tax as well as some power-related charges. But once again, we did see good strong margin growth, especially on the frac side like you mentioned. So...

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

Great. And can I ask -- relative to all this discussion about organic growth potential, can you please refresh us on the range of multiples that you targeted on those projects?

Thomas E. Long

I'm sorry. You're talking about organic growth in general?

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

Yes. If you gentlemen could please refresh us on the range of multiples that you expect to be able to put the organic growth projects in and -- as a rule of thumb.

Thomas E. Long

So we target in the mid to high teens at a minimum on returns, which would probably be in the 6 to [indiscernible] 5 to 6x multiple.

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

Great. And can I lastly ask, you gentlemen certainly have been certainly busy on the acquisition front with Hoover, Eagle Rock, Midstream and PVR. Do you need to pause in order to digest these assets operationally and/or financially and get your systems integrated? Or can you continue to be as aggressive as you like with both hands free here in the near term for any additional opportunistic M&A that presents?

Michael J. Bradley

Well obviously, we have a lot going on right now. But -- like the Hoover acquisition came up in the middle of all this and it was just a great fit, and we we're able to execute it, close it very quickly. And we'll continue to look at those kind of opportunities as we go forward. So the answer to your question is we'll continue to be opportunistic and look to our opportunities to expand our business. I think that the immigration teams are working very well. We've got a good plan and we expect that to go smoothly.

Operator

The next question comes from the line of Jerren Holder of Goldman Sachs.

Jerren Holder - Goldman Sachs Group Inc., Research Division

Given that 2014 is probably going to be a transformational year for you guys, and your 6% to 8% growth guidance, was just wondering what are you guys expecting in terms of distribution coverage, and also on our balance sheet, kind of debt to EBITDA, which seems a bit high at the moment. I'm just wondering if you could comment a bit on that as you go through the year?

Thomas E. Long

Yes. We continue on the distribution coverage. We're going to continue to target that above 1 -- 1 to 1.1x. But keeping in mind that we're always kind of looking out as we're making that decision or recommendations to the board, I might add. As far as the leverage ratio, we're going to still target that 4x. That's what we communicate to the rating agencies, and we think that's a good level based upon all the organic growth that we see in front of us. We think it's important to have a lot of financial flexibility to be able to continue to fund these projects at a very competitive cost of capital.

Operator

We have no further questions. I would now like to turn the call back over to Mike Bradley.

Michael J. Bradley

Well again, thanks, everyone for joining us on the call this morning. And I want to reiterate how excited we are about what's happening here at Regency, not only with the results of 2013 and how we are positioned this partnership going into 2014, which will be a transformation of this partnership into a very significant gathering and processing MLP. I want to thank our employees for their contribution in 2013 with the SUGS acquisition and the announcement of 3 others, there's a lot of work going on, and everybody has performed extremely well and we are very pleased with that. So we're very excited, and we'll be talking more about our acquisitions as they continue to close. And with that, have a great day, and thank you.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and good day.

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