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Regency Energy Partners LP (NYSE:RGP)

Q1 2012 Earnings Call

May 09, 2012 11:00 am ET

Executives

Shannon A. Ming - Senior Vice President of Finance and Investor Relations - Regency Gp Llc

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

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

Analysts

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

Cathleen King - BofA Merrill Lynch, Research Division

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Yves Siegel - Crédit Suisse AG, Research Division

Heejung Ryoo - Barclays Capital, Research Division

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

Bernard L. Colson - Global Hunter Securities, LLC, Research Division

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: Volumes increased 12% from the first quarter of '11 to the first quarter of '12. To facilitate this volume increase, we have installed more compression and dehydration on the system to utilize spare treating capacity in our developing plants to expand our processing capacity by restarting an idle 35 million a day refrig unit at our Dubach facility. For the remainder of 2012, we expect volumes to continue to increase slightly.

In the Midcontinent, comparing the first quarter of '11 to the first quarter of '12, volumes were flat. We are seeing real possibilities for upside as the Mississippian Shale and Granite Wash plays stretch toward our system, as well as more horizontal drilling techniques being utilized by producers. For the remainder of 2012, we expect volumes to remain relatively flat.

Now looking at West Texas, first quarter of 2012 volumes increased 36% to -- from first quarter of 2011, driven by higher levels of associated gas from the Permian Basin oil production. At the end of January, we were able to increase our NGL production as interim capacity became available on Lone Star's West Texas Pipeline. In addition, during the first quarter we received a 65,000 acreage dedication from a new producer to our Waha system in the Bone Spring formation. This dedication and the continued expansion of our system will eventually require additional processing capacity, which we intend to capture. We expect throughput in West Texas to continue to increase as the Ranch Joint Venture comes becomes operational.

Looking at South Texas. Rig counts have continued to increase, rising by 42% from the first quarter of 2011 to the first quarter of 2012. We saw volumes increase over 113% from Q1 of '11 to Q1 of '12, which includes the volumes associated with the Eagle Ford expansion project. Volumes will continue to ramp up on this system over the next few years, creating opportunities in all phases of Regency's business units, including transportation, treating, processing and compression.

Moving on to Slide 5. Joint Ventures segment adjusted EBITDA was $57 million for the first quarter of 2012 compared to $44 million for 2011 first quarter. Haynesville Joint Venture contributed $16 million compared to $19 million for the first quarter of '11, MEP contributed $26 million compared to $25 million in the first quarter of '11 and Lone Star contributed $15 million in the first quarter of 2012.

For the Haynesville Joint Venture, we continue to see the impact from lack of basis differential on our rigs pipeline as well as the impact of low natural gas prices. Even though total throughput volumes have decreased nearly 40% from the first quarter of 2011, rigs margins have only decreased 12% due to the demand-fee contracts and pipeline optimization projects.

Looking at MEP, volumes remained flat compared to Q1 of 2011, staying at around 1.4 million MMbtus per day. And for the Lone Star JV, for the first quarter of 2012, total throughput volumes for the West Texas Pipeline increased to an average of 135,000 barrels per day compared to 129,000 barrels per day in the fourth quarter of '11 primarily due to the interim expansion completed by Lone Star in the first quarter of 2012. NGL fractionation throughput volumes increased to an average of 19,000 barrels per day compared to an average of 18,000 barrels per day in the fourth quarter of 2011.

Looking at Contract Compression on Slide 6. This segment services both third-party customers as well as Regency's Gathering and Processing segment. For the first quarter of 2011 to the first quarter of 2012, external segment margin remained flat at $35 million. Revenue-generating horsepower was flat compared to the first quarter of 2011 to the first quarter of 2012. During the first quarter, we experienced more churn than usual as producers move their focus to richer plays. Quarter-over-quarter, this had an impact of a net reduction of 16,000 horsepower. As Mike mentioned, as of today, we have 80,000 horsepower booked, to be deployed during the next 90 to 120 days. As for the Eagle Ford expansion project, it continues to grow. We expect intercompany segment margins and Gathering and Processing horsepower to increase over time.

All of the compression CDM provides for Regency's Gathering and Processing segment in South and West Texas is under long-term contracts. For the first quarter, fleet utilization was approximately 85%, and we continue to expect utilization to be above 90% by year end.

Now looking at Contract Treating on Slide 7. Segment margin increased to $8 million for the first quarter of 2012 compared to $7 million for the first quarter of 2011. We are in the process of implementing upgrades to our treating fleet and developing new products to target the liquids-rich plays and higher concentrations of H2S versus CO2. Because of this adaptation along with the targeted drilling of liquids-rich plays by producers, we expect most of the growth for this business segment to occur in the Permian Basin, Avalon Shale and Eagle Ford Shale.

Turning to Slide 8, you can see how we've increased our fee-based margins over time. For full year 2012, we expect the fee-based portion to be approximately 80% of margins.

Now moving on to DCF sensitivities. For the balance of 2012, a $10 per barrel movement in crude, along with the same percentage change in NGL pricing, would result in a $4 million impact to our 2012 DCF. A $1 per MMbtu movement in natural gas pricing would result in a $2.8 million change to our 2012 DCF, and a $0.05 per pound change in the price of olefins would result in a $1.4 million change to our 2012 DCF.

Looking at liquidity, Slide 10. In March of 2012, we issued 12.7 million common units, with net proceeds of approximately $300 million. Proceeds were used to redeem 35% of our 9 3/8% senior notes due in 2016, which we will actually complete today. We also used the proceeds to pay down our outstanding balance under our revolving credit facility. As of the end of March, we had approximately $650 million of available liquidity on our revolving credit facility.

Other item to note, related to our depreciation policies, in the first quarter of 2012 we made a $6.9 million non-cash depreciation true-up adjustment related to our Contract Compression segment to adjust the estimated useful lives of certain compression assets to comply with our policy.

Looking ahead, Regency's total 2012 capital expenditures, we are increasing our 2012 guidance to between $775 million to $825 million, primarily related to the increased growth capital for the Eagle Ford expansion project and our Contract Treating segment. The majority of 2012 capital will be spent for the Lone Star joint venture as well as for Gathering and Processing in South and West Texas.

In the first quarter of 2012, Regency incurred $138 million of organic growth capital expenditures. In 2012, we expect maintenance capital of around $30 million, and this is inclusive of the joint venture spend.

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

Question-and-Answer Session

Operator

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

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

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 - Wells Fargo Securities, LLC, Research Division

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 - Wells Fargo Securities, LLC, Research Division

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 - Wells Fargo Securities, LLC, Research Division

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 - BofA Merrill Lynch, Research Division

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 - BofA Merrill Lynch, Research Division

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: There was no other terms -- no terms and conditions that were being altered in this contract at all, so...

Cathleen King - BofA Merrill Lynch, Research Division

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 - JP Morgan Chase & Co, Research Division

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 - JP Morgan Chase & Co, Research Division

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 - Crédit Suisse AG, Research Division

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 - Crédit Suisse AG, Research Division

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 - Crédit Suisse AG, Research Division

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: We have the legacy agreements and we have expansion agreements. The legacy agreements, we have some of that are roll-off between now and 2016, where expansion agreements don't roll-off 'til 2020. So we'll see a small decrease this year, probably somewhere in the nature of about $30 million to $40 million over the course of this -- by the end of the year that will roll-off this year. I guess one of the things that we'd like to kind of point out is that, if you took the total of the legacy agreements as far as what they contribute to our total segment margin, it would be about 2%. So while we are trying to renew all of these agreements, as having some of them roll-off, it's not as a big a disaster as we might think.

Operator

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

Heejung Ryoo - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

Yes, on...

Shannon A. Ming

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

Heejung Ryoo - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

Okay, even on the 600 million capacity?

Michael J. Bradley

That's right.

Heejung Ryoo - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

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

Thomas E. Long

Yes.

Heejung Ryoo - Barclays Capital, Research Division

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 - Barclays Capital, Research Division

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

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

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

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 - Global Hunter Securities, LLC, Research Division

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 - Global Hunter Securities, LLC, Research Division

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 - Global Hunter Securities, LLC, Research Division

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 - Global Hunter Securities, LLC, Research Division

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.

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