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Regency Energy Partners LP (NYSE:RGP)

Q2 2012 Earnings Call

August 8, 2012 11:00 am ET

Executives

Lyndsay Hannah – Head-Investor Relations & Manager-Finance

Michael Jack Bradley – President, Chief Executive Officer & Director

Thomas E. Long – Chief Financial Officer & Executive Vice President

Analysts

Louis Shamie – Zimmer Lucas Partners LLC

Scott K. Fogleman – Credit Suisse Securities (NYSE:USA) LLC (Broker)

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2012 Regency Energy Partners LP Earnings Conference Call. My name is Clarissa and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today’s conference, Ms. Lyndsay Hannah, Manager of Finance and Investor Relations. Please proceed.

Lyndsay Hannah

Hello, everyone, and thank you for joining us on our call this morning. Today, we will cover Regency’s performance for the second quarter of 2012. Joining me on the call today will be Mike Bradley, 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 for participants for questions. You may access the earnings release and presentation is on today’s call through Regency’s website at regencyenergy.com.

Our call is being recorded and is also being broadcast live on our website. An archive of the webcast and presentation will also be available on the site following this call. Please note, we plan to file our 10-Q this afternoon.

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 the ownership of our Limited Partnership unit. 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 Bradley

Thanks Lyndsay, and good morning, everyone, and thank you for joining our call. I’ll start, we had a good quarter, during which our adjusted EBITDA increased 12%, over the second quarter of last year as volumes continued to increase in South and West Texas and in North Louisiana. Cotton Valley drilling has picked up around our Dubach facility.

Overall, gathering and processing volumes were up nearly 30% over the second quarter of last year. We also continue to benefit from the addition of the Lone Star joint venture assets, which delivered solid results for the second quarter.

Drilling activity in the liquids-rich plays continues to be the primary growth driver for our business and remains active around our assets in West and South Texas and in North Louisiana.

Given the strong activity around our assets, we now expect to be expanding our processing capacity in West Texas and in North Louisiana in 2013. Now provide an update on the progress of our organic projects. In South Texas, rig counts have continued to increase, rising about 30% from the second quarter of 2011 to the second quarter of 2012.

In May, we announced an expansion of our adverse line joint venture to support this increased activity. An expansion will increase the system’s capacity from $70 million a day to $116 million a day and provide for 17,000 barrels per day of additional crude transportation and stabilization capacity. Regency’s investment is expected a total of approximately $90 million, and we anticipate that the expansion will be in service by the first quarter of 2013.

Regency owns a 60% interest and operates the assets on behalf of the joint venture. Talisman and Statoil own the remaining 40%. Regarding our Eagle Ford expansion project, volumes continued to increase on the system in conjunction with producer drilling and the full project is on schedule for completion in 2014.

Average second quarter volumes on the Eagle Ford expansion increased approximately 15% over the first quarter of this year. We have experienced some equipment installation delays due to overall industry demand, along with some downstream capacity constraints.

We’re all making good progress towards getting these issues resolved and have already seen a nice pickup in volumes on this system in July. Also in South Texas, we are constructing a $40 million expansion to our Tilden treating plant. Upon its completion in 2013, it will provide an incremental 60 million per day of treating capacity.

Additionally, we are close to filling our existing processing capacity for our South Texas volumes and will be working on expansion opportunities in the region for 2013. Each of these projects are backed by fee-based contracts and further extends Regency’s extensive gathering, processing, and treating platform in the South Texas area.

Moving on to West Texas, rig counts increased to 15% from the second quarter of 2011 to the second quarter of 2012. And to accommodate this production growth, as we have stated, we are constructing a new processing facility to our Ranch joint venture with Chesapeake and Anadarko, which we announced in December of last year. The joint venture is $25 million a day refrige plant was operational as of June, and construction of the $100 million a day cryo facility remains on schedule to be complete by the end of the year.

Contracts through this facility are fee-based. A combination of these facilities will elevate capacity constraints at Regency’s Waha plant and accommodate new opportunities for that system as well. Turning to our NGL joint venture, Lone Star the 209,000 barrel per day gateway NGL pipeline is still on budget and on schedule to be completed by January 2013. The pipeline is currently 75% contracted. Lone Star’s two Mont Belvieu fractionators also remain on budget and on schedule to be completed by January 2013 and the first quarter of 2014, respectively.

Frac 1 has been fully contracted and Frac 2 is approximately 65% contracted. We are actively working to fill the remaining capacity on Gateway and Frac 2, and plan to have the majority of the remaining capacity contracted by the end of this year. For contract services, our compression business continued to focus on resource optimization for producers as they shift their drilling programs to oil and liquid-rich plays. At the end of the second quarter, approximately 70% of our compression horsepower was placed in oil and liquid-rich plays.

During the first quarter earnings call, I stated we had 80,000 horsepower both to be set in the May to August timeframe and approximately 55,000 of that horsepower was set in the second quarter, the majority in the oil and liquid rich plays. However, we did see higher than expected horsepower returns during the second quarter, primarily associated with dry gas areas like the Fayetteville Shale.

Horsepower additions in the liquids-rich plays are becoming to overcome the declines in our dry gas regions, and we experienced very strong bookings during the second quarter. We now have more than a 100,000 horsepower booked to be set prior to the end of the year, with the majority of this horsepower expected to be set in the third quarter. We continue to see horsepower growth in the Marcellus Shale and will be setting our first units in the Utica Shale during the third quarter.

Additionally, we are also pursuing opportunities to enter the Granite Wash area. For our contract treating business during the second quarter, we continued to make upgrades to our treating fleet, develop new treating products, and diversify our product line to move with the shift to oil and liquid-rich plays and be more capable of handling higher concentrations of H2S.

In the first quarter we began expanding our services to include condensate stabilization facilities and recently executed contracts for two stabilizers that are expected to begin generating revenue by the end of October.

We still expect our highest growth opportunities for treating and stabilization services to be in West Texas and southeast New Mexico, as well as in expanding plays in East and South Texas. Now expanding more on our second quarter results, we are pleased with our continued growth in adjusted EBITDA on the second quarter, compared to the second quarter of 2011, which again was driven by strong drilling activity in our key gathering and processing areas, and solid results from our Lone Star joint venture.

As I mentioned in the first quarter, we are experiencing much higher GPM gas and expected which has created some challenges during the first and second quarters, but we are making good progress towards getting these issues resolved. While the results in the Gathering and Processing segment were significantly above the second quarter of last year, they were still lower than expected, largely due to some operational and downstream infrastructure takeaway issues in West and South Texas, and to a lesser extent, lower natural gas and NGL prices.

We estimate the combined impact of the quarter to be about $7 million. We remain very encouraged by drilling activity and we expect to see the contributions from these assets increase in the third and fourth quarters.

In summary, we are very excited about our prospects for the remainder of the year and continuing into 2013. Our strategically located assets and diverse portfolio of services continue to generate solid results while providing attractive options for producers and greater opportunities for growth.

We remain focused on completing our $1 billion in announced organic growth projects, which were supported by fee-based contracts. Nearly half of our announced expansion projects are expected to come online by the first half of next year, and we are well-positioned to see significant growth across the majority of our businesses.

In addition, we believe these projects are laying the foundation for future opportunities as they come online, and we are evaluating further expansions of our gas and liquid services to meet increasing producer demand.

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

Thomas Long

Thanks, Mike. And turning to slide number 3, Regency’s adjusted EBITDA increased 12% to $115 million, compared to $103 million in the second quarter of 2011. The primary drivers of the increase were $13 million, associated with higher volumes in our Gathering and Processing segment in South and West Texas and in North Louisiana around our Dubach system, and $5 million associated with a full quarter contribution from the Lone Star joint venture that was acquired in May of 2011.

These were partially offset by a $5 million increase in operations and maintenance expense, which predominantly occurred in South Texas. For the second quarter, Regency generated $71 million in cash available for distribution. CAFD was impacted by a one-time $8 million interest payment associated with the early redemption of 35% of our 9.38% senior notes due 2016, as well as operational impacts. We also received cash proceeds of $7 million from asset sales related to the sale of some compressor units.

Now, looking at performance by segment and starting with the gathering and processing, segment margin was $65 million for the second quarter of 2012, compared to $53 million for Q2 of 2011. This increase was primarily due to a 30% increase in volumes, which grew to $1.4 million MMbtu’s per day in the second quarter of 2012, compared to $1.1 million MMbtu’s per day in the second quarter of 2011. And NGL production increased to 37,000 barrels per day in the second quarter, compared to $28,000 barrels per day in the second quarter of last year.

Looking at volumes by region beginning with North Louisiana, while volumes remain flat overall in North Louisiana from the second quarter of 2011 to the second quarter of 2012, higher margin volumes did increase around our Logansport and Dubach facilities. But we’re offset by declines in lower margin volumes at our Elm Grove and Dubberly plants.

To facilitate the volume increases, we have installed additional compression and dehydration on the Dubach system and are adding $35 million a day of refrigeration capacity at our Dubach facility, which we expect online in the third quarter of this year. For the remainder of 2012, we expect volumes to continue increasing on our Dubach system.

Now, looking at the Midcontinent region, volumes remained flat in this region, compared to the second quarter of 2011, and we expect volumes will remain relatively flat for the second half of the year. The Mississippian Shale and the Granite Wash will provide the potential for growth opportunities as activities stretch toward our system and as producers utilize horizontal drilling techniques.

Moving to West Texas, second quarter of 2012 volumes increased 6%, compared to the second quarter of 2011, driven by higher volumes of associated gas from Permian Basin oil production. As Mike mentioned, the Ranch JV refrigeration plant was operational as of June, and we expect throughput to increase once the cryo facility becomes operational in Q4 of this year. We have some modifications planned for September, which will increase our NGL production, and we continue to see opportunities to further expand our West Texas System.

In South Texas, we saw volumes increase over 100%, second quarter of 2011 through the second quarter of 2012, which includes the volumes associated with the Eagle Ford expansion project.

We have seen volumes increase since the end of the quarter and expect this to continue as the year progresses, creating opportunities for the gathering, processing, treating, and compression.

Moving on to slide 5, to discuss our Joint Venture segment, adjusted EBITDA for the joint ventures was $59 million for the second quarter of 2012, compared to $55 million with Q2 of 2011.

The Haynesville joint venture contributed $18 million, compared to $20 million in the second quarter of 2011. Midcontinent Express contributed $25 million in both Q2 of last year, and Q2 of this year. And the Lone Star joint venture contributed $16 million in the second quarter of 2012, compared to $11 million for the period May to June of 2011.

For the Haynesville joint venture, due to the demand fee contracts and pipeline optimization project, rigs margin have decreased 12%, even though the total throughput volumes have decreased 41% from the second quarter of 2011.

For the remainder of 2012, we have no contracts expiring and expect throughput to remain relatively flat. Looking at Midcontinent Express, volumes increased to $1.4 million MMbtu’s per day, compared to $1.2 million MMbtu’s per day for the second quarter of 2011. We expect the volumes to remain relatively flat for the remainder of this year.

For the Lone Star joint venture for the second quarter of 2012, totaled throughput volumes for the West Texas pipeline increased to an average of 133,000 barrels per day, compared to 128,000 barrels per day for the period from May to June of 2011, 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 21,000 barrels per day, compared to an average of 15,000 barrels per day for the same period.

Moving on to contract compression on slide number 6, for the second quarter of 2012, segment margin inclusive of both revenues from external customers, as well as intersegment margin, rose to $38 million, compared to $37 million for the second quarter of 2011.

Revenue generating horsepower, again, including the intersegment horsepower increased from 811,000 horsepower to 825,000 horsepower, comparing the second quarter of 2011 to the second quarter of 2012. The increase in revenue generating horsepower is mostly attributable to additional horsepower placed into service in South Texas. As our Eagle Ford expansion project continues to grow, intercompany margin and horsepower will increase.

We had a strong booking during the second quarter as Mike mentioned, and have over 100,000 horsepower booked and to be deployed before the end of the year, mostly in liquid and oil-rich regions.

Now, looking at treating on slide number 7, segment margin was $7 million for the second quarter of 2012, compared to $8 million for the second quarter of 2011, while revenue generating GPM increased to 3,773, compared to 3,368 during the same period.

The increase in GPM occurred late in the quarter and therefore did not have the impact on margins. Enquiries for aiming treating facilities for higher H2S plants are up and we will begin setting a portion of our upgraded fleet as early as the end of October.

Most of the growth for this business segment will occur in the Permian Basin, and Avalon shale, and West Texas, and in the Eagle Ford Shale in South Texas. Quickly on slide 8, for the full year 2012, we continue to expect the fee-based portion on margins to be just over 80%. As to our liquidity on slide 9, as of the end of June, we had approximately $375 million that are available liquidity on a revolving credit facility.

Looking ahead to Regency’s total 2012 capital expenditures, we expect our 2012 growth CapEx to be between $775 million, up to $825 million, primarily for the Lone Star joint venture and for gathering and processing in South and West Texas. For the six months ended June 30, 2012, we incurred $373 million of organic growth capital expenditures, and in 2012, we still expect maintenance capital to be around $30 million.

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 Louis Shamie of Zimmer Lucas. Please proceed.

Louis Shamie – Zimmer Lucas Partners LLC

Hi, good morning, everyone.

Michael Bradley

Hey, Louis, good morning.

Thomas Long

Hi, Louis, how are you?

Louis Shamie – Zimmer Lucas Partners LLC

Doing well, wanted to ask a little bit about the Gathering and Processing segment and that $7 million in loss margin due to the downstream constraints. Can you elaborate a little bit about what was going on there and how we can expect that margin to come back in the coming quarters?

Mike Bradley

Sure. Couple of things, one is, in comparing the Q2 of 2011 to Q2 of 2012, there is roughly $2 million associated with just a difference in pricing. The other five is really made up of a combination of some operational downtime associated with maintenance on some of our facilities. We did experience some downstream capacity constraints on third parties, and then we did…

Louis Shamie – Zimmer Lucas Partners LLC

And then in terms of like fractionation capacity or?

Mike Bradley

No, no, no, pipeline.

Louis Shamie – Zimmer Lucas Partners LLC

Gas pipeline or?

Mike Bradley

Yes.

Louis Shamie – Zimmer Lucas Partners LLC

All right, okay.

Mike Bradley

Yes. And then the remainder is just due to the delay we have experienced in getting equipment delivered and installed in the Eagle Ford expansion project which, again, we mentioned we made good progress on that and have already seen a nice uptick in volumes.

Louis Shamie – Zimmer Lucas Partners LLC

Okay. Can you talk a little bit about the expansion that you’re looking to do in West Texas and North Louisiana in 2013, as you mentioned? What kind of size that and what’s driving that expansion?

Thomas Long

Well, there’s two things. In West Texas, we’re seeing the higher volumes in the liquid-rich gas, is primarily what’s driving the expansion. First of all, as we’ve already announced, we’ll have our Ranch JV that will come on. We are fully expecting to come on by the end of the, or in December of this year.

Additionally, there’s a 25 million a day of refrigeration capacity available there. So with that expansion, that will open up opportunities for us to bring additional gas to Waha. While, we are bringing the additional gas to Waha, we’ve already announced some of the dedications that we’ve received, 65,000 acre dedication, which will allow us to look at the possibility of putting additional facilities further out in the production area.

In North Louisiana, we are seeing additional drilling both in the Cotton Valley and then we’ve got producers who have taken positions in the Brown Dense formation. We’ve already, as Mike said earlier, we are bringing on 35 million a day of additional refrigeration, and we’re looking at putting in a 20 million a day JT unit, but we’re evaluating our other opportunities in that area.

Louis Shamie – Zimmer Lucas Partners LLC

Yeah, that’s great. Thanks so much.

Operator

And your next question comes from the line of Scott Fogleman of Credit Suisse. Please proceed.

Scott K. Fogleman – Credit Suisse Securities (USA) LLC (Broker)

Hi, good morning.

Mike Bradley

Good morning, Scott.

Thomas Long

Good morning.

Scott K. Fogleman – Credit Suisse Securities (USA) LLC (Broker)

Yeah, just a real quick question on the compression sales, approximately how much horsepower did you sell?

Mike Bradley

I don’t have that number, about 7,000 horsepower.

Scott Fogleman

Okay, it’s only about 7,000. And so what’s your total, I mean, I see you’ve lumped it back in, so it’s 825 between both third-party and internal now. And so how much idle capacity do you have?

Mike Bradley

We currently have a utilization rate of about 84%, Scott.

Scott Fogleman

Okay.

Mike Bradley

On our horsepower. Of that 100,000, that’s booked, about 60% of that’s going to come out of idle.

Scott Fogleman

All right. And the other is just going to shift over?

Mike Bradley

Yeah, and we don’t have any additional planned sales, or maybe someone off, but I think we still target in that 90% range by the end of the year.

Scott Fogleman

All right. Okay. And that 90%, I mean, that includes the intersegment or?

Mike Bradley

Yes.

Scott Fogleman

All right. Okay, that’s all I had. Okay, thank you, sir.

Mike Bradley

You’re welcome.

Operator

And there are no further questions. At this time, I would like to turn the call over to Mr. Mike Bradley for closing remarks.

Mike Bradley

Yeah. Again, thanks everybody. And to conclude, we had a good quarter as we continued to benefit from the increased activity we discussed in South and West Texas, as well in the North Louisiana area.

Additionally, we are pleased with the contribution from Lone Star. And what’s very exciting is the majority of Regency’s business segments are poised for further growth, and we continue to be excited about the expansion potential around all of our assets.

With a significant amount of organic growth coming on line, we are well-positioned for continued earnings and volume growth and expansion opportunities, because of these advantages, we believe Regency is in a very good position to continue expanding our services, creating unitholder value and growing distributions.

With that, again, thank you and have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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