Regency Energy Partners LP Management Discusses Q3 2012 Results - Earnings Call Transcript

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 |  About: Regency Energy Partners LP (RGP)
by: SA Transcripts

Regency Energy Partners LP (NYSE:RGP)

Q3 2012 Earnings Call

November 08, 2012 11:00 am ET

Executives

Lyndsay Hannah

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

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

Analysts

John Edwards - Crédit Suisse AG, Research Division

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Operator

A very a good day to you, ladies and gentlemen, and welcome to your Q3 2012 Regency Energy Partners LP Earnings Conference Call hosted by Lyndsay Hannah, Manager, Finance and Investor Relations. My name is Chris, and I'll be your conference coordinator for today. [Operator Instructions] I would just like to remind all parties this conference is being recorded for replay purposes today. Thank you. At this time, I would like to turn the call over to Lyndsay Hannah to start. Please go ahead.

Lyndsay Hannah

Good morning, everyone, and thank you for joining us on our call. Today, we will cover Regency’s performance for the third quarter of 2012. With 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 to participants for questions. You may access our earnings release and presentation used on today’s call through Regency’s website at regencyenergy.com.

Our call is being recorded and broadcast live on our website. An archive of the webcast and presentation will be available on the site following this call. Also, 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 statement. You should refer to our SEC filings for a more complete discussion of the risks involved in our business and in ownership of our limited partnership units. Included in the appendix of today's presentation are various non-GAAP measures that have been reconciled to the comparable GAAP measure.

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

Michael J. Bradley

Hello, everyone, and thank you for joining us today. I'd like to start by looking at our performance for the quarter, followed by an update on the progress of our expansion projects and other growth opportunities.

Starting with our performance, Regency's adjusted EBITDA for the third quarter of 2012 was $114 million compared to $112 million for the third quarter of 2011. Fundamentally, our business continued to grow year-over-year and quarter-over-quarter, and we are in great position for further significant growth as our expansion projects start to come online during 2013.

Volumes in our Gathering and Processing segment increased 13% from the third quarter of 2011 to the third quarter of 2012. And year-to-date, volumes have increased 25% over year-to-date 2011, driven by increased drilling and liquids-rich and oily plays in South and West Texas and in North Louisiana.

Results for the quarter were impacted by temporary operational issues and outages to our Gathering and Processing segment and in our Lone Star joint venture with a total impact of approximately $7 million.

Facilities that have experienced some downtime are back online, and we are making good progress on the ongoing operational shifts to accommodate much richer gas, as producers shift drilling programs to more liquids-rich and oily locations.

We view this as very positive for our long-term business, as new opportunities continue to develop to increase Gathering and Processing infrastructure. A good example of this is a $75 million expansion we announced during the third quarter to add an incremental 90 million a day of processing capacity at one of our North Louisiana facilities.

The first 20 million a day plant will be online in the fourth quarter of this year, and the additional 70 million a day plant is expected to come online towards the end of Q2 2013. We remain very excited about our expansion projects, which include over 200 million a day of processing capacity and up to 150 million a day of treating capacity that is expected to come online during 2013. Additionally, we expect continued volume growth from our Eagle Ford expansion project, which experienced a 28% volume growth from the second quarter to the third quarter, as infrastructure issues were resolved.

So looking forward, we expect another year of significant growth in our Gathering and Processing segment, and we anticipate there will be further expansions in North Louisiana, West Texas and South Texas during 2013.

Turning to our Lone Star joint venture. The 209,000 barrels per day gateway NGL pipeline is currently being filled with line pack and will be operational by the end of this year, and Frac 1 is also now expected to be in service by the end of this year. We expect our EBITDA to grow significantly as the projects come online and volumes ramp up in 2013 on gateway and Frac 1. And Frac 2 is now scheduled to be in service by the end of the year 2013. We remain excited about future possibilities to expand our Lone Star joint venture.

For the contract services business, returns from dry gas regions dropped significantly for our compression business in the third quarter, and bookings in the wet gas and oily plays have more than offset the reduction from dry gas plays with a net increase of nearly 50,000 horsepower. Utilization for the Contract Compression business increased to 87% for the third quarter of 2012 compared to 84% in the second quarter of 2012. And we expect utilization to be in the low 90% range by year-end, as bookings in the third quarter remained robust.

Also, we set our first units in the Utica Shale during the third quarter, and we now have more than 60,000 horsepower booked and expected to be set prior to the end of the year, which includes our first units in the Granite Wash. For Treating, during the third quarter, we completed design, fabrication and installation of our first condensate stabilizers and fuel gas conditioning skids and remain very encouraged with the demand for these services.

Also in the third quarter, we saw a strong growth in the number of coolers and JT skids booked and set. Additionally, we are seeing an increase in treating service proposals for 2013. We still expect our highest growth opportunities for treating and stabilization services to be in the West, South and East Texas.

In summary, Regency is poised for significant earnings growth as we make progress towards completing our $1 billion plus in announced organic projects. The majority of these expansions are coming online in 2013, and all of these projects are supported by long-term fee-based contracts. Additionally, all of these projects are laying the foundation for further expansion opportunities to meet increasing producer demand. The completion of all these projects is expected to improve coverage ratios and position Regency for distribution growth.

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

Thomas E. Long

Thanks, Mike. Let's start with a review of the consolidated results. As Mike mentioned, adjusted EBITDA for the quarter increased to $114 million compared to $112 million in the same period last year. The increase was primarily the result of higher segment margins in Gathering and Processing, Contract Compression and contract treating, partially offset by lower results in our Joint Venture segment.

For the third quarter, Regency generated $68 million in distributable cash flow. Third quarter Bcf was impacted by operational issues, as well as higher maintenance CapEx.

Year-to-date, Bcf is up 19% over year-to-date 2011. Looking at performance by segment, and we'll start with the Gathering and Processing segment, adjusted segment margin was $68 million for the third quarter of 2012 compared to $65 million for the same period last year. This increase was primarily due to a 13% increase in volume, partially offset by approximately $6 million of operational issues and unplanned outages. NGL production increased to 36,000 barrels per day in the third quarter compared to 35,000 barrels per day in the third quarter of last year.

Now discussing volumes by regions, and beginning with North Louisiana. Volumes remained flat overall in this region compared to the third quarter of 2011. Higher margin volumes did increase around our Logansport and Dubach facilities, but were offset by declines in lower margin volumes at our Elm Grove and Dubberly plant. To facilitate the volume increases at Dubach, we have installed additional compression and dehydration and brought back into service a 35 million a day refrigeration plant. In addition, we are expanding our Dubach facility to increase processing capabilities, with a portion scheduled to come online in the fourth quarter of this year and the remainder toward the end of the second quarter of 2013. We are expecting volumes to continue increasing on our Dubach system for the remainder of 2012.

Moving on to the Midcontinent region. Volumes remained relatively flat in this region compared to the third quarter of 2011. And we expect volumes will remain at current levels for the rest of the year. Longer term, we are optimistic about the potential growth opportunities, as activity from the Mississippian Shale and Granite Wash areas stretch toward our system.

Looking at West Texas, rig counts this region increased from Q3 of 2011 to Q3 of 2012. Volumes at our Waha facility increased slightly compared to the third quarter of 2011, driven by higher volumes of associated gas from Permian Basin's oil production. Our Ranch Joint Venture refrigeration plant was operational as of June, and our new 100 million a day cryogenic plant will provide additional processing capacity for the volume growth we are seeing in the region when it becomes operational later this year.

And finally, in South Texas, rig counts in this region have continued to increase, rising 16% year-over-year. We saw volumes increase over 40% from the third quarter of 2011 to the third quarter of 2012, which includes the volumes associated with our Eagle Ford expansion project. We expect volumes to continue increasing, creating additional opportunities for gathering, processing, treating and compression.

Now turning to our Joint Venture segment. Adjusted EBITDA was $54 million for Q3 of 2012 compared to $56 million for Q3 of 2011. The Haynesville Joint Venture contributed $16 million compared to $17 million for Q3 of 2011. MEP contributed $25 million compared to $26 million in Q3 of 2011. And our Lone Star joint venture contributed $13 million in both Q3 of 2012 and 2011. Lone Star's third quarter results were impacted by approximately $1 million related to downtime in Refinery Services due to Hurricane Isaac.

For the Haynesville Joint Venture, there has been questions about rigs. So let me provide a sensitivity for our contracts in 2013. We have 3 contracts expiring on our legacy system which, if not renewed, would have a margin impact to Regency of $2 million for the entire year, which is not material. And we do not have any contracts expiring in 2014 and 2015.

For the third quarter of 2012, rigs margins have decreased only 3% from the third quarter of last year despite a 31% decrease in volumes during the same period, due to the demand fee nature of our contracts. For the remainder of 2012, we expect throughput to remain relatively flat.

Looking at MEP, volumes increased to 1.4 million MMbtus per day compared to 1.3 million MMbtus per day for the third quarter of 2011. We expect these volumes on MEP will remain relatively flat for the remainder of the year.

And for our Lone Star Joint Venture, for the third quarter of 2012, total throughput volumes for the West Texas Pipeline decreased slightly to an average of 132,000 barrels from an average of 133,000 barrels per day for the third quarter of 2011.

NGL fractionation throughput volumes also decreased to an average of 11,000 barrels per day compared to an average of 14,000 barrels per day for the same period last year, primarily due to the downtime related to Hurricane Isaac.

Now turning to our Contract Compression segment. For the third quarter of 2012, segment margin, inclusive of both revenues from external customers as well as intersegment margin, rose to $39 million compared to $38 million for the third quarter of 2011. Revenue-generating horsepower increased to 873,000 horsepower from 836,000 horsepower, comparing Q3 of 2012 to Q3 of 2011. The increase in revenue-generating horsepower is primarily due to the additional horsepower placed into service in South and West Texas, along with North Louisiana. We had strong bookings during this quarter, with an additional 60,000 horsepower expected to be deployed before the end of the year, mostly in the liquids and oil-rich regions.

Now moving to Contract Treating. Segment margin was $8 million for the third quarter of 2012 compared to $7 million in the third quarter of 2011, while revenue-generating GPM increased to 3,910 compared to 3,468 during the same period. We are expecting the majority of new growth for this business segment to occur primarily in liquid-rich shale plays.

Looking at our liquidity position. During the third quarter, we launched a $700 million senior notes offering that closed in early October. Proceeds from the offering were used to repay the outstanding borrowing under our revolving credit facility. Pro forma for the notes offering, we had $1.15 billion of available liquidity as of September 30.

Now looking ahead for Regency's 2012 and 2013 CapEx, we expect 2012 growth capital to be approximately $820 million, primarily from Gathering and Processing and for our Lone Star joint venture. We expect maintenance capital to be around $32 million. For the 9 months ended September 30, 2012, we have incurred $557 million of organic growth capital and $26 million of maintenance capital. For 2013, we expect growth capital to be approximately $400 million, primarily for the Gathering and Processing segment and for our Lone Star joint venture. Maintenance capital is expected to be around $35 million.

Now with that, we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Matt Niblack from Regency.

Unknown Analyst

A couple questions. First one is, what do you see as your near-term need for equity funding?

Thomas E. Long

Well, Matt, as you probably know, we do have a lot of growth capital ahead of us. But at the same time, with the debt offering that we recently did, we have plenty of liquidity to carry us going forward.

Unknown Analyst

Okay, great. And then the bigger question, I imagine you were listening to the earlier Energy Transfer call, and Kelcy mentioned that the merger of RGP and ETP was, "inevitable." Is this something that there is discussion of? And if so, can you give any color on how you guys are thinking about that?

Michael J. Bradley

I think -- this is Mike Bradley. I think that topic has been out there for some time. And ultimately, it makes sense. I think at this point, there's really nothing that we can add more color on. I think we all know it ultimately makes sense.

Unknown Analyst

Right. And just to be clear, this would be ETP buying RGP in some kind of stock deal, most likely?

Michael J. Bradley

You know, it can take various forms. But at this point in time, it's really too early to even speculate on how a transaction might occur, if it did occur.

Unknown Analyst

Okay. And would you expect, is this something we could see in 2013? Or is this likely still further out than that?

Michael J. Bradley

No, I really, at this point in time, cannot give any more color. I don't think there's anything to -- that's active. I think it's just a concept that, as has been discussed, ultimately makes sense for the companies at some point in time.

Unknown Analyst

Okay. And any specific conditions that the company is waiting for in terms of relative yield or other business conditions to want to act on that, or are there other milestones before this would be a priority?

Michael J. Bradley

You know, I really can't answer that question. But what I can say is, Regency right now is focused on creating value for Regency shareholders. We've got a lot of good projects on the horizon. We want to improve our coverage and increase our distributions, and that's our sole focus right now.

Operator

Our next question is from the line of John Edwards from Credit Suisse.

John Edwards - Crédit Suisse AG, Research Division

I'm just curious, just kind of on a little broader level, what kind of requests or questions you're most commonly seeing now from your customers? And then in terms of backlog on opportunities you're looking at, this would be beyond the $400 million growth CapEx guidance you have for next year, what you're seeing these days in light of all the production increases on the liquid side?

Michael J. Bradley

I think, from a high level, John, we can see -- continue to see very active drilling in North Louisiana, West Texas and South Texas. As you know, we have some additional facilities scheduled to come online during 2013. And I think, at this point, we expect that most of those facilities are going to be full. And so we're continuing to discuss opportunities with producers in those areas for further expansions, both on processing, gathering, and obviously liquids and condensate handling. So we still see tremendous opportunities for growth. And that's not only in our Gathering and Processing segment, that also includes our Compression, as well as our Treating service. So we're continuing to see good drilling and more opportunities continue to develop.

John Edwards - Crédit Suisse AG, Research Division

Are you seeing sort of the return opportunities? Is that sort of holding steady? Or do you see it increasing slightly, falling slightly? What's your thoughts on that side?

Michael J. Bradley

Well, I think, we view the organic returns as very attractive, and I think they remain very attractive. As we've stated, on average, we try to target between that 15% to 18%, high-teens range. And so I think the opportunities out there still afford that ability.

Operator

[Operator Instructions] Okay. We've just had a question come through from the line of Selman Akyol from Stifel, Nicolaus.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

You guys talk about 60,000 in terms of additional, I guess, compression coming on in the fourth quarter. If you look at going into 2013 and beyond, can you talk a little bit about the opportunities you're seeing out there for that, if you could, in terms of just sort of specific horsepower potential? And then also, just following up on John's question. On the $400 million that you have for next year, is that just clearly identified projects at this point and significant upside to there from that?

Michael J. Bradley

Let me first start with the question regarding compression. We continue to see a lot of attractive opportunities in our Compression business. As I mentioned, we set our first units in the Utica Shale. We're setting our first units in the Granite Wash. So we're actually expanding into 2 new areas. We think there's a third area that we'll be expanding into in 2013, which I really can't discuss at this point, but it could be a good opportunity for us. And then, on top of that, we continue to see additional growth in North Louisiana, East Texas, South Texas and West Texas for both the Compression and Treating business. So, yes, we're very encouraged by what we see going into 2013. Regarding our capital expenditures for the $400 million that we talked about, it's a combination of Gathering and Processing, some of which we've announced. And also, our Lone Star joint venture, and then it includes some for our Compression and Treating business as well.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

All right. But I guess there's nothing in there for -- I mean, so they're just all identified projects. You're thinking you've got contracts, it's all coming online per se, but nothing in terms of additional projects that have not yet been announced yet?

Michael J. Bradley

The majority of the capital is based on projects that we know of and have been announced. And obviously, we think there'll be additional opportunities to deploy capital in 2013.

Operator

We have no further question. And I would now like to hand the call back to Mike Bradley for closing remarks.

Michael J. Bradley

Well, thanks again, everybody, for joining us today, and we really appreciate everybody's questions. In conclusion, we continue to benefit from increased drilling activity in South and West Texas, as well as richer gas plays in North Louisiana, as I had mentioned, and it's having a very positive impact on the majority of our businesses. And we are very excited about the amount of growth that's taking place at Regency today, not only today, but what we see going forward. We believe our billion dollar plus of organic projects, and again, a large part that will be coming online during 2013, will position Regency for further expansions, both organically and through strategic acquisitions. We remain focused, as I said, creating value for our unitholders through increased coverage and distribution growth. So with that, thanks again and have a great day.

Operator

Thank you very much. Okay, so ladies and gentlemen, that does now conclude your conference call for today. And you may now disconnect your lines. Have a great day. Thank you very much for joining.

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