Regency Energy Partners LP (NYSE:RGP) Q1 2013 Earnings Call May 9, 2013 11:00 AM ET
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
Good day, ladies and gentlemen, and welcome to the Q1 2013 Regency Energy Partners LP Earnings Conference Call. My name is Cathy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Lyndsay Hannah, Manager of Finance and Investor Relations. Please proceed, ma'am.
Good morning, everyone, and welcome to our call. Today, we will cover Regency's performance for the first quarter of 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 this morning 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.
Also, please note that we plan to file our 10-Q later this afternoon. During the call, we may use forward-looking statements. 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 the ownership of our limited partnership units. Also during the call today, we will refer to various non-GAAP measures. For your reference, reconciliations of these measures back to the comparable GAAP measure are provided in our press release issued this morning, which can be found on our website. Before we turn to today's call, we would like to say a brief word about Regency's 2013 Annual Investor Day. It will be held at the Crescent Hotel in Dallas on June 11. At this event, we'll provide an in-depth look at our operations and discuss our growth strategy and opportunities. We hope that you'll be able to join us. If you're interested in attending, invitations will be sent out next week and will be posted to the homepage of our website. Please RSVP by email to firstname.lastname@example.org or call us at (214) 840-5477. With that, I'll turn the call over to our CEO, Mike Bradley.
Michael J. Bradley
Thanks, Lyndsay. Hello, everyone, and thank you again for joining us on our call this morning. We are very pleased with our first quarter results, as we experienced solid growth across the majority of our operating areas where producer activity remains very strong. We also began to realize the benefits from the start-up of several of our organic growth projects. But also very importantly, we are excited to say that we closed on our acquisition of the SUGS assets on April 30, which is a very significant and strategic growth opportunity for Regency. We are already well into the process of integrating the SUGS and Regency Permian assets and expect to realize significant synergies and further growth opportunities as we move forward. Additionally, we are currently constructing a new 200 million-a-day cryogenic processing plant with associated treating facilities. The new Red Bluff facility is expected to be in service by the middle of this year. A second 200 million-a-day cryogenic processing facility is currently in the planning stages and is expected to be online in mid-to-late 2014.
The acquisition of SUGS positions Regency as a leading player in the growing Permian Basin, which is driven by oil and liquids-rich production. And we expect the combination to increase our ability to serve producers and increase value to our unitholders. This acquisition expands our footprint in West Texas and New Mexico to 16 counties with over 5,500 miles of pipe and includes over 725 million a day of cryogenic processing capacity upon completion of the Red Bluff plant, along with over 0.5 million acres dedicated to the assistant. The combined Permian assets allow Regency to access the major shale plays, including the Avalon, Bone Springs, Wolfcamp and Wolfbone shales, along with the traditional Permian formation and emerging Cline shale. We will be providing more details around our plans and opportunities during our Investor Day on June 11.
Now turning to our first quarter results. Adjusted EBITDA was $127 million compared to $134 million in the first quarter of 2012. The first quarter of 2012 included some one-time payments, primarily a $16 million one-time producer payment. From the fourth quarter of 2012 to the first quarter of 2013, adjusted EBITDA increased 10%, driven by the ramp-up of some of our organic growth projects coming online during the first quarter.
For the first quarter of 2013, our Gathering and Processing volumes increased 11% and NGL barrels increased 14%, primarily in South Texas, West Texas and North Louisiana. Volumes are increasing on our Ranch Joint Venture in West Texas, which was placed into service in December. A portion of these volumes were previously flowing to our Waha facility, which has opened up new capacity at Waha that will help bridge producers' processing needs prior to the start of the Red Bluff plant.
In South Texas, our tilled and treating expansion, which increased plant capacity from 70 million a day to 130 million a day, went into service in January, and volumes have increased over 60% since expansion came online. We have also continued to make significant operational improvements on our Eagle Ford expansion project, and volumes continued to ramp up during the first quarter.
For the Eagle Ford expansion project, March volumes increased more than 40% compared to the December '12 volumes. We have 2 additional projects, the Edwards Lime and Dubach expansions, which are expected to come online by the end of the second quarter. Combined, they will add an incremental 90 million a day of treating capacity and 70 million a day of cryogenic processing capacity.
I said previously that we expect to announce further expansions in 2013, and I am pleased to say that we have begun the process of building a 32-mile, 24-inch pipeline in North Louisiana that will increase our gathering capacity by 400 million cubic feet per day. This project is driven by the continued drilling in the Cotton Valley play and will connect to our 200 million a day Dubberly refrigeration plant. The residue out of the Dubberly plant will be transported through the RIGS pipeline. We are expecting an increase in Cotton Valley production as we have observed additional operators permitting and drilling Cotton Valley wells inside of our operating areas. Again, we continue to expect further expansions as drilling continues at a strong pace in South Texas, West Texas and North Louisiana during 2013.
Looking at our Lone Star Joint Venture. In the first quarter, we saw a nice boost in earnings, which was largely associated with the startup of our Mont Belvieu fractionator and the Gateway pipeline. Frac 2 remains ahead of schedule and is expected to be in service before the end of 2013. Frac 1 and Frac 2 are both now fully contracted.
For the Gateway pipeline, as volumes ramp up to the middle of 2014, we will have approximately 85% of the volumes contracted. These projects are expected to contribute strong cash flows as they continue to ramp up over the next 12 to 18 months.
On Monday, Lone Star and Sunoco Logistics announced plans to construct a LPG export-import facility on the Gulf Coast. The Mariner South project will integrate SXL's existing Nederland Terminal and pipeline with Lone Star's Mont Belvieu fractionation and storage facilities and will include the construction of a new 100,000-barrel-per-day deethanizer to convert propane to international specifications, as well as the construction of new refrigerated storage tanks. We have already completed a successful open season and signed a subsidiary of shale as the anchor shipper to the project under a long-term fee-based agreement.
Mariner South will have an initial capacity of 6 million barrels per month and is expected to be operational in the first quarter of 2015.
Next, for the Contract Services segment. Third-party horsepower for our Compression business increased by over 90,000 horsepower in the first quarter of 2013 compared to the fourth quarter of 2012, primarily in South Texas and West Texas, where demand remains strong. During the first quarter, we also set our first units in the Granite Wash and Niobrara Shale. Our utilization rate for the Contract Compression business increased to 93% at the end of the first quarter compared to 86% at the end of the first quarter of 2012.
For 2013, we expect utilization to continue to average in the mid-90s, which is a level that we feel is optimal to meet our expected customer demand. We have continued to pursue larger gas list opportunities and turnkey facility installations, including compression and production facilities, and we have recently completed installation of 3 turnkey projects with 2 more expected to be completed before the end of the year. These projects will provide the opportunity for higher returns. For Treating, GPM bookings increased significantly in the first quarter comp compared to all of 2012, and we are very encouraged about additional opportunities we are seeing for Treating installations in 2013.
In summary, for the first quarter of 2013, we saw strong performance across the majority of our businesses, and we're seeing the benefit from the ramp up of our recently completed growth projects. Some of these projects will lay the foundation for additional expansions to meet growing producer demand in our various operating areas. Regency is poised for significant earnings and volume growth for the remainder of this year. The completion and ramp up of all of our growth projects is expected to support our goals of improving coverage ratios and positioning Regency for future distribution growth. We're also very excited about the acquisition of SUGS, which will provide a strong, strategic platform on which to further expand our West Texas and New Mexico services through ongoing and proposed large-scale organic growth projects. 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 good morning. Regency's adjusted EBITDA for Q1 of 2013 was $127 million compared to $130 million for Q1 of 2012. This was largely due to the absence of a $16 million one-time producer payment received in March of 2012, which was partially offset by volume growth in the Gathering and Processing segment and the Lone Star joint venture. Without this payment in the first quarter of 2012, adjusted EBITDA was up 8% year-over-year. Regency's distributable cash flow was $101 million for Q1 of 2013 compared to $103 million for Q1 of 2012.
Now turning to our performance by segment. Starting with Gathering and Processing, adjusted segment margin for the first quarter of 2013 increased 9% to $74 million compared to $68 million for the first quarter of 2012. This was primarily due to an increase in volumes, which were up 11% to 1.5 million MMbtus per day, primarily in South and West Texas and in North Louisiana. Additionally, NGL production averaged 43,000 barrels per day for Q1 of 2013, which was a 14% increase over the prior period.
Now discussing volumes by region. Beginning with North Louisiana, our Dubach system is seeing all-time throughput highs. A strong drilling in the Cotton Valley area continues, and higher-margin volumes on the system have increased 70% year-over-year.
For the fourth quarter of 2012, volumes at Dubach have increased 17% as a result of the completion of a 12-inch trunk line that is part of the Dubach expansion project. In addition, the $20 million-a-day JT plant and additional compression has been online since the fourth quarter, and the 70 million-a-day cryo facility is still expected to come online in the second quarter of this year. Also, we recently began an expansion to connect our Dubach gathering system to our 200 million-a-day Dubberly refrigeration plant. This expansion will include the construction of high-pressured gathering pipelines that will add 400 million a day of gathering capacity and is expected to come online by the end of 2013. The expansion is backed by throughput commitments.
For 2013, we expect volumes to continue increasing, primarily around our assets in the Cotton Valley area, and we are evaluating further expansions in the area as demand for new Gathering and Processing infrastructure grows and volumes around our systems increase.
Now looking at West Texas. We continue to see higher volumes of associated gas from Permian Basin oil production. Volumes continue to increase at our Ranch JV, which came online in December, and have opened up additional capacity at Waha, allowing Regency to target higher-GPM gas. In the first quarter, Regency added an 8,500-acre dedication due to this increase in capacity. We have begun to implement our plans to integrate the Regency and SUGS operations, are in the process of executing the physical optimization projects identified by combining the 2 systems, which will increase reliability, maximize efficiencies and reduce costs.
And finally, in South Texas, including volumes associated with our Eagle Ford expansion project, overall volumes in South Texas increased more than 30% year-over-year. In 2013, we expect overall volumes to continue increasing, creating additional opportunities to provide -- for gathering, processing and contract services to our customers.
Now turning to our Natural Gas Transportation segment. For the Haynesville Joint Venture, adjusted EBITDA was $14 million for Q1 of 2013 compared to $16 million for Q1 of 2012. The decrease was primarily due to the expiration of some legacy contracts late last year, as well as a customer that recently declared bankruptcy on April 1 of this year, which contributed about $450,000 to the decrease.
Now looking at MEP. Our share of adjusted EBITDA for MEP was $26 million for both Q1 of 2012 and 2013. Volumes grew slightly to 1.5 million MMbtus per day in Q1 of 2013 compared to 1.4 million MMbtus per day in Q1 of 2012, and we expect volumes will remain relatively flat throughout 2013.
For NGL Services segment, which is now solely the Lone Star Joint Venture, adjusted EBITDA was $23 million for the first quarter of 2013 compared to $15 million for the first quarter of 2012. This increase was primarily due to the startup of Frac 1 and the Gateway NGL pipeline, which both went into service in December of 2012.
For the first quarter of 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 153,000 barrels per day from an average of 135,000 barrels per day from the first quarter of 2012. Refinery services throughput volumes averaged 17,000 barrels per day for Q1 of 2013 compared to 19,000 for Q1 2012.
And fractionation throughput volumes, which is Frac 1, averaged 51,000 barrels per day for the first quarter of 2013.
Turning to our Contract Services segment, which now combines our Compression and Treating businesses. For the first quarter of 2013, Contract Services segment margin remained flat at $47 million from both Q1 of 2012 to Q1 of 2013. Looking at the makeup of Contract Services segment margin, third-party compression margin increased by approximately $3 million to $38 million due to an increase in third-party revenue-generating horsepower from 761,000 to 853,000 as a result of additional horsepower placed into service in South and West Texas, along with North Louisiana.
And our segment margins decreased by approximately $1 million to $3 million due to a decrease in intercompany horsepower from 82,000 to 38,000 horsepower as a result of the transfer of certain compression units from the Contract Services segment to the Gathering and Processing segment. Our Treating margins decreased by approximately $1 million to $7 million due to some contract roll-offs in the fourth quarter of 2012, but as Mike mentioned, we saw strong bookings during the first quarter of 2013. And for our liquidity position, in conjunction with the $1.5 billion SUGS transaction that closed on April 30, 2013, Regency issued 31.4 million common units and 6.3 million class F units to ETP Holdco, and to fund the cash portion of the payment, Regency issued $600 million of 10-year 4.5% senior notes.
As of March 31, we had nearly $770 million of available liquidity. Now for Regency's 2013 CapEx. For 2013, we are increasing our forecasted growth capital expenditures to $685 million, of which $410 million is related to the Gathering and Processing segment and includes expenditures related to the recently acquire SUGS asset. $130 million is related to the Lone Star Joint Venture, and $145 million is related to Contract Services segment.
For 2013, we expect maintenance capital expenditures to be approximately $45 million. For the 3 months ended March 31, 2013, Regency incurred $174 million of growth capital and $7 million of maintenance capital expenditures. And for DCF, sensitivities for the balance of 2013, and this includes the SUGS assets; a $10-per-barrel movement in crude oil; along with the same percentage change in NGL pricing would result in a $10 million change in Regency's forecasted 2013 DCF. And a $1-per-MMbtu movement in Natural Gas pricing would result in a $10 million change in Regency's forecasted 2013 DCF.
And with that, we'll open the call up to your questions.
[Operator Instructions] Ladies and gentlemen, I would just now like to turn the call back over to Mike Bradley, CEO, for closing remarks. Thank you.
Michael J. Bradley
Well, again, everybody, we really appreciate you joining this morning for our first quarter earnings call. And in conclusion, we continue to benefit from the high levels of drilling activity in the Eagle Ford and Permian, as well as the richer gas plays in North Louisiana. We are already beginning to see volumes and margin growth associated with the ramp up of our recently completed growth projects, and we expect our contributions to increase as they continue to ramp up throughout the year. We are very excited to continue on the integration of the SUGS assets into our existing operations and believe this acquisition puts us in an excellent position to capture additional growth. We will continue our intense focus on executing on our business and operational objectives, including delivering increased value to our customers and to our unitholders with distribution growth. Thank you, and have a great day.
Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and have a very good day.
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