Resources Connection, Inc. (RGP) Q4 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Regency Energy Partners Earnings Conference Call. My name is Lacey, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Shannon Ming, Senior Vice President of Finance and Investor Relations. Please proceed.

Good morning, everyone, and welcome to today's call. Today, we will cover Regency's performance for the fourth quarter and full year 2010, as well as review industry trends and fundamentals. Presenting on today's call will be Mike Bradley, our President and Chief Executive Officer; and Tom Long, our Chief Financial Officer. Following our prepared remarks, Regency will open the call to participants for questions. You may access the earnings release and presentation used on today’s call through Regency’s website at regencyenergy.com. Please note, we plan to file our Form 10-K by the end of day tomorrow. Today's call is being recorded and is also being broadcast live over the Internet on the Regency corporate website. An archive of the webcast and presentation will be available on the corporate website 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 the actual results. Also included in the presentation today are various non-GAAP measures that have been reconciled back to GAAP. Before we turn the call over today to Mike, I would like to briefly state that our Regency Energy Investor Day will be on April 6. At this event, we will provide an in-depth look at our operations and discuss our growth opportunities. We hope that you will be able to join us. If you are interested in attending, please make sure to make your reservations by e-mail at ir@regencygas.com or call us at (214) 840-5477. With that, I will turn the call over to Mike Bradley, President and CEO.

Good morning, and thank you for joining us today. We're really pleased to have a chance to speak with you and are very excited about the opportunities that lie ahead. On today's call, in addition to reporting excellent fourth quarter and full-year performance of our business units, we will also discuss our strategy for building on a strong foundation that was laid in 2010. By executing on our growth strategy, including acquisitions, expansion projects and improving our financial flexibility, Regency has evolved into a more diversified midstream business and we will continue to enhance the stability of our cash flows, going forward. Let's turn now to some of the 2010 highlights. 2010 was a very active and transformational year for Regency. With the acquisition of our general partner by Energy Transfer Equity, we believe we are in a better position to facilitate growth. Energy Transfer Equity is an experienced leader in the midstream industry and is very supportive of our business objectives including our goals of raising distributions and reaching investment grade metrics. With this transaction, we believe there are opportunities for synergies between Regency and Energy Transfer, including leveraging our joint purchasing power and sharing best practices, as well as the potential to form additional partnerships through joint ventures. We're excited about this relationship and believe it will play a pivotal role in our overall success. Also this year, we introduced a new senior leadership team. Combining new talents with our existing strong management team, as well as capitalizing on opportunities with Energy Transfer, would help us does employ the best thinking across all aspects of our business. Looking at acquisition highlights. We acquired a 49.9% interest in the MEP Joint Venture, which expanded our Transportation business into the interstate pipeline market and added to our fee-based services. We completed the acquisition of Zephyr Gas Services, expanding our trading capabilities and related offerings. We acquired additional interest in the Haynesville Joint Venture, which brought our total ownership interest to 49.99%, which collectively have changed the landscape of our company and will allow us to provide producers with more robust service offerings. Next, reviewing our operational highlights. We completed the construction of the Haynesville and Red River expansion projects on time and under budget, strengthening our transportation capabilities in the Haynesville Shale. We completed the sale of our East Texas assets in July, decreasing our commodity exposure in providing funds to invest in higher growth regions. Also we completed the expansion of our Logansport Gathering System within budget, which added 485 million cubic feet per day of incremental data capacity in North Louisiana. And finally, we announced the series of expansions to our South Texas gathering system to provide incremental gas capacity in the Eagle Ford Shale. Moving on to financial highlights. We raised $408 million of equity through an issuance of 17.5 million LP units, which helped deleverage our balance sheet. And in March, we extended the maturity date of our revolving credit facility from August 2011 to June 2014. And then in October, we completed a $600 million debt refinancing. These transactions extended the weighted average maturity of our debt portfolio to 2017. We also paid quarterly cash distributions of $0.445 per common unit per quarter and generated $69 million in cash available for distribution in the fourth quarter. We are pleased with our coverage, which improved to 1.08x for the fourth quarter. For the full year, coverage was up 1.04x. We achieved $327 million of adjusted EBITDA for the full year 2010, meeting our 2010 guidance range of $310 million to $340 million. For 2011 and consistent with Energy Transfer practice, we will no longer be providing EBITDA guidance. However, we will be providing capital expenditure and key operational assumptions at our investor day in April. We have high expectations for Regency, going forward, and believe we are well-positioned for growth and are committed to achieving investment-grade metrics and increasing unit holder value by growing our distributions. Moving on to our fundamentals review. I first want to cover drilling activity. The U.S. land rig count continued to increase during the fourth quarter, reaching its highest level since 2008 at 1,858 working rigs. This represents a 56% year-over-year increase and a 4% quarter-over-quarter increase. Comparing the fourth quarter of 2010 to the fourth quarter of 2009, rigs increased year-over-year in the majority of our regions. The land rig count in the areas in which Regency operates increased to 1,382 rigs at the end of the fourth quarter of 2010. And this represents a 55% increase year-over-year and a 5% quarter-over-quarter increase. Quarter-over-quarter, the non-Texas Gulf Coast and Fayetteville areas remained relatively flat while North Louisiana and East Texas showed a decline in rigs as producers have pulled back on their Haynesville drilling. Driven by higher crude prices and NGL prices, West Texas increased by 27 rigs and Mid-Con increased by 32 rigs. Next on commodity prices. The February NYMEX contract settled at $4.08 per MMbtu, which represents a 24% decrease year-over-year compared to December of 2009. Crude prices continued to increase to a new range of $85 to $90 per barrel over the fourth quarter of 2010. We do expect the decline in pricing from 2010 to 2011 to have an impact, as Tom will discuss during his comments. Moving on to our growth strategy. Going forward, we will focus on the following two goals: First is increasing our tax distributions to unitholders, and second, achieving investment grade metrics. In order to meet these goals, we are committed to executing on the following four objectives: First is maximizing our assets, and one of the top priorities will be to optimize returns of our core assets. We will do this by improving operational efficiencies and leveraging synergies across our business segments. Additionally, we will strategically pursue organic growth projects and joint ventures, which meet producers’ needs, complement our core assets and provide a strategic platform for additional growth. Second is to expand and enhance our portfolio. A diverse portfolio provides multiple earnings streams and reduces our overall risks and in order to do this, we will focus on: First, expanding into new businesses and basins through joint ventures and strategic acquisitions that complement our core value chain and geographic footprint, focusing on the opportunities to provide attractive rates of return and are accretive to our unitholders. In addition, maintaining a comprehensive hedging program to mitigate the impact of commodity price fluctuations. Third is capital management. And we intend to remain focused on achieving investment grade metrics and maintaining a solid balance sheet and will proactively access the capital markets if necessary to fund acquisitions and large growth projects. And fourth is the leveraging relationships. Building on our existing partnerships with Energy Transfer Equity and key customers, we will align interests, share expertise and capitalize on strategic growth opportunity. By aligning our interests with producers and customers, we will provide services tailored to their needs, positioning us to grow together and providing the services necessary for their expansions as well. We will provide more details surrounding our growth strategy at our 2011 Investor Day meeting. And we're excited about our future and confident in our ability to create value for our investors, going forward. Now, I'll turn it over to Tom Long.

Thanks, Mike. And we'll go ahead and start with the financial review. For the full year 2010, Regency recorded a net loss of $11 million compared to net income of $140 million for full year 2009. The variance was primarily due to a $134 million gain on asset sales recognized in the prior year related to the contribution of the Regency Intrastate Gas System to the Haynesville Joint Venture. We also recognized an $18 million loss on debt refinancing this year related to the premium paid to redeem the senior notes due 2013. Regency's fourth quarter and full year adjusted EBITDA results were very strong. Adjusted EBITDA increased by 55% from $211 million in 2009 to $327 million in 2010. Adjusted EBITDA increased by 92% from $53 million for the fourth quarter of '09 to $102 million in the fourth quarter of 2010. For our Gathering and Processing segment, volumes increased by 3% year-over-year to $1.03 million MMbtus per day in Q4 of 2010. For the full year, adjusted segment margins increased by 9% from $207 million in 2009 to $226 million in 2010. Please note that adjusted segment margins and throughput for the prior quarters have been updated to reflect the sale of our East Texas assets that occurred in July of 2010. Our NGL production increased quarter-over-quarter by 29% to approximately 29,000 barrels per day. Overall, our adjusted segment margin per MMbtu increased by 11% from $0.57 in Q4 '09 to $0.63 in Q4 2010. This increase was primarily driven by higher commodity prices. Moving on to talk about volumes, starting with North Louisiana. Comparing the fourth quarter of 2010 to the fourth quarter of '09, throughput decreased by about 15% at our Dubach facility, primarily due to declining Terryville and Cotton Valley volumes. However, we have seen more recent producer interest in drilling Cotton Valley gas around our system and we expect our assets to remain relatively flat to a slight increase through 2011 based on discussions with producers holding acreage in the area. Volumes at the Logansport for the fourth quarter of 2010 were down by 3% compared to the fourth quarter of '09. As a shortage in frac crews led to delays in completion for a number of Haynesville wells. However, we have seen volumes continue to ramp up reaching the year's high in December of 2010. For 2011, we expect Logansport volumes to increase as frac-ing issues continue to be resolved and producers' concerted efforts on developing the highest returns section as opposed to drilling the hole leases[ph]. Looking at West Texas. Fourth quarter 2010 volumes were down 6% compared to fourth quarter 2009, as we were unable to process optional keep-whole gas due to a third-party liquid curtailment that constrained volumes on our Waha system. However, year-over-year, volumes increased 13% in West Texas as producers continue to focus drilling efforts on rich gas plays. We believe this region has a lot of potential to provide additional growth opportunities in 2011, not only for our Gathering and Processing business, but for our Compression and Treating businesses as well. In the Midcontinent region, comparing the fourth quarter of 2010 to fourth quarter of '09, volumes, excluding FrontStreet, increased by approximately 4% due to a short-term deal that brought additional gas onto our Mocane system in November and December of 2010. In 2011, we expect this region to follow traditional decline curve due to limited drilling activity around our assets. In the South Texas region, volumes increased by 45% from the fourth quarter of '09 to the fourth quarter of 2010 as producers ramped up their Eagle Ford drilling programs. We have recently completed several capital projects to handle the large increase of volumes from drilling and have several more capital projects under construction for our South Texas gathering system. We expect 2011 volumes to increase significantly and we continue to explore growth opportunities in this region. Moving on to our Transportation segment. Since we use equity method of accounting for the Haynesville and MEP Joint Ventures, we no longer report segment margin for Transportation. Instead, we report income from unconsolidated subsidiaries for both Haynesville and MEP. Our programs share of adjusted EBITDA was $44 million for the fourth quarter, compared to $4 million for the fourth quarter of '09, $20 million was related to Haynesville and $24 million was related to MEP. For the full year, our prorated share of adjusted EBITDA was $123 million for 2010, compared to $11 million for the full year 2009. $57 million was related to Haynesville and $56 million was related to MEP. As to the Haynesville volumes, we saw those continue to ramp up in the fourth quarter. Total combined throughput volumes increased by 141% to 1.5 million MMbtus per day in the fourth quarter of 2010, compared to 640,000 MMbtus per day in the fourth quarter of '09. Comparing the fourth quarter of '09 to fourth quarter 2010, volumes increased by 241%, primarily related to our rigs' expansion coming in line in January of 2010. Now looking at the MEP Joint Venture. Total throughput volumes per MEP averaged 1.5 million MMbtus per day in the fourth quarter of 2010, compared to 1.2 million MMbtus per day in the fourth quarter of 2009. The year-over-year increase is primarily due to the completion of the MEP expansion in June of 2010, which increased total pipeline capacity from 1.5 Bcf to 1.8 Bcf per day. Looking at our Contract Compression business. Despite the challenging conditions, we continue to see an increase in horsepower both quarter-over-quarter and year-over-year. Our revenue-generating horsepower increased by 91,000 from year-end '09 to year-end 2010. Segment margins increased by approximately 20%, from $34 million in the fourth quarter of '09 to $41 million for the fourth quarter of 2010. Our average horsepower per revenue-generating compression unit decreased slightly from 849 in the fourth quarter of '09 to 832 in the fourth quarter of 2010, a ratio that remains significantly higher than our Contract Compression peers. We continue to feel some pricing pressure from competitors in this segment. However, we are well situated to take advantage of increasing demand for compression in the near term in the Eagle Ford Shale. In addition, we are pursuing commitment in the Marcellus, Fayetteville and Barnett shales. Permitting issues have slowed drilling activity in the Marcellus, but we continue to believe this market represents an attractive growth opportunity. Now looking at our Contract Treating segment for a moment. Because treating services are important for the entire lifecycle of a well, we believe we are now able to provide unmatched set of high-quality service offerings to our customers from well head to market. Segment margin for the fourth quarter of 2010 was $9 million. Since acquiring Zephyr in September, it has contributed a total of $11 million in segment margin. Our treating assets are also well positioned for growth in 2011 and we expect the Haynesville and Eagle Ford shales to be some of the leading growth drivers for the Treating business. Now we'll take a look of the commodity risk management. As of September 4, we have hedged 88% of NGLs, 84% of condensate and 76% of natural gas length for 2011 through product-specific swaths[ph] . In addition, 47% of our NGL exposure, 55% of our condensate exposure and 25% of our natural gas length are hedged for 2012. We plan to layer in additional hedges during the first quarter to move our target levels up to approximately 55% for NGLs for 2012. Regency has executed NGLs and condensate swaths[ph] through all four quarters of 2012. We're expecting a negative impact to full year 2011 results as our hedge price deck for 2011 is lower than our deck for 2010. As you'll recall, our condensate production was hedged at $121 per barrel in 2010 compared to $83 per barrel in 2011. Additionally, we see a similar drop in hedge pricing across all of our NGL products. We do have length in natural gas due to a concerted effort to minimize keep-whole exposure and our percentage of proceed contracts. As to sensitivity, a $10 per barrel movement in crude oil along with the same percentage change in NGL pricing will result in a $1.2 million change in our forecasted 2011 DCF. A $1 per MMbtu movement in natural gas pricing will result in $500,000 change in our forecasted 2011 DCF. Both oil and gas prices are positively correlated to Regency's DCF. We also continue to grow our fee-based margins. For 2010, approximately 75% of our full-year margins came from fee-based activity, and we estimate this number will grow to a minimum of 80% for 2011. I'm moving on to liquidity. As you know, our goal is to achieve investment grade metrics, and one of our objectives is to ensure we have sufficient liquidity and financial flexibility to pursue growth opportunities. During the fourth quarter, in connection with the issuance of $600 million of senior notes due in 2018, we redeemed all of our senior notes due in 2013. This transaction improved our pricing and extended the maturity of our portfolio. We currently have over $500 million of available liquidity on our revolving credit facility. Moving on to the organic capital growth. Lastly, for the full year 2010, we incurred $193 million of growth capital expenditures: $121 million for Gathering and Processing segments, mostly in North Louisiana and South Texas, $67 million for Contract Compression segment and $5 million related to the corporate and other segment. We also invested $20 million in the Haynesville Joint Venture and in addition, our share in the capital related to the MEP Joint Venture with $86 million. We anticipate investing approximately $250 million for growth in 2011 with potential upside for additional organic growth opportunities and/or acquisitions. For 2011, we expect to invest approximately $15 million for maintenance capital. And with that, we'll open the call up for questions.

[Operator Instructions] And our first question will come from the line of Bernie Colson with Oppenheimer.

On the South Texas assets, I was wondering if you could give us a little bit more color about what the assets are down there? And maybe is it possible that down the road we may see some processing capacity built by you guys there? I guess just a little bit more color on potential there.

Bernie, this is Jim Holotik, I'm Chief Commercial Officer. We've got an existing footprint, consists of primarily gathering with some additional treating in the South Texas area. And we're currently moving somewhere between, I guess, we've said about $200 million a day, $250 million a day out of that area. In utilizing that, our existing assets, we are stepping into -- we're situated more in what they call the oily or the more liquid-rich Eagle Ford Shale. And not to get too much into our Investor Day presentation, but yes, we are looking to -- we just recently expanded one of our systems where we could have additional volumes out of the area. We currently have contracted for sampling[ph] and we'll be looking for just additional capacity in the future.

I guess bigger picture-related, where do you see us in the development of that area? I guess if you want to put it in terms of what inning are we in? How many years you think we have left of development before that? Assuming the current commodity environment stays kind of consistent, any comment on that?

I would say we're kind of in the opening innings of this. They're establishing essentially where the lines of demarcations are for the -- just dry gas, the liquid-rich gas, the more oil-producing areas. And as upon their discoveries of these new positions, there's going to be more and more call for infrastructure in the area.

I know this is on everyone's mind, I don't know if you'll answer or not. But maybe you can give us some commentary about resumption of distribution growth and what you guys are thinking there? Maybe not?

Bernie, our focus is to continue to improve our coverage so that we can raise the distribution and that's one of our top focus. And I think that as a Board, we look closely at it. We want to see distribution growth and create value for unitholders and that's going to be a strong focus for us. As for timing, that is something we'll evaluate on a quarter-by-quarter basis. Obviously, they're pleased with the coverage this past quarter and we've seem to be focused on improving that as we go forward.

And our next question will come from the line of Gary Stromberg with Barclays.

Just on your investment grade metrics target, do you have any sense of timing on when do you think you can achieve those and have you talked to the agencies recently on that?

We continue to improve all of our key metrics and expect that by year end we will have all the key metrics in place that we feel are necessary for investment grade ratings. The metrics that we look at are scales with achieving EBITDA growth. A greater mix of fee-based margins, we are going to be over 80% on that as our target and maintaining a strong debt-to-EBITDA ratio of below 4x.

So you think by the end of 2011, you'll basically be there?

Yes. We think we're there on a lot of metrics now, but by the end of 2011, we think that we'll have sufficient size as well.

And have you talked to the agencies about getting upgrades here?

Not directly in the last few months, no.

And then, Shannon, do you have any color on balance sheet at the end of the year, cash and revolver? Just for housekeeping.

Sure. At the end of 2010, we have $9 million of cash. We have over $500 million of available liquidity on our revolver and we had $285 million of credit outstanding on the revolver at year end. And then we have our senior notes, the $256 million of senior notes due in 2016 and then $600 million of senior notes due in 2018.

Just on the hedge pricing. The year-over-year delta, do you have some sense -- can you give us some sense of what the cash flow impact would be on the hedge volumes given lower pricing on the NGLs?

The cash impact, I think that we're expecting it to be upwards of $20 million for an impact from 2010 to 2011.

And our next question will come from the line of John Edwards with Morgan Keegan.

Just on a follow up on Gary's question in terms of scale, I know you used to speak of $400 million as being sort of the target that the credit agencies were looking for. What are they looking for now in terms of scale?

John, we haven't had direct conversations with them regarding the absolute or the exact number that they're looking for. But we think that that is within the range of what they're looking for on an annualized number.

And then in terms of revenue-generating horsepower and inventory, where does that stand now, for compression?

We're currently at 844,000 revenue-generating horsepower for the year.

Yes, I used to talk about what you had -- in effect, had the compression in inventory. I don't mean deployed, just trying to get a sense for basically your ability to grow there without having to the deploy CapEx.

We currently are running about 90% on our utilization rate, so we do have room to continue to grow without spending some [ph] capital. And that's improved over the last several quarters.

And our next question comes from the line of Yves Siegel with Crédit Suisse.

Just as it relates to that -- on horsepower, where do you see pricing going right now?

I think pricing today, it remains pretty competitive. I think coming out of 2009 when things turn down quite sharply, there is a surplus of horsepower, so I think competition is still pretty strong. We're seeing decent pricing and I think as the market picks up, we would expect to see pricing improve. But I'd say at this point in time, it remains pretty competitive.

I take that to mean that pricing is not going down in this -- some expectation, you could see some improvement. Is that right?

Yes.

And then, Tom, on the $250 million of growth CapEx, can you give a sense of how that would break down?

What we gave was, I guess, the guidance for right now, our plans are, as Michael kind of mentioned in his section, when we get to our Investor Day on April 6, we were going to do more of a drill down of that.

In your comments, you also said that there could be potential for that number to be larger. Any sense of what kind of potential backlog you have and how much larger could that $250 million be?

Well, I think, Yves, that we've got several projects that we are pursuing that could add significantly to that number. I'm not able to speak specifically to a project. Also, we continue to look hard at acquisitions, and so I think that there is a potential to significantly upsize that number if we're successful on some of these fronts.

And then my last question, Mike, you've been there now several months. From your perspective, any tweaking that you've done or that you think you may want to do, going forward?

Well, I think that the business here at Regency, the assets are very well-positioned. I think that the focus right now is, number one, is to develop I think a strong organic growth effort around some of our key assets. I mean, Eagle Ford is a prime example. We're sitting in the well-positioned area in the liquid-rich zone of Eagle Ford. Excellent opportunities in West Texas, very similar. I think obviously, we're focused, like a lot of people are, on building infrastructure and building capacity to move gas and liquids out. So I mean, that's a -- I wouldn't call that tweaking, it's just a very concentrated effort in that area. And I think the other is to look at opportunities for joint ventures. Obviously, we look at a lot of different joint ventures and at some point down the road there may be an opportunity for us and Energy Transfer to work together. But I think more than anything, is we got a great set of assets, we got a good team and we just want to continue to focus on building out those assets while looking for a good acquisition to significantly move this company forward.

Shannon, threw out an 80% number, I think, when you're talking about investment grade metrics for fee-based, when you think about expansion and you think about growth and acquisitions, would you be willing to take down that 80% fee-based down a notch? Or do you have a comfort zone of where you want to be on a percentage of fee-based?

Well, I think we like that level of fee-based, Yves, but it's not going to deter us from looking at good processing and gathering opportunities that would be accretive and then we could hedge effectively. So, no, that didn't stop us from looking at those kind of opportunities at all.

And our next question will come from the line of Michael Blum with Wells Fargo.

Correct me if I'm wrong, but I think you said in your opening remarks that you're not going to be providing EBITDA guidance, going forward. Is that right?

That is correct.

Can you just talk about the thought process of why you decided to do that?

I think number one is we will be consistent with the Energy Transfer practices of no guidance. I think that we are going to provide, I think some reasonable color on our growth and capital and other operational opportunities during our Investor Day meeting here in April. I also think that this continues to be a volatile environment. We see a lot of upside opportunities, but we'll move along consistently with Energy Transfer's practice.

And our next question will come from the line of James Censil [ph] with Height.

Have you looked towards getting towards investment grade and with the $250 million CapEx budget, do you foresee the need for additional equity issuance to get to investment grade in your model?

I think, today, we have sufficient liquidity to handle the $250 million of capital. Obviously, if we look to expand and build, we'll go to capital markets and issue equity or debt that's appropriate at that time. So I think we’re -- we feel like we're in good shape.

So you feel you can get to investment grade without additional equity issuance?

Yes, I think metrics today look pretty good, so I mean that's...

And our next question will come from the line of Charles Sy [ph], private investor.

I'd like to say that I think it's terrific that you made it through the financial crisis and management changes, while maintaining the distribution, and I know it was touched on lightly, but could you tell me what you foresee in the future to some degree because the four on my calculator is getting worn out?

I think if you look at how this company positioned itself during 2010, obviously, the Energy Transfer Equity acquisition GP, I think was a very good opportunity for this company, going forward. The addition of MEP, the expansion of rigs. And so you look at where we stand today. We ended the year with positive coverage, we continue to see good growth opportunities on our business, we're sitting in good basins. And I think as we continue you to execute well, we'll be in a position to better look at raising our distributions, going forward. I can't predict timing, but our focus is on continuing to put us in that position.

[Operator Instructions] And at this time, I show we have no questions in queue. I would like to turn the call back over to Mr. Mike Bradley for any closing remarks.

Well, again, thank you for joining us today. We really appreciate everybody's questions and interests in Regency Energy Partners. And in conclusion, we believe that Regency has excellent prospects and we'll continue an intense focus on executing on our business and operational objectives, not only to achieve continued growth, but also to be certain that the entire organization is fully invested in achieving our strategy, operating our assets safely and efficiently, and providing top-quality customer service to our clients. Again, thank, you and we look forward to talking with you more during our Investor Day in April. Have a great day. Thanks, everyone.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.