Resources Connection, Inc. (RGP) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Regency Earning (sic) [Energy] Partners LP Earnings Conference Call. My name is Jeremy, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Shannon Ming, Senior Vice President of Finance and Investor Relations. Please proceed.

Good morning, everyone, and welcome to today's call. Today, we will cover Regency's performance for the first quarter of 2011, as well as review industry trends and fundamentals. Presenting on today's call will be Mike Bradley, 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. 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 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 actual results. Also included in the presentation today are various GAAP measures that have been reconciled back to GAAP. I would also like to note that we will be filing our Form 10-Q after the market closes today. With that, I will turn the call over to Mike Bradley, our President and CEO.

Thanks, Shannon, and good morning, everyone, and thank you for joining us today. First, I'd like to start off the call talking about our recent LDH acquisition and the growth project associated with this joint venture that we announced today, which we are very excited about. Following that, then I will discuss our first quarter results. We have high expectations for Regency going forward and, with our expanding portfolio of services, believe that we are very well positioned to meet our goals of increasing distribution and achieving investment grade metrics. Regency's portfolio of assets, our supportive general partner, diverse business mix and continued focus on capital management puts us in an excellent position for growth going forward. Our focus on increasing our distributions and achieving investment-grade metrics was further illustrated earlier this week with the announcement that we have completed the formation of the LDH joint venture with Energy Transfer Partners, which was purchased for approximately $1.9 billion in cash before purchase price adjustments of approximately $48 million. We are very excited to have completed this joint venture, which will be called Lonestar NGL LLC or the Lone Star joint venture going forward. This acquisition supports our goals of expanding and enhancing our portfolio by establishing an NGL platform, which immediately gives us a strong competitive position in the Natural Gas Liquids business that would be very difficult to build organically due to the strategic location of many of the assets. In addition, with this acquisition, we expand our ability to provide full service capabilities for our producers in the midstream space. To recap, Lone Star is a Natural Gas Liquids, Storage, Fractionation and Transportation business. The storage assets are primarily located in Mont Belvieu, Texas, one of the largest NGL storage, distribution and training complexes in North America. The West Texas pipeline transports NGLs through a 1,000-mile intrastate pipeline system that originates in the Permian Basin in West Texas, passes through the Barnett Shale production area in North Texas and ends at the Mont Belvieu storage and fractionation complex. The processing and fractionation assets are located primarily in Louisiana. We see significant synergies with our current assets and many growth opportunities for coming years. This morning, we announced the first major growth initiative, which is a new 100,000-barrel per day NGL fractionation facility at Mont Belvieu, which is expected to be in service in early 2013. Total project costs are estimated to be between $350 million and $375 million with Regency's proportionate share being 30% of that. The project will be supported by a 10-year fee-based contract and NGL volumes will be coming from Energy Transfer's existing and soon-to-be completed assets as well as from Regency's assets. Returns on the projects are expected to be very attractive and accretive to our unit holders. This fractionator demonstrates the types of opportunities we intend to pursue through this partnership as we strengthen our NGL capabilities. In addition to this fractionation facility, we plan to construct -- I'd like to take a moment to discuss some of the additional growth opportunities that are currently being contemplated. First, we see the potential for up to $1.5 billion of capital to be spent over the next couple of years with Regency's proportionate share being approximately $500 million, which can significantly add to our distributable cash flow and fee-based revenue. Some of the projects being contemplated include expanding the West Texas pipeline, building additional storage capacity and further increasing processing capacity. Forming a strategic partnership with Energy Transfer allows us to capitalize on synergies between our 2 businesses and provide both businesses with the opportunity to take advantage of favorable NGL market fundamentals and pursue further joint venture opportunities. Energy Transfer, who is the operator, has already made substantial progress towards integrating the operations and personnel and expect to substantially complete the integration by the end of the second quarter. In addition, we are pleased to have everyone on board from an employment perspective. I'm happy to note their excitement for joining the Energy Transfer and Regency team. We believe Lone Star puts us in an excellent position for further significant growth over the years to come and are very excited about the possibilities we are already identifying. Moving to our fundamentals review. I first want to cover drilling activity. In comparing the first quarter of 2010 to the first quarter of 2011, rigs increased in the majority of our regions. The land rig count in the areas in which Regency operates increased to 1,409 at the end of the first quarter of 2011. This represents a 32% increase year-over-year and a 2% increase over the fourth quarter of 2010. Rig counts in the West Texas increased by 33 from Q4 of 2010 to Q1 2011 or a 10% increase. And although West Texas producers are primarily targeting liquids-rich plays, these wells do have very high-Btu gas, and we are seeing increased activity around our Waha system. South Texas rig counts increased by 9 from Q4 2010 to Q1 2011, which is an 8% increase, which continues to support additional growth opportunities in our South Texas gathering system and the Edwards Lime joint venture. While we continue to see declines in rig counts in North Louisiana as producers have moved rigs from Haynesville to more oil and liquid-rich plays, the Haynesville remains a very prolific field, and there are currently more than 200 rigs operating in North Louisiana near of our assets. And while they have declined, we have one producer who plans to bring on 8 to 12 wells by late summer on acreage dedicated to our Logansport system. In addition, we have seen the first horizontal well completed in the rich Cotton Valley area and believe there will be several more horizontal wells drilled over the next year. With the success of horizontal drilling, we expect richer volumes to increase at our Dubach facility. Moving on to Slide 4 and taking a look at commodity prices, the May NYMEX contract settled at $4.38 per MMbtu. Over the first quarter, WTI climbed to over $113 a barrel, the highest since September of 2008. Comparing 2010 to 2011, our net realized commodity prices, including the impact from our derivative swaps, will be lower. And in the first quarter of 2011, this impact was approximately $6 million. Turning to our first quarter performance on Slide 6. Regency's first quarter adjusted EBITDA results were in line with our internal projections. And from the first quarter of 2010 to the first quarter of 2011, adjusted EBITDA increased by 49% to $62 million for the first quarter of 2010 to $92 million for the first quarter of 2011. From Q4 2010 to Q1 2011, adjusted EBITDA decreased from $102 million to $92 million, and this decrease was primarily attributable to the lower hedge pricing in 2011 compared to 2010. From the first quarter of 2011 through the remainder of the year, we expect the following items to positively impact quarterly adjusted EBITDA: First is incremental EBITDA associated with the closing of the Lone Star joint venture; second is the additional growth in our South Texas and West Texas regions; and third, a positive impact to O&M and G&A from the shared services. For the first quarter, we paid a quarterly cash distribution of $0.445 per common unit and generated $59 million in cash available for distribution. This represented a coverage ratio of 0.88x for the first quarter, which enclosed the units issued in conjunction with the closing of the Lone Star joint venture. We anticipated coverage to be lighter during periods when we are raising equity. If you exclude the 8.5 million units issued following the first quarter close, coverage would have been at 0.93x. We expect our coverage to improve as the year progresses. And based on Lone Star and the growth we expect in South and West Texas, we anticipate being able to cover our distribution in the second quarter, barring any unforeseen event. With that, I will turn it over to Tom, who will take you through a review of our business unit performance.

All right. Thanks, Mike, and good morning, everyone. I'll start off with the consolidated operating results. For the first quarter of 2011, Regency recorded net income of $14 million compared to a net loss of $612,000 for the first quarter of 2010. The increase was primarily driven by a $16 million increase in income from unconsolidated subsidiaries from the acquisition of a 49.9% interest in the MEP joint venture in May of 2010 and a full quarter of operations of the Haynesville Expansion Project. Also, we had a $13 million increase in total segment margin, primarily from the addition of the Contract Treating business, which was acquired in September of 2010 and the Contract Compression margin, which was primarily due to increased revenue generating horsepower provided to third parties. These items were partially offset by a $15 million increase in depreciation and amortization expense resulting from the fair value adjustment upon the acquisition of Regency's general partner by Energy Transfer Equity in May of 2010. Now moving on to the Gathering and Processing segment. For the first quarter, adjusted margins decreased from $55 million for Q1 2010 to $52 million in Q1 2011. This decrease was primarily due to the lower hedge deck that Mike had mentioned earlier. Volumes remained flat at 1 million MMBTus per day comparing Q1 2010 to Q1 2011. We did see a large increase in volumes in South Texas, which was offset by decline at our Elm Grove and Dubberly facilities where margins are less than $0.10 per MMbtu and also at our FrontStreet facility, which is a cost of service contract, whereby volumes do not impact margins. However, NGL production increased 22% to approximately 28,000 barrels a day in Q1 2011 from approximately 23,000 barrels a day in Q1 2010. This increase in NGL production is primarily due to additional rich Eagle Ford volumes in South Texas and Bone Springs volumes around our Waha facility. Moving on to North Louisiana. Comparing the first quarter of 2010 to the first quarter of 2011, total volumes in North Louisiana declined by 9%. While volumes decreased at our Dubach facility due to changes in ownership and acreage positions that has delayed producer drilling programs, we continue to see some producer interest in the drilling Cotton Valley gas around this system as they take advantage of the high-margin, rich gas production. We had one producer turn on the first of 4 horizontal wells in the Cotton Valley field with initial rates of 2.5 million cubic feet per day. Additionally, we have a second producer turn on their first horizontal well in Cotton Valley at 5 million cubic feet per day, and they're currently drilling their second horizontal well. Turning to Logansport volumes. For the first quarter of 2011, they increased by 13% compared to first quarter of 2010 as volumes from the expansion completed last year continue to ramp up. For 2011, we expect Logansport volumes to continue to increase as frac crews become readily available and as producers concentrate on developing the highest return sections. One of our producers indicate plans to turn on around 8 wells between now and late summer, with initial deliveries of around 10 million cubic feet per day. Between our Elm Grove and Dubberly straddle plant, volumes were down 23% for the first quarter of 2010 to the first quarter of 2011 as volumes from the Elm Grove field declined and are replaced with Haynesville volumes, which do not need conditioning. For the remainder of 2011, we expect total volumes in North Louisiana to increase primarily on our Logansport System. Looking at West Texas, for the first quarter of 2011, volumes decreased 10% compared to the first quarter of 2010. This was primarily due to cold weather in the month of February, where we had a number of wells freezing off and a downstream NGL curtailment, which prevented us from processing optional keep-whole gas. Excluding these keep-whole volumes, wellhead volumes were actually up 3% from Q1 2010 to Q1 2011. During the first quarter, we entered into an agreement for expansion of the NGL facilities out of Waha, which was completed at the end of March, increasing our deliverable NGLs so that in the month of April, we were running the plant at full recoveries. In West Texas, we expect total volumes for the remainder of the year to increase. In our Midcontinent region, once again, comparing the first quarter of 2011 to the first quarter of 2010, volumes, excluding FrontStreet, decreased by approximately 4%. FrontStreet volumes were down 16% compared to the first quarter of 2010, contributing to our overall flat year-over-year Gathering and Processing volumes. However, this had no impacts to margin, since these assets provide fixed rates of returns. They are not dependent from throughput. For the remainder of the year, we do expect the Midcontinent volumes to hold relatively flat. In the South Texas region, volumes increased by 44% from the first quarter of 2010 to the first quarter of 2011 as producers continued to ramp up their Eagle Ford drilling programs. We have recently completed several capital projects to handle the large increase of volume and have several more capital projects under construction. For the remainder of the year, we expect volumes to continue to increase on both our gathering system and through our Edwards Lime JV. Looking at the Transportation segment in Slide #9. Our prorated share of adjusted EBITDA was $44 million for the first quarter of 2011 compared to $11 million for the first quarter of 2010. $19 million was related to the Haynesville joint venture and $25 million was related to the MEP joint venture. The increase is primarily due to the acquisition of the MEP joint venture in May 2010, as well as the completion of the Haynesville expansion project in January of 2010. For the Haynesville joint venture, total throughput volumes increased by 72% to 1.5 million MMBTus per day in the first quarter of 2011 compared to 883,000 MMBTus per day in the first quarter of 2010. Looking at the MEP joint venture, total throughput volumes for MEP averaged 1.3 million MMBTus per day in the first quarter of 2010 compared to 1.4 million MMBTus per day in the first quarter of 2011. The year-over-year increase is primarily due to the completion of the expansion of MEP in June 2010, which increased total pipeline capacity from 1.5 Bcf per day to 1.8 Bcf per day. Looking at the Contract Compression segment. Revenue-generating horsepower increased by approximately 12% from 760,000 in Q1 2010 to 848,000 in Q1 2011. Of the 848,000, approximately 84,000 serves Regency's Gathering and Processing segment, while 764,000 horsepower serves third-party customers. Segment margin increased by approximately 12% from $37 million for the first quarter of 2010 to $41 million for the first quarter of 2011, primarily due to the continued deployment of new and idled horsepower. We expect to focus primarily on increasing utilization and effectively managing and reapplying our idle horsepower fleet to drive higher returns in the business. We continue to feel some pricing pressure from competitors. However, we are situated to take advantage of increasing demand for compression in the near term in the Eagle Ford Shale. In addition, we are pursuing commitments in the Marcellus, Fayetteville and Barnett Shale fields. Looking at the Treating business. We acquired this business on September 1, 2010, and we are pleased with the performance as it continues to exceed our projections since acquisition. Segment margin was $7 million for the first quarter of 2011 compared to $9 million for the fourth quarter of 2010. As of March 31, 2011, revenue-generating gallons per minute was 3,268 compared to 3,431 at December 31, 2010. The decrease in revenue-generating GPM was primarily due to equipment being returned upon the completion of lease agreement. We have already replaced one of these contracts and expect to replace the remainder by mid-year. Our Treating assets are also well-positioned for growth in 2011 as we expect the Haynesville and Eagle Ford Shales to be some of the leading growth drivers for the Treating business. Kind of moving to the commodity risk management. As of March 31, 2011, as far as our hedged percentages, we had 80% hedged for the NGLs, 86% for the condensate and 60% for the natural gas exposures, and this is for the balance of 2011. For 2012, we've hedged 42% of the NGLs, 55% of the condensate and 18% of the natural gas. Looking at Slide 13. With the completion of the Lone Star joint venture, our commodity price exposure has increased due to the additional link in NGLs, as well as the ethylene and propylene. We are planning to hedge our prorated share of the commodity exposure. As far as the sensitivity, excluding the Lone Star joint venture, a $10 per barrel movement in crude, along with the same percentage change in NGL pricing, would result in a $1.2 million change in our forecasted 2011 DCF. And a $1 per MMbtu movement in natural gas pricing would result in s $500,000 change in our forecasted 2011 DCF. And of course, both the oil and the gas prices are positively correlated to Regency's DCF. We continue to make a concerted effort to increase our margins derived from fee-based businesses. Pro forma for the Lone Star joint venture, approximately 84% of full year margins are expected to come from fee-based activity. Looking at our liquidity position, we had approximately $600 million available at year end 2010. As of March 31, 2011, we had approximately $540 million available. Of course, we funded our portion of the Lone Star joint venture with a combination of the revolver debt as well as the equity that we issued. Post closing the Lone Star joint venture, we have $150 million available on the revolver. Looking at our organic growth capital. Turning to 2011, we expect to spend approximately $253 million excluding capital related to the Lone Star joint venture. Of this, we expect to spend approximately $155 million in the Gathering and Processing segment. Most of this will be in South Texas, $78 million on the Contract Compression segment, $12 million on the Contract Treating segment and $8 million related to Corporate and Others. In addition, we expect maintenance capital expenditures for 2011 to be approximately $14 million excluding expenditures related to our joint venture interest. During the first quarter of 2011, we invested approximately $62 million of growth capital, of which $34 million was for the Contract Compression segment, $26 million was for the Gathering and Processing segment and $2 million was related to the Contract Treating segment. And with that, we'll open the call up to questions.

[Operator Instructions] And our first question comes from Michael Blum with Wells Fargo.

Just a couple of questions from me. Number one, on the Haynesville JV, should -- are there any growth -- is there any growth you're looking for in that business? Do you see any growth projects on the horizon and any change in volumes there?

Michael, this is Jim Holotik. Yes, we are consistently looking for growth in that area. We think we're positioned well in the Haynesville formation drilling. We're situated in the fairway where we've seen continued drilling. Also, there's producers that are continuing to drill in some of the Bossier formations in that area which we were bringing into this Haynesville -- into our rig system, our Haynesville joint venture system.

Okay. And then the second question on just in terms of the benefits you'll see from the shared services, O&M and G&A. Any chance you'll quantify that or give us a little more detail to get an extent of the magnitude of how meaningful that could be?

Yes, and I think, Michael, that at this point, we really started rolling in the shared services the first of the year and we're in that transition period right now. We do expect to see considerable savings on both the G&A and operating right now. I think as the year progresses, we'll give you a little more color on that. But so far, we are seeing some big benefits, but you have to realize at that point in time we're in transition, so we're still, we still have people staffed at Regency until we complete that transition.

Okay. And then the last question is just on Lone Star, the $1.5 billion of potential projects, obviously, some of that has already been accounted for with your announcement this morning. But I was just curious in terms of you mentioned processing as one of the potential areas of expansion. Can you talk a little bit about where you're thinking about that processing would be and how meaningful that would be?

Yes, I think one of the processing opportunities that we're looking at, Michael, is associated with the Op-Gas [ph] Refinery business. We see some additional opportunities there that we're looking at.

And our next question comes from Bradley Olsen with Tudor Pickering Holt and Company.

I have a couple questions about the Lone Star JV and the announced fractionation expansion. You guys mentioned in your press release that there are 10-year contracts supporting. And I didn't understand from the press release, are they supporting the proposed frac expansion? Or are they supporting the Gathering and Processing assets, which would be feeding into that?

I think they will be supporting these NGLs and the frac both through long-term tapering that's through the fractionator.

And do you guys envision those contracts as being a kind of frac or pay structure? Or are they a fee-based volume metric? How -- have you discussed with customers how that might look?

Well, they're fee-based, but firm contracts.

Okay. So firm in the sense that there's a take-or-pay component.

Yes.

Okay, great. And you mentioned that the economics of the proposed fractionation expansion would be attractive. Does that assume a certain amount of, I guess, floating margin or margin that's left in the spot market? Or is that assuming that it's a fully contracted facility?

It's the margin or the return on the project and the accretion based on the firm fees to the fractionators. It does not include any marketing uplift.

Okay, great. And then just one final follow-up. When you guys purchased the Louis Dreyfus assets alongside Energy Transfer, it seemed as though the ability of Energy Transfer to attract Gathering and Processing volumes, it seemed like they pulled off several deals right after that. And it seems that the customer interest in your facility at Louis Dreyfus is already pretty strong. Could you maybe just qualitatively maybe provide just a couple comments around what does the addition of kind of integrated fractionation offer customers of your facility that maybe they wouldn't have had before? Or how does it increase the netbacks to the E&P customers that you guys are servicing?

I think from my perspective, one is, we are seeing some of the same benefits and opportunities that Energy Transfer's seeing around their assets in terms of offering a full service Gathering, Processing and fractionation. We do expect to bring barrels to this fractionator as well and we've got projects we're working on that would continue to enhance that, so very similar.

[Operator Instructions] At this time, there are no further questions. I would like to hand the call over to Mike Bradley.

Okay. Well, great, everyone, and we really appreciate you joining us today. In conclusion, number one, we're very excited about the Lone Star Joint Venture. This is a very significant acquisition and joint venture that, as we stated, gives us an immediate position as a major player in the NGL business. I think with the fractionation project, the additional projects I mentioned, we are well-positioned for growth. In addition to that, our assets in South Texas and West Texas provide us additional opportunities to expand our system really across all of our business segments, so we're very excited about what we're seeing there as well. We believe Regency is in an excellent position. We'll continue our strong focus on executing on our business and operational objectives and not only to achieve growth, but also to be certain that we are delivering continued, increasing value to our unit holders going forward. So with that, thank you again, and have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.