Targa Resources Corp. (TRGP) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Targa Resources second quarter 2013 earnings webcast and presentation. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions) As a reminder, this call maybe recorded. I'd now introduce your host for today's conference Jennifer (inaudible) Director of Finance, you may begin, sir.

Thank you, operator. I'd like to welcome everyone to our second quarter 2013 investor call for both Targa Resources Corp. and Targa Resources Partners LP. Before we get started, I would like to mention that Targa Resources Corp., TRC, or the Company and Targa Resources Partners LP, Targa Resources Partners or the Partnership have published their joint earnings release which is available on our website www.taragaresources.com. We will also be posting an updated investor presentation to the website later today. Speaking on the call today will be Joe Bob Perkins, Chief Executive Officer, and Matt Meloy, Chief Financial Officer. Other management team members are available for the Q&A. Joe Bob and Matt are going to be comparing the second quarter 2013 results to prior period results, as well as providing additional color on our results, business performance, and other matters of interest. I would like to remind you that any statements made during this call that might include the company's or the Partnership's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provisions of the Securities Acts of 1933 and 1934. Please note that actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings, including the Partnership's annual report on Form 10-K for the year ended December 31, 2012, and quarterly reports on Form 10-Q. With that, I will turn it over to Joe Bob Perkins.

Thanks, Jen. Welcome and thanks to everyone for participating. For today's call, I'll start off with a high level review of performance highlights. We'll then turn it over to Matt to review the Partnership's consolidated financial results, it's segment results and other financial matters for the partnership. Matt will also review key financial matters related to Targa Resources Corp. Following, Matt's comments, I'll provide some concluding remarks and then we'll take your questions. Our reported second quarter adjusted EBITDA was $127 million as compared to $123 million last year. This was 3% increase compared to second quarter last year driven by volume increases across all our Field Gathering & Processing system and by increased margin in our Logistics and Marketing division. Our overall results show the benefits of diversity and increasing fee based margin contributions. Fee based margins were greater than 50% for the second straight quarter. For the Field Gathering & Processing segment, the combination of volume increases and higher natural gas and condensate prices more than offset the NGL prices that were 20% lower in the second quarter of 2013 versus the second quarter of 2012. The logistics asset segment produced quarterly operating margin of $52 million, up 14% compared to last year, primarily driven by higher fractionation revenue of CBF, and increased LPG, export and storage activity and our integrated Galena Park and Mont Belvieu facilities. The strong results for the Logistics Assets segment were just achieved despite a planned partial turnaround at CBF that resulted in lower fractionation throughput. In addition to the work done during the turnaround to comply with OSHA requirements, we're completing some additional work that will increase operational efficiency at CBF. We're pleased to announce that CBF Train 4 is operational, we are also pleased to announce that we have finally broken…

Thanks, Joe Bob. I'd like to add my welcome and thank you for joining our call today. Adjusted EBITDA for the quarter was $127 million, compared to $123 million for the same period last year. The increase was primarily the result of increased volumes in our Field Gathering & Processing segment and higher LPG export activity in our Logistics and Marketing division, partially offset by lower NGL prices. Overall operating margin increased 2% for the second quarter compared to the second quarter of last year. I will review the drivers of this performance in our segment review. Gross maintenance capital expenditures were $21.8 million in the second quarter of 2013, compared to $15.5 million for the same period last year. Net maintenance capital expenditures were $19.4 million in the second quarter of 2013 compared to $13 million in the second quarter of '12. The increase in maintenance CapEx was consistent with increased activity, higher volumes and higher capacity utilizations across our businesses. As a result, we now expect net maintenance CapEx for 2013 to be $85 million versus previous guidance of $75 million. Turning to the segment level, I'll summarize the second quarter performance on a year-over-year basis. We'll start with the Gathering & Processing segments. Field Gathering & Processing operating margin increased by 25% compared to last year, driven by higher natural gas inlet volumes and NGL production. Higher natural gas and condensate prices and increasing margin contribution from Badlands. These increases were partially offset by lower NGL prices and higher offering expenses due to additional compression and maintenance cost associated with system expansion and the addition of Badlands. Second quarter 2013 natural gas inlet volumes for the field gathering and processing segment was 793 million cubic feet per day, a 19% increase compared to the same period in…

Thank you, Matt. To wrap up the final portion of our prepared remarks, let's start with a brief update on the status to some of the $1.7 billion of major growth projects coming online in the second half of 2013 and in 2014. As mentioned earlier in the call, our 100,000 barrel per day CBF Train 4 expansion is operational. Consistent with an estimated timing included in our 2013 fiscal year guidance given last year, we expect CBF Train 4 to contribute to third quarter operating margin and to be fully contributing to operating margin sometime during the fourth quarter of 2013. As briefly discussed in our last earnings call and it's now reported in the industry, our expanded international export project will likely be completed prior to our term contracts beginning in October, which may allow us to service additional cargos in September. We affirm take or pay contracts to load 4 VLGCs per month beginning in October, when the expansion will allow us to load total propane and or butane in excess of 3 million barrels per month. We expect to bring the facility up in September, ramping up during September to that October rate. We also expect to continue to increase our export loading capability. So that we can load in excess of 5 million total barrels per month sometime during the third quarter of 2014, when the second phase of our export project comes online. We continue to see strong demand for capacity reservations under multi-year take or pay contracts. In North Dakota there is a lot of hard work going on as we integrate and grow the footprint of the Badlands asset. Quarter over first quarter our average daily crude throughput increase by 21% driven by producer activity, volumes are now beginning to ramp. And…

(Operator Instructions). Our first question is from Edward Rowe of Raymond James.

With crude spread tightening and backward dated market, how are you guys, how is really customer reaction around the [Sand Hills] asset base, has that changed or compared to what your views were almost six months ago?

The change in spreads has not slowed down overall producer activity in our area at all. We have seen some switching month to month of where our producer would prefer for their barrels to be getting off of our system. We expect that to continue. That's why we're trying to provide the multiple outlets off of the system. That's really the short answer.

Given that we're seeing approximately 30% to 35% of natural gas being flared in the Bakken, do you guys see some incremental opportunities within the midstream space to really capture some of these constraints?

Gas gathering in processing is very much a part of our strategy in the Bakken. We got a lot of work to do. We've been reengineering the existing plant. The third plant is going to be coming on in (inaudible) the second Train is coming on in the third quarter and other third Train in the second quarter. That's way too much talking. Just coming on now, we are working with operators, producers to improve how their system is bringing gas to our gathering system. We've reengineered the plant to better handle too many liquids coming in to the gas and we are going to be improving that over time, we like the upside, and we are trying to help out with the flaring situation.

Couple more questions. Given the expectations that the Gulf Coast you get really saturated with condensate, although we are not really seeing that in prices, could this really open a door for may be refine product exports at your facility and may be condensate splitting capabilities?

The industry knows that we are looking at condensate splitting projects. And as far as exports are in Galena Park export facility is pretty much committed on what we handle through it right now. We do handle refine products and we are looking at refine products through the Patriot dock not necessarily for export.

And last and final question, there has been some chatter around the TMS and Cotton Valley, and I know the Coastal G&P segment is a little start of that, but are you guys seeing some extensions north with your facilities that capture some of these volumes?

I am bullish so it's not in our guidance or forecast about the positioning about Coastal Straddles operations. You mentioned the TMS, we've told people we've been benefitting with the [real cost]. We've had discussions with probably most of the producers working on the TMS. We've got existing facilities that can potentially serve that should they have significant gas processing needs. I also think that the position in the Coastal Straddles prospects over the next three years will benefit from increased activity in the Gulf of Mexico.

Our next question is from [Matthew Phillip with Clarkston].

We see a nice little bump in the propane prices the past month or so, during July $0.20 or so backup in the 90s on a down basis. If this sustains itself we can see average NGL barrel maybe back in the 80s, how do you see that in backing up your coverage guidance for the remainder of the year?

We were trying to be clear on how we felt about our overall guidance at current price levels. Our current price levels are in the below 80s right now for our barrel. And prices will go up and down in around current price levels in our opinion for the remainder of the year. We feel good about our guidance at current price levels. I think I even said that if prices were to go down and stay down below current price levels, we might be a little bit lower than our expectations for 2013 but not materially. And if prices go up from current levels and stay up from current levels, we might be a little bit above but not materially.

On Galena Park, what's your rough breakdown on propane versus butane exports? As butane exports are pretty seasonal counter the blending season and do you expect the expansion be aligned to may be capture some butane products before blending season kicks in?

If you look back historically, our performance on propane versus butane has range from 20% to 30% butane. Prospectively, the large deals GC contracts that we have, have rights to take percentages of butane that would be represented above. And in terms of before the blending season, water born butane isn't as seasonal as U.S. butane is and there wasn't a seasonal a percentage difference over the last year historically.

(Operator Instructions). I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

Thank you, operator. To the extent, anyone has follow-up questions, please feel free to give us a call, you can call me, Jim, Matt, any of the rest of us. Thank you again for your time today and we look forward to speaking with you in the future.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.