Targa Resources Corp (TRGP) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Targa Resources Third Quarter 2012 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to your host, Joe Brass, Director of Finance. Please begin.

Thank you, Operator. I'd like to welcome everyone to our third quarter 2012 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.targaresources.com.

We will also be posting an updated investor presentation to our website after the call.

Speaking on the call today will be Rene Joyce, Chairman, and Matt Meloy, Chief Financial Officer. Due to a prior travel commitment, Joe Bob Perkins, CEO, will not be speaking with us on the call, but will be available remotely during the Q&A session. Rene and Matt are going to compare the third quarter 2012 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 Safe Harbor provision of the Securities Acts of 1933 and 1934.

Please note that actual results may and could differ materially from those projected in any forward-looking statements. For a discussion of the 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, 2011, and quarterly reports on Form 10-Q.

With that, I would like to turn it over to Rene Joyce.

Thanks, Joe. Welcome and thanks to everyone for participating in this call. Besides Matt and myself, there are several other members of the Management Team who will be available to assist in the Q&A session. For today's call, I'll start with a high level review of performance, and then highlights. We will then turn it over to Matt to review the Partnership's consolidated financial results, its 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 will provide a few more remarks, and then we will take your questions. But before I get started, I would like to remind listeners that they can assess the presentation and a replay of our recent October 18 Investor Day webcast through our website for an even more detailed discussion of our businesses and growth projects.

Our reported third quarter adjusted EBITDA was $116 million, an 8% increase over last year, despite weaker commodity prices and the impact of Hurricane Isaac. Distributable cash flow of approximately $77 million resulted in distribution coverage of about one times, based on our third quarter declared distribution of $0.6625, or $2.65 on an annual basis. Consistent with our 2012 full year guidance given last fall, the Partnership's third quarter distribution represents a 14% increase, compared to the third quarter of 2011.

Moving to a brief business overview, despite lower commodity volumes, volumes in our field G&P continued to increase, up over 9% year-over-year, driven by strong producer activity across our systems. Hurricane Isaac impacted our coastal G&P volumes and operating margin during the quarter. We estimate approximately an $8 million impact to EBITDA during the quarter for these operating disruptions, which includes a $3.3 million charge in clean-up and repair costs. The downstream division continued its strong growth profile. Third quarter operating margin increased 53% over 2011. The increase is due to higher fractionation and treating fees, increased LPG export activity, and the impact of the 2011 petroleum logistics acquisition.

That wraps up my initial comments. I'll hand it over to Matt.

Thanks, Rene. I'd like to add my welcome and thank you for joining our call today. Let's start with a review of the consolidated results. As Rene mentioned, adjusted EBITDA for the quarter was $116.2 million, compared to our previous guidance of $113 million and $107.3 million for the same period last year. The increase was primarily the result of higher logistics and marketing operating margins and higher commodity hedge settlements, partially offset by lower operating margins in the gathering and processing division.

Overall gross margin increased 3% for the third quarter, compared to last year. I will review the drivers of this performance in our segment review.

Gross maintenance capital expenditures were $16.2 million in the third quarter of 2012, compared to $24.7 million in 2011. Adjusting for the non-controlling interest portion of maintenance capital expenditures and certain reimbursements from TRC to the Partnership, net maintenance capital expenditures were $12.4 million in the third quarter of 2012, compared to $21.9 million in 2011.

Turning to the segment level, I'll summarize the third quarter's performance on a year-over-year basis. We'll start with our gathering and processing segment. Field gathering and processing operating margin decreased by approximately 25% compared to last year, driven by lower natural gas and NGO prices, partially offset by increased throughput. These segment results do not include the impact of our hedging program. The third quarter of 2012 plant natural gas inlet for the field gathering and processing segment was 686 million cubic feet per day, a 9% increase compared to the same period in 2011.

Three of our four field gathering and processing business units were significantly up in volume - North Texas, SAOU, and Sand Hills natural gas inlet volumes increased by approximately 17%, 10%, and 11%, respectively, with a slight decrease in natural gas inlet volumes at Versado. For the segment, natural gas prices decreased by 36%, while NGL prices decreased 39%, and condensate prices increased 1%.

Turning now to the coastal gathering and processing segment, operating margin decreased 55% in the third quarter, compared to last year. The decrease was primarily driven by lower commodity prices and Hurricane Isaac impact, partially offset by an increase in richer volumes at LOU and the July purchase of the Big Lake plant, now part of the LOU business unit.

Following Hurricane Isaac, the joint venture owners of Yscloskey, which is an older, lower recovery lean oil plant, elected not to repair and restart the plant. The plant contributed less than 1% to the Partnership's operating margin for the first nine months of 2012, and is not material to the results of our coastal gathering and processing segment. It was only marginally profitable prior to the Hurricane, and the rebuild and repair costs were not economically justifiable.

Next, I'll provide an overview of the two segments in the downstream business. Starting with the logistics assets segments, third quarter operating margin increased 68%, compared to the third quarter 2011, an impressive increase that reflects, among other things, both our growth CapEx and our increased export activity. Growth investments include the Sound Terminal acquisition in October of 2011 and the startup of our benzene treating and depentanizer operations at Mont Belvieu in the first quarter of 2012.

Export activity at our Galena Park marine terminal on the Houston ship channel increased again this quarter with LPG export volumes currently running over 1 million barrels per month, loaded on small and medium-size vessels.

While operating margin for the logistics segment was higher versus the previous quarter, you might note slightly lower fractionation volumes versus last quarter. Both the third quarter and the second quarters reflect us being essentially full at Cedar Bayou and moving what we can to our Lake Charles frac, or LCF, as we call it. Prior to the third quarter, receipt volumes at the fractionators were counted without regard to the source of those volumes. Effective in the third quarter and going forward, volumes received at CBF, but fractionated at LCF, are only reflected at LCF.

In the marketing and distribution segment, operating margin for the segment increased 29% over the third quarter 2011, due primarily to increased LPG export activity and higher export margins.

With that, let's now move to--move briefly to a capital--to discuss capital structure and liquidity. At September 30, we had $280 million of outstanding borrowings under the Partnership's senior secured revolving credit facility with outstanding letters of credit of $47.4 million revolver availability, with about $773 million at quarter end. Total liquidity, including approximately $89 million of cash on hand, was approximately $861 million, leaving us with ample flexibility to pursue organic growth and acquisition opportunities.

Total funded debt on September 30 was approximately $1.7 billion, or about 52% of total capitalization, and the Partnership's consolidated leverage ratio at quarter end was approximately 3.1 times, at the low end of our target range of three to four times.

On October 25, we closed on a private offering of 400 million 5.25 notes, due 2000--May 2023, issued at 99.5% of par value, resulting in $393.5 million of net proceeds. We used a portion of these proceeds to call in the 8.25 notes. In October, we also refinanced the Partnership's credit facility, increasing the facility's size from $1.1 billion to $1.2 billion, extending the maturity five years, and lowering pricing.

Next, I'd like to make a few comments about our hedging and our capital spending programs for the year. Relative to the Partnership's expected equity volumes from the field gathering and processing segment, we estimate we have hedged approximately 55% of 2012 natural gas, and 75% of 2012 combined NGL and condensate. For 2013, we have hedged approximately 45% to 55% of expected 2012 equity volumes for natural gas, NGLs, and condensate. And a similar hedging approach is also in the context of significantly increasing levels of fee based margin.

Moving on to capital spending, we estimate approximately $680 million of gross capital expenditures in 2012, with approximately $600 million comprising growth capital expenditures. We expect maintenance CapEx net to our interest to be approximately $60 million.

Next, I will make a few brief remarks about the results of Targa Resources Corp. On October 11, Targa Resources Corp declared a third quarter cash dividend of $0.4225 per common share, or $1.69 per common share on an annualized basis, representing an approximately 37% increase over the annualized rate paid with respect to the third quarter of 2011.

TRC standalone distributable cash flow for the quarter of $21.9 million resulted in dividend coverage of 1.2 times the $17.9 million in total declared dividends for the quarter. TRC standalone G&A expenses in the third quarter were $2.2 million.

In October, we also refinanced the credit facility at TRC, increasing the facility size to $150 million from $75 million. We paid the remaining $88.3 million of outstanding borrowings under the HoldCo, using $75 million under the new revolver in cash on hand, leaving $75 million undrawn under the new revolving credit facility.

Before I hand the call back to Rene, I'd like to remind investors that new guidance was provided in the October 17 press release and in our October 18 investor presentation. The guidance is summarized on page four of that presentation. We pointed to strong growth in 2013, especially in the back half of the year when many of our growth projects come online. This positions us for strong EBITDA growth in 2014 and beyond. Given our outlook for growth, we pointed to 10% to 12% distribution growth in 2013, compared to 2012, for Targa Resources Partners, which would result in an estimated dividend growth of approximately 25% to 30%-plus for Targa Resources Corp.

That concludes my review, and I will turn the call back over to Rene.

Thanks, Matt. Just a few final comments, essentially the Executive Summary of the October 18 investor presentation. The underlying industry dynamics of shale and resource development provide the foundation for Targa's performance and future growth. We have a leadership G&P footprint in multiple basins where volumes are growing and we're taking advantage of this situation by adding processing capacity in these areas. We also have a leading presence in and around Mont Belvieu, where fee-based business is growing, and we're adding fractionation, storage, and export capacity.

Multiple projects contribute to our strong growth profile and we continue to work on additional projects. Two project approvals were announced in the press release preceding the October investor presentation. The first, a $225 million project to install a new $200 million a day cryogenic plant and infrastructure to support our San Angelo system and add to our strong Permian Basin presence. We will call it the High Plains plant. It is well located relative to multiple plays, such as the Cline Canyon Sands, Wolfberry, and others, and is well located relative to NGL and residue takeaway. The High Plains plant is expected to be completed in mid-2014.

A second project we announced was to expand our international export project even before we have completed the first phase of that expansion. The total combined spend will be approximately $480 million. In the third quarter of 2013, we will have the capacity to load four VLGCs in addition to our small to mid-size LPG export business. By the third quarter of 2014, we will be able to add another 1 million to 2 million barrels a month, or another two to four VLGCs.

We expect the impact from these and other highly visible growth projects to provide the margin, scale, and diversity that will support continued distribution growth. And we continue to work on unannounced--on the unannounced project portfolio. There are not really any new developments over the last few weeks since our investor day on October 18. But the ongoing work includes Train 5, another 100,000-barrel fractionation facility at Belvieu, other projects in the Permian Basin, and the potential for further expansion at our terminals and development of new terminals at other locations, all of which we have previously discussed.

And with the benefit of substantial liquidity providing flexibility to expand our diversified midstream platform, the Partnership is positioned to invest in even longer term growth. So with that, we'll open it up to questions, and then I'll turn it back to the operator.

Thank you. (Operator Instructions) I have a question from Scott Fogleman with Credit Suisse. Please go ahead.

Hi, guys. Good afternoon. Just a little housekeeping question. Just what is the capacity there at Big Lake, the new plant that you all got from [Campano]?

I believe it's a little over 200 million a day. It's a 250 million a day plant.

And--I mean, you kind of touched around it. What would you say the Hurricane impacted the overall throughput at Coastal during the quarter?

It was down for a period of time kind of late in the third quarter. When we looked at it and reported, we didn't outline the exact volume impact. But we just said it's about--when you look at the volume lost, we estimated all in about an $8 million EBITDA impact. Then you can look on a third quarter to second quarter, the volume's down at both the Coastal Straddle and Vesco, and then how much lower those volumes are Q3 to Q2.

With essentially all the Gulf shutoff, we had volumes impacted at all of our onshore facilities to varying degrees. But the bulk of the volume lost was at Venice and Yscloskey.

All right. Thank you. That's all I had. I appreciate it.

(Operator Instructions) I am not showing any other questions in the queue at this time, sir.

Thank you, Operator. And to the extent anyone has follow-up questions, please feel free to contact Matt or any of us. Thank you, again, for your time today, and we look forward to speaking with you again.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.